You are cordially invited to attend the 2010 annual meeting of shareholders of Reynolds American Inc. The meeting will be held at 9:00 a.m. (Eastern Time), on Friday, May 7, 2010, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina.

The matters to be acted on at the annual meeting are described in the accompanying notice of meeting and proxy statement. Please give careful attention to these proxy materials.

Pursuant to rules promulgated by the Securities and Exchange Commission, we are providing to most of our shareholders access to our proxy materials over the Internet through a process informally called “e-proxy.” We believe these rules allow us to deliver proxy materials to our shareholders in a cost-efficient and an environmentally sensitive manner, while preserving the ability of shareholders to receive paper copies of these materials if they wish.

It is important that your shares be represented and voted at the annual meeting regardless of the size of your holdings. Whether or not you plan to attend the annual meeting, we encourage you to vote your shares in advance of the annual meeting by using one of the methods described in the accompanying proxy materials.

Attendance at the annual meeting will be limited to our shareholders as of the record date of March 8, 2010, and to guests of RAI, as more fully described in the proxy statement. Admittance tickets will be required. If you are a shareholder and plan to attend, you MUST pre-register for the meeting and request an admittance ticket no later than Wednesday, April 28, 2010, by writing to the Office of the Secretary, Reynolds American Inc., 401 North Main Street, P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. If your shares are not registered in your own name, evidence of your stock ownership as of March 8, 2010, must accompany your letter. You can obtain this evidence from your bank or brokerage firm, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk, not mailed to you in advance of the meeting.

We anticipate that a large number of shareholders will attend the meeting. Seating is limited, so we suggest that you arrive early. The auditorium will open at 8:30 a.m.

If you have questions or need assistance in voting your shares, please contact our Shareholder Services Department at (866) 210-9976 (toll-free).

Thank you for your support and continued interest in RAI.

The 2010 annual meeting of shareholders of Reynolds American Inc. will be held at 9:00 a.m. (Eastern Time) on Friday, May 7, 2010, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina. At the meeting, shareholders will be asked to take the following actions:

Only holders of record of RAI common stock as of the close of business on March 8, 2010, are entitled to notice of, and to vote at, the 2010 annual meeting of shareholders of RAI.

Whether or not you plan to attend the meeting, we urge you to vote your shares using a toll-free telephone number or the Internet, or by completing, signing and mailing the proxy card that either is included with these materials or will be sent to you at your request. Instructions regarding the different voting methods are contained in the accompanying proxy statement.

The Board of Directors, sometimes referred to as the Board, of Reynolds American Inc. is soliciting your proxy to vote at our 2010 annual meeting of shareholders (or any adjournment or postponement of the annual meeting). (References in this proxy statement to “RAI,” “we,” “our,” or “us” are references to Reynolds American Inc.) This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the 2010 annual meeting. Please read it carefully.

In accordance with certain rules of the Securities and Exchange Commission, referred to as the SEC, we are making our proxy materials (consisting of this proxy statement, our 2009 Annual Report on Form 10-K and a letter from our Chairman) available over the Internet, rather than mailing a printed copy of our proxy materials to every shareholder, which process we refer to as e-proxy. We began mailing a Notice of Internet Availability of Proxy Materials, referred to as the Notice, on or about March 22, 2010, to all shareholders entitled to vote, except shareholders who already had requested a printed copy of our proxy materials and except participants in our Savings Plan and SIP, defined below, to whom we began mailing proxy materials (including a proxy card) on or about March 22, 2010. More information about e-proxy is provided in the following set of questions and answers, including information on how to receive by mail, free of charge, paper copies of the proxy materials, in the event you received a Notice.

The date, time and place of our 2010 annual meeting are set forth below:

Attendance at our 2010 annual meeting will be limited to our shareholders as of the record date of March 8, 2010, referred to as the record date, and to pre-approved guests of RAI. All shareholder guests must be pre-approved by RAI and will be limited to spouses, persons required for medical assistance and properly authorized representatives of our shareholders as of the record date. Admittance tickets will be required to attend the meeting. If you are a shareholder and plan to attend, you MUST pre-register and request an admittance ticket for you (and any guest for whom you are requesting pre-approval) no later than Wednesday, April 28, 2010, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. If your shares are not registered in your own name, evidence of your stock ownership as of March 8, 2010, must accompany your letter. You can obtain this evidence from your bank or brokerage firm, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk — not mailed to you in advance of the meeting. Proper identification will be required to obtain an admittance ticket.

The 2010 annual meeting is a private business meeting. In accordance with RAI’s Amended and Restated Bylaws, referred to as Bylaws, and North Carolina law, our Chairman has the right and authority to determine and maintain the rules, regulations and procedures for the conduct of the meeting, including, but not limited to, maintaining order and the safety of those in attendance, dismissing business not properly submitted, opening and closing the polls for voting and limiting time allowed for discussion of the business at the meeting. Failure to abide by the meeting rules will not be tolerated and may result in expulsion from the meeting. A copy of the meeting rules will be provided to all properly pre-registered shareholders and guests with their admittance ticket.

We anticipate that a large number of shareholders will attend the meeting. Seating is limited, so we suggest you arrive early. The auditorium will open at 8:30 a.m.

If you have a disability, we can provide reasonable assistance to help you participate in the meeting. If you plan to attend the meeting and require assistance, please write or call the Office of the Secretary of RAI no later than May 3, 2010, at P.O. Box 2990, Winston-Salem, North Carolina 27102-2990; telephone number (336) 741-5162.

At our 2010 annual meeting, shareholders will vote upon the matters outlined in the notice of meeting — the election of directors, ratification of the appointment of our independent auditors, and four shareholder proposals, if such proposals are presented by their proponents at the meeting. Also, RAI’s management will report on RAI’s performance during the last fiscal year and respond to questions from shareholders.

The Board recommends a vote:

E-proxy refers to the process allowed under SEC rules permitting companies to make their proxy materials available over the Internet, instead of mailing paper copies of the proxy materials to every shareholder. We are using e-proxy to distribute proxy materials to most of our shareholders because it will be cost effective for RAI and our shareholders (by lowering printing and mailing costs), reduce the consumption of paper and other resources, and provide shareholders with more choices for accessing proxy information.

Yes. In addition to providing instructions on accessing the proxy materials on the Internet (by visiting a web site referred to in the Notice), the Notice has instructions on how to request paper copies by phone, e-mail or on the Internet. You will be sent, free of charge, printed materials within three business days of your request. Once you request paper copies, you will continue to receive the materials in paper form until you instruct us otherwise.

Yes. The e-proxy rules work in harmony with the existing rules allowing shareholders to consent to electronic delivery of proxy materials. If you have already registered to receive materials electronically, you will continue to receive them that way. If you have not already done so, but desire now to consent to electronic delivery, please see the question below “Can I receive future proxy materials from RAI electronically?”

Shareholders who owned RAI common stock at the close of business on March 8, 2010, the record date, are entitled to vote. As of the record date, we had 291,371,094 shares of RAI common stock outstanding. Each outstanding share of RAI common stock is entitled to one vote. The number of shares you own is reflected on your Notice and/or proxy card.

Yes. If your shares are registered directly in your name with RAI’s transfer agent (BNY Mellon Shareowner Services), then you are considered to be the shareholder “of record” with respect to those shares, and the Notice and/or these proxy materials are being sent directly to you by RAI. If your shares are held in the name of a bank, broker or other nominee, then you are considered to hold those shares in “street name” or to be the “beneficial owner” of such shares. If you are a beneficial owner, then the Notice and/or these proxy materials are being forwarded to you by your nominee who is considered the shareholder of record with respect to the shares.

A quorum of shareholders is necessary to hold a valid meeting. The holders of record, present in person or by proxy at the meeting, of a majority of the shares entitled to vote constitute a quorum. Once a share is represented for any purpose at the meeting, it is considered present for quorum purposes for the remainder of the meeting. Abstentions, shares that are withheld as to voting with respect to one or more of the director nominees and “broker non-votes” will be counted in determining the existence of a quorum. A “broker non-vote” occurs on an item when a nominee is not permitted to vote without instructions from the beneficial owner of the shares and the beneficial owner fails to provide the nominee with such instructions.

You may vote in person at our 2010 annual meeting or you may designate another person — your proxy — to vote your stock. The written document used to designate someone as your proxy also is called a proxy or proxy card. We urge you to vote your shares by proxy even if you plan to attend the annual meeting. You can always change your vote at the meeting. If you are a shareholder of record, then you can vote by proxy over the Internet by following the instructions in the Notice, or, if you request printed copies of the proxy materials by mail, you can also vote by mail or telephone.

If you are a beneficial owner and you want to vote by proxy, then you may vote by proxy over the Internet, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions in the Notice.

If you plan to attend the meeting and vote in person and you hold your shares directly in your own name, then we will give you a ballot when you arrive. However, if you hold your shares in street name, then you must obtain a legal proxy assigning to you the right to vote your shares from the nominee who is the shareholder of record. The legal proxy must accompany your ballot to vote your shares in person.

If you participate in the RAI 401k Savings Plan, referred to as the Savings Plan, or in the Puerto Rico Savings & Investment Plan, referred to as the SIP, then your proxy card will serve as voting instructions for the trustee of the Savings Plan or the custodian of the SIP for shares of RAI common stock allocated to your account under the Savings Plan or the SIP. Shares for which no instructions are received will be voted by the trustee of the Savings Plan and the custodian of the SIP in the same proportion as the shares for which instructions are received by each of them.

You may specify whether your shares should be voted for all, some or none of the director nominees. You also may specify whether your shares should be voted for or against, or whether you abstain from voting with respect to, each of the other proposals.

If you sign and return a proxy card, one of the individuals named on the card (your proxy) will vote your shares as you have directed. If you are a shareholder of record and return a signed proxy card, or if you give your proxy by telephone or over the Internet, but do not make specific choices, your proxy will vote your shares in accordance with the Board’s recommendations listed above. Please see the discussion below under “How many votes are required to elect directors and adopt the other proposals?” for further information on the voting of shares.

