Eli Lilly 2005 Annual Report Download - page 80

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Adjustments for Unusual Items. Consistent with past practice and based on predetermined criteria, we adjusted
the earnings results on which 2005 bonuses and performance awards were determined to eliminate the effect
of certain unusual items. The adjustments are intended to ensure that award payments represent the underly-
ing growth of the core business and are not artificially inflated or deflated due to such unusual items either in the
award year or the previous (comparator) year. For the 2005 awards calculation, we adjusted EPS to eliminate the
effect in both 2004 and 2005 of major asset impairments, restructuring and other special charges, as well as the
2004 effect of acquired in-process research charges and a one-time tax expense for the expected repatriation of
earnings under the American Jobs Creation Act. In addition, in light of our voluntary adoption of stock option ex-
pensing in 2005, for purposes of determining growth rates between 2004 and 2005 we adjusted 2004 earnings per
share results as if we had expensed stock options in that year. Finally, we eliminated the 2005 cumulative effect of
an accounting change relating to the adoption of FIN 47 (conditional asset retirement obligations).
Other Compensation. In 2003 and 2004, we undertook a total executive compensation review with the guidance of
our independent consultant. In addition to the primary compensation elements of salary, cash bonuses, and long-
term incentives discussed above, we reviewed the deferred compensation program, other annual compensation,
and payments that would be required under various severance and change-in-control scenarios. We determined
that these elements of compensation were reasonable in the aggregate. Following our review, we recommended
to the board, and it approved, amendments to the deferred compensation and change-in-control severance pay
programs in 2004 that modestly reduced the future benefit levels under those programs.
Chief Executive Officer Compensation for 2005
In establishing Mr. Taurel’s compensation for 2005, we applied the principles outlined above in the same manner
as they were applied to the other executives. We compared company performance with that of the peer group com-
panies, including EPS growth, return on assets, return on equity, and total shareholder return. We did not assign
these performance measures relative weights but rather made a subjective determination after considering the
data collectively. In addition, consistent with our annual process, in an executive session including all independent
directors, we assessed Mr. Taurel’s 2004 performance. We considered the company’s and Mr. Taurel’s accomplish-
ment of objectives that had been established at the beginning of the year and our own subjective assessment of
his performance. We noted that under Mr. Taurel’s leadership, in 2004 the company achieved double-digit sales
growth and growth in adjusted earnings per share that exceeded external expectations while launching five new
products and several new indications or formulations. Mr. Taurel also successfully led important initiatives to im-
prove productivity and reduce the company’s cost structure. In addition, as a result of his leadership, the company
made substantial progress in its efforts to align all its actions with the Lilly brand—Answers That Matter—and
the four attributes of the brand: breakthrough products, medical expertise, active listening and responding, and
reliable and trustworthy. For example, in 2004 the company strengthened its compliance activities and adopted the
industry’s most progressive principles of medical research and clinical trial registry.
In recognition of his continued strong leadership in 2004, we increased Mr. Taurel’s annual salary by 4 percent
effective March 2005. Mr. Taurel’s 2005 target bonus remained at 110 percent of his base salary. As previously
discussed under “Cash bonuses,” the actual payout of $2.26 million was approximately 130 percent of target due to
above-target growth in company sales and adjusted earnings per share in 2005.
As previously described, in 2005 we substantially reduced the value of equity awards for management at all
levels and shifted the mix of awards to increase emphasis on performance awards and decrease emphasis on
stock options. Mr. Taurel’s award consisted of a stock option grant of 255,621 shares and a performance award
with a target payout of 51,752 shares. The combined value of these awards at the time of grant was an estimated
$7.2 million using the company’s trinomial lattice method (30.37 percent of the option price) and a stock price of
$55.65 to value the awards. In determining the value of the stock option and performance award grants for both
years, we took into consideration Mr. Taurel’s individual performance, internal relativity, peer group data, and the
value of grants previously made to Mr. Taurel. The reductions in Mr. Taurel’s award values compared with the prior
year were the result of our decision to reduce award values to all levels of management.