Eli Lilly 2009 Annual Report Download - page 160

Item 8. Shareholder Proposal on Executives Holding Equity Awards into Retirement
American Federation of State, County and Municipal Employees Pension Plan (AFSCME Employees Pension
Plan), 1625 L Street N.W., Washington, D.C. 20036-5687, beneficial owner of approximately 7,120 shares, has
submitted the following proposal:
RESOLVED, that shareholders of Eli Lilly and Company (“Lilly”) urge the Compensation Committee of the Board
of Directors (the “Committee”) to adopt a policy requiring that senior executives retain a significant percentage of
shares acquired through equity compensation programs until two years following the termination of their
employment (through retirement or otherwise), and to report to shareholders regarding the policy before Lilly’s
2011 annual meeting of shareholders. The shareholders recommend that the Committee not adopt a percentage
lower than 75% of net after-tax shares. The policy should address the permissibility of transactions such as
hedging transactions which are not sales but reduce the risk of loss to the executive.
Supporting Statement: Equity-based compensation is an important component of senior executive compensation
at Lilly. According to the Lilly 2009 proxy statement, our company pays a meaningful portion of named executive
officers’ total compensation in equity incentives through performance awards and shareholder value awards,
aligning the interests of employees and shareholders, providing an ownership stake in the company and
delivering equity compensation that is strongly linked to shareholder returns. Since 2004, Lilly named executive
officers have realized more than $47 million in reported value through the exercise of 725,176 options and
vesting of 521,141 shares. The six NEOs hold 1,504,458 shares outright, but hold another 4,795,270 in stock
options.
We believe there is a link between shareholder wealth and executive wealth that correlates to direct stock
ownership by executives. According to an analysis conducted by Watson Wyatt Worldwide, companies whose
CFOs held more shares generally showed higher stock returns and better operating performance. (Alix Stuart,
“Skin in the Game,” CFO Magazine (March 1, 2008)).
Requiring senior executives to hold a significant portion of shares obtained through compensation plans
after the termination of employment would focus them on Lilly’s long-term success and would better align their
interests with those of Lilly shareholders. In the context of the current financial crisis, we believe it is imperative
that companies reshape their compensation policies and practices to discourage excessive risk-taking and
promote long-term, sustainable value creation. A 2009 report by the Conference Board Task Force on Executive
Compensation stated that hold-to-retirement requirements give executives “an evergrowing incentive to focus on
long-term stock price performance.” (http://www.conference-board.org/pdf_free/ExecCompensation2009.pdf)
Lilly has a minimum stock ownership guideline requiring executives to own a number of shares of Lilly stock
as a multiple of salary. The executives covered by the policy have five years in which to comply. We believe this
policy does not go far enough to ensure that equity compensation builds executive ownership. Lilly also requires
executives to retain net after-tax shares received from equity programs from one year. We view a more rigorous
retention requirement as superior to a stock ownership policy with a one year retention guideline, because a
guideline loses effectiveness once it has been satisfied and a one year retention requirement is not sufficiently
long-term.
We urge shareholders to vote for this proposal.
Statement in Opposition to the Proposal on Executives Holding Equity Awards into Retirement
The board of directors believes that this proposal is not necessary given current company policies and programs
and recommends that you vote against it.
We agree with the proponent’s underlying premise—that meaningful, long-term stock ownership aligns
executives’ interests with those of the shareholders and promotes a focus on sustainable value creation.
However, we believe our current policies and programs achieve this goal effectively.
Share retention guidelines require significant stock holdings by executives.
The compensation committee has established minimum share-holding requirements as described in the
“Compensation Discussion and Analysis.” Executive officers must hold all net shares for at least one year after
payout of the award, and until the minimum-share requirements are met, executive officers must retain all
existing holdings plus 50 percent of net shares from new payouts. Employees are not permitted to hedge their
economic exposure to company stock that they own through short sales or derivative transactions.
The design of benefit and long-term incentive programs ensures an ownership stake in the company post
retirement.
Long-term equity incentive awards do not pay out upon retirement but according to the normal payout timing for
the award. For PAs, a retiring executive officer will have two awards outstanding, one of which will not pay out
for at least one year following retirement. SVAs have a three-year performance period, so a retiring executive
officer will have three outstanding awards: (i) one award will pay out in the year following retirement; (ii) one
award will pay out in the second year following retirement; (iii) one award will pay out in the third year following
retirement. Also, a retiring executive officer will have at least one grant of restricted stock units outstanding that
will not vest until the specified vest date.
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PROXY STATEMENT