If any other matter is presented at our 2010 annual meeting, then your proxy will vote in accordance with his or her best judgment. At the time this proxy statement went to press, we knew of no other matters that had been properly presented to be acted upon at the annual meeting.

Yes. You may revoke or change your proxy by:

The required number of votes depends upon the particular item to be voted upon:

We will retain an independent party, Broadridge Financial Solutions, Inc., to receive and tabulate the proxies, and to serve as an inspector of election to certify the results.

The votes of all shareholders will be held in confidence from our directors, officers and employees, except:

Preliminary voting results will be announced at the 2010 annual meeting, and will be set forth in a press release that we intend to issue after the annual meeting. The press release will be available on our web site at www.reynoldsamerican.com. Final voting results will be published in a Current Report on Form 8-K, which we will file with the SEC within four business days after the 2010 annual meeting. A copy of this Current Report on Form 8-K will be available on our web site after its filing with the SEC.

Yes. Shareholders can elect to receive an e-mail that will provide electronic links to these materials in the future. If you are a registered shareholder, and have not already elected to view documents issued by us over the Internet, then you can choose to receive these documents electronically by following the appropriate prompts when you vote using the Internet. (If you hold your RAI common stock in nominee name, then you should review the information provided by your nominee for instructions on how to elect to view future proxy materials and annual reports using the Internet.) By choosing to receive shareholder materials electronically, you support us in our effort to control escalating printing and postage costs, and to protect the environment. We hope that our shareholders find this service convenient and useful. Costs normally associated with electronic access, such as usage and telephonic charges, will be your responsibility.

If you elect to view our annual reports and proxy materials using the Internet, we will send you a notice at the e-mail address provided by you explaining how to access these materials, but we will not send you paper copies of these materials unless you request them. We also may choose to send one or more items to you in paper form even though you elected to receive them electronically. Your consent to receive materials electronically rather than by mail will be effective until you revoke it by terminating your registration by going to the web site www.enrollicsdelivery.com/rai, writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990, or calling us at (336) 741-5162. If at any time you would like to receive a paper copy of the annual report, proxy statement or other documents issued by us, you may request any of these documents by writing to the address above, calling us at (336) 741-5162 or going to the web site www.reynoldsamerican.com.

By consenting to electronic delivery, you are stating to us that you currently have access to the Internet and expect to have access to the Internet in the future. If you do not have access to the Internet, or do not expect to have access in the future, please do not consent to electronic delivery because we may rely on your consent and not deliver paper copies of documents, including, for example, future annual meeting materials or other documents issued by us.

Yes. SEC rules allow us to send a single Notice or copy of our proxy materials to two or more of our shareholders sharing the same address, subject to certain conditions, in a process called “householding.” To take advantage of the cost savings offered by householding, we have delivered only one Notice or copy of proxy materials to multiple shareholders who share an address, unless we received contrary instructions from the impacted shareholders prior to the mailing date. We agree to deliver promptly, upon written or oral request, a separate copy of the Notice or proxy materials, as requested, to any shareholder at the shared address to which a single copy of those documents was delivered. If you prefer to receive separate copies of the Notice, proxy statement or Form 10-K, contact Broadridge Financial Solutions, Inc. at 1-800-542-1061, or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

If you are currently a shareholder sharing an address with another shareholder and wish to receive only one copy of future Notices, proxy statements and Annual Reports on Form 10-K for your household, please contact Broadridge at the above phone number or address.

We are soliciting this proxy on behalf of your Board of Directors and will bear the solicitation expenses. We are making this solicitation by mail, but our directors, officers and employees also may solicit by telephone, e-mail, facsimile or in person. We will pay for the cost of these solicitations, but these individuals will receive no additional compensation for their solicitation services. We will reimburse nominees, if they request, for their expenses in forwarding proxy materials to beneficial owners.

Yes, an alphabetical list of the names of all shareholders of record, as of the close of business on the record date, will be available for inspection by any shareholder or his or her representative, upon written demand, during the period from March 24, 2010, to May 7, 2010. This list can be viewed at RAI’s corporate offices located at 401 North Main Street, Winston-Salem, North Carolina 27101 between the hours of 8:30 a.m. and 5:00 p.m. Under applicable North Carolina law, a shareholder or his or her representative may, under certain circumstances and at the shareholder’s expense, copy the list during the period it is available for inspection. A shareholder desiring to inspect and/or copy the shareholder list should contact RAI’s Secretary at 401 North Main Street, Winston-Salem, North Carolina 27101 (phone: (336) 741-5162), to make necessary arrangements. In addition, we will make the shareholders’ list available for inspection to any shareholder or his or her representative during the 2010 annual meeting.

If you have any questions or need further assistance in voting your shares, please contact:

The business and affairs of RAI are managed under the direction of your Board of Directors. The Board currently consists of 12 directors who are divided into three classes of four directors each, with each class serving staggered terms of three years. The Class I directors have a term ending on the date of the 2011 annual meeting, the Class II directors have a term ending on the date of the 2012 annual meeting, and the Class III directors have a term ending on the date of the 2010 annual meeting. Pursuant to our Articles of Incorporation, each class is to consist, as nearly as may reasonably be possible, of one-third of the total number of directors constituting the Board.

Each of the following persons currently serving on the Board as a Class III director has been nominated for re-election to such class at the 2010 annual meeting: Martin D. Feinstein, Susan M. Ivey, Lionel L. Nowell, III and Neil R. Withington. If re-elected at the 2010 annual meeting, such persons will hold office until the 2013 annual meeting or until their successors have been elected and qualified.

Pursuant to the terms of the Governance Agreement, dated July 30, 2004, as amended, referred to as the Governance Agreement, by and among RAI, Brown & Williamson Holdings, Inc. (formerly known as Brown & Williamson Tobacco Corporation), referred to as B&W, and British American Tobacco p.l.c., the parent corporation of B&W and referred to as BAT, B&W has designated Messrs. Feinstein and Withington as nominees for re-election as Class III directors. (The material terms of the Governance Agreement relating to the nomination of directors are described below under “— Governance Agreement.”) The Board’s Corporate Governance and Nominating Committee, referred to as the Governance Committee, also has recommended Ms. Ivey and Mr. Nowell as nominees for re-election to the Board as Class III directors. The other persons who have been designated by B&W pursuant to the Governance Agreement as directors of RAI are Ms. Atkins (Class I director) and Messrs. Durante and Powell (Class II directors).

As previously disclosed, Joseph P. Viviano retired from the Board effective with the 2009 annual meeting, coincident with the expiration of his term as a Class II director.

Your proxy will vote for each of the nominees for directors unless you specifically withhold authority to vote for a particular nominee. If any such nominee is unable to serve, your proxy may vote for another nominee proposed by the Board, or the Board may reduce the number of directors to be elected.

Your Board of Directors recommends a vote FOR the election of each of the four Class III director nominees.

Certain biographical information regarding the persons nominated for election to the Board at our 2010 annual meeting and regarding the other persons serving on the Board is set forth below:

In connection with the business combination transactions, collectively referred to as the Business Combination, consummated on July 30, 2004, pursuant to which, among other things, the U.S. cigarette and tobacco business of B&W was combined with the business of RJR Tobacco, RAI, B&W and BAT entered into the Governance Agreement, which sets forth the parties’ agreement regarding various aspects of the governance of RAI, including the nomination of RAI directors. As noted above, under “— Item 1: Election of Directors,” the Board currently consists of 12 persons. Under the terms of the Governance Agreement, the Board is nominated as follows:

The number of directors B&W is entitled to designate for nomination to the Board will be affected by the amount of RAI common stock which B&W owns. (As of the date of this proxy statement, B&W owns approximately 42% of RAI common stock.) Specifically, the Governance Agreement provides that designations by B&W will be subject to the following limitations prior to the recommendation of nominees by the Governance Committee:

For purposes of the Governance Agreement, an independent director means a director who would be considered an “independent director” of RAI under the NYSE listing standards, as such listing standards may be amended from time to time, and under any other applicable law that imposes as a condition to any material benefit to RAI or any of its subsidiaries, the independence of one or more members of the Board, excluding, in each case, requirements that relate to “independence” only for members of a particular committee or directors fulfilling a particular function. In no event will any person be deemed to be an “independent director” if such person is, or at any time during the three years preceding the date of determination was, a director, officer or employee of BAT or any of its subsidiaries, other than RAI and its subsidiaries, if applicable. In addition, no person will be deemed to be an “independent director” unless such person also would be considered to be an “independent director” of BAT under the NYSE listing standards, whether or not such person is in fact a director of BAT, assuming the NYSE listing standards were applicable to BAT. Under the Governance Agreement, the fact that a person has been designated by B&W for nomination will not by itself disqualify that person as an “independent director.”

Pursuant to the Governance Agreement, because the Board will include the number of directors designated by B&W in accordance with the terms of the Governance Agreement following the election of directors at the 2010 annual meeting (assuming that management’s entire slate of nominees is elected at the meeting), BAT and its subsidiaries will vote, pursuant to an irrevocable proxy, their shares of RAI common stock in favor of management’s slate of nominees (consisting of Ms. Ivey and Messrs. Feinstein, Nowell and Withington for Class III) at the 2010 annual meeting. Under the Governance Agreement, BAT and its subsidiaries will not be required to vote in favor of management’s slate of nominees at a particular shareholders’ meeting if a third party has made a material effort to solicit proxies in favor of a different slate of directors for that meeting.

The NYSE listing standards require that all listed companies have a majority of independent directors. For a director to be “independent” under the NYSE listing standards, the board of directors of a listed company must affirmatively determine that the director has no material relationship with the company, or its subsidiaries or affiliates, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company or its subsidiaries or affiliates. In accordance with the NYSE listing standards, RAI’s Board has adopted the following standards to assist it in its determination of director independence; a director will be determined not to be independent under the following circumstances:

The foregoing director independence standards are set forth in RAI’s Corporate Governance Guidelines, which can be found in the “Governance” section of the www.reynoldsamerican.com web site, or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

The Board has determined that the following directors are independent within the meaning of the foregoing NYSE listing standards: Betsy S. Atkins, Martin D. Feinstein, Luc Jobin, Holly K. Koeppel, Nana Mensah, Lionel L. Nowell, III, H.G.L. (Hugo) Powell, Thomas C. Wajnert and John J. Zillmer. In addition, the Board determined that Mr. Viviano was independent within the meaning of the NYSE listing standards during his tenure on the Board in 2009. None of the foregoing independent directors has any relationship with RAI, other than being a director and/or shareholder of RAI.

