UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Valero Energy Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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VALERO ENERGY CORPORATION

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS

The Board of Directors has determined that the 2009 Annual Meeting of Stockholders of Valero Energy Corporation will be held on Thursday, April 30, 2009, at 10:00 a.m., Central Time, at our offices located at One Valero Way, San Antonio, Texas 78249 for the following purposes:

	(1)		Elect four Class III directors to serve until the 2012 annual meeting of stockholders or until their respective successors are elected and have been qualified;
	(2)		Ratify the appointment of KPMG LLP as our independent registered public accounting firm for 2009;
	(3)		Vote on a stockholder proposal entitled, “Say-on-Pay”;
	(4)		Vote on a stockholder proposal entitled, “Stock Retention by Executives”;
	(5)		Vote on a stockholder proposal entitled, “Compensation Consultant Disclosures”;
	(6)		Vote on a stockholder proposal entitled, “Disclosure of Political Contributions/Trade Associations”; and
	(7)		Transact any other business properly brought before the meeting.

By order of the Board of Directors,

Jay D. Browning
Senior Vice President-Corporate Law and Secretary

Valero Energy Corporation
One Valero Way
San Antonio, Texas 78249

March 20, 2009

TABLE OF CONTENTS

GENERAL INFORMATION			1
INFORMATION REGARDING THE BOARD OF DIRECTORS			2
INDEPENDENT DIRECTORS			3
Independence Determinations			3
COMMITTEES OF THE BOARD			4
Audit Committee			4
Compensation Committee			4
Compensation Committee Interlocks and Insider Participation			4
Executive Committee			4
Finance Committee			5
Nominating/Governance Committee			5
Selection of Director Nominees			5
Evaluation of Director Candidates			5
LEAD DIRECTOR AND MEETINGS OF NON-MANAGEMENT DIRECTORS			6
PROPOSAL NO. 1 ELECTION OF DIRECTORS			6
INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS			7
Nominees			7
Other Directors			8
BENEFICIAL OWNERSHIP OF VALERO SECURITIES			9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS			9
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS			10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE			10
COMPENSATION COMMITTEE REPORT			11
COMPENSATION DISCUSSION AND ANALYSIS			11
OVERVIEW			11
ADMINISTRATION OF EXECUTIVE COMPENSATION PROGRAMS			12
Selection of Comparator Group and Other Benchmarking Data			12
Towers Perrin Compensation Data Bank			12
Compensation Comparator Group			12
Peer Group			13
Use of Benchmarking Data			13
Process and Timing of Compensation Decisions			14
ELEMENTS OF EXECUTIVE COMPENSATION			14
General			14
Relative Size of Major Compensation Elements			16
Individual Performance and Personal Objectives			16
Base Salaries			17
Annual Incentive Bonus			18
Company Financial Performance Objectives			18
Long-Term Incentive Awards			21
Stock Options and Restricted Stock			21
Performance Shares			23
Perquisites and Other Benefits			23
Perquisites			23
Other Benefits			23
Post-Employment Benefits			24
Pension Plans			24
Nonqualified Deferred Compensation Plans			24
Severance Arrangements			26
IMPACT OF ACCOUNTING AND TAX TREATMENTS			26
Accounting Treatment			26
Tax Treatment			26
ii

COMPENSATION-RELATED POLICIES			27
Stock Ownership Guidelines			27
Prohibition on Insider Trading and Speculation in Valero Stock			27
EXECUTIVE COMPENSATION			28
SUMMARY COMPENSATION TABLE			28
GRANTS OF PLAN-BASED AWARDS			31
OUTSTANDING EQUITY AWARDS			33
OPTION EXERCISES AND STOCK VESTED			36
POST-EMPLOYMENT COMPENSATION			37
PENSION BENEFITS			37
NONQUALIFIED DEFERRED COMPENSATION			39
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL			40
PAYMENTS UNDER CHANGE OF CONTROL SEVERANCE AGREEMENTS			41
COMPENSATION OF DIRECTORS			44
DIRECTOR COMPENSATION			44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			46
REVIEW, APPROVAL AND RATIFICATION OF TRANSACTIONS WITH MANAGEMENT AND OTHERS			46
TRANSACTIONS WITH MANAGEMENT AND OTHERS			46
PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			47
KPMG FEES FOR FISCAL YEAR 2008			47
KPMG FEES FOR FISCAL YEAR 2007			48
AUDIT COMMITTEE PRE-APPROVAL POLICY			48
REPORT OF THE AUDIT COMMITTEE FOR FISCAL YEAR 2008			49
STOCKHOLDER PROPOSALS			50
PROPOSAL NO. 3 STOCKHOLDER PROPOSAL — SAY-ON-PAY			50
PROPOSAL NO. 4 STOCKHOLDER PROPOSAL — STOCK RETENTION BY EXECUTIVES			53
PROPOSAL NO. 5 STOCKHOLDER PROPOSAL — COMPENSATION CONSULTANT DISCLOSURES			55
PROPOSAL NO. 6 STOCKHOLDER PROPOSAL — DISCLOSURE OF POLITICAL CONTRIBUTIONS/TRADE ASSOCIATIONS			57
EQUITY COMPENSATION PLAN INFORMATION			59
MISCELLANEOUS			60
GOVERNANCE DOCUMENTS AND CODES OF ETHICS			60
STOCKHOLDER COMMUNICATIONS			60
STOCKHOLDER NOMINATIONS AND PROPOSALS			60
OTHER BUSINESS			61
FINANCIAL STATEMENTS			61
HOUSEHOLDING			61
TRANSFER AGENT			61
iii

VALERO ENERGY CORPORATION

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

GENERAL INFORMATION

Introduction

Our Board is soliciting proxies to be voted at the 2009 Annual Meeting of Stockholders on April 30, 2009 (the “Annual Meeting”). The accompanying notice describes the time, place, and purposes of the Annual Meeting. Action may be taken at the Annual Meeting on April 30, 2009, or on any date to which the meeting may be adjourned. Unless otherwise indicated, the terms “Valero,” “we,” “our,” and “us” are used in this proxy statement to refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries, or to all of them taken as a whole. The term “Board” refers to the Board of Directors of Valero Energy Corporation.

We are mailing the Notice of Internet Availability of Proxy Materials (“Notice”) to stockholders on or about March 20, 2009. On this date, you will have the ability to access all of our proxy materials on the website referenced in the Notice.

Record Date and Shares Outstanding

Holders of record of our common stock, $0.01 par value (“Common Stock”), at the close of business on March 2, 2009 (the “record date”) are entitled to vote on the matters presented at the Annual Meeting. On the record date, 516,331,846 shares of Common Stock were issued and outstanding and entitled to one vote per share.

Quorum

Stockholders representing a majority of voting power, present in person, or represented by properly executed proxy, will constitute a quorum.

Voting in Person at the Meeting

If you attend the Annual Meeting and plan to vote in person, we will provide you with a ballot at the meeting. If your shares are registered directly in your name, you are considered the stockholder of record and you have the right to vote the shares in person at the meeting. If your shares are held in the name of your broker or other nominee, you are considered the beneficial owner of shares held in street name. As a beneficial owner, if you wish to vote at the meeting, you will need to bring to the meeting a legal proxy from the stockholder of record (e.g., your broker or other nominee) authorizing you to vote the shares.

Revocability of Proxies

You may revoke your proxy at any time before it is voted at the Annual Meeting by (a) submitting a written revocation to Valero, (b) returning a subsequently dated proxy to Valero, or (c) attending the Annual Meeting, requesting that your proxy be revoked, and voting in person at the Annual Meeting. If instructions to the contrary are not provided, shares will be voted as indicated on the proxy card.

Broker Non-Votes

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners of Common Stock. If specific instructions are not received, brokers may generally vote these shares in their discretion. However, the New York Stock Exchange (the “NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. This results in a “broker non-vote” on such a proposal. A broker non-vote is treated as “present” for purposes of determining a quorum, has the effect of a negative vote when a majority of the voting power of the issued and outstanding shares is required for approval of a particular proposal, and has no effect when a majority of the voting power of the shares present in person or by proxy and entitled to vote or a plurality or majority of the votes cast is required for approval. Per the NYSE’s rules, brokers will not have discretion to vote on the stockholder proposals presented as Proposals 3, 4, 5, and 6 in this proxy statement, but will have discretion to vote on the other items scheduled to be presented at the Annual Meeting.

Solicitation of Proxies

Valero pays for the cost of soliciting proxies and the Annual Meeting. In addition to solicitation by mail, proxies may be solicited by personal interview, telephone, and similar means by directors, officers, or employees of Valero, none of whom will be specially compensated for such activities. Valero also intends to request that brokers, banks, and other nominees solicit proxies from their principals and will pay such brokers, banks, and other nominees certain expenses incurred by them for such activities. Valero retained Georgeson Inc., a proxy soliciting firm, to assist in the solicitation of proxies, for an estimated fee of $14,000, plus reimbursement of certain out-of-pocket expenses.

For participants in our qualified 401(k) plan (“Thrift Plan”), the proxy card will represent (in addition to any shares held individually of record by the participant) the number of shares allocated to the participant’s account in the Thrift Plan. For shares held by the Thrift Plan, the proxy card will constitute an instruction to the trustee of the plan on how those shares should be voted. Shares for which instructions are not received may be voted by the trustee per the terms of the plan.

Our 2005 and 2004 Stock Splits

Our Common Stock split two-for-one on December 15, 2005, and on October 7, 2004. Each split was effected in the form of a Common Stock dividend. All share and per share data in this proxy statement have been adjusted to reflect the effect of these stock splits for all periods presented.

INFORMATION REGARDING THE BOARD OF DIRECTORS

Valero’s business is managed under the direction of our Board. Our Board conducts its business through meetings of its members and its committees. Valero’s Restated Certificate of Incorporation requires the Board to be divided into Class I, Class II, and Class III directors, with each class serving a staggered three-year term. During 2008, our Board held six meetings and the standing Board committees held 20 meetings in the aggregate. No member of the Board attended less than 75% of the meetings of the Board and committees of which he or she was a member. All Board members are expected to attend the Annual Meeting. All Board members attended the 2008 annual stockholders meeting.

INDEPENDENT DIRECTORS

The Board presently has one member from our management, William R. Klesse (Chief Executive Officer, President, and Chairman of the Board), and 10 non-management directors. The Board determined that each of its non-management directors who served at any time during 2008 met the independence requirements of the NYSE listing standards as set forth in the NYSE Listed Company Manual. Those independent directors were W.E. “Bill” Bradford, Ronald K. Calgaard, Jerry D. Choate, Irl F. Engelhardt, Ruben M. Escobedo, Bob Marbut, Donald L. Nickles, Robert A. Profusek, Susan Kaufman Purcell, and Stephen M. Waters. As a member of management, William R. Klesse is not an independent director under the NYSE’s listing standards.

The Board’s Audit, Compensation, and Nominating/Governance Committees are composed entirely of directors who meet the independence requirements of the NYSE listing standards. Each member of the Audit Committee also meets the additional independence standards for Audit Committee members set forth in regulations of the SEC.

Independence Determinations

Under the NYSE’s listing standards, no director qualifies as independent unless the Board affirmatively determines that he or she has no material relationship with Valero. Based upon information requested from and provided by each director concerning their background, employment, and affiliations, including commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, the Board has determined that, other than being a director and/or stockholder of Valero, each of the independent directors named above has either no relationship with Valero, either directly or as a partner, stockholder, or officer of an organization that has a relationship with Valero, or has only immaterial relationships with Valero, and is independent under the NYSE’s listing standards.

