Eli Lilly 2007 Annual Report Download - page 88

PROXY STATEMENT
8686
Two named executive offi cers did not receive reductions in their target equity values. Dr. Paul’s 2007 value
remained the same as in 2006 to preserve competitiveness within peer company pay and to recognize the strategic
importance of the chief scientifi c offi cer role. Mr. Rice’s 2007 value increased due to his promotion in May 2006.
Equity Incentives—Performance Awards
Performance awards provide employees with shares of Lilly stock if certain company performance goals are
achieved, aligning employees with shareholder interests and providing an ownership stake in the company. The
awards are structured as a schedule of shares of Lilly stock based on the company’s achievement of specifi c ad-
justed earnings per share (adjusted EPS) levels over specifi ed time periods of one or more years. Possible payouts
range from zero to 200 percent of the target amount, depending on adjusted EPS growth over the period. No divi-
dends are paid on the awards during the performance period. At the end of the performance period, the committee
has discretion to adjust an award payout downward, but not upward, from the amount yielded by the formula. For
the 2007 grants, the committee took into consideration the following:
• Target grant values. As described above, the committee reduced target grant values for most job levels and
established a 50/50 split for executives between performance awards and SVAs.
• Company performance measure. The committee established the performance measure as adjusted EPS growth
(reported EPS adjusted as described below under “Adjustments for Certain Items”) over a one-year period, with
a one-year holding period, thus creating a two-year award. The committee believes adjusted EPS growth is an
effective motivator because it is closely linked to shareholder value, is broadly communicated to the public,
and is easily understood by employees. In setting the target growth percentage of 8 percent, the committee
considered the expected earnings performance of companies in our peer group over a one-year period, based on
published investment analyst estimates. Eight percent represented approximately the median expected growth
for our peer group; accordingly, consistent with our compensation objectives, Lilly performance exceeding the
peer group median would result in above-target payouts while Lilly performance lagging the peer group median
would result in below-target payouts. Payouts were determined according to this schedule:
Adjusted 2007 EPS Growth Up to 2.99% 3.00–4.99% 5.00–6.99% 7.00–8.99% 9.00–10.99% 11.00–12.99% 13.00–15.99% 16.00% +
Percent of Target 0 50% 75% 100% 125% 150% 175% 200%
Pro forma adjusted EPS growth of 16.8 percent resulted in a 2007 performance award payout at 200 percent of
target. See page 87 for a reconciliation of 2007 reported and pro forma adjusted EPS.
Equity Incentives—Shareholder Value Awards
Beginning in 2007, the company implemented a new equity program, the shareholder value award (SVA), which re-
placed our stock option program. The SVA pays out shares of Lilly stock based on the performance of the compa-
ny’s stock over a three-year period. No dividends are paid on the awards during the performance period. Payouts
range from zero to 140 percent of the target amount, depending on stock price performance over the period. The
SVA program delivers equity compensation that is strongly linked to longer-term shareholder returns. It is more
cost-effective than the stock option program it replaces because the SVA program delivers, at a lower cost to the
company, an equity incentive that is equally or more effective in aligning employee interests with long-term share-
holder return. For the 2007 grants, the committee considered the following:
• Target grant size. As described above, the committee reduced target grant sizes for most job levels and
established a 50/50 split between performance awards and SVAs.
• Company performance measure. The SVA is designed to pay above target if Lilly’s stock price outperforms
an expected compounded annual rate of return for large-cap companies and below target if Lilly stock
underperforms that rate of return. The expected rate of return used in this calculation was determined
considering total return that a reasonable investor would consider appropriate for investing in the stock of a
large-cap U.S. company, based on input from external money managers, less Lilly’s current dividend yield.
Executive offi cers receive no payout if the stock price (less three years of dividends at the current rate) does not
grow over the three-year performance period—in other words, if total shareholder return for the three-year
period is zero or negative.
The starting price for the 2007 SVAs was $54.01 per share, representing the average of the closing prices of
Lilly stock for all trading days in November and December 2006. The ending price to determine payouts will be
the average of the closing prices of Lilly stock for all trading days in November and December 2009.