2010 Long -Term Incentive StrategyPerformance Unit Award Design

March 2010

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2010 Performance Unit Award - Design Eligibility – All senior executives and vice presidents in top 3 salary grades or

as selected by the Chief Executive Officer

Targeted Value as % of Total Long-Term Incentive Compensation –

EVPs – 40% SVPs – 33% VPs – 25%

Performance Period – 33 Months – April 1, 2010 – December 31, 2012

Vesting – Three-year cliff

Payout Range – 0% to 200% of target – See Performance Payout tables on slides 5 through 7

Form of Payout – Cash

Performance Criteria –

Relative Total Shareholder Return against the Performance Peer Group and S&P 500 index

Absolute Shareholder Return of Tesoro’s stock over performance period

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2010 Performance Unit Award - Design

PERFORMANCE PEER GROUP

Alon (ALJ) Valero (VLO)

Holly (HOC) Sunoco (SUN)

Frontier (FTO) S&P 500 (SPX)

Western (WNR)

Calculation of Total Shareholder Return (TSR) –

Stock prices utilized for purposes of calculating shareholder return for Tesoro and the peer group will be determined using average stock price for the 30 business days preceding the beginning and end of the performance period.

Dividends will be assumed to be reinvested in company stock as of the end of the quarter declared.

Reduction in Peers – Additional payout tables have been developed in the event of a reduction in the # of peers due to merger and acquisition activity. Peers who file bankruptcy during the performance period will rank last for purposes of determining performance.

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2010 Performance Unit Award - Design

Treatment of Awards upon Termination of Employment

• Retirement/Death/Disability – Paid out at end of performance period based on # of full months worked divided by 33 based on actual performance

• Voluntary Termination or Termination for Cause – Award forfeited

• Involuntary Termination or Voluntary for “Good Reason” – pro-rated payout based on # of months worked (minimum of 12) divided by 33 based on actual performance

• Change in Control – Awards immediately vest when the change of control is completed and are paid out at the greater of target or based on actual performance (relative and absolute total shareholder returns) using the stock transaction price

Performance Table

RANKPAYOUT %

(7 PEERS PLUS TESORO)

RELATIVE

TSR

#1 60% 100% 125% 150% 175% 200%

#2 30% 90% 112.5% 125% 150% 175%

#3 20% 60% 100% 112.5% 125% 150%

#4 0% 30% 75% 100% 112.5% 125%

#5 0% 15% 50% 75% 100% 112.5%

#6 0% 0% 25% 50% 75% 100%

Payout % will be interpolated to reflect shareholder returns between percentages outlined in this table.

< 5% 5% 10% 15% 20% 25%

ABSOLUTE TOTAL SHAREHOLDER RETURNNote: Ranking 7 or 8 results in 0% payout. Committee retains full discretion on award payout at end of performance period.

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Supplemental Performance Table #1

RANKPAYOUT %

(6 PEERS PLUS TESORO)

RELATIVE

TSR

#1 60% 100% 125% 150% 175% 200%

#2 30% 75% 100% 125% 150% 175%

#3 0% 50% 75% 100% 125% 150%

#4 0% 25% 50% 75% 100% 125%

#5 0% 0% 25% 50% 75% 100%

< 5% 5% 10% 15% 20% 25%

ABSOLUTE TOTAL SHAREHOLDER RETURNNote: Ranking 6 or 7 results in 0% payout. Committee retains full discretion on award payout at end of performance period.

In the event performance peer group is reduced as the result of a business combination, the following payout table will be used. Peers who file bankruptcy during the performance period will rank last for purposes of determining payouts.

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Supplemental Performance Table #2

RANKPAYOUT %

(5 PEERS PLUS TESORO)RELATIVE

TSR

#1 60% 100% 125% 150% 175% 200%

#2 25% 50% 75% 100% 125% 150%

#3 0% 25% 50% 75% 100% 125%

#4 0% 0% 25% 50% 75% 100%

< 5% 5% 10% 15% 20% 25%

ABSOLUTE TOTAL SHAREHOLDER RETURN

Note: Ranking 5 or 6 results in 0% payout. Committee retains full discretion on award payout at end of performance period.

In the event performance peer group is reduced as the result of a business combination, the following payout table will be used. Peers who file bankruptcy during the performance period will rank last for purposes of determining payouts.

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Accounting & SEC Reporting

Financial Reporting/162(m) SEC Reporting

• If settled in cash, the value of PUAs are re-measured each reporting date to current fair value until the awards are settled (marked-to-market)

• Accounting expense related to PUAs with market conditions (e.g. TSR or stock price targets) is not reversed at the end of the performance period regardless of whether performance results in any payout

• PUA compensation is deductible for purposes of IRC section 162(m) as long as performance goals are established in writing by the Comp Committee within the first 90 days of the performance period

• Grants to NEOs are reportable in the Proxy in the “Grants of Plan-Based Awards Table” with target, threshold, and maximum value reported

• Grant date fair value is reported in the Summary Compensation Table under the “Non-Equity Incentive Compensation” column

• SEC strongly encourages very robust descriptions of the performance goals established for the grant

• Form 4 reporting is not required unless units are paid in stock

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Performance Units – Additional Accounting Considerations

• Absolute or relative shareholder return metrics are considered “Market” conditions under FAS 123(R)

• Monte Carlo simulation valuation model will be used to value awards

• Award valuation is based on projection of future stock prices of Tesoro and peer group using assumptions:

Expected Share Price Volatility

Dividend Yield

Risk Free Rate of Return

Length of Performance Period

• PUA settled in cash must be re-valued each accounting period and expense adjusted upward or downward to reflect Tesoro’s relative performance

• Resulting volatility in earnings due to mark to market accounting is minimal and much less than with our current SARs due to high correlation of the stock prices among the performance peer group