As provided for under the NYSE listing standards, the Board has adopted categorical standards or guidelines to assist the Board in making its independence determinations with respect to each director. These standards are published in Article I of Valero’s Corporate Governance Guidelines and are available on our website at www.valero.com under the “Corporate Governance” tab in the “Investor Relations” section. Under the NYSE listing standards, immaterial relationships that fall within the guidelines are not required to be disclosed in this proxy statement.

A relationship falls within the guidelines adopted by the Board if it:

	•		is not a relationship that would preclude a determination of independence under Section 303A.02(b) of the NYSE Listed Company Manual;
	•		consists of charitable contributions by Valero to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization’s gross revenue in any of the last three years;
	•		consists of charitable contributions to any organization with which a director, or any member of a director’s immediate family, is affiliated as an officer, director, or trustee pursuant to a matching gift program of Valero and made on terms applicable to employees and directors; or is in amounts that do not exceed $1 million per year; and
	•		is not required to be, and it is not otherwise, disclosed in this proxy statement.

COMMITTEES OF THE BOARD

The Board has standing Audit, Compensation, Executive, Finance, and Nominating/Governance Committees. Each committee has a written charter. The charters are available on our website at www.valero.com under the “Corporate Governance” tab in the “Investor Relations” section. The committees of the Board and the number of meetings held by each committee in 2008 are described below.

Audit Committee

The Audit Committee reviews and reports to the Board on various auditing and accounting matters, including the quality, objectivity, and performance of our internal and external accountants and auditors, the adequacy of our financial controls, and the reliability of financial information reported to the public. Members of the Audit Committee are Ruben M. Escobedo (Chairman), Ronald K. Calgaard, Irl F. Engelhardt, Susan Kaufman Purcell, and Stephen M. Waters. The Audit Committee met seven times in 2008. The “Report of the Audit Committee for Fiscal Year 2008” appears below following the disclosures related to Proposal 2.

The Board has determined that Ruben M. Escobedo is an “audit committee financial expert” (as defined by the SEC), and that he is “independent” as independence for audit committee members is defined in the NYSE Listing Standards. For further information regarding Mr. Escobedo’s experience, see "Proposal No. 1 Election of Directors — Information Concerning Nominees and Other Directors.”

Compensation Committee

The Compensation Committee reviews and reports to the Board on matters related to compensation strategies, policies, and programs, including certain personnel policies and policy controls, management development, management succession, and benefit programs. The Compensation Committee also approves and administers our equity compensation plans and incentive bonus plan. The Compensation Committee’s duties are described more fully in the “Compensation Discussion and Analysis” section below. The Compensation Committee has, for administrative convenience, delegated authority to Valero’s Chief Executive Officer to make non-material amendments to Valero’s benefit plans and to make limited grants of stock options and restricted stock to new hires who are not executive officers.

Members of the Compensation Committee are Bob Marbut (Chairman), W.E. “Bill” Bradford, Jerry D. Choate, and Robert A. Profusek. The Compensation Committee met six times in 2008. The “Compensation Committee Report” for fiscal year 2008 appears below, immediately preceding “Compensation Discussion and Analysis.”

     Compensation Committee Interlocks and Insider Participation

There are no compensation committee interlocks. None of the members of the Compensation Committee listed above has served as an officer or employee of Valero or had any relationship requiring disclosure by Valero under Item 404 of the SEC’s Regulation S-K, which addresses related party transactions.

Executive Committee

The Executive Committee exercises the power and authority of the Board during intervals between meetings of the Board. With limited exceptions specified in Valero’s bylaws and under Delaware law, actions taken by the Executive Committee do not require Board ratification. Members of the Executive Committee are William R. Klesse (Chairman), Jerry D. Choate, Irl F. Engelhardt, Ruben M. Escobedo, and Bob Marbut. The Executive Committee met once in 2008.

Finance Committee

The Finance Committee reviews and monitors the investment policies and performance of our Thrift Plan and pension plans, insurance and risk management policies and programs, and finance matters and policies as needed. Members of the Finance Committee are Irl F. Engelhardt (Chairman), Ruben M. Escobedo, Bob Marbut, Donald L. Nickles, Susan Kaufman Purcell, and Stephen M. Waters. The Finance Committee met three times in 2008.

Nominating/Governance Committee

The Nominating/Governance Committee evaluates policies on the size and composition of the Board and criteria and procedures for director nominations, and considers and recommends candidates for election to the Board. The Committee also evaluates, recommends, and monitors corporate governance guidelines, policies and procedures, including our codes of business conduct and ethics. Members of the Nominating/Governance Committee are Jerry D. Choate (Chairman), W.E. “Bill” Bradford, Ronald K. Calgaard, Donald L. Nickles, and Robert A. Profusek. The Committee met three times in 2008.

The Nominating/Governance Committee recommended Jerry D. Choate, William R. Klesse, Donald L. Nickles, and Susan Kaufman Purcell to the Board as the director nominees for election as Class III directors at the Annual Meeting. The Committee also considered and recommended the appointment of a lead director to preside at meetings of the independent directors without management (see “Information Regarding the Board of Directors — Lead Director and Meetings of Non-Management Directors”), and recommended assignments for the committees of the Board. The full Board approved the recommendations of the Nominating/Governance Committee and adopted resolutions approving the slate of director nominees to stand for election at the Annual Meeting, the appointment of a lead director, and assignments for the committees of the Board.

     Selection of Director Nominees

The Nominating/Governance Committee solicits recommendations for potential Board candidates from a number of sources including members of the Board, Valero’s officers, individuals personally known to the members of the Board, and third-party research. In addition, the Committee will consider candidates submitted by stockholders when submitted in accordance with the procedures described in this proxy statement under the caption “Miscellaneous — Stockholder Nominations and Proposals.” The Committee will consider all candidates identified through the processes described above and will evaluate each of them on the same basis. The level of consideration that the Committee will extend to a stockholder’s candidate will be commensurate with the quality and quantity of information about the candidate that the nominating stockholder makes available to the Committee.

     Evaluation of Director Candidates

The Nominating/Governance Committee is responsible for assessing the skills and characteristics that candidates for election to the Board should possess, as well as the composition of the Board as a whole. The assessments include qualifications under applicable independence standards and other standards applicable to the Board and its committees, as well as consideration of skills and expertise in the context of the needs of the Board.

Each candidate must meet certain minimum qualifications, including:

	•		independence of thought and judgment;
	•		the ability to dedicate sufficient time, energy and attention to the performance of her or his duties, taking into consideration the nominee’s service on other public company boards; and
	•		skills and expertise complementary to those of the existing Board members; in this regard, the Board will consider its need for operational, managerial, financial, governmental affairs, or other relevant expertise.

The Nominating/Governance Committee may also consider the ability of a prospective candidate to work with the then-existing interpersonal dynamics of the Board and the candidate’s ability to contribute to the collaborative culture among Board members.

Based on this initial evaluation, the Committee will determine whether to interview the candidate, and if warranted, will recommend that one or more of its members, other members of the Board, or senior management, as appropriate, interview the candidate in person or by telephone. After completing this evaluation and interview process, the Committee ultimately determines its list of nominees and submits the list to the full Board for consideration and approval.

Following the above procedures, the Committee identified, interviewed and recommended to the Board that Stephen M. Waters be elected as a director. Mr. Waters was elected as a director at the meeting of the Board held on September 23, 2008.

LEAD DIRECTOR AND MEETINGS OF NON-MANAGEMENT DIRECTORS

Following the recommendation of the Nominating/Governance Committee, the Board designated W.E. “Bill” Bradford to serve as the Lead Director during 2009 for meetings of the non-management Board members outside the presence of management. Non-management Board members regularly meet outside the presence of management.

PROPOSAL NO. 1

Our Board is divided into three classes for purposes of election. Four Class III directors will be elected at the Annual Meeting to serve a three-year term expiring at the 2012 annual meeting of stockholders. Nominees for Class III directors are Jerry D. Choate, William R. Klesse, Donald L. Nickles, and Susan Kaufman Purcell. The persons named on the proxy card intend to vote for the election of each of these nominees unless you direct otherwise on your proxy card.

The Board recommends that stockholders vote “FOR ALL” nominees.

In accordance with Valero’s bylaws, each director to be elected under this Proposal No. 1 shall be elected by the vote of the majority of the votes cast at the Annual Meeting if a quorum is present. For purposes of this election, a “majority of the votes cast” shall mean that the number of shares voted “for” a director’s election exceeds 50 percent of the number of votes cast with respect to that director’s election. With respect to each nominee, votes “cast” shall include votes to withhold authority and shall exclude abstentions.

If any nominee is unavailable as a candidate at the time of the Annual Meeting, either the number of directors constituting the full Board will be reduced to eliminate the resulting vacancy, or the persons named as proxies will use their best judgment in voting for any available nominee. The Board has no reason to believe that any current nominee will be unable to serve.

INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS

The following table describes (a) each nominee for election as a director at the Annual Meeting, and (b) the other members of the Board whose terms expire in 2010 and 2011. The information provided is based partly on data furnished by the directors and partly on Valero’s records. There is no family relationship among any of the executive officers, directors, or nominees for director of Valero.

		Executive Officer or				Age as of				Director
		Director Since (1)				12/31/08				Class (2)
Nominees
Jerry D. Choate, Director			1999				70			III
William R. Klesse, Chairman of the Board,
Chief Executive Officer, and President			2001				62			III
Donald L. Nickles, Director			2005				60			III
Susan Kaufman Purcell, Director			1994				66			III
Other Directors
Ruben M. Escobedo, Director			1994				71				I
Bob Marbut, Director			2001				73				I
Robert A. Profusek, Director			2005				58				I
W.E. “Bill” Bradford, Director			2001				73			II
Ronald K. Calgaard, Director			1996				71			II
Irl F. Engelhardt, Director			2006				62			II
Stephen M. Waters, Director			2008				62				(3	)

Footnotes:

Nominees

          Mr. Choate retired from Allstate Corporation, an insurance company, at the end of 1998 where he had served as Chairman of the Board and Chief Executive Officer since 1995. Mr. Choate also serves as a director of Amgen, Inc. and Van Kampen Mutual Funds. He has served as a director of Valero since 1999.

          Mr. Klesse is Valero’s Chairman of the Board, Chief Executive Officer, and President. He was elected Chairman of the Board in January 2007, and was elected President in January 2008. He previously served as Valero’s Chief Executive Officer and Vice Chairman of the Board since the end of 2005. He served as Valero’s Executive Vice President and Chief Operating Officer from 2003 through 2005, and as Executive Vice President-Refining and Commercial Operations since Valero’s acquisition of Ultramar Diamond Shamrock Corporation (“UDS”) in 2001.

          Senator Nickles retired in January 2005 as U.S. Senator from Oklahoma after serving in the U.S. Senate for 24 years. He had also served in the Oklahoma State Senate for two years. During his tenure as a U.S. Senator, he was Assistant Republican Leader for six years, Chairman of the Republican Senatorial Committee, and Chairman of the Republican Policy Committee. He served as Chairman of the Budget Committee, and as a member of the Finance and Energy and Natural Resources Committees. In 2005, he formed and is the Chairman and Chief Executive Officer of The Nickles Group, a Washington-based consulting and business venture firm. Senator Nickles also serves on the Board of Directors of Chesapeake Energy Corporation; Fortress International Group, Inc.; and Washington Mutual Investors Fund. He has served as a director of Valero since 2005.