The standing committees of the Board are the Audit and Finance Committee, referred to as the Audit Committee, the Compensation and Leadership Development Committee, referred to as the Compensation Committee, and the Governance Committee. All of the current standing committees of the Board are comprised of non-management directors, who are independent as defined by applicable NYSE listing standards as discussed above under “— Determination of Independence of Directors.” Pursuant to the Governance Agreement, each of the Board committees will have at least five members, though currently the Audit Committee has one vacancy. The Governance Agreement also provides that the directors designated by B&W will have proportionate representation on each Board committee, with at least one director designated by B&W serving on each Board committee so long as any directors designated by B&W serve on the Board. Notwithstanding the foregoing, a director designated by B&W may not serve on any Board committee if such service would violate mandatory legal or exchange listing requirements or any other applicable law that requires committee member independence as a condition to a material benefit to RAI or any of its subsidiaries.

Each of the Board’s three standing committees operates in accordance with the terms of a written charter. Copies of each such charter can be found in the “Governance” section of the www.reynoldsamerican.com web site, or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. Information regarding the current membership of each standing committee of the Board is set forth in the table below, and information regarding the activities of each standing committee of the Board is presented following the table.

In 2009, the Board also established an ad hoc committee, the Strategic Planning Review Committee, the purpose of which is to evaluate, and provide feedback regarding, strategic plans and initiatives proposed by management. Such committee met eight times during 2009. The members of the Strategic Planning Review Committee were: Luc Jobin, H.G.L. (Hugo) Powell and Thomas C. Wajnert (Chair).

The Audit Committee, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act, is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities by overseeing:

The oversight of finance related matters was added to the Audit Committee’s responsibilities in 2008. The Audit Committee is directly responsible for the appointment, termination, compensation, retention, evaluation and oversight of the work of RAI’s independent auditors for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for RAI. The Audit Committee also serves as a qualified legal compliance committee, within the meaning of the Sarbanes-Oxley Act of 2002, responsible for, among other things, reviewing reports by RAI’s attorneys of any material violations of securities laws and any material breaches of fiduciary duties under applicable law.

General.  The Compensation Committee is responsible for:

As part of its responsibilities, the Compensation Committee:

In 2007, the Governance Committee was responsible for evaluating the Chief Executive Officer’s performance and making a recommendation to the independent directors for their approval of any changes to her base salary. Commencing in 2008, the Compensation Committee assumed the responsibility, with input from all members of the Board, for evaluating the performance of RAI’s Chief Executive Officer. Based on such evaluation, the Compensation Committee recommends to the independent directors for their approval any

Delegation.  Pursuant to the Compensation Committee charter, the Chair of the Committee has the authority to approve the compensation for persons at the Executive Vice President level or below (except for RAI’s Chief Financial Officer and RAI’s General Counsel) to the extent the Chair deems such approval necessary and appropriate under the circumstances, and if the Committee is not otherwise in session. In addition, the Compensation Committee may, in its discretion and as it considers appropriate, delegate such other of its powers and responsibilities to other subcommittees, or to committees comprised of officers or employees, except that grants to persons who are subject to the Section 16 reporting requirements may only be approved by a subcommittee comprised solely of two or more non-employee directors, and grants designed to be “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, referred to as the Code, may only be approved by a subcommittee comprised solely of two or more outside directors. In February 2010, the Compensation Committee delegated to a committee consisting of Ms. Ivey, as Chief Executive Officer, and Lisa J. Caldwell, RAI’s Executive Vice President and Chief Human Resources Officer, the authority during the remainder of 2010 to approve, outside of the normal, annual grant cycle, long-term incentive grants under the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan, to persons at the Vice President level and below. Any such grants made under that delegated authority are required to have the same terms as the grants made to other employees as of March 1, 2010, and any such additional long-term incentive grants may not cause the maximum amount of the total 2010 long-term incentive grants approved by the Compensation Committee to be exceeded. See “Executive Compensation — Compensation Discussion and Analysis — Long-Term Incentive Compensation — Long-Term Incentive Opportunity — 2010 Long-Term Incentives” below for information regarding the general terms of the 2010 long-term incentive grants under the Omnibus Plan made to key employees.

Compensation Consultants.  Under its charter, the Compensation Committee has the sole authority to retain any compensation consultant for purposes of evaluating, and making recommendations with respect to, the compensation of our executive officers, as well as the sole authority to approve the terms of any such consulting arrangement, including the fees payable to the consultant. The Compensation Committee also has the sole authority to terminate any compensation consultant that it has retained. In addition to the retention of compensation consultants, the Compensation Committee has the authority, under its charter, to retain independent legal counsel or other independent advisors to assist the Committee in performing its duties.

In 2009, the Compensation Committee engaged Hewitt Associates to provide the Committee with recommendations regarding executive compensation in light of market practices and legal or regulatory considerations, and consistent with RAI’s needs and the Committee’s compensation philosophy. Hewitt Associates provided the Compensation Committee with market or benchmark data to assist the Committee in making determinations concerning senior management base salary and annual incentive levels, and long-term incentive awards. A representative of Hewitt Associates attended each meeting of the Compensation Committee in 2009. During 2009, the Compensation Committee requested that Hewitt Associates work with RAI’s management in preparing appropriate executive compensation proposals for the Committee’s review and consideration; provide independent, candid advice to the Committee; and help ensure that the Committee receives the information and counsel necessary to make well-informed, reasoned decisions in the best interests of RAI’s shareholders on matters related to executive compensation. In early 2010, Hewitt spun off a part of its executive compensation consulting practice into a separate and independent entity called Meridian Compensation Partners, LLC, referred to as Meridian. For 2010, the Compensation Committee has engaged Meridian as its independent compensation consultant.

In 2009, the Human Resources department of RAI also engaged Hewitt Associates to provide compensation advice on matters pertaining to RAI executives whose compensation is not within the Compensation Committee’s scope of review. Pursuant to procedures established by the Committee in February 2007, management of RAI or its operating subsidiaries may retain the same compensation consulting firm retained

In 2009, the Governance Committee also used Hewitt Associates to assist in the evaluation of the compensation of RAI’s non-employee directors. For 2010, the Governance Committee has engaged Meridian for such work.

Compensation Committee Interlocks and Insider Participation.  An SEC rule requires RAI to disclose the existence of certain relationships involving any member of RAI’s Compensation Committee, on the one hand, and RAI, on the other hand. Such relationships, referred to as “compensation committee interlocks and insider participation” include, among other things, where

During 2009, there were no compensation committee interlocks or insider participation at RAI.

General.  The Governance Committee:

Director Nomination Process.  The Board is responsible for selecting its members, subject to shareholder approval and the relevant provisions of the Governance Agreement, but delegates the screening process to the Governance Committee with input from the Chairman of the Board, the Chief Executive Officer (if different from the Chairman of the Board) and the Lead Director. The Governance Committee uses the following

In connection with its process of identifying, screening and recommending candidates for Board membership, the Governance Committee evaluates each potential candidate against the qualifications set forth in its committee charter and the Corporate Governance Guidelines, and reviews the appropriate skills and characteristics required of directors in the context of prevailing business conditions and the then-existing composition of the Board. The qualifications considered in the selection of director nominees include the following:

Additional policies regarding Board membership, as set forth in the Corporate Governance Guidelines, include the following:

Incumbent directors are reviewed for suitability for continued service on the Board by the Governance Committee and the full Board prior to their nomination for re-election.

Candidates are recommended to the full Board for nomination for election as directors only upon the affirmative vote of a majority of the members of the Governance Committee.

Shareholder Nominations to the Board.  Shareholders may recommend candidates for Board membership by submitting their recommendations in writing to the Office of the Secretary, Reynolds American Inc., P. O. Box 2990, Winston-Salem, North Carolina 27102-2990. The written recommendation must provide the following information:

The Governance Committee will evaluate any director candidate recommended by a shareholder based upon the facts and circumstances at the time of the receipt of such recommendation. Applicable considerations would include:

A shareholder also may nominate a person for election to the Board at the 2011 annual meeting of shareholders by providing notice and the other required information described in RAI’s Bylaws, in writing, to the Office of the Secretary, Reynolds American Inc., P. O. Box 2990, Winston-Salem, North Carolina 27102-2990, for receipt between October 23, 2010, and November 22, 2010. RAI’s Bylaws can be found in the “Governance” section of the www.reynoldsamerican.com web site or may be obtained, free of charge, from the Office of the Secretary.

Under our Corporate Governance Guidelines, and subject to the applicable provisions of the Governance Agreement, the Board elects the Chairman of the Board and the Chief Executive Officer on an annual basis in the manner and based on the criteria that it deems appropriate and in the best interests of RAI given the

Similarly, the Board considers whether the roles of Chairman of the Board and Chief Executive Officer should be separate and whether the Chairman of the Board should be an independent director. Ms. Ivey, our Chief Executive Officer and President, has held the additional position of Chairman of the Board since January 1, 2006, following the retirement of Andrew J. Schindler as Non-Executive Chairman of the Board.

Under our Corporate Governance Guidelines, if the positions of Chairman of the Board and Chief Executive Officer are held by the same person, the independent directors may elect, upon nomination by the Governance Committee, an independent director to serve as Lead Director. A director may be elected as Lead Director for more than one term in succession. Pursuant to our Corporate Governance Guidelines, after consideration and nomination by the Governance Committee, the independent directors elected John T. Chain, Jr. to serve as Lead Director, commencing January 1, 2006. In 2007, the Board modified the Corporate Governance Guidelines to provide that the term of any future Lead Director would be one year, instead of three years. Upon General Chain’s retirement from the Board in 2008, the independent directors elected Mr. Wajnert to serve as Lead Director. In May 2009, the independent directors elected Mr. Wajnert to serve an additional one-year term as Lead Director.

