Document:

VALERO GP, LLC

Valero L.P.

Annual Bonus Plan

Table of Contents

ArticleTopic      Page

	Definitions2

	Administration3

	Participation4

	Determination of Bonus Awards5

	Bonus Targets6

	Form of Payment6

	Miscellaneous Terms and Provisions7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTRODUCTION

The Valero L.P. Annual Bonus Plan (hereinafter referred to as the "Plan") has been established for the purpose of providing bonus compensation to eligible designated employees of Valero GP, LLC and its Affiliates (hereinafter collectively referred to as the "Company").  The Company intends and desires to create individual performance incentive by providing bonus compensation awards based upon individual contributions to Company profitability by eligible designated employees. Such bonus compensation is intended to encourage levels of individual performance that will assure focus by employees on continued Company profitability.  It is further intended that when added to other forms of compensation the bonus compensation awards will result in total compensation to employees in amounts that are competitive when Company performance is compared to peer organizations.

Article 1 - Definitions

For purposes of the Plan, unless the context requires otherwise, the following terms should have the meanings set forth below.

	"Affiliate" means (a) any entity that, directly or indirectly through one or more intermediaries, is controlled by or under common control with Valero GP, LLC and (b) any entity in which Valero L.P. has a significant equity interest, in each case determined by the Committee.

	"Board" means the Board of Directors of Valero GP, LLC.

	"Bonus Target" means a percentage established to represent a normal or average bonus percentage determined through competitive survey analysis and based on each position's relative importance to the overall financial success of the Company.

	"Committee" means the Compensation Committee of the Board.

	"Discretionary Adjustment Factor" means the authority of the Committee to adjust the Company's total calculated bonus awards upward or downward by up to 25% based upon such factors as the Committee deems appropriate, and ultimately to determine whether to award a bonus to any individual.

	 "Employee" means an employee of the Company.

	"Fair Market Value" means, with respect to any property (including, without limitation, any units or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.  Notwithstanding the foregoing, unless otherwise determined by the Committee, the Fair Market Value of Company units on a given date for purposes of the Plan shall be the closing sales prices of the units on the New York Stock Exchange Consolidated Exchange as reported in the consolidation transaction reporting system on such date or, if such Exchange is not open for trading on such date, on the next following date when such Exchange is open for trading. 

	"Participant" means an Employee who is selected by the Committee to participate in the Plan.

	"Peer Group" means those companies designated by the Committee as comparable companies that will be benchmarked for determining the Company's performance as measured by selected Performance Criteria.

	"Performance Criteria" means those performance measures approved by the Compensation Committee that determine the level of Bonus Target to be earned, subject to the Discretionary Adjustment Factor.

	"Plan Year" means Valero L.P.'s fiscal year.

	"Plan" means the Valero L.P. Annual Bonus Plan.

Article 2 - Administration

	The Plan shall be administered by the Committee.  The Committee shall consist of no less than three "Non-Employee Directors" (as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time).  In the event the Committee fails to meet the foregoing criteria, then additional non-employee persons shall be appointed by the Board for purposes of administering this Plan so that the committee administering this Plan shall be composed solely of three or more Non-Employee Directors.

	The Committee is empowered to:

	Review and approve all determinations relating to the eligibility of Participants;

	Make rules and regulations for the administration of the Plan which are not inconsistent with the terms and provisions hereof;

	Construe all terms, provisions, conditions, and limitations of the Plan in good faith.  All such determinations shall be final and conclusive on all parties of interest; 

	Review and approve determinations and computations concerning the amounts to which any Participant or his beneficiary is entitled under the Plan; and

	Select, employ, and compensate from time to time consultants, accountants, attorneys and other agents as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan.

	The foregoing list of express powers is not intended to be either complete or exclusive, but the Committee shall, in addition, have such powers, whether or not expressly authorized, that it may deem necessary, desirable, advisable, or proper for the supervision and administration of the Plan.  Except as otherwise specifically provided herein, the decision or judgment of the Committee on any question arising hereunder in connection with the exercise of any of its powers shall be final, binding, and conclusive upon all parties concerned.

	The Committee shall have the responsibility of authorizing payment to each eligible Participant and directing that such payment be disbursed by the Company.

	The Board or the Committee may, at any time, amend or terminate the Plan.  Such amendments or terminations may be made without the consent of the Participants.

Article 3 - Participation

3.1The designation of Employees of the Company as Participants under the Plan shall be approved by the Committee, and no Employee of the Company will have the right to require the Committee to make him or her a Participant or to allow him or her to remain a Participant under the Plan.

