Eli Lilly 2006 Annual Report Download - page 80

PROXY STATEMENT
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pressures on health care costs require us to continually improve productivity in all that we do. To achieve these
goals, it is critical that we be able to attract, motivate, and retain highly talented individuals at all levels of the or-
ganization who are committed to the company’s core values of excellence, integrity, and respect for people.
The compensation committee bases its executive compensation programs on the same objectives that guide
the company in establishing all its compensation programs:
• Compensation should be based 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
should be linked to company performance and shareholder returns, because they are more able to affect the
company’s results.
• Compensation should refl ect 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.
• Compensation should reward performance. Our programs should deliver top-tier compensation given top-tier
individual and company performance; likewise, where individual performance falls short of expectations and/or
company performance lags the industry, the programs should deliver lower-tier compensation. In addition, the
objectives of pay-for-performance and retention must be balanced. Even in periods of temporary downturns in
company performance, the programs should continue to ensure that successful, high-achieving employees will
remain motivated and committed to Lilly.
• Compensation should foster the long-term focus required for success in the pharmaceutical industry. While
all employees receive a mix of both annual and longer-term incentives, employees at higher levels have an
increasing proportion of their compensation tied to longer-term performance because they are in a position to
have greater infl uence on longer-term results.
• To be effective, performance-based compensation programs should enable employees to easily understand how
their efforts can affect their pay, both directly through individual performance accomplishments and indirectly
through contributing to the company’s achievement of its strategic and operational goals. No matter how elegant
a performance measure may be in theory, if in practice employees cannot easily understand how it works or how
it relates to their daily jobs, it will not be an effective motivator.
• Compensation and benefi t programs should be egalitarian. While the programs and individual pay levels will
always refl ect differences in job responsibilities, geographies, and marketplace considerations, the overall
structure of compensation and benefi t programs should be broadly similar across the organization. Perquisites
for executives should be rare and limited to those that are important to the executive’s ability to safely and
effectively carry out his or her responsibilities.
• Compensation and benefi t programs should attract employees who are interested in a career at Lilly. The
company’s nationally recognized benefi t programs provide a competitive advantage by helping the company
attract and retain highly talented employees who are looking for the opportunity to build a career. These
programs include a strong retirement program, fl exible health care coverage options for active employees and
retirees, and leading-edge work/life programs to help employees manage the sometimes confl icting demands of
career and family.
The Committee’s Processes
The compensation committee has established a number of processes to assist it in ensuring that the company’s
executive compensation program is achieving its objectives. Among those are:
• Assessment of Company Performance. The committee uses company performance measures in two ways. First,
in establishing total compensation ranges, the committee considers various measures of company and industry
performance, including sales, earnings per share, return on assets, return on equity, and total shareholder
return. The committee does not apply a formula or assign these performance measures relative weights.
Instead, it makes a subjective determination after considering such measures collectively. Second, as described
in more detail below, the committee has established specifi c company performance measures that determine
the size of payouts under the company’s three formula-based incentive programs—the Eli Lilly and Company
Bonus Plan, the performance award program and, beginning in 2007, the shareholder value award which
replaces the stock option program (the shareholder value award is discussed on pages 84–85.)
• Assessment of Individual Performance. Individual performance has a strong impact on the compensation of
all employees, including the CEO and the other executive offi cers. With respect to the CEO, the independent
directors, under the direction of the presiding director, meet with the CEO in executive session annually at the
beginning of the year to agree upon the CEO’s performance objectives (both individual and company objectives)
for the year. At the end of the year, the independent directors meet in executive session under the direction
of the presiding director to conduct a performance review of the CEO based on his or her achievement of the