          Dr. Purcell is Director of the Center for Hemispheric Policy at the University of Miami. The Center examines political, economic, financial, trade, and security issues in Latin America, as well as U.S. — Latin America relations. Dr. Purcell previously served as Vice President of the Council of the Americas, a non-profit business organization of Fortune 500 companies with investments in Latin America, and of the Americas Society, a non-profit educational institution, both in New York City. Dr. Purcell has been a director of Valero or its former parent company since 1994.

Other Directors

          Mr. Bradford is the retired Chairman of Halliburton Company, a services and construction company. Prior to its 1998 merger with Halliburton, he was Chairman and Chief Executive Officer of Dresser Industries, Inc., where he had been employed in various capacities since 1963. Mr. Bradford served as a director of UDS or its predecessors since 1992, and has served as a director of Valero since Valero’s acquisition of UDS in 2001.

          Dr. Calgaard is Chairman of the Ray Ellison Grandchildren Trust in San Antonio, Texas. He was formerly Chairman and Chief Executive Officer of Austin Calvert & Flavin Inc., a San Antonio-based investment management firm, from 2000 to February 2006. Dr. Calgaard served as President of Trinity University, San Antonio, Texas, from 1979 until his retirement in 1999. He is also a director of The Trust Company, N.A. and served as its Chairman from June 1999 until January 2000. Dr. Calgaard has served as a director of Valero or its former parent company since 1996.

          Mr. Engelhardt is Chairman of the Board and Executive Advisor of Patriot Coal Corporation. Mr. Engelhardt served as Chairman and Chief Executive Officer of Peabody Energy Corporation from 1990 to December 2005 and as its Chairman of the Board from 2006 to October 2007. He served as Co-Chief Executive Officer of The Energy Group from 1997 to 1998, Chairman of Suburban Propane Company from 1995 to 1996, Chairman of Cornerstone Construction and Materials from 1994 to 1995, Director and Group Vice President of Hanson Industries from 1995 to 1996, and Chairman of the Federal Reserve Bank of St. Louis from 2007 to 2008. Mr. Engelhardt is also a director of The Williams Companies, Inc., and General Manager of White Walnut Farms LLC. He has served as a director of Valero since 2006.

          Mr. Escobedo is a Certified Public Accountant. He owned and operated his public accounting firm, Ruben Escobedo & Company, CPAs, in San Antonio, Texas since its formation in 1977 through 2007. Mr. Escobedo also serves as a director of Cullen/Frost Bankers, Inc. He has served as a director of Valero or its former parent company since 1994.

          Mr. Marbut is Chief Executive Officer of Argyle Security, Inc., a provider of physical electronic security solutions, a company he co-founded in 2005 as Argyle Security Acquisition Corporation and where he served as Chairman and Co-Chief Executive Officer through January 2009. He is a director of Tupperware Brands Corporation and Hearst-Argyle Television, Inc. Mr. Marbut was previously founder and Chief Executive Officer of SecTecGLOBAL, Inc. from 2002 through 2006. He served as a director of UDS since 1990, and has served as a director of Valero since Valero’s acquisition of UDS in 2001.

          Mr. Profusek is a partner, and heads the mergers and acquisitions department, of the Jones Day law firm. His law practice focuses on mergers, acquisitions, takeovers, restructurings, and corporate governance matters, including compensation. Mr. Profusek is also a director of CTS Corporation. He has served as a director of Valero since 2005.

          Mr. Waters has been the managing partner of Compass Advisers LLP since 1996 and the Chief Executive of Compass Partners European Equity Fund since 2005. From 1988 to 1996, he served in several capacities at Morgan Stanley, including Co-Head of the Mergers and Acquisitions department from 1990 to 1992, Co-Chief Executive Officer of Morgan Stanley Europe from 1992 to 1996, and as a member of the firm’s worldwide Firm Operating Committee from 1992 to 1996. From 1974 to 1988, he was with Lehman Brothers, co-founding the Mergers and Acquisitions department in 1977, becoming a partner in 1980 and serving as Co-Head of the Mergers and Acquisitions department from 1985 to 1988. Mr. Waters is also a director of Boston Private Financial Holdings, Chairman of the Advisory Board of the Boston University School of Public Health, Acting Chairman of the United States Naval Institute, and Co-Chairman of the Harvard College Fund. He has served as a director of Valero since 2008.

For information regarding the nominees’ holdings of Common Stock, compensation, and other arrangements, see “Information Regarding the Board of Directors,” “Beneficial Ownership of Valero Securities,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Certain Relationships and Related Transactions.”

BENEFICIAL OWNERSHIP OF VALERO SECURITIES

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table presents information regarding each person, or group of affiliated persons, we know to be a beneficial owner of more than five percent of our Common Stock as of February 1, 2009. The information is based solely upon reports filed by such persons with the SEC.

		Amount and Nature
		of Beneficial
Name and Address of Beneficial Owner		Ownership				Percent of Class
FMR LLC			34,889,195	(1)			6.76	%
82 Devonshire Street Boston, Massachusetts 02109

SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS

The following table presents information as of February 1, 2009 regarding Common Stock beneficially owned (or deemed to be owned) by each nominee for director, each current director, each executive officer named in the Summary Compensation Table, and all current directors and executive officers of Valero as a group. No executive officer, director, or nominee for director owns any class of equity securities of Valero other than Common Stock. None of the shares listed below are pledged as security. The address for each person is One Valero Way, San Antonio, Texas 78249.

						Shares Under								Percent
Name of Beneficial Owner		Shares Held (1)				Options (2)				Total Shares				of Class
Kimberly S. Bowers			44,929				23,675				68,604				0.01	%
W.E. “Bill” Bradford			55,624				49,000				104,624				*
Ronald K. Calgaard			26,413				13,000				39,413				*
Jerry D. Choate			19,946				57,000				76,946				*
Michael S. Ciskowski			230,959				89,560				320,519				0.06	%
Irl F. Engelhardt			18,771				5,000				23,771				*
Ruben M. Escobedo			13,819				0				13,819				*
Joseph W. Gorder			73,113				39,616				112,729				0.02	%
William R. Klesse			772,704				687,976				1,460,680				0.28	%
Bob Marbut			29,755				76,652				106,407				*
Richard J. Marcogliese			142,034				251,820				393,854				0.08	%
Donald L. Nickles			8,137				11,000				19,137				*
Robert A. Profusek			7,998				11,000				18,998				*
Susan Kaufman Purcell			12,540				37,000				49,540				*
Stephen M. Waters			3,241				0				3,241				*
Directors and executive officers as a group (16 persons)			1,508,063				1,370,257				2,878,320				*

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers, directors, and greater than 10% stockholders to file with the SEC certain reports of ownership and changes in ownership of our Common Stock. Based on a review of the copies of such forms received and written representations from certain reporting persons, we believe that during the year ended December 31, 2008, all Section 16(a) reports applicable to our executive officers, directors and greater than 10% stockholders were timely filed.

The following Compensation Committee Report is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference into any of Valero’s filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, respectively, whether made before or after the date of this proxy statement and irrespective of any general incorporation language therein.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the following Compensation Discussion and Analysis with management. Based on the foregoing review and discussions and such other matters the Compensation Committee deemed relevant and appropriate, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

Members of the Compensation Committee:
Bob Marbut, Chairman
W.E. “Bill” Bradford
Jerry D. Choate
Robert A. Profusek

COMPENSATION DISCUSSION AND ANALYSIS

OVERVIEW

Our philosophy for compensating our “named executive officers” (as defined below) is based on the belief that a significant portion of executive compensation should be incentive-based and determined by both company and individual performance. Our executive compensation programs are designed to accomplish the following long-term objectives:

	•		to produce long-term, positive results for our stockholders;
	•		to build stockholder wealth while practicing good corporate governance;
	•		to align executive incentive compensation with Valero’s short- and long-term performance results, with discrete measurements of such performance; and
	•		to provide market-competitive compensation and benefits to enable us to recruit, retain, and motivate the executive talent necessary to be successful.

Compensation for our named executive officers includes base salary, an annual incentive bonus opportunity, and long-term, equity-based incentives. Our named executive officers also participate in benefit plans generally available to our other employees.

Named Executive Officers. Throughout this proxy statement, in accordance with SEC rules, the individuals serving as our principal executive officer (Chief Executive Officer) and our principal financial officer (Chief Financial Officer) during the last completed fiscal year (i.e., William R. Klesse and Michael S. Ciskowski, respectively), and our three other most highly compensated executive officers who were serving as executive officers at the end of the last completed fiscal year (i.e., Richard J. Marcogliese, Kimberly S. Bowers, and Joseph W. Gorder) are referred to collectively as the “named executive officers.”

ADMINISTRATION OF EXECUTIVE COMPENSATION PROGRAMS

Our executive compensation programs are administered by our Board’s Compensation Committee. The Compensation Committee is composed of four independent directors who are not participants in our executive compensation programs. Policies adopted by the Compensation Committee are implemented by our compensation and benefits staff. The Compensation Committee has retained Towers Perrin as an independent compensation consultant with respect to executive compensation matters. In its role as an advisor to the Compensation Committee, Towers Perrin is retained directly by the Committee, which has the authority to select, retain, and/or terminate its relationship with the consulting firm in its sole discretion. The duties and responsibilities of the Compensation Committee are further described in this proxy statement under the caption “Information Regarding the Board of Directors — Committees of the Board — Compensation Committee.”

Selection of Comparator Group and Other Benchmarking Data

When determining executive compensation, the Compensation Committee relies on several sources of compensation data in assessing benchmark rates of base salary, annual incentive compensation, and long-term compensation. The Towers Perrin Compensation Data Bank and Compensation Comparator Group (further described below) are used as references in benchmarking compensation for our named executive officers. These are sometimes referred to as “compensation survey data” or “competitive survey data” in this proxy statement.

     Towers Perrin Compensation Data Bank

The Towers Perrin Compensation Data Bank (“Data Bank”) includes 900 companies operating in several industries. Use of the Data Bank enables Valero to compare its executive base salary compensation to that of other companies from many industries having similar revenues and market capitalization. Valero believes that the Data Bank represents an appropriate benchmark for Valero’s executive base salaries because Valero competes across all industry lines for executive talent. Valero believes that many of the skills required for a successful management team (e.g., business acumen, leadership, integrity) transcend the refining industry. Valero believes that to recruit and retain executive talent, Valero must compete with all companies, not just refining and marketing companies. The Data Bank provides a guide for Valero to assess how its executive base salaries compare with the salaries of a wide range of other businesses.

     Compensation Comparator Group

The Compensation Comparator Group, a subset of the Towers Perrin Compensation Data Bank, consists of compensation information and analyses of Towers Perrin that includes compensation practices and available data for the following 13 companies that significantly participate in the domestic oil and gas industry:

	BP PLC		Marathon Oil Corporation
	Chevron Corporation		Murphy Oil Corporation
	CITGO Petroleum Corporation		Occidental Petroleum Corporation
	ConocoPhillips		Shell Oil Company (USA)
	Exxon Mobil Corporation		Sunoco, Inc.
	Hess Corporation		Tesoro Corporation
	Koch Industries, Inc.

Valero uses the Compensation Comparator Group as a reference in benchmarking base salaries, annual incentive bonus targets, and long-term incentive targets for our named executive officers. Selection of the Compensation Comparator Group reflects consideration of each company’s relative revenues, asset base, employee population and capitalization, and the scope of managerial responsibility and reporting relationships for the positions under consideration.