Article 4 - Determination of Bonus Awards

4.1During the course of the Plan Year, the Committee shall review and approve those Performance Criteria which will measure the Company's financial, shareholder, and/or operational performance for the applicable Plan Year.  The Performance Criteria will be developed by Company management and submitted to the Committee for review and discussion.  The Committee may request Company management to provide threshold, target, and maximum levels of performance for each Performance Criteria considered.

	The Company's performance may be evaluated on an absolute basis by determining the Company's achievement versus a budgeted or pre-established level of performance approved by the Committee.  Likewise, the Company's performance may be evaluated by comparing the Company's performance against a Peer Group's performance achievement for the same Performance Criteria.

	When the Performance Criteria are established and approved during the course of the Plan Year, the Committee may elect to weight each of the Performance Criteria based upon the strategic importance of the respective Performance Criteria in consideration of the Company's annual business plan.  The weightings of the Performance Criteria may change from one Plan Year to the next.

4.4In determining the Company's performance during a measurement period, Performance Criteria will be utilized.  These Performance Criteria may be modified, deleted, or added to from one Plan Year to the next as determined by the Committee in its judgment and discretion.

	Following the close of the Plan Year, the Committee will evaluate the Company's performance compared to the Performance Criteria.  The results of this evaluation will serve as the basis for the determination of the amount of Bonus Target earned, which may range from 0 percent to as much as 200 percent of Participants' Bonus Targets.  At this time, the Committee has the authority to consider the addition to or subtraction from the bonus of as much as 25 percent of the Bonus Target for additional considerations of management and/or Company performance.  The application of this discretionary adjustment is formally referred to as the Discretionary Adjustment Factor and may be applied only by discretionary judgment of the Committee.

4.6The Committee will normally authorize the payment of bonus awards within two and one-half months (75 days) after the close of the Plan Year.  However, the Committee reserves the right to accelerate the determination and payment of bonus awards prior to the completion of the Plan Year based on the estimated or expected performance of the Company for such Plan Year.

Article 5 - Bonus Targets

5.1Bonus Targets for each position are established based upon competitive survey data and the position's relative importance to the overall financial success of the Company. The Committee shall review and approve a Bonus Target for each officer.  

5.2Each bonus award shall be calculated by using the established Bonus Target for Participants in the Plan, adjusted by the results of the Performance Criteria and the Committee's Discretionary Adjustment Factor. A qualitative evaluation of the participant's performance may also be used to adjust a participant's bonus award.  The established Bonus Target, as adjusted, will serve as the norm for a range of possible bonus awards. 

Article 6 - Form of Payment

6.1Bonuses payable under the Plan shall be paid in the form of cash in whole or in part or, if permitted under applicable NYSE and SEC rules and regulations, in the form of units of the Company in whole or in part.   Under the Plan, if permitted under applicable NYSE and SEC rules and regulations, certain Participants may also be provided with an election to purchase, at Fair Market Value, units of the Company utilizing a pre-determined portion of their bonus. 

	With respect to Plan bonuses payable in part or in whole in units of the Company, a Participant may pay all or part of the amount of any taxes required to be collected or withheld by the Company upon payment of the Participant's bonus by electing, before an established date prior to the time of payment of the bonus, to have the Company withhold from the number of units otherwise deliverable under the bonus a number of units having a Fair Market Value on the  established date not exceeding the amount of the tax payment. However, for this purpose, Federal Income Tax may be withheld at the highest personal tax rate then in effect.

6.3The Committee may approve a deferral of the payment of bonuses with payment in whole at a later date or in installments over a period of time.  The length of time of deferral or installment period will be determined at the discretion of the Committee.

Article 7 - Miscellaneous Terms and Provisions

7.1No Employee shall have any claim or right to be paid a bonus or any form of award, and the award of a bonus will not be construed as giving a Participant the right to be retained in the employ of the Company.  Further, the Company expressly reserves the right at any time to terminate the employment of any Participant free from any liability under the Plan.

	The validity, construction, and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable Federal law.

	The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, expressly to assume and agree to perform the Company's obligations under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place.  As used herein, the "Company" shall mean the Company as hereinbefore defined and any aforesaid successor to its business and/or assets.

	No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or Employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation.

