Eli Lilly 2007 Annual Report Download - page 89

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PROXY STATEMENT
8787
Payouts will be determined by this grid:
Ending Stock Price Up to $48.72 $48.72–$53.85 $53.86–$58.99 $59.00–$62.99 $63.00–$66.99 $67.00–$70.99 $71.00 +
Percent of Target 0 40% 60% 80% 100% 120% 140%
Adjustments for Certain Items
Consistent with past practice, the committee adjusted the results on which 2007 bonuses and performance awards
were determined to eliminate the effect of certain unusual income or expense items. The adjustments are intended to:
• align award payments with the underlying growth of the core business
• avoid volatile, artifi cial infl ation or defl ation of awards due to the unusual items either in the award year or the
previous (comparator) year
• eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring
new technologies or to defer disposing of underutilized assets or settling legacy litigation in order to protect
current bonus payments.
To assure the integrity of the adjustments, the committee establishes adjustment guidelines at the beginning of the
year. These guidelines are consistent with the company guidelines for reporting adjusted earnings to the investment
community, which are reviewed by the audit committee of the board. The adjustments apply equally to income and
expense items and must exceed a materiality threshold. The committee reviews all adjustments and retains “downward
discretion”—i.e., discretion to reduce compensation below the amounts that are yielded by the adjustment guidelines.
For the 2007 awards calculation, the committee adjusted EPS to eliminate the effect in 2007 of accounting
charges for the acquisition of in-process research and development (IPR&D), and in both 2006 and 2007 of major
product liability charges, major asset impairments, restructuring, and other special charges. In addition, to elimi-
nate the distorting effect of the acquisition of ICOS Corporation (which was completed in January 2007) on year-
over-year growth rates, the committee adjusted sales and EPS for both 2006 and 2007 on a pro forma basis as if
the acquisition had been completed at the beginning of 2006.
The adjustments were intended to align award payments more closely to underlying business growth trends
and eliminate volatile swings (up or down) caused by the unusual items. This is demonstrated by the 2006 and 2007
adjustments:
Reconciliations of the adjustments to our reported sales and earnings per share are below. The shaded num-
bers were used for calculating growth percentages for the compensation programs.
2007 2006
% Growth
2007 vs. 2006 2005
% Growth
2006 vs. 2005
Sales as reported ($ millions) $18,633.5 $15,691.0 19% $14,645.3 7%
pro forma ICOS adjustment $72.7 $755.2 N/A
Sales—pro forma adjusted $18,706.2 $16,446.2 14% N/A N/A
EPS as reported $2.71 $2.45 11% $1.81 35%
Eliminate IPR&D charges for acquisitions and in-licensing
transactions $.63 — —
Eliminate asset impairments, restructuring and other special
charges (including product liability charges) $.21 $.73 $1.04
Eliminate cumulative effect of change in accounting principle —— $.02
EPS—adjusted $3.55 $3.18 $2.87 11%
pro forma ICOS adjustment $(.01) $(.15) N/A
EPS—pro forma adjusted $3.54 $3.03 17% N/A N/A
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