Hershey Foods (HSY)

Long-Term Incentive Program

To date, we have used awards of performance stock units, stock options and restricted stock units to provide long-term incentive compensation. These awards are made under the long-term incentive program of the Incentive Plan. The Committee customarily awards the long-term incentive awards, including stock options, to executive officers and various other management and professional employees in February of each year, two to three weeks after the release of fourth quarter and full-year results in late January. In February 2007, the Committee elected to delay the granting of stock options until after the April 2007 annual meeting of stockholders, when stockholders were asked to vote on the amended and restated Incentive Plan. The Plan was approved and the 2007 awards were made following the April release of our first quarter financial results. For 2008, we returned to making the long-term incentive awards in February.

The Committee determines the amount of long-term incentive awards made to an executive officer by comparing the executive’s target total direct compensation (the sum of base salary, target AIP award and the value of the long-term incentive award) to the 50^th to 75^th percentile level of target total direct compensation of his or her counterparts in the size-adjusted CPG peer group. In determining the value of the long-term incentive awards, the Committee values performance stock units and restricted stock units using the fair market value of our Common Stock at the time of

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award and values stock options using the value of the stock options at the date of grant as determined for financial reporting purposes (the Black-Scholes value). Overall, after taking into account the long-term incentive awards made in 2007, the target total direct compensation of our executive officers approximated the median level of compensation of similar executives employed by the size-adjusted CPG peer group.

Performance Stock Units.  Performance stock units, or PSUs, are granted to those executive officers and other senior officers in a position to affect the Company’s long-term results. PSUs have been awarded annually and are earned based upon the Company’s performance over a three-year cycle. Each year begins a new three-year cycle.

At the start of each three-year cycle, a contingent target number of PSUs is established for each executive. This target is expressed as a percentage of the executive’s annual salary and determined as part of a total compensation package based on size-adjusted CPG peer group benchmarks. The PSU award generally represents one-half of the long-term incentive portion of the target total direct compensation package.

At the end of each three-year cycle, the Committee reviews whether the Company has achieved the established performance objectives to determine the percentage of the target number of PSUs earned. In determining whether performance objectives have been achieved, specific adjustments may be made by the Committee to the Company’s performance to take into account extraordinary or unusual items occurring during the cycle. The Committee did not make any specific adjustments with respect to PSUs during 2007.

For the three-year performance cycle of 2005-2007, the award was based upon (i) the Company’s three-year compound annual growth in diluted EPS from operations, measured against the median three-year compound annual growth in diluted EPS from operations of the high-performing financial peer group and (ii) the cumulative three-year improvement in the Company’s economic return on invested capital, or E-ROIC, measured against an internal target. The Company’s financial performance during the 2005-2007 performance cycle of 1.32% compound annual growth rate in diluted EPS from operations and three-year E-ROIC of 16.5% fell below the threshold levels required to earn an award for the 2005-2007 performance cycle. Management recommended and the Committee concurred that no payment would be made with respect to the 2005-2007 PSUs.

The performance objectives for the 2007-2009 performance cycle awarded during 2007 are the following equally-weighted measures: (i) the Company’s three-year compound annual growth in diluted EPS from operations measured against an internal target in line with our previously-announced anticipated growth rate of 7% to 9%; and (ii) the Company’s total stockholder return, or TSR, as measured by change in the market price of our Common Stock and dividends paid over the three-year period, measured against the TSR of the high-performing financial peer group. The TSR target is centered around achieving TSR at the 50^th percentile of the companies in the high- performing financial peer group. The use of relative TSR is a change from prior PSU performance cycles. In making the change to add TSR as a performance measure, the Committee’s intent was to more directly align the long-term incentive compensation attributable to this PSU award to the relative returns obtained by our stockholders over the performance period. The required performance to earn the PSUs has been set to significantly reward achievement of above average relative TSR performance against the high-performing financial peer group and growth in diluted EPS from operations above anticipated growth rates, and significantly less than target for performance below the financial goals. The three-year cycle reinforces our objective to build and sustain stockholder value over the long term and serves to retain executive talent.

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PSUs earned during the 2007-2009 three-year performance cycle are payable in shares of Common Stock. The actual value received by each executive will be dependent upon the market value of the shares at the end of the cycle and our performance during the three-year cycle. At the time of award, the value of each PSU awarded in 2007 was $50.37 and was based upon the average of the market closing prices of our Common Stock each trading day during December 2006. See Columns (f), (g) and (h) of the Grants of Plan-Based Awards table on page 59 for more information about the PSUs awarded in 2007.