	Notwithstanding anything in this Plan to the contrary, if any Plan provision or bonus award under the Plan would result in the imposition of an applicable tax under Section 409A of the Internal Revenue Code of 1986, as amended, and related regulations and Treasury pronouncements ("Section 409A"), that Plan provision or bonus award may be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant's rights to an award._

[drugstore.com, inc. logo]

411 108th Ave NE " Suite 1400 " Bellevue, Washington 98004 " Telephone 425.372.3200 " Facsimile 425.372.3800

January 30, 2007

Mr. Robert A. Barton

c/o drugstore.com

411 108th Ave. NE, Suite 1400

Bellevue, WA  98004

Re.Transition and Separation Agreement

Dear Bob:

This letter agreement (this "Agreement") will confirm our understanding with regard to your decision to transition out of your current role as an employee and Chief Financial Officer ("CFO") of drugstore.com and its subsidiaries (the "Company").

 

	Transition.  Subject to the terms set forth herein, you will remain a full time employee of the Company and serve as its CFO through the earlier of (a) April 30, 2007, (b) the date on which your successor commences his or her employment with the Company as its CFO, or (c) such other date as may be mutually agreed upon in writing by you and the Company (the "Transition Date").  The Company will endeavor to identify and hire a qualified successor before April 30, 2007.  

	Role through the Transition Date.  From the date hereof until the Transition Date, you will continue to conscientiously and diligently perform the duties of CFO of the Company on a full-time basis.  The Company may allocate some of your job responsibilities to others.  However, subject to the foregoing, the Company will rely upon you to continue to function as its CFO until a successor is available to assume that role.

	Role through the Separation Date.  Subject to the terms set forth herein, following the Transition Date and through the Separation Date (defined below) you will remain available to assist the Company, as it may request, in transitioning your current duties to your successor(s) or in serving in an advisory capacity to me, the Company's CEO.  As used above "Separation Date" means the earlier of (a) September 30, 2007, (b) the date on which you begin providing substantial, compensated services to any individual or entity other than the Company, whether as an employee or independent contractor, or (c) such other date as may be mutually agreed upon in writing by you and the Company.

	Salary and benefits.  From the date hereof through your Separation Date, subject to the terms set forth herein, the Company will continue to pay your regular base salary and you will continue to be eligible for all benefits and perquisites that you currently enjoy; provided, however, that you will not be eligible for any new equity grants or other new incentive bonus opportunities.

	Bonus.  You are entitled to receive your bonus for the Company's fiscal year ending December 31, 2006.  Further, with respect to the fiscal year ending December 31, 2007, subject to (i) your compliance with the terms of this Agreement and any other agreement with the Company by which you are bound, and (ii) the discretion of the Company's CEO, the Company will pay you in 2008 an amount equal to the bonus you would have been eligible to receive for the fiscal year based on your current, regular base salary and on full year results, prorated for period through your Separation Date.  Any payment of such bonus will be made to you at the same time in 2008 as bonuses are paid to other senior executives of the Company for the fiscal year ending December 31, 2007.  

	Equity compensation.  As long as you remain employed by drugstore.com, stock options of the Company that have been granted to you as of the date hereof will continue to vest through your Separation Date.  Assuming successful discharge of your duties through the Separation Date, the Company will extend to December 31, 2007 the time period for exercising any vested stock options.

	Accrued obligations.  You will be paid for accrued, unused vacation dates, if any, and any other accrued obligations of the Company (e.g., unpaid base salary, unreimbursed business expenses, etc.) after your Separation Date in a manner consistent with the Company's then applicable policies for such payments to terminating employees.

	Severance and Release Agreement.  As a condition of receiving the above benefits, you agree to execute on or near the Separation Date, a Severance and Release Agreement substantially in the form attached.

	Integration.  While we will honor our commitments to you under this Agreement in good faith, nothing in this Transition and Separation Agreement is intended to alter your at-will employment status at drugstore.com.  This Transition and Separation Agreement represents the entire understanding between you and the Company concerning the matters described herein, and supersedes all prior communications.  It can only be modified expressly in a writing signed by both parties.  

On behalf of the Company, I wish to thank you for the many contributions you have made to drugstore.com over the years.  I also appreciate your willingness to enable the Company to effect an orderly transition.  I look forward to continuing to work with you through the transition and wish you good luck in your future endeavors.

 
Sincerely,

drugstore.com, inc.

