Eli Lilly 2008 Annual Report Download - page 122

PROXY STATEMENT
120120
Infl uential proxy voting service RiskMetrics Group, recommends votes in favor, noting: “RiskMetrics encourag-
es companies to allow shareholders to express their opinions of executive compensation practices by establishing
an annual referendum process. An advisory vote on executive compensation is another step forward in enhancing
board accountability.”
The Council of Institutional Investors endorsed advisory votes and a bill to allow annual advisory votes passed
the House of Representatives by a 2-to-1 margin. We believe the statement like [sic] approach for company leaders
is to adopt an Advisory Vote voluntarily before required by law.
We believe that existing U.S. Securities and Exchange Commission rules and stock exchange listing standards
do not provide shareholders with suffi cient mechanisms for providing input to boards on senior executive compen-
sation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the “directors’
remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a
clear voice that could help shape senior executive compensation.
We believe that a company that has a clearly explained compensation philosophy and metrics, reasonably
links pay to performance, and communicates effectively to investors would fi nd a management sponsored Advisory
Vote a helpful tool.
We urge our board to allow shareholders to express their opinion about senior executive compensation
through an Advisory Vote.
Statement in Opposition to the Proposal on Shareholder Ratifi cation of Executive Compensation
The board of directors believes that this proposal is not in the best long-term interests of the shareholders and
recommends that you vote against it.
An advisory vote is not a substitute for the informed judgment of independent directors.
The compensation committee, composed of independent directors and assisted by an independent consultant,
takes very seriously its fi duciary duties to oversee executive compensation programs that are designed to promote
long-term value for the company and its shareholders. The committee’s work is complex and time-consuming; it
involves analysis of both public and confi dential information, including competitively sensitive strategic and opera-
tional information. Any votes by shareholders would necessarily be based on less information and analysis and
therefore could not be a substitute for the fully informed judgment of the independent directors.
An advisory vote is an ineffective way to communicate shareholder opinions regarding our executive compensation.
The compensation committee welcomes shareholder input on executive compensation; however, a simple “up or
down” advisory vote would give the committee no insight into what aspects of the company’s programs should be
addressed or how to address them. Further, voting results could be misconstrued. For example, a heavily posi-
tive vote could lead the committee to discount legitimate concerns raised by a small minority of shareholders.
Likewise, a heavily negative vote could be a reaction to events unrelated to the company’s executive compensation
programs and could pressure the committee to make compensation changes that are not in the best long-term
interests of the shareholders.
Shareholders already have an effi cient and effective way to express their opinions.
The company has established an avenue for shareholders to communicate directly with the board or its commit-
tees. See “How do I contact the board of directors?” on page 71 for instructions on how shareholders can com-
municate with the compensation committee or board. In addition, company representatives periodically meet with
large shareholders and shareholder representatives to discuss governance issues and executive compensation.
Finally, the committee’s independent consultant routinely consults with shareholder groups and advises the com-
mittee of evolving shareholder views on executive compensation best practices.
These communications yield results. In recent years, the committee has made a number of changes to our exec-
utive compensation programs that were infl uenced at least in part by shareholder views expressed to us directly:
• eliminated stock options in favor of performance-based shareholder value awards
• extended the performance period for performance awards from one to two years and added additional stock
retention periods for executive offi cers
• substantially reduced benefi ts under the change-in-control severance pay program for executives
• implemented a claw-back provision to recoup performance-based compensation from executives in the case of
restatement of results attributable to misconduct
• enhanced the transparency and clarity of our disclosures on executive compensation.