Eli Lilly 2003 Annual Report Download - page 68

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PROXY STATEMENT
66
EXECUTIVE COMPENSATION
Compensation Committee Report
The following is a report of the compensation committee of the board regarding executive compensation. The
committee’s membership and duties are described on page 60–61.
Executive Compensation Policy
Philosophy. The compensation committee bases its executive compensation policy on the same principles that
guide the company in establishing all its compensation programs. We design programs to attract, retain, and
motivate highly talented individuals at all levels of the organization while balancing the interests of shareholders.
In particular:
• We base compensation on the level of job responsibility, individual performance, and company performance. As
employees progress to higher levels in the organization, an increasing proportion of their pay is linked to com-
pany performance.
• We refl ect in our compensation the value of the job in the marketplace. To attract and retain a highly skilled work
force, we must remain competitive with the pay of other premier employers who compete with us for talent.
• To assure our employees’ interests are aligned with those of our shareholders, we provide employees worldwide
at all levels of the organization with the opportunity for equity ownership.
• We develop and administer our compensation programs to foster the long-term focus required for success in our
industry.
The program consists of both annual and long-term components, which are considered together in assessing
whether the program is attaining its objectives.
Methodology. We consider various measures of company and industry performance, including sales, earnings per
share, total market value, total shareholder return, and economic value added (EVA®). These data assist us in exer-
cising judgment in establishing total compensation ranges. We do not assign these performance measures relative
weights. Instead, we make a subjective determination after considering all such measures collectively.
We also compare, or benchmark, our programs with other global pharmaceutical companies of comparable size
and stature to the company. For this benchmarking, we use the peer group identifi ed on page 73. We compare the
executive compensation programs as a whole, and we also compare the pay of individual executives if we believe
the jobs are suffi ciently similar to make the comparison meaningful.
We use the peer group data primarily to ensure that the executive compensation program as a whole is within the
broad middle range of comparative pay of the peer group companies when the company achieves the targeted per-
formance levels. We do not target a specifi c position in the range of comparative data for each individual or for each
component of compensation. We establish individual amounts in view of the comparative data and such other factors
as level of responsibility, prior experience, and our subjective judgment as to individual contribution. We do not apply
formulas or assign these factors specifi c mathematical weights; instead, we exercise judgment and discretion.
We also retain an independent compensation consultant to assist us in evaluating our executive compensation pro-
grams. The use of an independent consultant provides additional assurance that our programs are reasonable and
consistent with the company’s objectives.
Components of Executive Compensation for 2003
Annual Compensation. Annual cash compensation for 2003 consisted of base salary and a cash bonus.
• We determined base salaries based on company and individual performance for the previous year, internal rela-
tivity, and market conditions, including pay at the peer group companies. As noted above, we used the peer group
and other market data to test for reasonableness and competitiveness of base salaries, but we also exercised
subjective judgment in view of our compensation objectives. Following a freeze on salary increases for all man-
agement employees in 2002, we approved merit increases for 2003.
• Cash bonuses for management have historically been determined under the EVA® Bonus Plan (EVA Plan), a for-
mula-based plan based on the concept of Economic Value Added. In basic terms, EVA is after-tax operating profi t
less the annual total cost of capital. Under the EVA Plan, the size of bonuses varied directly with the amount by