Stock Options.  Another important element of our long-term incentive compensation program is stock options. Stock options are designed to align the interests of executives with those of stockholders. Stock options generally are awarded annually to the Company’s senior executive group as well as to other key managerial and professional employees. Stock options entitle the holder to purchase a fixed number of shares of Common Stock at a set price during a specified period of time. Because stock options only have value if the value of our Common Stock increases, they encourage efforts to enhance long-term stockholder value.

The Committee sets guidelines for the number of stock options to be awarded based on the target total direct compensation package established in relation to the competitive compensation data. In 2007, the number of stock options awarded to our executive officers was determined by multiplying base pay by the “market-competitive option target level,” divided by the Black-Scholes value. The “market-competitive option target level” for each position is targeted to be one-half of the recipient’s long-term incentive compensation target award. The value of an option is determined using the Black-Scholes option-pricing model, as described in note 15 of the consolidated financial statements contained in the 2007 Annual Report to Stockholders that accompanies this proxy statement. The actual number of options awarded may vary from the target level based on an executive’s individual performance evaluation.

Stock options are awarded annually under the Incentive Plan to all eligible recipients; however, the Committee may elect not to award stock options in a given year. In order to have flexibility to provide stock option awards as recruitment, retention, performance recognition or promotion awards, the Committee is authorized under the Incentive Plan to establish a stock option pool and an RSU pool (described below) for use by our CEO for such purposes. The Committee establishes the stock option pool annually.

At the beginning of 2007, the number of stock options allocated to the pool was 15% of the aggregate number of options included in the annual award. In light of retention difficulties experienced by the Company during 2007, the Committee also authorized the CEO to award stock options or RSUs (as discussed below) during the year from a separate pool established for recruitment or retention purposes up to an aggregate value to the recipients (as measured at the time of grant), of $2.5 million, in addition to the pool amounts established at the beginning of 2007. The value of option awards made from the pools is determined using the value determined for financial reporting purposes (the Black-Scholes value). Options and RSUs remaining in any pool at the end of the period do not carry over to the following period. The CEO may not make discretionary awards from any pool to the Company’s executive officers. Stock option awards from the CEO pool are made one time per month according to an annually pre-determined schedule and the exercise price for the options is based on the closing price of our Common Stock on the date of award. Individual awards may not exceed 7,500 stock options or 5,000 RSUs without further approval by the Chairman of the Committee.

Stock options awarded in 2007 vest ratably over four years and have a 10-year term. As required by the Incentive Plan approved by the stockholders at the 2007 annual meeting of stockholders, the options awarded in 2007 have an exercise price equal to the closing market price of the

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Common Stock on the New York Stock Exchange on the date of award. Prior to April 2007, as required by our predecessor Incentive Plan, we used the closing price on the trading day preceding the date of award to set the exercise price.

See Column (f) of the Summary Compensation Table, Columns (j) through (l) of the Grants of Plan-Based Awards table, Columns (b) through (f) of the Outstanding Equity Awards table and Columns (b) and (c) of the Option Exercises and Stock Vested table for more information on stock options awarded to Mr. Lenny, Mr. West and the other named executive officers.

Restricted Stock Units.  The Committee awards restricted stock unit, or RSU, awards from time to time as special incentives. RSUs also are awarded to replace compensation forfeited by newly-hired executive officers and key managers of the Company upon leaving a prior employer to join Hershey. Each RSU awarded under the Incentive Plan represents a value equal to that of a share of Common Stock. RSUs vest if the award recipient remains in the Company’s employment for a prescribed period of time.

At the time of award, the Committee determines if an RSU award is payable upon vesting in shares of the Company’s Common Stock, net of applicable taxes, or if recipients may elect to receive payment for vested RSUs in cash or in shares of the Company’s Common Stock, net of applicable taxes. The value for financial reporting purposes of an RSU payable in shares is based upon the closing price of the Company’s Common Stock on the New York Stock Exchange on the grant date. The value of an RSU payable in cash or shares for financial reporting purposes is adjusted based upon the closing price of the Company’s Common Stock on the New York Stock Exchange at the end of each fiscal quarter.