/s/ Dawn G. Lepore

By:  Dawn G. Lapore

Title: President and CEO; Chairman of the Board

Agreed to and accepted:

 

/s/ Robert A. Barton

By: Robert A. Barton

Date:January 31, 2007

 
Attachment to Letter to Robert A. Barton dated January 30, 2007

SEVERANCE AND RELEASE AGREEMENT

THIS SEVERANCE AND RELEASE AGREEMENT (the "Agreement") is entered into by Robert A. Barton (hereinafter referred to as "Employee") and drugstore.com, its parent, affiliates, subsidiaries, officers, directors, and managers (hereinafter referred to as "drugstore.com" or "Employer").  The effective date of this Agreement is .
RECITALS

WHEREAS, Employee has been employed by the Company as Vice President, Finance & Operations, Chief Financial Officer and Treasurer; and

WHEREAS, the Employee wishes to terminate his employment with the Company, effective ; and

WHEREAS, the Employee is hereby advised of his right to consult an attorney prior to signing this Agreement.  Employee has either consulted an attorney of his choice or voluntarily elected not to consult legal counsel, and understands that he is waiving all potential claims against the Company arising prior to the effective date of this Agreement and relating to his employment in any way; and 

WHEREAS, Employee acknowledges that he enters into this Agreement knowingly and voluntarily without coercion or duress from any source.  Employee has had a reasonable time in which to consider whether he wished to sign this Agreement.
AGREEMENTS

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises contained below, it is agreed as follows:
EMPLOYMENT AND OFFICES:  ENDING DATE AND RESPONSIBILITIES

The Company and Employee acknowledge and agree that Employee's employment with the Company and its affiliates, and his status as an officer, will terminate effective  (the "Separation Date").  Employee understands and agrees that this termination is effective with respect to all offices and positions he holds with the Company and any of its affiliates.  
BENEFITS FROM EMPLOYER

As consideration for the release of claims set forth below and other obligations under this Agreement:

The Company will allow Employee to exercise vested option grants until December 31, 2007.  In addition, the Company will pay Employee an amount equivalent to up to two weeks salary (up to 80 hours) to compensate employee for accrued but unused vacation.  Finally, the Company will facilitate the transfer of the cell phone number that employee uses ((XXX) XXX-XXXX) to a personal account in the name of the Employee or to a corporate account for the benefit of Employee.    
VALID CONSIDERATION

Employee and drugstore.com agree that the offer by drugstore.com to Employee to extend the option exercise period described in the preceding paragraph is not required by drugstore.com's policies or procedures or by any pre-existing contractual obligation of drugstore.com or by any statute, regulation or ordinance, and is offered by drugstore.com solely as consideration for this Agreement.  In the event Employee fails to abide by the terms of this Agreement, drugstore.com may elect, at its option and without waiver of other rights or remedies it may have, not to pay or provide any unpaid severance payments or benefits, and to seek to recover previously paid severance pay.
 STOCK OPTIONS

Employee acknowledges and agrees that no shares will vest after his Separation Date.  
REAFFIRMATION OF CONFIDENTIALITY AND INVENTIONS AGREEMENT

Employee expressly reaffirms and incorporates herein as part of this Agreement the Confidentiality and Inventions Agreement dated August 30, 1998, which Employee signed as part of his employment with drugstore.com, a copy of which is attached hereto as Exhibit A, which shall remain in full effect.  
RELEASE OF CLAIMS

Employee expressly waives any claims against drugstore.com (including, for purposes of this paragraph 6, all parents, affiliates, subsidiaries, officers, directors, stockholders, managers, employees, former employees, agents, investors, and representatives, predecessors and successors) and further releases drugstore.com (including its parents, affiliates, subsidiaries, officers, directors, stockholders, managers, employees, former employees, agents, investors, and representatives, predecessors and successors) from any claims, whether known or unknown, which existed or may have existed at any time up to the date of this Agreement, including claims related in any way to Employee's employment with drugstore.com or the ending of that relationship.  This release includes, but is not limited to, any claims for wages, bonuses, employment benefits, stock options, or damages of any kind whatsoever, claims arising out of any common law torts, arising out of any contracts, express or implied, any covenant of good faith and fair dealing, express or implied, any theory of wrongful discharge, any theory of negligence, any theory of retaliation, any theory of discrimination or harassment in any form, any legal restriction on drugstore.com's right to terminate employees, or any federal, state, or other governmental statute, executive order, or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964 as amended, the Civil Rights Act of 1991, the Civil Rights Act of 1866, 42 U.S.C. Section 1981, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Family and Medical Leave Act, the Employee Retirement Income Security Act, the Washington Law Against Discrimination, or any other legal limitation on or regulation of the employment relationship.  Employee agrees to indemnify and hold drugstore.com harmless from and against any and all loss, costs, damages, or expenses, including, without limitation, reasonable attorneys' fees incurred by drugstore.com arising out of any breach of this Agreement by Employee or resulting from any representation made herein by Employee that was false when made.  Notwithstanding any other provision of this Agreement to the contrary, this waiver and release shall not apply to any claims by either party arising under that certain Indemnification Agreement between Employee and drugstore.com, and which is reaffirmed and incorporated herein as part of this Agreement.

