Eli Lilly 2009 Annual Report Download - page 157

Item 6. Shareholder Proposal on Prohibiting CEOs from Serving on the Compensation Committee
American Federation of Labor and Congress of Industrial Organizations Reserve Fund (AFL-CIO Reserve Fund),
815 16th Street, N.W., Washington, D.C. 20006, beneficial owner of approximately 765 shares, has submitted the
following proposal:
RESOLVED, The shareholders of Eli Lilly and Company (the “Company”) request that the Board of Directors (the
“Board”) adopt a policy prohibiting any current or former chief executive officers of public companies from
serving on the Board’s Compensation Committee. The policy shall be implemented so that it does not affect the
unexpired terms of previously elected directors.
Supporting Statement: It is a well-established tenet of corporate governance that a compensation committee
must be independent of management to ensure fair and impartial negotiations of pay with individual executives.
Indeed, this principle is reflected in the listing standards of the major stock exchanges.
We do not dispute that CEOs can be valuable members of other Board committees. Nonetheless, we believe
that shareholder concerns about aligning CEO pay with performance argue strongly in favor of directors who can
view senior executive compensation issues objectively. We are particularly concerned about CEOs on the
Compensation Committee because of their potential conflicts of interest in setting the compensation of their
peers.
We believe that CEOs who benefit from generous pay will view large compensation packages as necessary to
retain and motivate other executives. In our view, those who benefit from stock option plans will view them as an
efficient form of compensation; those who receive generous “golden parachutes” will regard them as a key
element of a compensation package. Consequently, we are concerned that the inclusion of CEOs on the
Compensation Committee may result in more generous pay packages for senior executives than that necessary
to attract and retain talent.
In their 2004 book “Pay Without Performance,” law professors Lucian Bebchuk and Jesse Fried cite an
academic study by Brian Main, Charles O’Reilly and James Wade that found a significant association between the
compensation level of outsiders on the compensation committee and CEO pay.
“There are still plenty of CEOs who sit on compensation committees at other companies,” said Carol Bowie,
a corporate governance expert at RiskMetrics Group. “They don’t have an interest in seeing CEO pay go down.”
(Crain’s Chicago Business, May 26, 2008.)
Executive compensation expert Graef Crystal concurs. “My own research of CEOs who sit on compensation
committees shows that the most highly paid executives award the fattest packages to the CEOs whose pay they
regulate. Here’s an even better idea: bar CEOs from serving on the comp committee.” (Bloomberg News column,
June 22, 2009.)
Moreover, CEOs “indirectly benefit from one another’s pay increases because compensation packages are
often based on surveys detailing what their peers are earning.” (The New York Times, May 24, 2006.)
At our Company, CEO John C. Lechleiter received a 6% compensation increase in 2008 to $12.8 million
including the grant date fair value of equity-based awards, despite the Company’s poor performance, both in
absolute terms and relative to peers. Two of the four directors on the Compensation Committee are either
current or retired CEOs.
Statement in Opposition to the Proposal on Prohibiting CEOs from Serving on the Compensation Committee
The board of directors believes this proposal is not in the best long-term interests of the shareholders and
recommends that you vote against it.
The board must be able to staff the compensation committee with the best mix of directors to do the job.
Compensation committees do far more than just establish compensation for the CEO. For example, the Lilly
compensation committee:
• approves the company’s executive pay philosophy
• approves the pay of the company’s executive officers
• oversees the design and administration of the company’s cash incentive bonus program for the majority of
the company’s employees and the equity incentive program for more than 5,000 employees
• oversees senior management succession plans.
To provide effective counsel and oversight on these wide-ranging issues, a committee should bring to the table a
diversity of experiences and viewpoints. The board needs the flexibility to staff the compensation committee—and
all other committees—with directors who have the right mix of experiences and skills to carry out the
committees’ broad fiduciary responsibilities. The board also needs the flexibility to rotate membership of all
committees over time to ensure the right blend of continuity and fresh perspectives. Imposing artificial
restrictions on who can serve on the compensation committee would prevent the board from staffing committees
in a way that best represents the shareholders’ interests.
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