Prepared By R.R. Donnelley Financial -- Form 8-K

On January 18, 2006, the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of Valero Energy Corporation (the "Company") approved certain compensation arrangements for each of the Company's "named executive officers" (as defined in Item 402(a)(3) of Regulation S-K). On January 19, 2006, the independent directors of the Board ratified and approved the compensation arrangements payable to the Company's Chief Executive Officer. In addition, a new non-employee director was elected to the Board on January 19, 2006, making him eligible to participate in the Company's compensation arrangements for non-employee directors. These compensation arrangements are described below.

Incentive Bonus. The Committee (and the independent directors of the Board with respect to the CEO) approved incentive bonus awards for 2005 for each of the Company's named executive officers pursuant to the terms of the Valero Energy Corporation Annual Bonus Plan (the "Bonus Plan").

Performance Share Award s. The Committee (and the independent directors of the Board with respect to the CEO) approved awards of performance shares for each of the Company's named executive officers pursuant to the terms of the Company's 2005 Omnibus Stock Incentive Plan (the "OSIP"). The performance shares are payable in shares of the Company's common stock, $.01 par value ("Common Stock"). The performance shares vest annually in one-third increments beginning on the first anniversary of their grant date. Upon vesting, the performance shares are converted into a number of shares of Common Stock based upon the Company's total shareholder return during rolling three-year periods that end on December 31 of each year following the date of grant. At the end of each performance period, the Company's total shareholder return is compared to its peer group and is ranked by quartile. Holders of the performance shares then earn 0 percent, 50 percent, 100 percent or 150 percent of that portion of the initial grant that is vesting, depen ding upon whether the Company's total shareholder return is in the last, third, second or first quartile, respectively; holders earn 200 percent if the Company is the highest ranking entity in the peer group.

Compensation Arrangements for New Non-Employee Director. Irl F. Engelhardt was elected to the Board on January 19, 2006. Accordingly, he is eligible to receive equity compensation grants from the Company pursuant to the terms of the Company's (i) Restricted Stock Plan for Non-Employee Directors ("NED RS Plan"), and (ii) Non-Employee Director Stock Option Plan ("NED SO Plan"). In addition, he is entitled to the non-employee director fees generally payable to the Company's non-employee directors. The foregoing compensation arrangements are further described on pages 6 and 7 of the Company's proxy statement for the 2005 annual meeting of stockholders (file no. 1-13175, filed March 26, 2005) under the caption "Compensation of Directors," and that information is hereby incorporated by reference into this Current Report.

Note. The forms of agreements filed as exhibits to this Current Report - together with the OSIP, the Bonus Plan, the NED RS Plan, the NED SO Plan and the disclosures stated above - contain the material terms and conditions for participation in the compensation arrangements described in this Item. In reliance on Instruction 1 to Item 601(b)(10) of Regulation S-K, the Company is not filing each individual's personal arrangement under the plans.

Exhibit No.		Description
EX-10.02		Form of Performance Award Agreement
EX-10.04		Amendment to Bonus Plan

EX-10.02 2 rrd104422_11016.htm FORM OF PERFORMANCE AWARD AGREEMENT PERFORMANCE SHARE AGREEMENT Exhibit 10.02

PERFORMANCE SHARE AGREEMENT

This Performance Share Agreement (the "Agreement") is entered into effective January 18, 2006, by and between Valero Energy Corporation, a Delaware corporation ("Valero"), and _______, a participant (the "Participant") in Valero's 2005 Omnibus Stock Incentive Plan (as may be amended, the "Plan"), pursuant to and subject to the provisions of the Plan.

1. Grant of Performance Shares. Valero hereby grants to Participant _______ Performance Shares pursuant to Section 6.7 of the Plan. The Performance Shares represent rights to receive shares of Common Stock of Valero, subject to the terms and conditions of this Agreement and the Plan.

2. Performance Period. Except as provided below with respect to a Change of Control (as defined in the Plan), the "Performance Period" for any Performance Shares eligible to vest on any given Normal Vesting Date (as defined below) shall be the three calendar years ending on the December 31 immediately preceding the Normal Vesting Date.

3. Vesting and Delivery of Shares.

A. Vesting. The Performance Shares granted hereunder shall vest over a period of three years in equal, one-third increments with the first increment vesting on the date of the regularly scheduled meeting of the Board's Compensation Committee ("Meeting Date") in January 2007, and the second and third increments vesting on the Committee's Meeting Dates in January 2008 and January 2009, respectively (each of these three vesting dates is referred to as a "Normal Vesting Date"), such vesting being subject to verification of attainment of the Performance Objectives described in Paragraph 4 by the Compensation Committee. If the Committee is unable to meet in January of a given year, then the Normal Vesting Date for that year will be the date not later than March 31 of that year as selected by the Compensation Committee.

