Sears Holdings (SHLD)

2007 Executive LTIP

The 2007 Executive LTIP provides for grants of performance-based restricted stock to our executive officers. During fiscal 2008, the Company concluded that the EBITDA performance target established in connection with the performance-based restricted stock grants was unlikely to be achieved. Accordingly, the Company ceased recording expense and reversed all prior expense recognized in connection with such awards even though there were no forfeitures during fiscal 2008 relating to such grants. It is expected that the each participating named executive officers will forfeit half of his respective award at the end of fiscal 2009, and the remaining portion of the award will be forfeited at the end of fiscal 2010. If a participating named executive officer leaves the Company before the payment date, the participating named executive officer will forfeit his performance-based restricted stock. Mr. Johnson is the only named executive officer that currently participates in the 2007 Executive LTIP.

In light of the fact that it is not expected that vesting of the performance-based restricted stock will occur, the 2007 Executive LTIP was amended, effective March 12, 2009, by the Compensation Committee to convert the performance-based restricted stock awards previously granted under the 2007 Executive LTIP to a cash incentive award. The amendment to the 2007 Executive LTIP is designed to preserve the value of the awards granted under the 2007 Executive LTIP, and it releases the stock for future grants under our company’s incentive plans. Under the amended 2007 Executive LTIP, the cash incentive award consists of a number of units equal to the number of shares performance-based restricted stock awarded to Mr. Johnson. Each unit has a value equal, as of any date, to the value of a share of restricted stock on that date. Each unit represents the right to receive an amount equal to the number of units multiplied by the fair market value of a share of common stock at the time of distribution. Payment of the cash incentive award is subject to the same performance goals and criteria, vesting requirements and other terms and conditions of the 2007 LTIP. Each cash incentive award is expected to be satisfied by a distribution in cash to the participant, provided, however, that, at the discretion of the Compensation Committee, the Company may elect to satisfy such cash incentive award by payment of shares of the Company’s common stock in lieu of cash, or a combination of cash and shares of the Company’s common stock. On March 12, 2009, Mr. Johnson surrendered 19,667 shares of performance-based restricted stock to the Company in exchange for a cash incentive award consisting of 19,667 units.

2007 Executive LTIP

The 2007 Executive LTIP contains the following elements.

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If the target is achieved during fiscal 2007, 2008 or 2009, the number of shares released during fiscal 2009 will be the entire award amount reflected in the table on page 23 of this proxy statement. If the performance target is achieved in fiscal 2010, the number of shares released will be half of the original award amount reflected in the table on page 23 of the proxy statement. If the performance target is not achieved by 2010, no portion of the target award will be received.

Performance-based restricted stock will be forfeited if the executive leaves the Company prior to the initial payment date in fiscal 2010. An executive whose employment with us ends after the initial payment date may receive shares in certain cases.

Our ability to achieve the 2007 Executive LTIP performance target is dependent upon a number of factors. Given our recent operating performance and the current retail market conditions, there is substantial uncertainty with respect to achieving the 2007 Executive LTIP performance target in any year in the performance period. If the present conditions persist, vesting of the performance-based restricted stock awarded under the 2007 Executive LTIP is not likely to occur.