     Peer Group

We also use certain peer groups for measuring Valero’s performance when calculating annual incentive bonuses or the number of common shares that may be awarded upon the vesting of performance shares. To measure Valero’s 2008 return-on-investment (ROI) metric for purposes of calculating annual incentive bonuses, we used an ROI Peer Group composed of the following 13 companies engaged in domestic refining operations:

	Alon USA Energy Inc.		Holly Corporation
	Chevron Corporation		Marathon Oil Corporation
	ConocoPhillips		Murphy Oil Corporation
	CVR Energy Inc.		Sunoco, Inc.
	Exxon Mobil Corporation		Tesoro Corporation
	Frontier Oil Corporation		Western Refining Inc.
	Hess Corporation

To measure Valero’s total shareholder return (TSR) for the purpose of calculating the number of common shares that may be issued upon the vesting of performance shares, we used a TSR Peer Group composed of the following 10 companies:

	Chevron Corporation		Marathon Oil Corporation
	ConocoPhillips		Murphy Oil Corporation
	Exxon Mobil Corporation		Occidental Petroleum Corporation
	Frontier Oil Corporation		Sunoco, Inc.
	Hess Corporation		Tesoro Corporation

The foregoing peer groups represent the groups of companies that we use for purposes of the “Performance Graph” disclosed in Part II, Item 5 of our Form 10-K for the year ended December 31, 2008. The peer groups are not used in benchmarking base salaries, bonus targets, or long-term incentive targets.

     Use of Benchmarking Data

Recommendations for base salary, bonuses, and other compensation arrangements are developed under the supervision of the Compensation Committee by our compensation and benefits staff using the foregoing information and analyses and with assistance from Towers Perrin. Use of the compensation survey data is consistent with our philosophy of providing executive compensation and benefits that are competitive with those of companies competing with us for executive talent. In addition, the use of competitive compensation survey data and analyses assists the Compensation Committee in gauging our pay levels and targets relative to companies in our Compensation Comparator Group, the domestic oil refining and marketing industry, and general industry.

In addition to benchmarking competitive pay levels to establish compensation levels and targets, we also consider the relative importance of a particular management position in comparison to other management positions in the organization. In this regard, when setting the compensation level and target for a particular position, we evaluate that position’s scope and nature of responsibilities, size of business unit, complexity of duties and responsibilities, as well as that position’s relationship to managerial authorities throughout the management ranks of Valero.

Process and Timing of Compensation Decisions

The Compensation Committee reviews and approves all compensation targets and payments for the named executive officers. The Chief Executive Officer evaluates the performance of the other named executive officers and develops individual recommendations based upon the competitive survey data. Both the Chief Executive Officer and the Committee may make adjustments to the recommended compensation based upon an assessment of an individual’s performance and contributions to the Company. The compensation for the Chief Executive Officer is reviewed and approved by the Compensation Committee and by the Board, based on the competitive survey data, and discretionary adjustments may be made based upon their independent evaluation of the Chief Executive Officer’s performance and contributions. In addition, the charter of the Compensation Committee requires the independent directors of the Board to review and approve all compensation for the Chief Executive Officer.

The Compensation Committee establishes the target levels of annual incentive and long-term incentive compensation for the current fiscal year based upon its review of competitive market data provided by the Committee’s consultant. The Compensation Committee also reviews competitive market data for annual salary rates for executive officer positions for the next fiscal year and recommends new salary rates to become effective the next fiscal year. The Compensation Committee may, however, review salaries or grant long-term incentive awards at other times during the year because of new appointments or promotions during the year.

The following summarizes the approximate timing of some of our more significant compensation events:

     First Quarter:

	•		establish financial performance objectives for annual incentive bonus
	•		determine annual incentive bonus for preceding fiscal year
	•		review and certify financial performance for performance shares granted in prior years

     Third Quarter:

•

establish target levels of annual incentive and long-term incentive compensation for executive officers for the current fiscal year

     Fourth Quarter:

	•		consider base salaries for executive officers for next fiscal year
	•		consider long-term incentive compensation awards for executive officers for current fiscal year

ELEMENTS OF EXECUTIVE COMPENSATION

General

Our executive compensation programs consist of the following material elements:

	•		base salaries;
	•		annual incentive bonuses;
	•		long-term equity-based incentives, including:

	–		stock options
	–		restricted stock; and

•

medical and other insurance benefits, retirement benefits, and other perquisites.

We chose these elements in order to remain competitive in attracting and retaining executive talent and to provide strong performance incentives that provide the potential for both current and long-term payouts. We

use base salary as the foundation for our executive compensation program. Base salary is designed to provide a fixed level of competitive pay that reflects the executive officer’s primary duties and responsibilities as well as a foundation upon which incentive opportunities and benefit levels are established. Our annual incentive bonuses are designed to focus our executive officers on Valero’s attainment of key financial performance measures (i.e., return-on-investment, earnings per share, and total stockholder return) to generate profitable annual operations and sustaining results. Our long-term equity incentive awards are designed to tie the executive officer’s financial reward opportunities with the rewards to stockholders as measured by long-term stock price performance and payment of regular dividends, and increasing our stockholders’ return-on-investment. In this proxy statement, the term “Total Direct Compensation” refers to the sum of an executive officer’s base salary, incentive bonus, and long-term incentive awards for a particular fiscal year.

Our Compensation Committee’s general philosophy for 2008 was to target base salary compensation for our named executive officers at or near the 50th percentile of competitive survey data. Base salaries are benchmarked on the 50th percentile of competitive survey data using regression analysis based on company size as measured by annual revenues. In both 2007 and 2008, for base salaries, actual compensation for each of our named executive officers was either at or below the 50th percentile benchmark. The 50th percentile has been established as a desired target for our executives’ base salaries, and through the past several years the Company has been working toward that target. Significant changes in the structure and size of Valero from 2000 to the present, including significant mergers in 2001 and 2005, have resulted in changing landscapes of competitive compensation and benchmarks from year to year.

We established annual incentive bonus and long-term incentive target opportunities (expressed as a percentage of base salary) for each executive position based upon the 65th percentile benchmark of the Compensation Comparator Group for the annual incentive bonus, and the 65th percentile benchmark of the Compensation Comparator Group for long-term incentives.

In 2008, the Compensation Committee directed a change in the Company’s strategy with respect to long-term incentive compensation. The change was made following a wide-ranging review in mid-2008 by the Committee of substantially all aspects of the Company’s compensation philosophy, programs, and metrics. The review included a lengthy special meeting of the Compensation Committee in which it received extensive input from the Committee’s compensation consultant and Valero management with respect to these matters and modified certain aspects of the Company’s compensation programs. Those modifications are explained below. In 2007, long-term incentives were targeted at the 50th percentile as had been the practice in preceding years. In 2008, the Committee decided to revamp the pay-mix of long-term incentives to a stronger performance orientation and establish the 65th percentile as the benchmark for long-term incentives in 2008. In 2007 and prior years, long-term incentives were granted in the form of stock options (35% of total), restricted stock (35% of total), and performance shares (30% of total). In 2008, the mix of incentives was changed such that long-term incentives were granted in only two forms: stock options (60% of total) and restricted stock (40% of total). The shift in strategy to the 65th percentile of all elements of incentive compensation (i.e., both the annual incentive bonus and long-term incentive opportunities) is consistent with the Committee’s desire to pay above the median if the Company’s performance warrants. This strategy further emphasizes the risk/reward relationship of incentive pay while continuing to target fixed compensation in the form of base salary at the 50th percentile level.

For 2008, we paid annual incentive bonuses well below the 65th percentile target for our named executive officers, reflecting the Company’s performance over the course of 2008, which was reflective of the difficult and volatile markets for crude oil and refined products in 2008. As described under the caption “Annual Incentive Bonus — Company Financial Performance Objectives,” Valero’s performance for 2008 resulted in a bonus payout of 61.18% of target. Our annual incentive bonuses were paid at a level that was below the

Relative Size of Major Compensation Elements

In setting executive compensation, the Compensation Committee considers the aggregate amount of compensation payable to an executive officer and the form of the compensation. The Committee seeks to achieve an appropriate balance between immediate cash rewards for the achievement of company and personal objectives and long-term incentives that align the interests of our executive officers with those of our stockholders. The size of each element is based on the assessment of competitive market practices as well as company and individual performance. The Committee believes that making a significant portion of an executive officer’s incentive compensation contingent on long-term stock price performance more closely aligns the executive officer’s interests with those of our stockholders.

We evaluate the total compensation opportunity offered to each executive officer at least once annually and have conducted compensation assessments on several occasions during the course of the year. In this regard, the Compensation Committee analyzes total compensation from a market competitive perspective, and then evaluates each component relative to its market reference. Because we place such a large amount of our total executive compensation opportunity at risk in the form of variable pay (annual and long-term incentives), the Committee generally does not adjust current compensation based upon realized gains or losses from prior incentive awards, prior compensation, or current stock holdings. For example, we normally will not change the size of a target long-term incentive grant in a particular year solely because of the way in which Valero’s stock price performed during the immediately preceding years, although we may take this into account in other compensation decisions. The Compensation Committee recognizes that refining and marketing is a volatile industry and strives to maintain a measure of predictability consistent with a substantial reliance on variable compensation structures in furtherance of a fundamental pay-for-performance philosophy.

The following table summarizes the relative size of base salary and target incentive compensation for 2008 for each of our named executive officers:

		Percentage of Total Direct Compensation
						Annual
Name		Base Salary				Incentive Bonus				Long-Term Incentives
William R. Klesse			12	%			16	%			72	%
Michael S. Ciskowski			15	%			18	%			67	%
Richard J. Marcogliese			15	%			18	%			67	%
Kimberly S. Bowers			24	%			18	%			58	%
Joseph W. Gorder			24	%			18	%			58	%

Individual Performance and Personal Objectives

The Compensation Committee evaluates the individual performance and performance objectives for the Chief Executive Officer and our other named executive officers. Compensation for our Chief Executive Officer is reviewed and approved by the Compensation Committee and the Board’s independent directors. For officers other than the Chief Executive Officer, individual performance is evaluated by the Compensation Committee with the recommendations of the Chief Executive Officer. Individual performance and objectives are specific to each officer position.

Assessment of individual performance may include objective criteria, but by necessity it is largely subjective. Generally, we do not use prescribed targets or other quantitative criteria — such as an executive’s business unit achieving a certain percentage of sales or growth — to measure individual performance. We do employ specific quantitative metrics (e.g., return-on-investment, earnings per share, and total stockholder return) under our annual incentive bonus program. The criteria used to measure an individual’s performance may include assessment of objective criteria (e.g., execution of projects within budget parameters, improving an operating unit’s profitability, or timely completing an acquisition or divestiture) as well as more qualitative factors such as the executive officer’s ability to lead, ability to communicate, and successful adherence to Valero’s stated core values (i.e., commitment to environment and safety, acting with integrity, showing work commitment, communicating effectively, and respecting others). There are no specific weights assigned to these various elements of individual performance.

Base Salaries

Base salaries for each executive officer position are determined using data from the Towers Perrin Compensation Data Bank and the Compensation Comparator Group for positions with similar duties and levels of responsibility. Base salaries are reviewed annually and may be adjusted to reflect promotions, the assignment of additional responsibilities, individual performance or the performance of Valero. Salaries are also periodically adjusted to remain competitive with entities within the compensation survey data.