Under our Corporate Governance Guidelines, the Lead Director is responsible for:

The Board believes that the existing leadership structure, under which Ms. Ivey serves as Chairman of the Board, Chief Executive Officer and President, and Mr. Wajnert serves as Lead Director, is appropriate and in the best interests of RAI. Given the current needs of RAI, the Board believes that having the Chief Executive Officer and President serve as Chairman of the Board and having an independent director serve as Lead Director strikes an effective balance between management and independent director participation in the Board process. In this regard, the Board believes that it has operated effectively since Ms. Ivey assumed the role of Chairman of the Board on January 1, 2006, and that Ms. Ivey has provided strong and clear leadership of RAI. Moreover, General Chain’s and Mr. Wajnert’s service as independent Lead Director has promoted the Board’s consideration of diverse viewpoints and facilitated communication between the Board and management.

Although the Board believes that the existing leadership structure is currently in the best interests of RAI, the Corporate Governance Guidelines provide the Board with the flexibility to elect different individuals to the positions of Chairman of the Board and Chief Executive Officer if, in the future, the Board determines that such a leadership structure would be appropriate.

The Corporate Governance Guidelines provide that each Board meeting agenda shall include time for an executive session with only directors and the Chief Executive Officer present, and an executive session with only non-employee directors present. In addition, the Corporate Governance Guidelines provide that at the Board meeting following each annual meeting of shareholders, the Board shall have an executive session with only independent directors present. The Lead Director, if one has been appointed, is responsible for presiding over executive sessions of the non-management directors and the independent directors. In the absence of the Lead Director, if one has been appointed, the Chair of the Governance Committee shall preside over executive sessions of the non-management directors and the independent directors. Similarly, if no Lead Director has been appointed, and the Chairman of the Board is an employee of RAI or a subsidiary of RAI, then the Chair of the Governance Committee shall preside over executive sessions with only non-employee directors or independent directors present. As noted above, Mr. Wajnert has served as Lead Director since May 6, 2008. Currently, Mr. Powell serves as the Chair of the Governance Committee.

During 2009, there were eight meetings of the Board. Each director attended at least 75% of the total meetings of the Board and committees of which he or she was a member. The Corporate Governance Guidelines provide that Board members are expected to attend annual meetings of shareholders, barring unavoidable circumstances that prevent attendance. All of our current directors, except Ms. Atkins, attended our annual shareholders’ meeting held on May 6, 2009.

The Board, together with the Audit Committee and Compensation Committee, is primarily responsible for overseeing RAI’s risk management. On a semi-annual basis, management of RAI and its operating companies, under the direction of RAI’s chief risk officer, identifies and assesses significant risks. Each risk category, as well as the consolidated risk profile, is reviewed and discussed with the full Board or appropriate Board committee, based on the scope of the risk and the expertise needed for oversight. The Board is assigned and directly oversees risks that could have a broad impact on RAI, strategic risks, as well as any risk that could threaten a key growth strategy. The Compensation Committee is assigned and oversees risks that may require its specific expertise, such as human resources risks or compensation risks. Consistent with NYSE regulations, the Audit Committee is assigned and oversees management’s processes to identify, assess and manage risks. Additionally, the Audit Committee oversees risks that may require its specific expertise, such as financial reporting risks, as well as other risks that do not fit into one of the foregoing categories.

Although the Board and its committees oversee RAI’s risk management strategy, management is responsible for implementing and supervising day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks faced by RAI. At meetings of the Board, the Audit Committee or the Compensation Committee, as applicable, management reports on the specific categories of risk for which the Board or such committee is responsible. In particular, management discusses its assessment of and strategy for managing each category of risk. Each of the Audit Committee and the Compensation Committee also regularly reports to the Board with respect to the risk categories it oversees. These ongoing discussions enable the Board, the Audit Committee and the Compensation Committee to monitor RAI’s exposure to and mitigation of risk.

The existing Board leadership structure encourages communication between management, including the Chairman of the Board, Chief Executive Officer and President, on the one hand, and the non-management directors, including the Lead Director, on the other hand. By fostering increased communication, we believe that the current Board leadership structure leads to the identification and implementation of effective risk management strategies.

We provide to our non-employee directors (other than Messrs. Durante and Withington, both of whom were full-time employees of BAT during 2009) compensation for their service on the Board in the form of retainers and meeting fees, and certain equity awards, all as described in greater detail below. See “— Payment for Services of Certain Board Designees” below for a discussion of the compensation RAI pays for the service of Messrs. Durante and Withington as directors of RAI. (Our non-employee directors, other than Messrs. Durante and Withington, are collectively referred to as Outside Directors). RAI does not compensate any director who is an employee of RAI or any of its subsidiaries in his or her capacity as a director, except that RAI does reimburse all directors for actual expenses incurred in connection with attendance at Board and committee meetings, including transportation, food and lodging expenses. If a guest accompanies a director on a trip to a Board meeting and the guest was not invited by RAI, then charges associated with that guest will not be reimbursed by RAI. Transportation, food and lodging expenses that are incurred by a guest and paid for by RAI will be imputed as income to the director. RAI also reimburses Outside Directors for the fees and expenses incurred by them in connection with their attendance at one director education program per year.

The Governance Committee, with the assistance of an outside compensation consultant, periodically evaluates and recommends changes to the compensation program for RAI’s non-employee directors. In 2009, the Governance Committee used Hewitt Associates to evaluate and provide recommendations regarding the compensation program for the non-employee directors. No executive officer is involved in approving, or recommending changes to, any elements of the director compensation program.

The following table shows the annual compensation paid by RAI to the Outside Directors for their service on the Board during 2009.

Under the Amended and Restated Deferred Compensation Plan for Directors of Reynolds American Inc., referred to as the DCP, Outside Directors may defer payment of their retainers and meeting fees until termination of service as a director or until a selected year in the future. Participating directors may elect, on an annual basis, to direct RAI to defer their retainers and meeting attendance fees in 25% increments to a cash account, a stock account or a combination of both. The plan provides that amounts deferred to a cash account earn interest at the prime rate as set by JPMorgan Chase Bank, and amounts deferred to a stock account mirror the performance of, and receive dividend equivalents based on, RAI common stock. Participating directors are entitled to receive a distribution, only in the form of cash, of their account balances either in full on the deferral date or in up to ten annual installments commencing on a selected future date.

RAI provides its Outside Directors with certain stock-based awards pursuant to the terms of the EIAP. Upon election to the Board, an Outside Director receives under the EIAP an initial grant of 3,500 deferred stock units or, at the director’s election, 3,500 shares of RAI common stock. Upon appointment as a Non-Executive Chairman of the Board, such director receives a grant of 3,500 deferred stock units or, at such person’s election, 3,500 shares of RAI common stock, so long as such director previously did not receive an initial grant upon his or her election to the Board. In addition, pursuant to the EIAP, each Outside Director receives on the date of each annual meeting of shareholders (provided the Outside Director remains on the Board after the date of such meeting), a grant of 2,000 (or, in the case of a Non-Executive Chairman of the Board, 4,000) deferred stock units or, at the director’s election, 2,000 (or, in the case of a Non-Executive Chairman, 4,000) shares of RAI common stock. If RAI does not hold an annual meeting of shareholders in any year, then the annual award under the EIAP will be made to Outside Directors on the anniversary of the preceding year’s annual meeting of shareholders. Shares of RAI common stock awarded to Outside Directors in lieu of deferred stock units upon a director’s initial award or any annual award under the EIAP will not bear any transfer restrictions, other than any restrictions arising generally by virtue of federal and state securities laws. Each Outside Director also is entitled to receive a quarterly award of deferred stock units on the last day of each calendar quarter, with the number of units being equal to: $10,000 (or, in the case of a Non-Executive Chairman of the Board, $20,000) divided by the average closing price of a share of RAI common stock for each business day during the last month of such calendar quarter. If a director has served for less than the entire quarter, the number of units granted will be prorated based upon the period of such person’s actual Board service during the quarter.

The deferred stock units granted under the EIAP receive dividends at the same rate as RAI common stock, but the dividends are credited in the form of additional deferred stock units. The deferred stock units have no voting rights. For all grants made under the EIAP on or prior to December 31, 2007, distribution of a director’s deferred stock units will be made on (or commencing on) January 2 following his or her last year of service on the Board. For all grants under the EIAP after December 31, 2007, distribution of a director’s deferred stock units will be made in accordance with such director’s election(s) to receive his or her deferred stock units (1) on (or commencing on) January 2 following his or her last year of service on the Board, or (2) on (or commencing on) the later of January 2 of a year specified by such director and January 2 following his or her last year of service on the Board. At the election of the director, distributions may be made in one lump sum or in up to 10 annual installments. At the election of the director, the payment of the initial and annual deferred stock unit grants may be made in cash or in RAI common stock, which shares of stock will not bear transfer restrictions other than any restrictions arising generally by virtue of federal and state securities laws. Distribution of the deferred stock units received in connection with a quarterly award will be made only in cash. Cash distributions of deferred stock units generally are based on the average closing price of RAI common stock during December of the year preceding payment. Notwithstanding the foregoing, upon the death of a participating director (whether before or after ceasing to serve as a director), any deferred stock units then outstanding in such director’s account will be distributed in a single lump sum cash amount to the director’s designated beneficiary or estate, as the case may be. Such distribution will be made after the end of the quarter in which the plan administrator is notified of the participant’s death and will be based upon the average closing price of RAI common stock during that month.

An aggregate of 1,000,000 shares of RAI common stock have been authorized for issuance under the EIAP. Shares relating to awards under the EIAP that are forfeited, terminated or settled in cash in lieu of stock will become available for future grants. The EIAP also affords its administrator, the Governance Committee, the discretion to grant Outside Directors options to acquire shares of RAI common stock. Any such options will have an exercise price equal to the per share closing price of RAI common stock on the date of grant, will vest and become exercisable in full six months after the date of grant and will have a ten-year term. No options were granted to Outside Directors in 2009, and no options currently are held by Outside Directors under the EIAP.