Employee represents that Employee has not filed any complaints, charges or lawsuits against drugstore.com with any governmental agency or any court, and agrees that Employee will not initiate, assist or encourage any such actions, except as required by law.  Employee further agrees that if a commission, agency, or court assumes jurisdiction of such claim, complaint or charge against drugstore.com on behalf of Employee, Employee will request the commission, agency or court to withdraw from the matter. This clause does not prohibit employee from enforcing the terms of this Agreement.

Employee represents and warrants that he is the sole owner of the actual or alleged claims, rights, causes of action, and other matters which are released herein, that the same have not been assigned, transferred, or disposed of in fact, by operation of law, or in any manner and that he has the full right and power to grant, execute and deliver the releases, undertakings, and agreements contained herein.
NO ADMISSION OF WRONGDOING

This Agreement shall not be construed as an admission by either party of any wrongful act, unlawful discrimination, or breach of contract. Employer specifically disclaims any liability to or discrimination against Employee or any other person.
NONDISPARAGEMENT  

Employee agrees to refrain from making any derogatory or disparaging comments to the press or any individual or entity regarding drugstore.com's business or related activities or the relationship between the parties.    
RETURN OF PROPERTY

Employee confirms that Employee has returned to Employer all files, memoranda, records, credit cards, pagers, computers, computer files, passwords and passkeys, Card Keys, or related physical or electronic access devices, and any and all other property received from Employer or any of its current or former employees or generated by Employee in the course of employment.
BREACH OR DEFAULT 

Any party's failure to enforce this Agreement in the event of one or more events that violate this Agreement shall not constitute a waiver of any right to enforce this Agreement against subsequent violations.
SEVERABILITY

The provisions of this Agreement are severable, and if any part of it is found to be unlawful or unenforceable, the other provisions of this Agreement shall remain fully valid and enforceable to the maximum extent consistent with applicable law.  If any one or more of the provisions of this Agreement is for any reason held to be excessively broad as to duration, geographical scope, activity, subject or for any other reason, it will be construed by limiting it and reducing it, so as to be enforceable to the extent compatible with the applicable law as it then appears in order to carry out the intent of the provision to the greatest extent possible. 
ENTIRE AGREEMENT

This Agreement sets forth the entire understanding between Employee and drugstore.com and supersedes any prior agreements or understandings, express or implied, pertaining to the terms of Employee's employment with drugstore.com and the employment relationship.  Employee acknowledges that in executing this Agreement, Employee does not rely upon any representation or statement by any representative of drugstore.com concerning the subject matter of this Agreement, except as expressly set forth in the text of the Agreement.  No modification or waiver of this Agreement will be effective unless evidenced in a writing signed by both parties.
GOVERNING LAW

This Agreement will be governed by and construed exclusively in accordance with the laws of the State of Washington without reference to its choice of law principles.  Any disputes arising under this Agreement shall be brought in a court of competent jurisdiction in the State of Washington.
KNOWING AND VOLUNTARY AGREEMENT

Employee represents and agrees that Employee has read this Agreement, understands its terms and the fact that this Agreement releases any claims that Employee might have against Employer.  Further, Employee understands that Employee has the right to consult counsel of choice and has either done so or knowingly waived the right to do so, and enters into this Agreement without duress or coercion from any source.
OPPORTUNITY TO CONSIDER AND REVOKE AGREEMENT

Employee agrees that he has been encouraged to seek legal counsel to review this Agreement, has been provided the opportunity to consider for twenty-one (21)  days whether to enter this Agreement, and has voluntarily chosen to enter the Agreement on this date.  Employee may revoke this Agreement for a period of seven (7) days following the execution of this Agreement; this Agreement shall become effective following expiration of this seven (7) day period (the "Effective Date").  Employee acknowledges that he is voluntarily executing this Agreement, that he has carefully read and fully understands all aspects of this Agreement, that he has not relied upon any representations or statements not set forth herein or made by Employer's agents or representatives.

IN WITNESS WHEREOF, the parties have executed this Agreement. 

	
drugstore.com, inc.

By: 

Its: 

	
Robert A. Barton

_______________________________

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