An executive’s compensation typically increases in relation to his or her responsibilities within Valero, with the level of compensation for more senior executive officers being higher than that for less senior executive officers. For example, the base salary and overall compensation for Mr. Marcogliese (Executive Vice President and Chief Operating Officer) in 2008 was higher than that of the other named executive officers (except for our Chief Executive Officer) because the Compensation Committee believed that this compensation appropriately reflected the duties and responsibilities assigned to his position as compared to the duties and responsibilities of the other officer positions. The determination of Mr. Marcogliese’s compensation in light of these duties and responsibilities was otherwise commensurate with the determination process for other named executive officers.

In 2008, the base salaries of our named executive officers were adjusted to the following levels:

Name		Base Salary 12/31/2007				Base Salary 12/31/2008
William R. Klesse		$	1,500,000			$	1,500,000
Michael S. Ciskowski		$	580,000			$	700,000
Richard J. Marcogliese		$	555,000			$	855,000
Kimberly S. Bowers		$	400,000			$	475,000
Joseph W. Gorder		$	423,000			$	445,000

The base salaries for our Chief Executive Officer and other executive officers are approved by the Compensation Committee taking into consideration compensation survey data. In addition, the Compensation Committee considers the recommendations of the Chief Executive Officer with regard to officers other than the Chief Executive Officer. The base salary and all other compensation of the Chief Executive Officer is reviewed and approved by the independent directors of the Board.

The base salaries of our named executive officers (other than the Chief Executive Officer) were increased for fiscal year 2008 to remain competitive in our market. Effective January 1, 2009, the annual base salaries of Richard J. Marcogliese, Michael S. Ciskowski, Kimberly S. Bowers, and Joseph W. Gorder were increased to $955,000; $750,000; $494,000; and $460,000; respectively, in recognition of competitive survey data, promotions, and/or the assumption of additional duties and responsibilities.

Annual Incentive Bonus

Our named executive officers can earn annual incentive bonuses based on the following three factors:

	•		the position of the named executive officer, which is used to determine a targeted percentage of annual base salary that may be awarded as incentive bonus based on the Compensation Comparator Group at the 65th percentile benchmark, with the targets ranging from a low of 75% of base salary to 130% of base salary for our Chief Executive Officer;
	•		Valero’s realization of quantitative financial performance goals for the year, which are approved by the Compensation Committee during the first quarter of the year; and
	•		a qualitative evaluation of the individual’s performance.

The following table shows the percentage of each named executive officer’s annual base salary that represents his or her annual bonus target for the fiscal year ended December 31, 2008, before discretionary adjustments, as discussed below:

		Annual Incentive Bonus Target
Name		as a Percentage of Base Salary
William R. Klesse			130	%
Michael S. Ciskowski			120	%
Richard J. Marcogliese			120	%
Kimberly S. Bowers			75	%
Joseph W. Gorder			75	%

   Company Financial Performance Objectives

The dollar amount of a named executive officer’s annual incentive bonus is determined by first multiplying the executive officer’s bonus target percentage by his or her base salary (e.g., for Mr. Klesse, 130% times $1,500,000 results in an annual incentive bonus target of $1,950,000). Then, the performance of Valero for the applicable year is assessed using the following quantitative performance metrics, which are measured against target levels for each as pre-established by the Compensation Committee:

	•		Valero’s earnings per share, or “EPS,” compared to the target, threshold, and maximum EPS performance levels approved at the start of the plan year by the Compensation Committee;
	•		Valero’s total stockholder return, or “TSR,” compared to the target, threshold, and maximum TSR performance levels approved at the start of the plan year by the Compensation Committee (TSR measures the growth in the daily average closing price per share of our Common Stock during the month of November, including the reinvestment of dividends, compared with the daily average closing price of our Common Stock during the corresponding period in the prior year); and
	•		Valero’s return-on-investment, or “ROI,” percentile ranking compared to the ROI percentile of the Peer Group for the 12-month period ended September 30, 2008, as approved at the start of the plan year by the Compensation Committee.

The sum of the three calculations (each metric is weighted equally as one-third of the total) yields a total performance score that is then applied to the executive officer’s bonus target to determine his or her annual incentive bonus award for the year. The performance score can range from 0% of target to as high as 200% of the target. (To continue the foregoing example, if Valero’s performance yielded a 140% performance score, then Mr. Klesse’s annual incentive target of $1,950,000 would be multiplied by 140% to yield an actual annual incentive bonus of $2,730,000.) In addition, under the bonus plan the Compensation Committee has the authority to adjust the calculated bonus awards upward or downward by up to a maximum

of 25 percentage points or 25 percent of the amount of bonus target earned. The Committee also retains the authority ultimately to determine whether any annual incentive award will be paid in any year to an executive officer for his or her performance.

We believe that annual incentive bonus plans should be predicated on metrics measuring both the quantity of earnings as well as the quality of earnings, while maintaining an appropriate focus on increasing returns to stockholders. The quantity of earnings is typically measured by some amount of earnings performance, such as earnings per share or net income from operations. The quality of earnings is typically measured by some determination of return-on-investment, such as return-on-investment or return on capital employed, allowing consideration of management’s ability to generate a reasonable rate of return on the capital investment in the business. Our current incentive bonus plan considers these financial principles in its overall design. While we believe that these financial performance metrics appropriately reflect our business planning process and corporate financial theory regarding financial performance measurement, we also recognize that due to the volatility of our industry and, in recent years, the economy generally, the difficulty in selecting a truly comparable peer group, and other factors, no financial metrics are perfect for fixing annual bonuses.

For the EPS and TSR performance measures, the target percentage of base salary is subject to adjustment, upward or downward, based upon whether our EPS and TSR exceed or fall short of the target EPS and TSR, respectively. For the ROI financial performance measure, the target percentage of base salary is subject to adjustment, upward or downward, depending upon whether our ROI exceeds, or falls short of, the ROI 50th percentile ranking for our ROI Peer Group.

For the 2008 annual incentive bonus program, the Compensation Committee established during the first quarter of the year the following company performance metrics as the target metrics: EPS of $6.87, TSR of 7.50%, and ROI at the 50th percentile of our ROI Peer Group ranking. For 2008, our performance was at the 26.87% payout level for EPS, ROI was at the 9.31% payout level, and TSR did not reach the payout level. Accordingly, the three financial metrics generated a bonus performance score of 36.18% of the target bonus amounts.

At the request of the Chief Executive Officer and in consultation with the Compensation Committee’s compensation consultant, the Committee used its discretion under the incentive bonus program to adjust the bonus performance score for 2008 upward by 25% to 61.18%. In making his request, the Chief Executive Officer cited Valero’s many positive accomplishments during 2008, which included:

	•		a quarterly dividend increase of 25 percent to $0.15 per common share,
	•		paying off over $350 million in debt,
	•		the successful completion of the sale of the Krotz Springs Refinery,
	•		implementation of the Commitment to Excellence Management System to drive operational excellence and to further enhance Valero’s commitment to the health and safety of its employees and protection of the environment,
	•		a record year for retail operations including the purchase of 70 Albertsons convenience stores and kiosks,
	•		continued expense reduction through the systematic review of the Company’s cost structure,
	•		an upgrade of Valero’s senior unsecured debt rating by Moody’s Investors Service,
	•		working through the effects of two hurricanes on the Gulf Coast and one near Aruba and the support-effort required to aid employees and restart four refineries,

	•		Valero’s continued achievements in safety, and
	•		significant improvements in environmental operations and compliance as regulatory requirements continue to tighten.

In making its decision, the Compensation Committee gave substantial consideration to the program metrics and the effect of the decline in trading prices for Valero’s Common Stock over the course of 2008, which the Committee regarded as an important factor militating against use of its upward discretion. The Compensation Committee weighed this against other factors, including:

	•		Valero’s historical cultural commitment to its employees, including senior management, and the potential effect on morale of adverse developments in the refining and marketing industry and the economy generally beginning in the second half of 2008,
	•		the Committee’s view that the decline in trading prices for the Company’s stock was primarily attributable to industry and general economic conditions rather than matters specific to Valero,
	•		that bonus targets had been established for 2008 well before the general declines in the industry and general economy during the second half of the year,
	•		accomplishments by Valero’s senior management team, including in respect of operational, safety, and strategic matters (including the matters cited by the Chief Executive Officer described above),
	•		that the bonus awards, as increased, would still represent the lowest bonus award for Valero management since 1999, and
	•		that the Chief Executive Officer excluded himself from receipt of any additional bonus amount if the Committee exercised its discretion.

At the request of Mr. Klesse, the Committee and the Board determined that the bonus of the Chief Executive Officer would be paid at the Company performance score of 36.18% rather than the discretionary adjusted amount of 61.18%, and that from the amount that otherwise would have accrued to Mr. Klesse at the 61.18% level, an extra $50 would be paid to each hourly and nonexempt employee participating in Valero’s all-employee bonus pool.

The following table provides a summary of how the 2008 annual incentive bonus amounts paid to our named executive officers were calculated:

		Klesse				Ciskowski				Marcogliese				Bowers				Gorder
Base salary (1)		$	1,500,000			$	700,000			$	855,000			$	475,000			$	445,000
Bonus target percentage (2)			130	%			120	%			120	%			75	%			75	%
Bonus target amount (3)		$	1,950,000			$	840,000			$	1,026,000			$	356,250			$	333,750
Valero performance score (4)			36.18	%			36.18	%			36.18	%			36.18	%			36.18	%
Bonus amount before discretionary adjustment (5)		$	705,510			$	303,912			$	371,207			$	128,891			$	120,751
Discretionary adjustment (6)			0	%			25.00	%			25.00	%			25.00	%			25.00	%
Discretion adjusted bonus calculation (7)		$	705,510			$	513,912			$	627,707			$	217,954			$	204,188
Actual bonus amount paid (8)		$	705,510			$	513,912			$	627,707			$	217,954			$	204,188

Footnotes:

Long-Term Incentive Awards

We provide stock-based, long-term compensation for executive officers through our stockholder-approved equity plans. The plans provide for a variety of stock and stock-based awards, including stock options and restricted stock, each of which vest over a period determined by the Compensation Committee. The Committee does not time the grants of long-term incentive awards around Valero’s release of undisclosed material information.

For each eligible executive, a target amount of long-term incentives is established based on the 65th percentile of the Compensation Comparator Group and is expressed as a percentage of base salary. Our 2008 long-term incentive awards consisted of an allocation of stock options and restricted stock weighted 60% in the form of stock options and 40% in the form of restricted stock, and is based on Valero’s determination to provide an appropriate balance of long-term incentives. An executive officer’s targeted award may be adjusted based upon the Compensation Committee’s evaluation of the executive officer’s individual performance, which (for executive officers other than the Chief Executive Officer) takes into consideration the recommendation of the Chief Executive Officer. See “Compensation Discussion and Analysis — Elements of Executive Compensation — Individual Performance and Personal Objectives.” As with the annual incentive bonus, the Compensation Committee retains discretion to determine whether any award should be made.