B. Rights. Until shares of Common Stock are actually issued to Participant (or his or her estate) in settlement of the Performance Shares, neither Participant nor any person claiming by, through or under Participant shall have any rights as a stockholder of Valero (including, without limitation, voting rights or any right to receive dividends or other distributions) with respect to such shares, and Participant's status with respect to the issuance of such shares shall be that of a general creditor of Valero.

C. Distribution. Any shares of Common Stock to be distributed under the terms of this Agreement shall be distributed as soon as administratively practicable after the applicable Normal Vesting Date, but not later than two-and-one-half months following the end of the year in which the vesting date for such Common Stock occurred.

4. Performance Objectives.

A. Total Shareholder Return. Total Shareholder Return ("TSR") will be compiled for a peer group of companies (the "Target Group") for the Performance Period immediately preceding each Normal Vesting Date. TSR for each such company is measured by dividing the sum of (i) the dividends on the common stock of such company during the Performance Period, assuming dividend reinvestment, and (ii) the difference between the price of a share of such company's common stock at the end and at the beginning of the period (appropriately adjusted for any stock dividend, stock split, spin-off, merger or other similar corporate events) by (iii) the price of a share of such company's common stock at the beginning of the period.

B. Target Group. The applicable Target Group shall be selected by the Compensation Committee, acting in its sole discretion, at the beginning of the calendar year immediately preceding each Normal Vesting Date (or not later than 90 days after the commencement of such calendar year). The same Target Group shall be utilized to determine the number of Performance Shares vesting under all Performance Award Agreements of Valero having a similar Normal Vesting Date, but the decision of the Compensation Committee as to the composition of such Target Group shall be final.

C. Performance Ranking. The TSR for the Performance Period for Valero and each company in the Target Group shall be arranged by rank from best to worst according to the TSR achieved by each company. The total number of companies so ranked shall then be divided into four groups ("Quartiles"). For purposes of assigning companies to Quartiles (with the 1st Quartile being the best and the 4th Quartile being the worst), the total number of companies ranked (including Valero) shall be divided into four groups as nearly equal in number as possible. The number of companies in each group shall be the total number contained in the Target Group divided by four. If the total number of companies is not evenly divisible by four, so that there is a fraction contained in such quotient, the extra company(ies) represented by such fraction will be included in one or more Quartiles as follows:

fraction is 1/4: extra company(ies) in 1st Quartile

fraction is 1/2: extra company(ies) in 1st and 2nd Quartile

fraction is 3/4: extra company(ies) in 1st, 2nd and 3rd Quartile

Any performance shares not awarded as shares of Common Stock as a result of a ranking in the 3rd or 4th Quartile will carry forward for one more Performance Period; up to 100% of the Performance Shares carried forward may be awarded based on Valero's TSR during the next Performance Period, provided, that if any Performance Shares are carried forward due to a ranking in the 3rd Quartile, no such shares shall be awarded unless Valero's TSR in the subsequent period is in the 2nd or 1st Quartile. To the extent shares of Common Stock are not distributed due to a ranking in the 3rd or 4th Quartile and are further deferred, such deferred shares may be distributed in accordance with this paragraph as soon as administratively practicable following a determination that such shares are to be awarded in accordance with this Paragraph 4(C), and in such event, the distribution shall not occur later than two-and-one-half months following the end of the year in which the vesting date for such Common Stock occurred.

D. Vesting Percentages. The number of shares of Common Stock, if any, that Participant will be entitled to receive in settlement of the vested Performance Shares will be determined on each Normal Vesting Date and, subject to the provisions of the Plan and this Agreement, on such Normal Vesting Date, the following percentage of the vested Performance Shares will be awarded as shares of Common Stock to the Participant if Valero's TSR during the Performance Period falls within the following ranges:

Valero TSR is 4th Quartile: 0% awarded as common shares

Valero TSR is 3rd Quartile: 50% awarded as common shares

Valero TSR is 2nd Quartile: 100% awarded as common shares

Valero TSR is 1st Quartile: 150% awarded as common shares

If Valero's TSR is the highest achieved in the 1st Quartile for the Performance Period, Participant shall be awarded a number of shares of Common Stock equal to 200% of the Performance Shares that vested during the Performance Period.

5. Termination of Employment.

A. Voluntary Termination and Termination for "Cause". Except for a Change of Control (described below), if Participant's employment is voluntarily terminated by the Participant (other than through retirement, death or disability), or is terminated by Valero for "cause" (as defined pursuant to the Plan), then (a) those Performance Shares that have not vested or been forfeited, and for which a Normal Vesting Date occurs on or before the 30th day following the date of such termination, shall be awarded as shares of Common Stock on such Normal Vesting Date subject to the attainment of the performance objectives in accordance with Paragraph 4 hereof, and (b) any such Performance Shares for which a Normal Vesting Date does not occur within such 30-day period, or that are not otherwise awarded as shares of Common Stock on a Normal Vesting Date as a result of the application of Paragraph 4, shall thereupon be forfeited.