Matching Grants Program.  All Outside Directors are eligible to participate in a matching grants program sponsored by RAI and the Reynolds American Foundation. Pursuant to this program, RAI or the Reynolds American Foundation will match grants, on a one-for-one basis, that a director makes to an educational, art, cultural or charitable organization. The maximum, aggregate annual amount of the matching grants for each director is $10,000. The Reynolds American Foundation will provide a matching grant up to the first $4,000, and RAI will provide a matching grant up to the next $6,000, for each qualifying contribution made by an Outside Director. A director may participate in the matching grants program through the end of the calendar year in which the director terminates his or her service on the Board.

In consideration for the service of the two BAT employee directors on the Board, referred to as the BAT employee directors, RAI pays BAT an annual fee, paid on a quarterly basis, per director. Such amounts are paid to BAT in lieu of any other compensation (other than the reimbursement of certain expenses) to which the BAT employee directors otherwise would be entitled in their capacities as members of RAI’s Board. For 2009, the amount of the annual fee for each of the two BAT employee directors, Messrs. Durante and Withington, was $215,020. For 2010, the annual fee for the Board service of each of Messrs. Durante and Withington will be $213,300.

After completion of five years of service as a member of RAI’s Board of Directors, each director is expected to hold and retain a minimum of 10,000 shares of RAI common stock. It is generally expected that a director will not dispose of RAI common stock during the first five years of service on the Board, unless the director holds and retains RAI common stock in excess of the minimum threshold level of 10,000 shares. For purposes of the foregoing ownership guidelines, RAI common stock includes:

These stock ownership guidelines do not apply to any director who is also an officer or employee of BAT so long as such director does not participate in any equity compensation plan made available to RAI’s non-employee directors. All directors with at least five years of service currently hold amounts in excess of the minimum threshold level, and those directors with less than five years of service are making progress in meeting the five-year minimum threshold goals.

RAI has adopted a Code of Conduct that applies to all directors, officers and employees of RAI and its subsidiaries, including RAI’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The Code of Conduct is intended to constitute a “code of ethics” within the meaning of Item 406(b) of Regulation S-K. Any amendment to, or waiver from, a provision of RAI’s Code of Conduct (other than technical, administrative or other non-substantive amendments) that applies to any director or executive officer of RAI will be disclosed on the www.reynoldsamerican.com web site, by distributing a press release or by filing a current report on Form 8-K with the SEC within four business days following the amendment or waiver. The Code of Conduct can be found in the “Governance” section of the www.reynoldsamerican.com web site, or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

Shareholders and other interested parties may communicate directly with the Board or individual members of the Board by submitting written correspondence to Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. Shareholders and other interested parties may communicate directly with the non-management directors as a group by writing to the Lead Director or, if a Lead Director has not been appointed, to the Chair of the Governance Committee at the foregoing address. Additional information on our procedures for the handling of communications from our shareholders and other interested parties is contained in our Corporate Governance Guidelines, which can be found in the “Governance” section of the www.reynoldsamerican.com web site.

We have been notified by the persons in the following table that they are beneficial owners (as defined by the rules of the SEC) of more than 5% of RAI common stock.

The following table indicates the number of shares of RAI common stock beneficially owned as of March 8, 2010, by each current director, each named executive officer and all directors and executive officers as a group, based on information provided to RAI by these individuals. In general, “beneficial ownership” includes those shares a director or executive officer has the power to vote, or the power to transfer, and stock options that are exercisable currently or become exercisable within 60 days. Except as described in the footnotes to the table, each person has sole investment and voting power over the shares for which he or she is shown as beneficial owner.

In addition to provisions relating to the nomination and election of directors to RAI’s Board, the Governance Agreement, among other things, prohibits BAT and its subsidiaries from acquiring, or making a proposal to acquire, beneficial ownership of additional shares of RAI common stock until the earlier of July 30, 2014 (the tenth anniversary of the Governance Agreement) and the date on which a significant transaction is consummated (such period is referred to as the Standstill Period). For purposes of the Governance Agreement, a significant transaction means any sale, merger, acquisition or other business combination involving RAI or its subsidiaries pursuant to which more than 30% of the voting power or the total assets of RAI would be received by any person or group. Under the Governance Agreement, BAT and its subsidiaries also are prohibited during the Standstill Period from taking certain actions, including, without limitation, participating in certain proxy solicitations with respect to RAI common stock and seeking additional representation on RAI’s Board. The Governance Agreement provides several exceptions to the foregoing prohibitions, including, without limitation, permitting BAT and its subsidiaries to acquire additional shares of RAI common stock in connection with certain BAT counteroffers made in response to a third party’s offer to enter into a significant transaction involving RAI.

The Governance Agreement also restricts the ability of BAT and its subsidiaries to sell or transfer shares of RAI common stock. Specifically, during the term of the Governance Agreement, BAT and its subsidiaries may not:

Notwithstanding these restrictions, B&W may transfer any of its shares of RAI common stock to BAT or its subsidiaries, and any such transferee may make similar transfers, provided the transferee agrees to be bound by the terms of the Governance Agreement and, provided further, that all shares of RAI common stock held by B&W and a permitted transferee will be taken into account for purposes of calculating any ownership thresholds applicable to B&W and/or its affiliates under the Governance Agreement. The Governance Agreement will terminate upon the occurrence of various events, including, without limitation, B&W’s ownership interest in RAI falling below 15%, and the election by BAT and B&W to terminate the Governance Agreement, which election may be made in the event of RAI’s material breach of certain provisions of the Governance Agreement (and RAI’s failure to cure such breach in a timely manner). In other cases, each of BAT and B&W, on the one hand, and RAI, on the other hand, may terminate certain provisions of the Governance Agreement upon the material breach of the Governance Agreement by the other (subject to the breaching party’s right to cure the breach in a timely manner), except that other provisions of the Governance Agreement will remain in effect.

In addition to the provisions of the Governance Agreement described in the preceding three paragraphs and under the heading “The Board of Directors” above, the Governance Agreement also grants BAT and its subsidiaries the right to have shares of RAI common stock held by them to be registered under the securities laws in certain circumstances, requires the approval of a majority of the directors designated by B&W to authorize certain issuances or repurchases of RAI securities, and requires the approval of B&W, as a shareholder of RAI, for RAI to effect certain transactions.

A copy of the Governance Agreement and Amendments No. 1 and No. 2 to the Governance Agreement are included as Exhibits 10.10, 10.11 and 10.12, respectively, to our 2009 Annual Report on Form 10-K.

Section 16(a) of the Exchange Act requires RAI’s directors and executive officers, and any persons holding more than 10% of RAI’s equity securities, to file with the SEC reports disclosing their initial ownership of RAI’s equity securities, as well as subsequent reports disclosing changes in such ownership. To RAI’s knowledge, based solely on a review of such reports furnished to it and written representations by certain reporting persons that no other reports were required, during the 2009 fiscal year, RAI’s directors, executive officers and greater than 10% beneficial owners complied with all Section 16(a) filing requirements, except that Mr. Feinstein filed a report on Form 4 which identified three sales, aggregating 355 shares of RAI common stock, that inadvertently were not reported earlier on reports on Form 4.

Our executive compensation programs serve two primary objectives — to attract, motivate, and retain exceptional management talent, and to reward our management for strong performance and the successful execution of our business plans and strategies. Consistent with these objectives, a meaningful portion of the annual compensation, and all of the long-term compensation, of each named executive officer is variable, or “at risk,” in that the receipt or value of that compensation depends upon the attainment of specific performance goals by RAI and/or its operating subsidiaries. This compensation structure aligns management’s interests with the long-term interests of our shareholders. In addition, our executive compensation programs are designed to provide adequate incentives to overcome the reluctance that some people may have to work in a controversial industry, such as the tobacco industry.

The Board’s Compensation Committee, comprised solely of independent directors, is responsible for structuring and administering the compensation programs and plans in which our executive officers named in the 2009 Summary Compensation Table below participate (each officer named in such table is referred to as a named executive officer). Information regarding the Compensation Committee’s other duties, responsibilities and activities is set forth above under “Committees and Meetings of the Board of Directors — Compensation and Leadership Development Committee — General.” The table below lists the name, title and employer of each of our named executive officers for 2009:

From 2005 through 2009, the Compensation Committee engaged Hewitt Associates, an independent executive compensation consultant, to advise and counsel the Committee. Hewitt Associates reports directly to the Compensation Committee and provides it with executive compensation advisory services and assistance in establishing competitive, cost-effective executive compensation programs. Throughout 2009, at the Compensation Committee’s direction, Hewitt prepared, presented and made recommendations on a variety of executive compensation-related topics, including peer group data, competitive market pay, compensation risk management, general market trends, compensation elements, and legislative and regulatory changes, which the Committee used in its compensation decision making process. In addition, Hewitt reviewed and made recommendations on the materials prepared by management for each Compensation Committee meeting. A representative of Hewitt Associates attended each meeting of the Compensation Committee in 2009 and, at each meeting, met with the Committee in executive session without management present. In early 2010, Hewitt spun off a part of its executive compensation consulting practice into a separate and independent entity called Meridian Compensation Partners, LLC. For 2010, the Compensation Committee has engaged Meridian as its independent compensation consultant. Information regarding the Compensation Committee’s policy governing management’s use of compensation consultants is set forth above under “Committees and Meetings of the Board of Directors — Compensation and Leadership Development Committee — Compensation Consultants.”

In evaluating and determining appropriate levels of base salary and annual and long-term incentives for our named executive officers, the Compensation Committee annually reviews competitive peer group information showing the compensation paid to executives holding similar positions at a peer group of companies. The peer group used by the Compensation Committee for 2009 continued to consist of a combination of those companies that compete directly with our operating subsidiaries in the tobacco business — Altria Group, Inc., Lorillard, Inc., Phillip Morris International Inc. and UST, Inc. — and certain companies outside of the tobacco industry that sell brand-focused consumer products and have annual revenues ranging from one-half to two times that of RAI. We believe that the peer group represents those companies, in terms of industry and relative revenue size, that RAI and its operating subsidiaries were most likely to compete against for senior executive talent in 2009. Changes to the companies in our peer group may be necessary from year to year to reflect the impact of mergers, acquisitions and similar events (for example, Altria Group, Inc.’s acquisition of UST, Inc. in the first quarter of 2009), if a company no longer falls within the revenue range set for the peer group or if compensation survey data is no longer available for a peer group company.