The following table shows the percentages of each named executive officer’s base salary and Total Direct Compensation that represent his or her long-term compensation target for the fiscal year ended December 31, 2008:

		Long-Term Incentive Awards				Long-Term Incentive Awards
		Target as a Percentage of				Target as a Percentage of Total
Name		Base Salary				Direct Compensation
William R. Klesse			585	%			72	%
Michael S. Ciskowski			450	%			67	%
Richard J. Marcogliese			450	%			67	%
Kimberly S. Bowers			250	%			58	%
Joseph W. Gorder			250	%			58	%

 

     Stock Options and Restricted Stock

In the design of our 2008 long-term incentive program, stock options comprise 60% of each executive officer’s total long-term incentive target, and shares of restricted stock comprise an additional 40% of the officer’s target. The Compensation Committee presently expects to make awards of options and restricted

stock annually. In 2008, the Compensation Committee determined that awards of restricted stock will vest in equal annual installments over a period of five years and contain a performance accelerator feature to provide for the potential early vesting of one-half of the restricted stock grant. The performance accelerator feature requires that the closing market price per share for Valero’s common stock must be $60 or above for five consecutive trading days, whereupon the shares then eligible for accelerated vesting will vest. Given the significant decline in the market share price of Valero common stock from the fourth quarter of 2007 to the fourth quarter of 2008, the performance accelerator feature is intended to reward company performance that triggers a significant appreciation in Valero’s market share price within the next several years. Stock options granted in 2008 will vest in equal annual installments over a period of three years and have seven-year terms.

Grants and vesting of stock options are not contingent upon the achievement of any specified performance targets. However, because the exercise price of options cannot be less than 100% of the fair market value of our Common Stock on the date of grant, options will provide a benefit to the executive only to the extent that there is appreciation in the market price of our Common Stock. Options and restricted stock are subject to forfeiture if an executive terminates employment prior to vesting.

The Compensation Committee considers and grants stock options and restricted stock to our executive officers and other employees annually, typically during the third or fourth quarter. The Committee may also grant stock options or restricted stock to new executive officers and employees when they are hired or promoted. During periods between meetings of the Compensation Committee, as an administrative convenience, the Chief Executive Officer has limited authority to make awards to employees other than executive officers when they are hired or promoted.

The exercise price for stock options is the mean of the highest and lowest sales prices per share of our Common Stock as reported on the NYSE on the grant date. All awards of options described in the Summary Compensation Table and Grants of Plan-Based Awards Table of this proxy statement were reviewed and approved by the Compensation Committee. All of these stock options have a grant date that is equal to or after the date on which the options were approved by the Compensation Committee, except for grants to our Chief Executive Officer, which have a grant date that is equal to or after the date on which our independent directors approve grants recommended by the Compensation Committee.

The stock option and restricted stock components of our executive officers’ 2008 long-term incentive packages were awarded in October 2008. The following table shows the percentages of each named executive officer’s base salary and Total Direct Compensation that represent his or her stock option and restricted stock targets for the fiscal year ended December 31, 2008.

						Stock Option								Restricted Stock
		Stock Option				Target as a				Restricted Stock				Target as
		Target as a				Percentage of Total				Target as a				Percentage of
		Percentage of				Direct				Percentage of				Total Direct
Name		Base Salary				Compensation				Base Salary				Compensation
William R. Klesse			351	%			43	%			234	%			29	%
Michael S. Ciskowski			270	%			40	%			180	%			27	%
Richard J. Marcogliese			270	%			40	%			180	%			27	%
Kimberly S. Bowers			150	%			35	%			100	%			23	%
Joseph W. Gorder			150	%			35	%			100	%			23	%

     Performance Shares

In prior years, performance shares comprised a portion of the executive officers’ long-term incentive targets. Although no performance shares were granted in 2008, each of the named executive officers holds performance shares that were granted in 2006 and 2007, which have scheduled vesting dates from January 2008 to January 2011. The performance shares are earned (vest) only upon Valero’s achievement of an objective performance measure, namely total stockholder return.

Each award is subject to vesting in three annual increments, based upon our TSR 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, our TSR for the prior three years is compared to that of our TSR Peer Group and ranked by quartile. Executive officers then earn 0%, 50%, 100%, or 150% of that portion of the initial grant amount that is vesting, depending upon whether our TSR is in the last, 3rd, 2nd, or 1st quartile, respectively, and they earn 200% if we rank highest in the group. Amounts not earned in a given performance period can be carried forward for one additional performance period and up to 100% of the carried amount can still be earned, depending upon the quartile performance ranking for that subsequent period. For the performance period ended December 31, 2008, Valero’s TSR placed Valero in the fourth quartile, resulting in a 0% vesting of eligible shares.

In 2008, the Compensation Committee determined to eliminate performance shares as a component of our long-term incentive program choosing to base our long-term incentive program on stock options and restricted stock given that most of our peers employ two long-term incentive vehicles. Additionally, the Committee concluded that the performance shares measure of total shareholder return was somewhat redundant to the annual bonus plan performance metric that was also based on total shareholder return.

Perquisites and Other Benefits

     Perquisites

We provide certain perquisites to our named executive officers. They are eligible to receive reimbursement for club dues, personal excess liability insurance, federal income tax preparation, life insurance policy premiums with respect to cash value life insurance, annual health examination, residential alarm monitoring, residential internet service with access to Valero’s information services portal, and tickets to sporting and other entertainment events. We do not provide executive officers with automobiles or automobile allowances or supplemental executive medical benefits or coverage. In addition, we generally do not allow executive officers to use company aircraft for personal use, such as travel to and from vacation destinations. However, spouses (or other family members) occasionally accompany executive officers when executive officers are traveling on company aircraft for business purposes, such as attending an industry business conference at which spouses are invited and expected to attend.

     Other Benefits

We provide other benefits, including medical, life, dental, and disability insurance in line with competitive market conditions. Our named executive officers are eligible for the same benefit plans provided to our other employees, including our Thrift Plan and insurance and supplemental plans chosen and paid for by employees who desire additional coverage.

Executive officers and other employees whose compensation exceeds certain limits are eligible to participate in non-qualified excess benefit programs whereby those individuals can choose to make larger contributions than allowed under the qualified plan rules and receive correspondingly higher benefits. These plans are

described below under “Compensation Discussion and Analysis — Elements of Executive Compensation — Post-Employment Benefits.”

Post-Employment Benefits

     Pension Plans

We have a noncontributory defined benefit Pension Plan in which most of our employees, including our named executive officers, are eligible to participate and under which contributions by individual participants are neither required nor permitted. We also have a noncontributory, non-qualified Excess Pension Plan and a non-qualified Supplemental Executive Retirement Plan, or “SERP,” which provide supplemental pension benefits to certain highly compensated employees, and under which our named executive officers are participants. The Excess Pension Plan and the SERP provide eligible employees with additional retirement savings opportunities that cannot be achieved with tax-qualified plans due to Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), limits on (i) annual compensation that can be taken into account under qualified plans, or (ii) annual benefits that can be provided under qualified plans.

The Pension Plan (supplemented, as necessary, by the Excess Pension Plan) provides a monthly pension at normal retirement equal to 1.6% of the participant’s average monthly compensation (based upon the participant’s earnings during the three consecutive calendar years during the last 10 years of the participant’s credited service, including service with our former parent, affording the highest such average) times the participant’s years of credited service. The SERP provides an additional benefit equal to .35% times the product of the participant’s years of credited service (maximum 35 years) multiplied by the excess of the participant’s average monthly compensation over the lesser of 1.25 times the monthly average (without indexing) of the social security wage bases for the 35-year period ending with the year the participant attains social security retirement age, or the monthly average of the social security wage base in effect for the year that the participant retires. For purposes of the SERP, the participant’s most highly compensated consecutive 36 months of service are considered, including employment with our former parent and its subsidiaries. The SERP benefit payment is made in a lump sum; an annuity form of benefit payment is not available under the SERP. An executive will become a participant in the SERP as of the date he or she is selected and named in the minutes of the Compensation Committee for inclusion as a participant in the SERP. Compensation for purposes of the Pension Plan, Excess Pension Plan, and SERP includes salary and bonus. Pension benefits are not subject to any deduction for social security or other offset amounts. For more information regarding our named executive officers’ participation in our pension plans, see the table under the caption “Pension Benefits” and its related disclosures.

     Nonqualified Deferred Compensation Plans

Deferred Compensation Plan. Our named executive officers are eligible to participate in our Deferred Compensation Plan (“DC Plan”). The DC Plan permits eligible employees to defer a portion of their salary and/or bonus until separation (i.e., retirement or termination of employment) or at other designated distribution times provided for in the DC Plan. The DC Plan is a non-qualified deferred compensation arrangement designed to be a “top hat” plan within the meaning of the Employee Retirement Income Security Act (“ERISA”) and is, therefore, exempt from most of ERISA’s requirements relating to pension plans. The DC Plan is not designed to constitute a qualified pension plan under Section 401(a) of the Internal Revenue Code.

Designated eligible employees are intended to constitute a select group of management or highly compensated employees within the meaning of ERISA. Under the DC Plan, each year eligible employees are permitted to elect to defer up to 30% of their salary and/or 50% of their cash bonuses to be earned for services performed during the following year.

Pursuant to the DC Plan, Valero may from time to time make discretionary contributions to participants’ accounts in such amounts as shall be determined or determinable under a formula and announced to DC Plan participants. For the Chief Executive Officer or the President, any such discretionary contributions would be made upon recommendation by the Compensation Committee and approval of the Board. For certain other executive officers, any such discretionary contributions would be made upon recommendation of the Chief Executive Officer and approval of the Compensation Committee. For any other participant, any such discretionary contributions would be made upon recommendation of the Chief Executive Officer. We have made no discretionary contributions to participants’ accounts, and currently we have no plans to make any discretionary contributions to participants’ accounts. We would likely only consider such contributions in the event of a significant, catastrophic economic event (or series of events) that materially impairs the value of participants’ accounts.

All amounts credited under the DC Plan (other than discretionary credits) are immediately 100 percent vested. Any discretionary credits will vest in accordance with the vesting schedule determined at the time of the grant of discretionary credits. Participant accounts are credited with earnings (or losses) based on investment fund choices made by the participants among available funds selected by Valero’s benefits plans administrative committee from time to time.

At the time of their deferral elections, participants may also elect when and over what period of time their deferrals will be distributed. Specifically, participants may elect to have their accounts distributed in a lump sum on a specified date in the future, at least five years from the date of the deferral election. Even if a participant has elected a specified distribution date, the participant’s DC Plan account will be distributed upon the participant’s death, retirement, or other termination of employment. Participants may, at the time of their deferral elections, choose to have their accounts distributed as soon as reasonably practical following retirement or other termination, or on the January 1st following the date of retirement or termination.

Participants may also elect to have their accounts distributed in one lump sum payment or in five, 10 or 15 year installments upon retirement, and in a lump sum or five annual installments upon other termination. Upon a participant’s death, the participant’s beneficiary will receive the participant’s DC Plan account in one lump-sum payment within 90 days following the participant’s death. Participants may also receive a portion of their DC Plan account necessary to satisfy an unforeseeable emergency (as defined in the DC Plan). Upon a change in control (as defined in the DC Plan) of Valero, all DC Plan accounts are immediately vested in full. However, distributions are not accelerated and, instead, are made in accordance with the DC Plan’s normal distribution provisions.

As a nonqualified deferred compensation arrangement, the DC Plan is subject to Internal Revenue Code Section 409A and its regulations. We intend to administer and interpret the DC Plan in a manner consistent with such Internal Revenue Code section and regulations.

Excess Thrift Plan. Our Excess Thrift Plan provides benefits to our employees whose annual additions to our Thrift Plan are subject to the limitations on such annual additions as provided under Section 415 of the Internal Revenue Code, and/or who are constrained from making maximum contributions under the Thrift Plan by Section 401(a)(17) of the Internal Revenue Code, which limits the amount of an employee’s annual compensation which may be taken into account under that plan. Two separate components comprise the Excess Thrift Plan: (a) an “excess benefit plan” as defined under Section 3(36) of ERISA; and (b) a plan that is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Each component of the Excess Thrift Plan consists of a separate plan for purposes of Title I of ERISA.

