Eli Lilly 2004 Annual Report Download - page 72

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Methodology. We consider various measures of company and industry performance, including sales, earnings per
share, total market value, and total shareholder return. These data assist us in exercising 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 77. We compare
the executive compensation programs as a whole, and we also compare the pay of individual executives if we be-
lieve 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 judgment as to individual performance. 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
programs and in setting our chief executive offi cer’s compensation. The consultant reports directly to the commit-
tee. 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 2004
Annual Compensation. Annual cash compensation for 2004 consisted of base salary and a cash bonus.
• We determined base salaries based on company and individual performance for the previous year, internal
relativity, 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. Our merit budget processes for
executives are no different from those used for all employees.
• Cash bonuses for all management employees worldwide, as well as most non-management employees in the
U.S, were determined under the Eli Lilly and Company Bonus Plan, a shareholder-approved formula-based
bonus plan adopted in 2004. Under the plan, bonus target amounts, expressed as a percentage of base salary,
are established for participants each year based on job responsibilities. Bonus payouts for the year are then
determined by the company’s performance relative to predetermined goals that are based 25 percent on sales
growth and 75 percent on earnings per share growth (adjusted for unusual items). In establishing the company
performance measures, we considered the expected performance of Lilly and the other companies in our peer
group. For the executive offi cers, we established bonus targets based on job responsibilities, internal relativity,
and peer group data. Our objective was to set bonus targets such that total annual cash compensation was
within the broad middle range of peer group companies and a substantial portion of that compensation was
linked to company performance. Under the plan formula, payouts can range from zero to 200 percent of target
depending on company performance. While the company achieved good growth in both sales and adjusted
earnings per share in 2004, the results were somewhat below the predetermined goals, and therefore the
bonuses paid for 2004 were 90 percent of target.
Long-Term Incentives. We normally employ two forms of long-term equity incentives granted under the 2002 Lilly
Stock Plan: stock options and performance awards. These incentives foster the long-term perspective necessary
for continued success in our business. They also ensure that our leaders are properly focused on shareholder
value. Our objective is to have a combined grant value of stock options and performance awards that is competi-
tive within the broad middle range of peer company long-term incentive grant amounts. Stock options and perfor-
mance awards have traditionally been granted broadly and deeply within the organization, with approximately 4,950
management and professional employees now participating.
• Stock options align employee incentives with shareholders because options have value only if the stock
price increases over time. Our 10-year options, granted at the market price on the date of grant, ensure
that employees are focused on long-term growth. In addition, options help retain key employees because
they typically cannot be exercised for three years and, if not exercised, are forfeited if the employee leaves
the company before retirement. The three-year vesting also helps keep employees focused on long-term
performance. In determining the size of option grants, we consider job responsibility, individual performance,
peer group data, and the number of options previously granted. Generally, we granted stock options in 2004 in
amounts the same as the previous year. The increase for Mr. Taurel is discussed on page 72, and the increases