During 2007, we made special RSU awards to aid in retention of certain executives who were recently hired. These awards were made because the value of the replacement equity awards issued when these executives were hired and the value of their 2005-2007 and 2006-2008 PSU awards were diminished in light of the Company’s 2006 financial performance. Upon consultation with Towers Perrin, management recommended to the Committee a one-time RSU award to these executives. On May 1, 2007, the Committee made retention RSU grants that would vest ratably over three years and be paid in shares of Common Stock to six executives, including an award of 7,750 RSUs to Mr. Alfonso.

We also made a special award of 22,000 RSUs to Mr. West in connection with his promotion to President on October 2, 2007 and designation as CEO to take effect December 1, 2007. This award, which vested on January 2, 2008 and is payable on April 2, 2008, was made in recognition of the importance of Mr. West’s leadership of the Company during the transition period.

Mr. Snyder received a special retention award of 5,000 RSUs from the Board in November 2007 in recognition of his expertise and leadership in ongoing Company operations and the desire for the Company to retain him during the transition from Mr. Lenny to Mr. West as CEO. This award will vest in full in November 2008, subject to Mr. Snyder’s continued employment through that date.

As described in the discussion of stock options, the Committee is authorized under the Incentive Plan to allocate a pool of RSUs for our CEO to use as recruitment, retention, performance recognition or promotion awards. The Committee establishes the RSU pool annually. The Committee authorized a pool of 60,000 RSUs for 2007. The CEO may not make discretionary awards from this pool to the Company’s executive officers. RSUs remaining in the pool at the end of the period do not carry over to the following period.

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Long-Term Incentive Program

To date, we have used awards of performance stock units, stock options and restricted stock units to provide long-term incentive compensation. These awards are made under the long-term incentive program of the Incentive Plan.

Performance Stock Units.  Performance stock units, or PSUs, are granted to those executive officers and other senior officers in a position to affect the Company’s long-term results. PSUs have been granted annually and are earned based upon the Company’s performance over a three-year cycle. Each year begins a new three-year cycle.

At the start of each three-year cycle, a target number of PSUs is established for each executive. This target is expressed as a percentage of the executive’s annual salary and determined as part of a total compensation package based on primary peer group benchmarks. The PSU award generally represents one-half of the long-term incentive portion of the total compensation package. For the 2006-2008 PSU cycle, the target number of PSUs established for each executive was adjusted based upon his or her 2005 performance rating.

At the end of each three-year cycle, the Committee reviews whether the Company has achieved the established performance objectives to determine the percentage of the target number of PSUs earned. In determining whether performance objectives have been achieved, specific adjustments may be made by the Committee to the Company’s performance to take into account extraordinary or unusual items occurring during the cycle.

For the three-year performance cycle of 2004-2006, the award was based upon (i) the Company’s three-year compound annual growth in EPS, measured against the median three-year compound annual growth in EPS of the high-performing financial peer group and (ii) the cumulative three-year improvement in the Company’s economic return on invested capital, or E-ROIC, measured against an internal target. Based upon the Company’s financial performance during the 2004-2006 cycle of a 10.85% compound annual growth rate in EPS and three-year E-ROIC of 19.12%, the Committee determined that 176.0% of the PSUs granted in 2004 were earned. See Columns (d) and (e) of the Option Exercises and Stock Vested table on page 51 for more information regarding PSU awards for the 2004-2006 cycle. At the start of the performance cycle, the Committee determined that PSUs earned for the 2004-2006 cycle would be payable in cash or Common Stock or a combination of both cash and Common Stock at the election of the executive.

In 2004, the Committee recommended and the independent directors approved a special contingent grant of up to 80,000 PSUs payable to Mr. Lenny at the conclusion of the three-year

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cycle beginning January 1, 2004, and ended December 31, 2006. The maximum grant of 80,000 PSUs was contingent upon achieving a compound annual growth rate in net sales, excluding sales generated by acquisitions, of at least 4.5% over that period. The compound annual growth rate of our net sales, excluding sales generated by acquisitions, exceeded the maximum achievement level set in 2004 for this award. As a result, the Committee approved payment of the full contingent grant of 80,000 PSUs to Mr. Lenny as reflected in the Option Exercises and Stock Vested table.

The established performance measures for PSUs for the three-year cycle beginning in 2006 are the Company’s three-year compound annual growth in EPS versus the median three-year compound annual growth in EPS of the high-performing financial peer group, and the Company’s cumulative three-year improvement in E-ROIC against an internal benchmark. The performance scores can range from 0% to 250%, with each factor weighted at 50%. These performance measures are chosen and the metrics set to significantly reward achievement of top-quartile performance against the high-performing financial peer group and internal targets, and significantly less than target for below-average performance. The three-year cycle reinforces our objective to build and sustain stockholder value over the long term and serves to retain executive talent.