Information regarding contributions by Valero and each of our named executive officers under our non-qualified defined contribution and other deferred compensation plans during the year ended December 31, 2008, is stated in this proxy statement in the table under the caption “Executive Compensation — Nonqualified Deferred Compensation.”

     Severance Arrangements

We have entered into change of control agreements with each of the named executive officers. These agreements are intended to assure the continued availability of these executive officers in the event of certain transactions culminating in a change of control of Valero. If a “change of control” (as defined in the agreements) occurs during the term of an agreement, then the agreement becomes operative for a fixed three-year period. The agreements provide generally that the executive officer’s terms and conditions of employment (including position, location, compensation and benefits) will not be adversely changed during the three-year period after a change of control.

Following a change of control, particular payments under the agreements are triggered commensurate with the occurrence of any of the following: (a) termination of employment by Valero other than for “cause” (as defined in the agreement) or disability; (b) termination by the executive for “good reason” (as defined in the agreements); (c) termination by the executive other than for “good reason”; and (d) termination of employment because of death or disability. These triggers were designed to ensure the continued availability of the executive officers following a change of control, and to compensate the executive officers at appropriate levels if their employment is unfairly or prematurely terminated during the applicable term following a change of control. For more information regarding payments that may be made under our severance arrangements, see our disclosures below under the caption “Executive Compensation — Potential Payments upon Termination or Change of Control.”

IMPACT OF ACCOUNTING AND TAX TREATMENTS

Accounting Treatment

Effective January 1, 2006, we adopted SFAS 123R, which requires us to recognize in our financial statements the costs of equity awards over the period in which an employee is required to provide service in exchange for the awards. The cost of such awards is measured at fair value on the date of grant and we use the Black-Scholes option pricing model to determine the grant date present value of stock options.

Tax Treatment

Under Section 162(m) of the Internal Revenue Code, publicly held corporations may not take a tax deduction for compensation in excess of $1 million paid to the Chief Executive Officer or the other four most highly compensated executive officers unless that compensation meets the Internal Revenue Code’s definition of “performance based” compensation. Section 162(m) allows a deduction for compensation to a specified executive that exceeds $1 million only if it is paid (a) solely upon attainment of one or more performance goals, (b) pursuant to a qualifying performance-based compensation plan adopted by the Compensation Committee, and (c) the material terms, including the performance goals, of such plan are approved by the stockholders before payment of the compensation.

The Compensation Committee considers deductibility under Section 162(m) with respect to compensation arrangements for executive officers. The Committee believes that it is in our best interests for the Committee to retain its flexibility and discretion to make compensation awards to foster achievement of performance goals established by the Committee and other corporate goals the Committee deems important to our success, such as encouraging employee retention, rewarding achievement of nonquantifiable goals and achieving

progress with specific projects. We believe that our outstanding stock options and performance share grants qualify as performance-based compensation and are not subject to any deductibility limitations under Section 162(m). Grants of restricted stock or other equity-based awards that are not subject to specific quantitative performance measures will likely not qualify as “performance based” compensation and, in such event, would be subject to Section 162(m) deduction restrictions.

COMPENSATION-RELATED POLICIES

Stock Ownership Guidelines

Our Board, the Compensation Committee and our executive officers recognize that ownership of Common Stock is an effective means by which to align the interests of our directors and executive officers with those of our stockholders. We have long emphasized the importance of stock ownership among our executive officers and directors. Our stock ownership and retention guidelines for our directors and officers, as approved by the Compensation Committee and our Board, are set forth below.

Non-Employee Director Stock Ownership Guidelines. Non-employee directors are expected to acquire and hold during their service shares of our Common Stock equal in value to at least three times the annual cash retainer paid to our directors. Directors have five years from their initial election to the Board to meet the target stock ownership guideline, and they are expected to continuously own sufficient shares to meet the guideline once attained.

Executive Stock Ownership Guidelines. Stock ownership guidelines for our officers are as follows:

Officer Position		Value of Shares Owned
Chief Executive Officer		5x Base Salary
President		3x Base Salary
Executive Vice Presidents		2x Base Salary
Senior Vice Presidents		1x Base Salary
Vice Presidents		1x Base Salary

Our officers are expected to meet the applicable guideline within five years and are expected to continuously own sufficient shares to meet the guideline once attained. The full text of our stock ownership and retention guidelines is available on our website at www.valero.com under the “Corporate Governance” tab in the “Investor Relations” section.

Prohibition on Insider Trading and Speculation in Valero Stock

We have established policies prohibiting our officers, directors, and employees from purchasing or selling Valero securities while in possession of material, nonpublic information, or otherwise using such information for their personal benefit or in any manner that would violate applicable laws and regulations. In addition, our policies prohibit our officers, directors, and employees from speculating in our stock, which includes short selling (profiting if the market price of our stock decreases), buying or selling publicly traded options (including writing covered calls), hedging, or any other type of derivative arrangement that has a similar economic effect.

EXECUTIVE COMPENSATION

The tables that appear in the following sections of this proxy statement provide information required by the SEC regarding compensation paid to or earned by our named executive officers for the year ended December 31, 2008. We have used captions and headings in these tables in accordance with the SEC regulations requiring these disclosures. The footnotes to these tables provide important information to explain the values presented in the tables, and are an important part of our disclosures.

SUMMARY COMPENSATION TABLE

The following table provides a summary of compensation paid to our named executive officers for the fiscal years ending December 31, 2008, 2007, and 2006. The table shows amounts earned by such persons for services rendered to Valero in all capacities in which they served. The elements of compensation listed in the table are more fully described in the “Compensation Discussion and Analysis” section of this proxy statement and in the table’s footnotes.

																						Change in
																						Pension Value
																						and Nonquali-
														Stock				Option				fied Deferred				All Other
														Awards				Awards				Compensation				Compensa-
Principal Position		Year				Salary ($)				Bonus ($)				($) (1) (2)				($) (1) (3)				Earnings ($) (4)				tion ($) (5)				Total ($)
William R. Klesse,			2008				1,500,000				705,510				4,507,207				2,439,123				1,181,461				138,494				10,471,795
Chief Executive Officer,			2007				1,500,000				3,720,015				5,545,605				3,028,257				1,122,665				117,110				15,033,652
President, and			2006				900,000				1,305,000				4,704,686				2,162,232				780,800				85,755				9,938,473
Chairman of the Board
Michael S. Ciskowski,			2008				700,000				513,912				867,081				336,962				636,887				56,880				3,111,722
Executive Vice President			2007				580,000				870,000				1,018,068				280,081				—				47,309				2,795,458
and Chief Financial			2006				465,000				475,000				1,832,153				315,044				275,048				43,221				3,405,466
Officer
Richard J. Marcogliese,			2008				855,000				627,707				1,637,985				1,040,234				1,757,183				72,049				5,990,158
Executive Vice President			2007				555,000				1,332,000				2,393,109				1,597,676				835,994				51,490				6,765,269
and Chief Operating			2006				415,000				475,000				964,230				193,481				676,857				41,918				2,766,486
Officer
Kimberly S. Bowers,			2008				475,000				217,954				257,193				104,355				185,353				39,143				1,278,998
Executive Vice President and General Counsel (6)
Joseph W. Gorder,			2008				445,000				204,188				544,500				193,614				207,099				43,141				1,637,542
Executive Vice President-			2007				423,000				634,500				472,737				135,306				70,659				44,306				1,780,508
Marketing and Supply (7)

Footnotes to “Summary Compensation” table:

(1)		Represents the dollar amount recognized by Valero for financial statement reporting purposes for the fiscal years ended December 31, 2008, 2007, and 2006, as applicable, in accordance with SFAS 123R, which requires companies to expense the fair value of equity awards over the period in which an employee is required to provide service in exchange for the awards. The reported amounts represent the amount of compensation expense recognized by Valero in 2008, 2007, and 2006 (as the “requisite service periods” per SFAS 123R) pertaining to stock options, restricted stock, and performance shares. Following SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.

(2)		The amounts stated in the table reflect Valero’s accounting expense in 2008 for restricted stock and performance share awards, and do not correspond to the actual value that will be recognized by the named executive officers. Performance shares are subject to market and performance conditions as described in “Compensation Discussion and Analysis - Long-Term Incentive Awards — Performance Shares.” There were no grants of performance shares in 2008. The amounts reported for the performance awards subject to vesting for the year ended December 31, 2008, were based on an expected conversion to Common Stock at a rate of 100% and a weighted-average fair value of $70.97 per share, representing the market value of our Common Stock on the grant date reduced by expected dividends over the vesting period. The amounts reported for the performance awards subject to vesting for the year ended December 31, 2007, were based on an expected conversion to Common Stock at a rate of 150% and a weighted-average fair value of $52.62 per share, representing the market value of our Common Stock on the grant date reduced by expected dividends over the vesting period. The amounts reported for the performance awards subject to vesting for the year ended December 31, 2006, were based on an expected conversion to Common Stock at a rate of 150% and a weighted-average fair value of $58.90 per share, representing the market value of our Common Stock on the grant date reduced by expected dividends over the vesting period. The values presented in the table reflect Valero’s accounting expense for the performance share awards; the actual value that will be recognized by the named executive officers depends solely on the achievement of specified performance objectives over the performance period as described in “Compensation Discussion and Analysis.” For restricted stock, the reported amounts represent the amount of compensation expense recognized by Valero in 2008, 2007, and 2006 as the “requisite service periods” per SFAS 123R. See the Grants of Plan-Based Awards table for additional information regarding shares of restricted stock granted in 2008.
(3)		See the Grants of Plan-Based Awards table for information on stock options granted in 2008. For additional information about valuation assumptions for the 2008 stock option grants, refer to Note 22 (“Stock Based Compensation”) of Notes to Consolidated Financial Statements in Valero’s Form 10-K for the year ended December 31, 2008. For additional information on the valuation assumptions with respect to the 2007 stock option grants, refer to Note 21 of Notes to Consolidated Financial Statements in Valero’s Form 10-K for the year ended December 31, 2007. For additional information on the valuation assumptions with respect to the 2006 stock option grants, refer to Note 22 of Notes to Consolidated Financial Statements in Valero’s Form 10-K for the year ended December 31, 2006.
(4)		This column represents the sum of the change in pension value and non-qualified deferred compensation earnings in 2008, 2007, and 2006 for each of the named executive officers. See the “Pension Benefits Table” for additional information, including the present value assumptions used for these calculations. The actual change-in-value amount for Mr. Ciskowski for the year ended December 31, 2007, is a negative number, but is computed as a “zero amount” in the table above in accordance with Instruction 3 to Item 402(c)(2)(viii) of SEC’s Regulation S-K, which instructs that negative values are not be reflected in the sum reported in the table. For each of the named executive officers, the following table identifies the separate amounts attributable to (A) the aggregate change in the actuarial present value of the named executive officer’s accumulated benefit under all defined benefit and actuarial pension plans, including supplemental plans (but excluding tax-qualified defined contribution plans and nonqualified defined contribution plans), and (B) above-market or preferential earnings on compensation that is deferred on a basis that is not tax-qualified.