In the fourth quarter of 2008, at the Compensation Committee’s direction, Hewitt Associates reviewed and updated the 2008 peer group, using information from its Total Compensation Measurement^tm DataBase, to ensure that each of the companies continued to meet the Committee’s criteria for inclusion in the comparator group. The following companies were eliminated from the peer group for 2009 because compensation survey data was no longer available in Hewitt’s database: Cadbury Schweppes, plc; Constellation Brands, Inc. and Miller Brewing Company. At the same time, the following companies were added due to their compensation survey data becoming available and/or their revenues for 2008 falling within the peer group revenue range: Chiquita Brands International; Clorox Company; Diageo North America, Inc.; L’Oreal USA, Inc.; Newell Rubbermaid Inc.; Pitney Bowes Inc. and United Stationers, Inc. Phillip Morris International Inc. also was added as a result of its spin-off in 2008 from Altria Group, Inc. RAI’s revenues for 2008 were $8.8 billion, an amount that was between the overall peer group’s median annual revenues of $7.9 billion and average annual revenues of $9.5 billion.

The peer group used by the Compensation Committee for its 2009 compensation decisions consisted of the following 35 companies operating in the food, beverage, tobacco or consumer products industries:

For 2010, UST, Inc. and Wm. Wrigley Jr. Company have been eliminated from the peer group as a result of being acquired by Altria Group, Inc. and Mars, Incorporated, respectively.

Each year, when reviewing RAI’s executive compensation programs, the Compensation Committee is given tally sheets for certain of our executive officers, including the named executive officers. These tally sheets are prepared by Hewitt Associates with assistance from management, and summarize for each such executive officer:

The tally sheets show the Compensation Committee the cumulative effect in value of its various executive compensation decisions. The Compensation Committee believes that annual reviews of tally sheets help it see how making a change in one compensation program or element may impact another compensation program or element or an executive officer’s overall compensation, and prevent it from making compensation decisions in isolation. In addition, the tally sheets help the Compensation Committee see the impact of stock price changes and performance leverage on the value of the long-term incentives and provide perspective on wealth accumulation from our compensation programs and the company’s obligations in the event of terminations of employment under various scenarios.

In September 2008, the Compensation Committee reviewed tally sheets for each of our named executive officers to help decide whether it should make changes to the 2009 compensation program for such officers. The Compensation Committee determined that the 2009 compensation program for each of the named executive officers continued to be consistent with the company’s compensation objectives.

RAI’s Chief Executive Officer had an indirect role in determining the annual base salary increase for certain executive officers, including the other named executive officers, in that she assigned the 2008 individual performance ratings for such persons used to determine 2009 base salary increases. As discussed below, the individual performance rating and the target merit increase determine the amount of a person’s proposed base salary increase. Before the proposed base salary increase becomes effective for any named executive officer, however, the Compensation Committee or the other independent members of the Board must approve such increase. RAI’s Chief Executive Officer, with assistance from the Executive Vice President and Chief Human Resources Officer, also recommended to the Compensation Committee target annual incentive percentages and long-term incentive multiples, based on the market data provided by Hewitt Associates and the prior year’s percentages and multiples, for the named executive officers other than the Chief Executive Officer for 2009. No executive officer has any role in determining or recommending the compensation of the Chief Executive Officer.

The material components of the compensation program for the named executive officers consist of annual base pay and perquisites, an annual cash incentive, long-term incentive compensation, severance benefits payable under certain termination circumstances and retirement benefits. Each of these components is discussed below, together with information about RAI’s other compensation policies and practices.

General.  We pay base salary because it is a standard element of pay for executive positions and is required for talent attraction and retention. When determining the annual base salary for any of our executive officers when they are first hired as, or promoted to become, an executive officer, the Compensation Committee generally targets the officer’s salary at approximately the 50th percentile of those persons in the peer group holding a comparable position. The Compensation Committee and management believe that targeting base salary to the median of the peer group allows RAI to be competitive in the market for executive talent. The Compensation Committee also considers other relevant factors in setting an executive officer’s base salary for the first time, such as the person’s experience and, in the case of a new hire, whether such person is employed elsewhere (and, if so, at what rate). Depending upon the existence of such factors, the Compensation Committee may adjust a particular executive officer’s initial salary either above or below the 50th percentile of the comparable peer group position.

The Compensation Committee approves the initial determination of most executive officers’ base salaries, but in the case of the initial base salary determination for the Chief Executive Officer, Chief Financial Officer, RJR Tobacco President and General Counsel, the Committee makes a recommendation to the independent members of the Board for their approval. After an executive officer’s base salary is first set, he or she, like all other employees, is eligible to receive annually a base salary increase based upon his or her individual performance rating and the target merit increase generally applicable to all employees of RAI and its subsidiaries as described below.

All of our employees, including our named executive officers, are required at the beginning of the year to establish specific individual objectives for the year. Each employee’s objectives are designed to be consistent with our fundamental core values (principled, creative, dynamic and passionate behavior) and our strategic and operational goals. At the end of each year, each of our employees is evaluated and assigned a performance rating in one of five categories based upon the extent to which the employee has met his or her objectives.

The Compensation Committee, with input from the Board, evaluates the Chief Executive Officer, and the Chief Executive Officer evaluates and assigns the performance ratings for the other named executive officers. Depending upon a named executive officer’s performance rating for a given year, he or she will receive a base salary merit increase, generally effective April 1 of the next year, in an amount equal to:

Under this merit increase formula, all named executive officers in a rating category receive the same base salary merit increase. Generally, no named executive officer’s merit increase will exceed two times the target merit increase.

For 2009, Hewitt Associates provided the Compensation Committee and management with a market outlook and projected 2009 merit increase budget data for the food, beverage and tobacco industries in general. After reviewing such information and the company’s business outlook for 2009, management recommended to the Committee for approval a target merit increase of 3.0%, an amount consistent with the median data for our industry and a reduction of .25% from 2008, which was approved by the Compensation Committee.

2009 Base Salary Merit Increases.  In February 2009, the Compensation Committee evaluated, with input from the entire Board, the Chief Executive Officer’s performance for 2008 against her individual objectives for 2008, and finding that she had fully met expectations recommended to the Board an “achieves” performance rating for 2008. Ms. Ivey evaluated and assigned the performance ratings for the other named executive officers for 2008, all of whom also fully met expectations and received “achieves” ratings. Based on these performance ratings, all of our named executive officers received the 3.0% target merit increase for 2009.

The amount of each named executive officer’s base salary increase (expressed as a percentage of such officer’s base salary immediately prior to such increase) and base salary for 2009 is shown in the table below:

Salary Increase Limitations.  To ensure that base salary levels do not become too costly and do not escalate above a range that is competitive in the market, we generally impose a cap on the amount of the annual base salary of any salaried employee, including the base salary of any named executive officer. If the increase in annual base salary resulting from the annual merit review process, or from a promotion, would cause the base salary to exceed the 65th percentile for those persons in the peer group holding a comparable position, then the employee or named executive officer will receive (in the pay period immediately following the effective date of the increase) the amount of such excess in a lump sum cash payment. Any such lump sum cash payment is not taken into account for purposes of calculating amounts payable under the annual incentive plan, described below, but is considered in determining benefits under other plans, such as our defined contribution and defined benefit plans. For 2009, both Ms. Ivey’s and Mr. Delen’s base salaries prior to any merit increase exceeded the 65th percentile cap. As a result, the three percent merit increases for Ms. Ivey and Mr. Delen, approximately $37,000 and $23,700, respectively, also were in excess of the cap and were paid to them in a lump sum. With the exception of Ms. Ivey’s and Mr. Delen’s 2009 merit increases, no other named executive officer exceeded the 65th percentile cap in connection with his or her respective 2009 base salary increase reflected in the table above.

Annual Incentive Opportunity.  As noted below, a significant portion of the annual compensation of each named executive officer is linked directly to the attainment of specific corporate financial and operating targets. We believe that because the named executive officers hold positions giving them the authority to make critical decisions affecting the overall performance of RAI, the named executive officers should have a material percentage of their annual compensation contingent upon the performance of RAI and/or its operating subsidiaries. Moreover, the greater the responsibilities a particular named executive officer has, the greater his or her annual cash incentive opportunity should be. The named executive officers’ annual cash incentive and annual base salary, together, are targeted at the mid-point between the 50th and 75th percentiles of the peer group. The Compensation Committee and management believe that targeting to this level is consistent with our competitors in the tobacco industry and allows RAI to be competitive in the marketplace for executive talent. Further, as noted above, in evaluating whether RAI’s annual incentive (or any other element of RAI’s executive compensation program) provides an adequate inducement to attract and retain highly qualified executive talent, the Compensation Committee is mindful of the reluctance that certain persons may have to work for RAI or its operating subsidiaries given the decline in the social acceptability of smoking and the controversial nature of the tobacco industry. In 2009, the Compensation Committee re-examined the rationale for this pay philosophy and determined that all of the factors indicated above continue to be relevant and support the rationale for such pay philosophy.

Each named executive officer is eligible to receive an annual cash incentive based on a target incentive expressed as a percentage of base salary, but an individual’s actual annual incentive payout may be higher or lower than the targeted amount, as explained in further detail below.

Annual Incentive Plan Design for Named Executive Officers.  For 2009, eligible employees generally received annual cash bonuses pursuant to our Annual Incentive Award Plan, referred to as the AIAP. A group of executive officers, including the named executive officers (the “covered executives”), however, did not participate in the AIAP. Under Section 162(m) of the Code, we are limited in our ability to take certain tax deductions for the named executive officers unless their compensation consists of “qualified performance-based compensation.” The performance-based exception to Section 162(m) of the Code requires, in part, that compensation be paid under a shareholder approved plan. Since the AIAP is not a shareholder approved plan, in order to ensure that the named executive officers’ annual incentives would count as qualified performance-based compensation, which would then allow us to take advantage of tax deductions under Section 162(m), the Compensation Committee denominated the 2009 annual incentive opportunity for the covered executives in the form of performance units granted under the LTIP, which is a shareholder approved plan. See “Other Compensation Policies — Deductibility of Compensation” below for additional information about our philosophy on structuring our executive compensation for tax purposes.