PSUs earned during the 2006-2008 three-year cycle are payable in shares of Common Stock. The actual value received by each executive will be dependent upon the market value of the shares at the end of the cycle and our performance during the three-year cycle. At the time of grant, the value of each PSU granted in 2006 was $56.30 and was based upon the average of the market closing prices of our Common Stock each trading day during December 2005. See Columns (f), (g) and (h) of the Grants of Plan-Based Awards table on page 47 for more information about the PSUs granted in 2006.

Stock Options.  Another important element of our long-term incentive compensation program is the award of stock options. Stock options are designed to align the interests of executives with those of stockholders. Stock options generally are granted annually to the Company’s senior executive group as well as to other key managerial and professional employees. Stock options entitle the holder to purchase a fixed number of shares of Common Stock at a set price during a specified period of time. Because stock options only have value if the value of our Common Stock increases, they encourage efforts to enhance long-term stockholder value.

The Committee sets guidelines for the number of stock options to be granted based on the total compensation package established in relation to the competitive compensation data. In 2006, the number of stock options granted to our executive officers was determined by multiplying base pay by the “market-competitive option target level,” divided by the Black-Scholes value. The “market-competitive option target level” for each position is targeted to be one-half of the recipient’s long-term incentive compensation target award. The value of an option is determined using the Black-Scholes option-pricing model, as described in note 15 of the consolidated financial statements contained in the 2006 Annual Report to Stockholders that accompanies this proxy statement. Executives performing below expectations did not receive a stock option award in 2006.

Stock options are awarded annually under the Incentive Plan to all eligible recipients; however, the Committee may elect not to grant stock options in a given year. In order to have flexibility to provide stock option grants as recruitment, retention, performance recognition or promotion awards, the Committee is authorized under the Incentive Plan to establish a stock option pool for use by our CEO for such purposes. The Committee establishes the stock option pool annually.

The number of stock options allocated to the pool is generally 10% of the aggregate number of options included in the annual grant. Options remaining in the pool at the end of the period do not

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carry over to the following period. The CEO may not make discretionary grants from the pool to the Company’s executive officers. Stock option grants from the CEO pool are made one time per month according to an annually pre-determined schedule.

Stock options granted in 2006 vest ratably over four years and have a 10-year term. As required by the Incentive Plan, the options have an exercise price equal to the closing market price of the Common Stock on the New York Stock Exchange on the trading day immediately preceding the date of grant. As discussed elsewhere in this proxy statement, we are proposing that our stockholders approve changes to the Incentive Plan at this year’s annual meeting, including the way the exercise price of stock options is determined. If the changes are approved, the exercise price of stock options would be set as the closing price of our Common Stock on the New York Stock Exchange on the grant date. These changes are described in the response to the next question below and in Proposal No. 3 beginning on page 62 of this proxy statement.

See Column (f) of the Summary Compensation Table, Columns (j) through (l) of the Grants of Plan-Based Awards table, Columns (b) through (f) of the Outstanding Equity Awards table and Columns (b) and (c) of the Option Exercises and Stock Vested table for more information on stock options granted to Mr. Lenny and the other named executive officers.

Restricted Stock Units.  The Committee grants restricted stock unit, or RSU, awards from time to time as special incentives. RSUs also are awarded to replace compensation forfeited by newly-hired executive officers and key managers of the Company upon leaving a prior employer to join Hershey. Each RSU granted under the Incentive Plan equals a share of Common Stock. RSUs vest if the grant recipient remains in the Company’s employment for a prescribed period of time. Recipients may elect to receive payment for vested RSUs in cash or in shares of the Company’s Common Stock, net of applicable taxes. The value of an RSU is based upon the closing price of the Company’s Common Stock on the New York Stock Exchange on the trading day immediately preceding the vesting date.

The Committee is authorized under the Incentive Plan to allocate a pool of RSUs for our CEO to use as recruitment, retention, performance recognition or promotion awards. The Committee establishes the RSU pool annually. For the past several years, the Committee has allocated 50,000 RSUs to the pool. Such discretionary awards may not be made by the CEO to the Company’s executive officers. RSUs remaining in the pool at the end of the period do not carry over to the following period.