Name		Year				(A)				(B)				Total
William R. Klesse			2008			$	1,181,461			$	0			$	1,181,461
			2007				1,122,665				0				1,122,665
			2006				780,800				0				780,800
Michael S. Ciskowski			2008			$	636,887			$	0			$	636,887
			2007				(62,988	)			0				(62,988	)
			2006				275,048				0				275,048
Richard J. Marcogliese			2008			$	1,757,183			$	0			$	1,757,183
			2007				835,994				0				835,994
			2006				676,857				0				676,857
Kimberly S. Bowers			2008			$	185,353			$	0			$	185,353
Joseph W. Gorder			2008			$	207,099			$	0			$	207,099
			2007				70,659				0				70,659

(5)		The amounts listed as “All Other Compensation” for the year ended December 31, 2008, are composed of the following items:

Item of income (in dollars)		Klesse				Ciskowski				Marcogliese				Bowers				Gorder
Valero contribution to Thrift Plan account			13,800				13,800				13,800				13,800				13,800
Valero contribution to Excess Thrift Plan account			76,200				27,950				37,500				14,700				12,900
Contribution to Thrift Plan account from unused portion of Valero-provided dollars for health and welfare benefits			4,117				—				—				—				491
Reimbursement of club membership dues *			5,070				7,226				5,070				4,840				7,226
Imputed income for personal liability insurance			1,575				1,575				1,575				1,575				1,575
Imputed income for tax return preparation			—				785				785				—				785
Executive insurance premiums with respect to cash value life insurance			25,073				—				—				—				—
Long-term disability premium imputed income			3,728				3,728				3,728				3,728				3,728
Imputed income for insurance (life & survivor) over $50,000			7,564				1,477				9,591				—				2,636
Residential alarm monitoring			239				239				—				—				—
Incremental cost to company for personal use of company aircraft **			1,128				—				—				—				—
Imputed income — golf tournament award							—				100				—				- -
Total			138,494				56,880				72,049				39,143				43,141

*		reimbursement for Mr. Klesse was discontinued effective 2009 upon his request
**		represents 0.47 hours of a portion of one round trip using Valero’s direct operating cost rate of $2,400 per hour

(6)		Ms. Bowers was not a named executive officer for the years ended December 31, 2007 and 2006.
(7)		Mr. Gorder was not a named executive officer for the year ended December 31, 2006.

GRANTS OF PLAN-BASED AWARDS
FOR FISCAL YEAR ENDED DECEMBER 31, 2008

The following table provides information regarding grants of plan-based awards (specifically, shares of restricted stock and stock options) made to our named executive officers in 2008.

																		Exercise or
						Estimated Future Payouts Under												Base Price				Closing				Grant Date Fair
						Equity Incentive Plan Awards												of Option				Market Price				Value of Stock
						Threshold				Target				Maximum				Awards				on Grant				and Option
Name		Grant Date				(#)				(#)				(#)				($/sh.) (1)				Date ($/sh.)				Awards ($)(2)
William R. Klesse			10/16/08	(3)			n/a				120,330				n/a												2,058,846
			10/16/08	(4)			n/a				446,175				n/a				17.11				17.62				2,235,337
Michael S. Ciskowski			10/16/08	(3)			n/a				43,200				n/a												739,152
			10/16/08	(4)			n/a				160,175				n/a				17.11				17.62				802,477
Richard J. Marcogliese			10/16/08	(3)			n/a				52,760				n/a												902,724
			10/16/08	(4)			n/a				195,625				n/a				17.11				17.62				980,081
Kimberly S. Bowers			10/16/08	(3)			n/a				16,280				n/a												278,551
			10/16/08	(4)			n/a				60,375				n/a				17.11				17.62				302,479
Joseph W. Gorder			10/16/08	(3)			n/a				15,260				n/a												261,099
			10/16/08	(4)			n/a				56,575				n/a				17.11				17.62				283,441

Footnotes:

(1)		Valero’s 2005 Omnibus Incentive Plan provides that the exercise price for all options granted under the plan will be equal to the mean of the high and low reported sales price per share on the NYSE of our Common Stock on the date of grant.
(2)		The reported grant date fair value of stock and option awards was determined in compliance with SFAS 123R.
(3)		Represents a grant of shares of restricted stock. The shares vest (become nonforfeitable) in equal annual installments over a period of five years beginning in 2009. Fifty percent of the shares granted in 2008 are eligible for performance accelerated vesting (“Eligible Shares”). Therefore, notwithstanding the restricted shares’ regular five-year vesting schedule, to the extent any Eligible Shares have not yet vested per their regular vesting schedule, and to the extent the Eligible Shares have not been forfeited or otherwise canceled, all unvested Eligible Shares will vest automatically at the close of business on the last date of the period when the NYSE-reported closing price per share of Common Stock is $60.00 or above for five consecutive trading days. Dividends on restricted stock are paid as and when dividends are declared and paid on our outstanding Common Stock. Restricted stock is more fully described in “Compensation Discussion and Analysis — Elements of Executive Compensation — Long-Term Incentive Awards.”
(4)		Represents a grant of options to purchase our Common Stock. The options vest (become nonforfeitable) in equal annual installments over a period of three years beginning in 2009, and will expire in seven years from their date of grant. Under SFAS 123R, the fair value of stock options must be determined using an option-pricing model such as Black-Scholes or a binomial model taking into consideration the following:

	•		the exercise price of the option;
	•		the expected life of the option;
	•		the current price of the underlying stock;
	•		the expected volatility of the underlying stock;
	•		the expected dividends on the underlying stock; and
	•		the risk-free interest rate for the expected life of the option.

The Black-Scholes option pricing model was used to determine grant date fair value. This model is designed to value publicly traded options. Options issued under our plans are not freely traded, and the exercise of such

options is subject to substantial restrictions. Moreover, the Black-Scholes model does not give effect to either risk of forfeiture or lack of transferability. The estimated values under the Black-Scholes model are based on assumptions as to variables such as interest rates, stock price volatility, and future dividend yield. The estimated values presented in this table were calculated using an expected average option life of 4.5 years, risk-free rate of return of 2.8%, average volatility rate of 43.2%, and a dividend yield of 3.5%, which is the expected annualized quarterly dividend rate in effect at the date of grant expressed as a percentage of the market value of our Common Stock on the date of grant. The actual value of stock options could be zero; realization of any positive value depends upon the actual future market performance of our Common Stock (which cannot be forecast with reasonable accuracy), the continued employment of the option holder throughout the vesting period, and the timing of the exercise of the option. Accordingly, the values set forth in this table may not be achieved. The actual value, if any, a person will realize upon exercise of an option will depend on the excess of the market value of our Common Stock over the exercise price on the date the option is exercised. The options are more fully described in “Compensation Discussion and Analysis — Elements of Executive Compensation - Long-Term Incentive Awards.”

OUTSTANDING EQUITY AWARDS
AT DECEMBER 31, 2008

The following table provides information regarding our named executive officers’ unexercised stock options, unvested shares of restricted stock, and unvested performance shares as of December 31, 2008.

																		Stock Awards
																										(Performance Shares)
																										Equity Incentive				Equity Incentive
						Option Awards												(Restricted Stock)								Plan Awards:				Plan Awards:
		Number of				Number of																Market Value				Number of				Market or
		Securities				Securities												Number of				of Shares				Unearned Shares,				Payout Value of
		Underlying				Underlying												Shares or				or Units of				Units or				Unearned Shares,
		Unexercised				Unexercised				Option				Option				Units of Stock				Stock That				Other Rights				Units or Other
		Options (#)				Options (#)				Exercise				Expira-				That Have				Have Not				That Have Not				Rights That Have
Name		Exercisable				Unexcercisable				Price ($)(1)				tion Date				Not Vested (#)				Vested ($)(2)				Vested (#)(2)				Not Vested ($)(2)
William R. Klesse			200,000				—				9.61875				12/31/11				5,600	(3)			121,184				9,263	(9)			200,451
			108,000				—				9.825				10/29/13				6,240	(4)			135,034				15,746	(10)			340,743
			102,392				—				11.5525				02/06/11				17,238	(5)			373,030				38,000	(11)			822,320
			40,084				—				14.755				02/06/11				36,000	(6)			779,040
			50,900				—				15.65				02/06/11				120,330	(8)			2,603,941
			27,476				—				18.6125				02/06/11
			26,164				—				18.0825				02/06/11
			54,400				13,600	(3)			21.355				10/21/14
			26,400				17,600	(4)			47.4775				10/20/12
			30,160				45,240	(5)			52.545				10/19/13
			22,000				88,000	(6)			71.45				10/25/14
			—				446,175	(7)			17.11				10/16/15
Michael S. Ciskowski			27,200				—				9.825				10/29/13				3,600	(3)			77,904				1,973	(9)			42,696
			36,800				9,200	(3)			21.355				10/21/14				3,296	(4)			71,325				3,353	(10)			72,559
			14,760				9,840	(4)			47.4775				10/20/12				3,672	(5)			79,462				7,500	(11)			162,300
			6,400				9,600	(5)			52.545				10/19/13				7,200	(6)			155,808
			4,400				17,600	(6)			71.45				10/25/14				43,200	(8)			934,848
			—				160,175	(7)			17.11				10/16/15
Richard J. Marcogliese			40,000				—				7.00				05/04/10				1,600	(3)			34,624				1,676	(9)			36,269
			20,000				—				9.8625				06/16/11				1,600	(4)			34,624				2,993	(10)			64,769
			60,000				—				8.43625				07/18/11				3,276	(5)			70,893				17,680	(11)			382,595
			60,000				—				7.515				09/18/12				16,960	(6)			367,014

																		Stock Awards
																										(Performance Shares)
																										Equity Incentive				Equity Incentive
						Option Awards												(Restricted Stock)								Plan Awards:				Plan Awards:
		Number of				Number of																Market Value				Number of				Market or
		Securities				Securities												Number of				of Shares				Unearned Shares,				Payout Value of
		Underlying				Underlying												Shares or				or Units of				Units or				Unearned Shares,
		Unexercised				Unexercised				Option				Option				Units of Stock				Stock That				Other Rights				Units or Other
		Options (#)				Options (#)				Exercise				Expira-				That Have				Have Not				That Have Not				Rights That Have
Name		Exercisable				Unexcercisable				Price ($)(1)				tion Date				Not Vested (#)				Vested ($)(2)				Vested (#)(2)				Not Vested ($)(2)
Richard J. Marcogliese (cont.)			32,000				—				9.825				10/29/13				52,760	(8)			1,141,726
			16,000				4,000	(3)			21.355				10/21/14
			7,800				5,200	(4)			47.4775				10/20/12
			5,740				8,610	(5)			52.545				10/19/13
			10,280				41,120	(6)			71.45				10/25/14
			—				195,625	(7)			17.11				10/16/15
Kimberly S. Bowers			9,600				—				9.825				10/29/13				760	(3)			16,446				346	(9)			7,487
			7,520				1,880	(3)			21.355				10/21/14				584	(4)			12,638				1,126	(10)			24,367
			2,610				1,740	(4)			47.4775				10/20/12				1,236	(5)			26,747				3,000	(11)			64,920
			2,200				3,300	(5)			52.545				10/19/13				2,880	(6)			62,323
			1,745				6,980	(6)			71.45				10/25/14				16,280	(8)			352,299
			—				60,375	(7)			17.11				10/16/15
Joseph W. Gorder			14,400				—				9.825				10/29/13				1,200	(3)			25,968				1,273	(9)			27,548
			11,200				2,800	(3)			21.355				10/21/14				1,280	(4)			27,699				2,523	(10)			54,598
			6,000				4,000	(4)			47.4775				10/20/12				2,763	(5)			59,791				5,470	(11)			118,371
			4,836				7,251	(5)			52.545				10/19/13				5,248	(6)			113,567
			3,180				12,720	(6)			71.45				10/25/14				15,260	(8)			330,226
			—				56,575	(7)			17.11				10/16/15