B. Retirement, Death, Disability, and Involuntary Termination Other Than for "Cause". Except for a Change of Control, if a Participant's employment is terminated through retirement, death, or disability, or by Valero other than for cause (as determined pursuant to the Plan), then (a) those Performance Shares that have not theretofore vested or been forfeited, and for which a Normal Vesting Date occurs on or before the 90th day following the date of such termination, shall be subject to vesting on such Normal Vesting Date in accordance with Paragraph 4 hereof, and (b) any such Performance Shares for which such a Normal Vesting Date does not occur within such 90-day period, or which otherwise do not vest on a Normal Vesting Date as a result of application of Paragraph 4, shall thereupon be forfeited.

6. Change of Control. If a Change of Control occurs with respect to Valero, then each Performance Period with respect to any Performance Shares that have not vested or been forfeited shall be terminated effective as of the date of such Change of Control (a "Change of Control Vesting Date"); the TSR for Valero and for each company in the Target Group shall be determined for each such shortened Performance Period and the percentage of Performance Shares to be received by the Participant for each such Performance Period shall be determined in accordance with Paragraph 4 and shall be distributed as soon as administratively practicable thereafter. For purposes of determining the number of Performance Shares to be received as of any Change of Control Vesting Date, the Target Group as most recently determined by the Compensation Committee prior to the date of the Change of Control shall be used.

7. Plan Incorporated by Reference. The Plan is incorporated into this Agreement by this reference and is made a part hereof for all purposes. Capitalized terms not otherwise defined in this Agreement shall have the meaning specified in the Plan.

8. No Assignment. This Agreement and the Participant's interest in the Performance Shares granted by this Agreement are of a personal nature, and, except as expressly permitted under the Plan, Participant's rights with respect thereto may not be sold, mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Participant, except by an executor or beneficiary pursuant to a will or pursuant to the laws of descent and distribution. Any such attempted sale, mortgage, pledge, assignment, transfer, conveyance or disposition shall be void, and Valero shall not be bound thereby.

9. Successors. This Agreement shall be binding upon any successors of Valero and upon the beneficiaries, legatees, heirs, administrators, executors, legal representatives, successors and permitted assigns of Participant.

VALERO ENERGY CORPORATION

By:

R. Michael Crownover, Vice President

__________________________________________

Participant

EX-10.04 3 rrd104422_11017.htm AMENDMENT TO BONUS PLAN AMENDMENT TO THE Exhibit 10.04

AMENDMENT TO THE VALERO ENERGY CORPORATION

ANNUAL BONUS PLAN

Recitals:

A. Valero Energy Corporation (the "Company") has heretofore adopted and placed into effect the Valero Energy Corporation Annual Bonus Plan (the "Bonus Plan").

B. The By-laws of the Company authorize the Board of Directors (the "Board") to delegate to the person acting as chief executive officer of the Company (the "Chief Executive Officer") such duties as may be deemed advisable by the Board.

C. By resolution dated May 9, 2002, the Board delegated to the Chief Executive Officer of the Company the full authority of the Board to approve and cause to be placed into effect amendments to, among other plans, the Bonus Plan.

D. The Company desires to amend the Bonus Plan for compliance with certain provisions of the Internal Revenue Code of 1986, as amended, relating in particular to deferred compensation.

WITNESSETH:

The undersigned, William R. Klesse, Chief Executive Officer of the Company, acting pursuant to the authority set forth above, and having determined that this Amendment is desirable and in the best interests of the Company, hereby amends the Bonus Plan as follows:

1. Section 4.6 is hereby amended by replacing the first sentence thereof with the following:

"The Committee will normally authorize the payment of bonus awards within two and one-half months (75 days) after the close of the Plan Year."

2. Article 7 is hereby amended by adding a new Section 7.5 to read in its entirety as follows:

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.

3. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings given to them in the Bonus Plan.

4. As amended hereby, the Bonus Plan shall continue in full force and effect, and the Secretary or any Assistant Secretary of the Company shall incorporate the foregoing amendments and all prior amendments, together with such conforming changes and corrections as he or she may determine to be necessary or appropriate, into an amended and restated Bonus Plan document, which shall thereupon constitute the official Bonus Plan document for the Bonus Plan for all purposes.

5. This Amendment shall be effective as of January 1, 2006.

In Witness Whereof, the undersigned Chief Executive Officer of the Company has executed this Amendment effective as of the date written above.

/s/ William R. Klesse

William R. Klesse

Chief Executive Officer

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Delaware		74-1828067
(State or other jurisdiction of		(IRS Employer
incorporation)		Identification No.)

		Valero Energy Corporation


Date: January 20, 2006	By:	/s/ Jay D. Browning
		Jay D. Browning
		Vice President and Secretary