Eli Lilly 2008 Annual Report Download - page 97

PROXY STATEMENT
9595
cost-effective than the stock option program it replaced because the SVA program delivers,
at a lower cost to the company, an equity incentive that is equally or more effective in aligning
employee interests with long-term shareholder returns. For the 2008 grants, the committee
considered the following:
• Target grant size. As described above, the committee increased target grant sizes for most
named executives and maintained a 50/50 split between performance awards and SVAs.
• Company performance measure. The SVA is designed to pay above target if Lilly stock
outperforms an expected compounded annual rate of return for large-cap companies and
below target if Lilly stock underperforms that rate of return. The expected rate of return used
in this calculation was determined considering total return that a reasonable investor would
consider appropriate for investing in the stock of a large-cap U.S. company, based on input
from external money managers, less Lilly’s current dividend yield. Executive offi cers receive
no payout if the stock price (less three years of dividends at the current rate) does not grow over the three-year
performance period—in other words, if total shareholder return for the three-year period is zero or negative.
The starting price for the 2008 SVAs was $52.71 per share, representing the average of the closing prices
of Lilly stock for all trading days in November and December 2007. The ending price to determine payouts will
be the average of the closing prices of Lilly stock for all trading days in November and December 2010.
Payouts of the 2008 grant will be determined by this grid when they are paid out in early 2011:
Ending Stock Price Less than $46.79 $46.79-$52.39 $52.40-$57.99 $58.00-$61.99 $62.00-$65.99 $66.00-$69.99 $69.99 +
Percent of Target 0 40% 60% 80% 100% 120% 140%
Adjustments for Certain Items
Consistent with past practice, the committee adjusted the results on which 2008 bonuses and performance awards
were determined to eliminate the distorting effect of certain unusual income or expense items on year-over-year
growth percentages. The adjustments are intended to:
• align award payments with the underlying growth of the core business
• avoid volatile, artifi cial infl ation or defl ation of awards due to the unusual items in either the award year or the
previous (comparator) year
• eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring
new technologies or to defer disposing of underutilized assets or settling legacy legal proceedings in order to
protect current bonus payments.
To assure the integrity of the adjustments, the committee establishes adjustment guidelines at the beginning
of the year. These guidelines are consistent with the company guidelines for reporting adjusted earnings to the
investment community, which are reviewed by the audit committee of the board. The adjustments apply equally to
income and expense items and must exceed a materiality threshold. The committee reviews all adjustments and
retains “downward discretion”—i.e., discretion to reduce compensation below the amounts that are yielded by the
adjustment guidelines.
For the 2008 awards calculation, the committee made these adjustments to EPS:
• Both 2007 and 2008: Eliminated the impact of (i) one-time accounting charges for the acquisition of in-process
research and development and (ii) signifi cant asset impairments and restructuring charges
• 2007: Eliminated the impact of special charges related to product liability litigation
• 2008: Eliminated the impact of (i) a one-time benefi t to income resulting from settlement of a tax audit and (ii)
special charges related to the resolution of government investigations of prior sales and marketing practices of
the company.
In addition, to eliminate the distorting effect of the acquisition of ICOS Corporation (completed in late Janu-
ary 2007) on year-over-year growth rates, the committee adjusted sales and EPS for 2007 on a pro forma basis as
if the acquisition had been completed at the beginning of 2007. The committee also eliminated the impact on 2008
sales and EPS of the acquisition of ImClone Systems Incorporated (completed in late November 2008).
The adjustments were intended to align award payments more closely to underlying business growth trends
and eliminate volatile swings (up or down) caused by the unusual items. This is demonstrated by the 2006, 2007,
and 2008 adjustments:
Shareholder Value
Awards:
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