For 2009, our annual incentive program for our named executive officers involved a maximum performance metric based on our cash net income results for the year and designed to meet the requirements for qualified performance-based compensation under the Code. Achievement of the maximum performance metric was used to establish a maximum limitation on the dollar amount of an award that could be paid to each named executive officer for the 2009 performance period (specifically by establishing the maximum award pool for the performance units that could be paid to each named executive officer). The Compensation Committee, using “negative discretion,” then paid a reduced value of performance units to each named executive officer after consideration of the performance of RAI and its operating companies, as measured by performance metrics designed to reflect in more detail the degree to which we achieved specific business goals for the year, all as further discussed below.

2009 Annual Incentives.  In February 2009, the Compensation Committee established a performance formula based on RAI’s cash net income (which performance metric was previously approved by RAI’s shareholders) for determining the award pool of performance units for each named executive officer under the LTIP for 2009. Under the formula, the award pool of performance units for each of the named executive officers was determined based on the following percentages of RAI’s cash net income: Susan M. Ivey = 0.40%; Thomas R. Adams = 0.15%; Daniel M. Delen = 0.20%; E. Julia (Judy) Lambeth = 0.15%; and Jeffery S. Gentry = 0.15%. For purposes of determining such award pools, the term “cash net income” means net income from continuing operations in the consolidated statement of income adjusted for the impact of non-cash items, such as depreciation, amortization, unrealized gains and losses, intangible asset impairments and other non-cash gains/losses included in net income (as reported in RAI’s 2009 Annual Report on Form 10-K). The maximum performance unit payout that any named executive officer could receive for 2009 was limited to the award pool for the performance units determined by the performance formula based on RAI’s cash net income established for such named executive officer and any award limitations contained in the LTIP.

RAI’s 2009 market share and shipment volume measures continued to focus on key strategic growth areas for its operating companies. Since RJR Tobacco’s business is dependent on the U.S. cigarette business, and cigarette consumption in the U.S. has been declining and is expected to continue to decline, increasing the market share of its two growth brands remains a key factor to RJR Tobacco’s, and thus RAI’s, future success, and is a key element in RJR Tobacco’s brand portfolio strategy. Consistent with that strategy, a performance metric based on the total market share of RJR Tobacco’s two growth brands, Camel and Pall Mall, and, in recognition of the strategic growth opportunities for RJR Tobacco’s new smoke-free tobacco products, a performance metric based on the market share of the new Camel smoke-free tobacco products, each underlying the cash net income maximum award pools were included for employees of RAI. For 2009, the Compensation Committee continued to believe it was appropriate to include metrics relating to the performance of Conwood and Santa Fe Natural Tobacco Company, Inc., referred to as Santa Fe, for employees of RAI for the following reasons: in the case of Conwood, because it is the only operating subsidiary of RAI, other than RJR Tobacco, that is separately reportable for financial statement purposes and because of the significance moist snuff products have in connection with RAI’s strategy to become a total tobacco company; and in the case of Santa Fe, because of the significance Natural American Spirit, a brand sold by Santa Fe and referred to as NAS, has in connection with RAI’s strategy of promoting premium tobacco brands. (The term Conwood refers collectively to Conwood Company, LLC and its affiliated companies, all of which are engaged in the smokeless tobacco business and were acquired by RAI in 2006. Effective January 1, 2010, Conwood Company, LLC was renamed American Snuff Company, LLC, referred to as ASC.) For the reasons discussed above, the marketplace measures for employees of RJR Tobacco also focused on increasing market share in its key strategic growth areas: the individual market share of its two growth brands, Camel and Pall Mall, and the market share of the new Camel smoke-free tobacco products, as well as the overall market share of RJR Tobacco.

Due to the uncertainty surrounding the state of the economy, the potential impact of the increase in the federal tax on tobacco products, and the effect of any state tax increases and potential federal regulation on the 2009 performance of RAI and RJR Tobacco at the time the Compensation Committee approved the 2009 performance metrics underlying the cash net income maximum award pools and weightings in February 2009, the Compensation Committee elected to wait until additional information was available to set the 2009 underlying performance targets. The 2009 performance targets and scoring grids underlying the cash net income maximum award pools, based on management’s updated 2009 business plan and the past performance of RAI and its operating subsidiaries, were approved by the Committee in May 2009. The Compensation Committee established each target based upon the belief that the likelihood of actual performance exceeding the target was the same as the likelihood of actual performance not reaching the target. The foregoing approach strikes a proper balance, as a particular target should be set high enough so that executives are rewarded for achieving a level of performance that requires considerable individual effort, but not so unrealistically high that the compensation program ceases to be an effective incentive device.

RAI’s 2009 net income and operating income performance, after the exclusions described above, were both significantly above target. The 2009 market share performances for RJR Tobacco total growth brands, primarily as result of the outstanding performance of Pall Mall, and Conwood moist snuff both were significantly above target and capped at the maximum score, while the market share performance for Camel smoke-free tobacco products was slightly below target. The 2009 NAS shipment volume performance was significantly above target. After reviewing these results, the Compensation Committee approved management’s recommendation to reduce RAI’s overall annual bonus score by 20% of the calculated score in order to achieve a score that was more internally consistent with the underlying operating company results and reflected the resolution of various uncertainties (for example, the impact of the increase in the federal excise taxes on tobacco products) at the time the goals were set. The 2009 annual incentive compensation final payout score for RAI was 138.0%.

For 2009, RJR Tobacco’s operating income target was $1.925 billion. Although the preceding table also does not include the market share targets for RJR Tobacco’s individual growth brands, Camel smoke-free tobacco products and total RJR Tobacco, given the competitively sensitive nature of that information, the 2009 market share targets for both of the individual growth brands, Camel and Pall Mall, represented an increase in the actual market share achieved by each brand in 2008. As indicated above, the market share target for the new Camel smoke-free tobacco products was set at the market share level projected in management’s 2009 business plan. RJR Tobacco’s cigarette brands, collectively, however, have experienced declining market share for several years. RJR Tobacco’s current brand portfolio strategy is designed to address such decline by focusing on the long-term market share growth of its growth brands while managing its support brands for long-term sustainability and profitability. Although the objective of such strategy is to grow the market share of RJR Tobacco’s growth brands in order to offset declines in the market share of other categories, management of RJR Tobacco anticipates that the total market share of RJR Tobacco’s cigarette brands will continue to decline. As a result, the RJR Tobacco total cigarette market share target for 2009 represented a small decline from the actual 2008 market share.

RJR Tobacco’s 2009 operating income performance, after the exclusions described above, was significantly above target. Although the 2009 market share performance for Pall Mall was significantly above target and capped at the maximum score, Camel’s market share performance was below the minimum threshold and the market share performance for Camel smoke-free tobacco products was slightly below target. Total RJR Tobacco market share performance, primarily as a result of the outstanding performance of Pall Mall, was significantly above target and capped at the maximum score. Based on these results, the 2009 annual incentive compensation final payout score for RJR Tobacco was 125.9%.

The table below shows each named executive officer’s target annual incentive, and actual annual incentive payout, for 2009, expressed as a percentage of annual base salary:

2010 Annual Incentives.  In May 2009, our shareholders approved the Omnibus Plan. The Omnibus Plan replaced the LTIP, which expired in June 2009. Generally, all eligible employees will now receive their 2010 annual cash bonuses under the Omnibus Plan. Similar to 2009, however, the 2010 annual incentives for the covered executives have been designed to qualify as performance-based compensation for purposes of Section 162(m) of the Code using a performance formula based on RAI’s cash net income.

In addition, the performance metrics underlying the cash net income maximum award pools for the 2010 annual incentive program will be the same for both RAI and RJR Tobacco, in order to focus on the overall results of the organization and to further align the annual incentive program with shareholder interests. The following performance metrics and weightings were approved by Compensation Committee in February 2010 and will be considered by the Committee in determining the 2010 annual incentive cash awards for the covered executives:

The Compensation Committee approved the performance metrics underlying the cash net income maximum award pools based on a consideration of the 2010 business plan and the past performance of RAI and its operating subsidiaries. We will discuss this aspect of the 2010 annual incentive compensation in further detail in next year’s proxy statement.

We have eliminated many of the perquisites that previously had been offered to senior management. In 2009, however, we continued to provide to each named executive officer, other than Ms. Lambeth and Mr. Delen, an annual supplemental cash payment in lieu of participating in our former perquisites program, as described in more detail in footnote 9 to the 2009 Summary Compensation Table below. These supplemental cash payments are not taken into account in calculating incentives or benefits under any of our plans, including our defined contribution and defined benefit plans. With the exception of certain grandfathered executives, including the named executive officers other than Ms. Lambeth and Mr. Delen, RAI ceased providing such annual supplemental payments in 2004. (RAI instead provides non-grandfathered executives such as Ms. Lambeth and Mr. Delen with an annual financial planning allowance of $6,000.) To remain competitive in the market, in 2009, we also provided our named executive officers and other executives with the following other benefits: personal excess liability insurance of up to $10 million and reimbursement of up to $30,000 for the cost of joining a country club. After a review of all perquisites in 2009, the tax gross-up on the value of the personal excess liability insurance was eliminated.

General.  The Compensation Committee believes that an executive compensation program should have an appropriate mix between short-term and long-term incentive compensation. Although the performance of RAI and its operating subsidiaries over a one-year period helps drive shareholder returns, the Compensation Committee also believes that an overemphasis on short-term results ultimately will impair shareholder value. As a result, the Compensation Committee’s practice has been to award long-term incentive grants with a value dependent upon RAI’s performance over a three-year period, a measurement period commonly used by our peer group companies. Consistent with the philosophy of allocating a significant portion of each executive’s total compensation to variable or performance-based compensation, the grant date value of long-term incentive grants to each of our named executive officers is targeted to be at the mid-point between the 50th and 75th percentiles of the peer group, with such values denominated as a multiple of the executive’s annual base salary. For the same reasons indicated above for the annual incentive targets, the Compensation Committee and management believe that targeting to this level is consistent with our competitors in the tobacco industry, allows RAI to be competitive in marketplace for executive talent, and recognizes the need to have incentive targets above the median to attract and retain highly qualified executive talent in the tobacco industry. In 2009, the Compensation Committee re-examined the rationale for this pay philosophy and determined that all of the factors indicated above continued to be relevant and support the rationale for such pay philosophy.

Generally, in February of each year, the Compensation Committee, at its first regularly scheduled meeting of the year, approves broad-based long-term incentive grants to key employees, and recommends to the Board for approval long-term incentive grants for the Chief Executive Officer, Chief Financial Officer, RJR Tobacco President and General Counsel. The actual grant date of the long-term incentive awards is generally effective in early March of each year, after the public announcement of RAI’s financial results, and after the filing with the SEC of RAI’s Annual Report on Form 10-K, for the prior year. In addition to the regular annual long-term incentive grants, the Compensation Committee, depending upon the particular circumstances (such as the hiring or promotion of an executive officer, or as a retention device), may approve or recommend to the Board for approval, as the case may be, a supplemental long-term incentive grant outside of the normal annual grant cycle. No such supplemental grants were made to any named executive officer in 2009.

Long-Term Incentive Plan Design for Named Executive Officers.  As we described above for the annual incentive awards to our named executive officers, under Section 162(m) of the Code, we are limited in our ability to take certain tax deductions for the named executive officers unless their compensation consists of qualified performance-based compensation. In order to ensure that the named executive officers’ long-term incentives also would count as qualified performance-based compensation under Section 162(m), the Compensation Committee denominated the 2009 long-term incentive compensation for the covered executives in the

For 2009, as we described above for our annual incentive awards, the long-term incentive program for our named executive officers involves a maximum performance metric based on our cash net income results for the three-year performance period and designed to meet the requirements for qualified performance-based compensation under the Code. Achievement of the maximum performance metric will be used to establish a maximum limitation on the dollar amount of the award that can be paid to each named executive officer for the 2009-2011 performance period (specifically by establishing the maximum award pool for the performance shares that can be earned by each named executive officer). The Compensation Committee, using negative discretion, may then reduce that amount to a lesser actual payment amount of performance shares for each named executive officer after consideration of the performance of RAI and its operating companies, as measured by performance metrics designed to reflect in more detail the degree to which we achieved specific business goals for the three-year period, all as further discussed below. The reductions in payout values, if any, will not result in any increase in payout values for any other employee. The program gives the Compensation Committee the ability to grant each individual executive officer the pre-established maximum award that may be granted to that officer, or a reduced amount.

2009 Long-Term Incentives.  In February 2009, the Compensation Committee established a performance formula based on RAI’s cash net income for determining the award pool for the performance shares granted to each named executive officer under the LTIP for 2009. Under the formula, the award pool of performance shares for each of the named executive officers was determined based on the following percentages of RAI’s cumulative cash net income for the three-year performance period: Susan M. Ivey = 0.50%; Thomas R. Adams = 0.15%; Daniel M. Delen = 0.20%; E. Julia (Judy) Lambeth = 0.15%; and Jeffery S. Gentry = 0.15%. These pools will serve as the maximum limitation on the dollar amount of awards that can be paid to these named executive officers for the 2009-2011 performance period. The term “cash net income” is defined the same as for the annual incentive plan, except it is based on the amounts as reported in RAI’s Annual Reports on Form 10-K for the 2009, 2010 and 2011 fiscal years. The maximum amount of performance shares that any named executive officer can receive at the end of the three-year performance period for the 2009 performance shares grant also is limited by award limitations contained in the LTIP.

The table below provides for each named executive officer the target long-term incentive award, expressed as a multiple of annual base salary, for 2009.

The number of performance shares each named executive officer actually will receive, if any, will be determined by the Compensation Committee at the end of the three-year performance period based first on the maximum payout limitation provided by the performance shares award pool generated for each of the named executive officers under the pre-established cash net income formula, and then subject to possible reduction by the Committee using negative discretion after consideration of the average of RAI’s scores under the annual incentive award program for each of the three years of the performance period, subject to a cap of 150% on such average annual incentive award score. In addition, if RAI fails to pay cumulative dividends for the three-year performance period of at least $10.20 per share (an amount equal to the dividend paid for the first quarter of the performance period times the number of quarters in the performance period), then the number of performance shares earned will be reduced by an amount equal to three times the percentage of the dividend underpayment for the three-year performance period, up to a maximum additional performance share reduction of 50 percent. Subject to the foregoing, the performance shares generally will vest on March 2, 2012, and will be paid in the form of shares of RAI common stock. At the time the performance shares vest, each grantee, including the named executive officers, also will receive a cash dividend equivalent payment equal to the aggregate amount of dividends per share declared and paid to RAI’s shareholders on RAI common stock during the period from the beginning of the performance period through the payment of the performance shares, multiplied by the number of performance shares actually earned by the grantee after the performance adjustments.

The decision to shift the form of long-term incentive entirely to performance shares that are subject to specific pre-established performance conditions reflects the Compensation Committee’s belief that such form of incentive effectively aligns the interests of senior management with long-term shareholder interests by:

In addition, the Compensation Committee and management share the belief that the return to a performance metric based on an average of the RAI annual incentive scores over the three-year performance period more accurately measures the overall performance of RAI both in the short-term and over the entire performance period than a single year earnings per share, referred to as EPS, target several years into the future, the metric used for LTIP grants in 2007 and 2008. Given the ever-changing regulatory environment faced by RAI’s operating companies, it has become increasingly difficult to make a projection of RAI’s EPS three years into the future. The use of the RAI annual incentive scores as the performance measure for participants in the LTIP, including the executives of RAI’s operating subsidiaries, also ensures a unified focus on RAI’s overall performance.

2010 Long-Term Incentives.  As indicated above, in May 2009, our shareholders approved the Omnibus Plan. As a result, the long-term incentive grants for 2010 have been made under the Omnibus Plan. Similar to 2009, however, the long-term incentives for the covered executives have been designed to qualify as performance-based compensation for purposes of Section 162(m), using a performance formula based on RAI’s cash net income and consisting of three-year performance shares. We will discuss this aspect of the 2010 long-term incentive compensation in further detail in next year’s proxy.

During 2009, each of the named executive officers earned LTIP grants that had been made before 2009. One such grant consisted of restricted shares of RAI common stock granted under the LTIP on March 6, 2006, to each of the named executive officers, other than Mr. Delen (who commenced his employment with RJR Tobacco in 2007), the vesting of which had been conditioned upon RAI’s payment of a minimum quarterly

In addition, each of the named executive officers earned three-year performance units originally granted on March 6, 2007, referred to as the 2007 LTIP performance units, the vesting of which had been conditioned upon RAI’s payment of a minimum quarterly dividend of $.75 per share (the amount of the last quarterly dividend declared by the Board prior to the grant date) during the period from the grant date through December 31, 2009. This dividend condition was satisfied, and the performance units vested on December 31, 2009. The number of vested units earned was determined based on RAI’s 2009 EPS performance compared to the pre-established 2009 EPS targeted goal of $4.92. In determining RAI’s 2009 EPS, the Compensation Committee considered unanticipated, unusual or material events that affected such metric. The Committee approved the exclusion of the following items, consistent with the manner in which the EPS targeted goal was established, for purposes of calculating RAI’s 2009 EPS score: non-cash trademark impairment charges at RJR Tobacco and Conwood, restructuring and other related charges relating to severance benefits and costs, incremental pension and post retirement expenses, loss of income related to the termination of the R.J. Reynolds-Gallaher International Sarl joint venture and the impact of the federal excise tax increase on certain products at Conwood. RAI’s 2009 EPS, after the exclusions described above, was $5.08 and resulted in a 2009 EPS score of 132%. The number of vested units also was subject to adjustment by +/- 10% based on RAI’s total shareholder return, referred to as TSR, over the three-year period ended December 31, 2009, compared to the TSR of the companies within the Standard and Poor’s Food and Beverage Index as of the grant date, plus Altria Group, Inc., Carolina Group (now known as Lorillard, Inc.) and UST, Inc. (subsequently eliminated due to its acquisition by Altria Group), referred to as the TSR comparator group. RAI’s TSR was in the middle third of the TSR comparator group and, as a result, no additional adjustment to the number of vested performance units was made. The vested 2007 LTIP performance units were settled in cash in the first quarter of 2010. For more information on the payments in settlement of the 2007 LTIP performance units, see footnote 7 to the 2009 Summary Compensation Table below.

RAI maintains severance arrangements with its executives, including the named executive officers. RAI believes it obtains several benefits important to the business by providing these severance arrangements, including post-employment restrictive covenants, such as non-competition and non-disclosure of confidential information, assistance with any future litigation, maintenance of a competitive executive compensation program and stability during uncertain times, particularly in the event of a threatened or pending change in control.

Prior to the inception of the Executive Severance Plan (described below under “— Executive Severance Plan”), RAI entered into a standard form of severance agreement, referred to as the severance agreement, with each of Ms. Ivey, Mr. Adams and Dr. Gentry.

Under the terms of the severance agreement, upon an executive’s qualifying termination, namely, if the executive’s employment is involuntarily terminated other than for “cause” or if the executive terminates his or her employment for “good reason,” then he or she will receive (1) in the case of Ms. Ivey, three years base salary plus target bonus, and benefit continuation for three years, and (2) in the case of Mr. Adams and Dr. Gentry, two years base salary plus target bonus, and benefit continuation for three years. These amounts were determined to be competitive at the time the severance agreement was approved. The base salary and target bonus amounts under the severance agreement are payable in a lump sum. No executive is entitled to receive severance benefits if the executive retires or otherwise voluntarily terminates his or her employment unless such termination satisfies the agreement’s definition of “good reason.”