Eli Lilly 2008 Annual Report Download - page 100

PROXY STATEMENT
9898
awards, a portion of which would be paid out upon a change in control, based on time worked up to the change in
control and the target or forecasted payout level at the time of the change in control. The committee believes this
partial payment is appropriate because of the diffi culties in converting the Lilly EPS targets into an award based
on the surviving company’s EPS. Likewise, if Lilly is not the surviving entity, a portion of the shareholder value
awards is paid out, based on time worked up to the change in control and the merger price for Lilly stock.
• Covered terminations. Employees are eligible for payments if, within two years of the change in control, their
employment is terminated (i) without cause by the company or (ii) for good reason by the employee, each as
is defi ned in the program. See pages 108–110 for a more detailed discussion, including a discussion of what
constitutes a change in control.
• Two-year protections. Employees who suffer a covered termination receive up to two years of pay and benefi t
protection. The purpose of these provisions is to assure employees a reasonable period of protection of their
income and core employee benefi ts upon which they depend for fi nancial security.
—Severance payment. Eligible terminated employees would receive a severance payment ranging
from six months’ to two years’ base salary. Executives are all eligible for two years’ base salary
plus cash bonus (with bonus established as the higher of the then-current year’s target bonus or
the last bonus paid prior to the change in control).
—Benefi t continuation. Basic employee benefi ts such as health and life insurance would be
continued for up to two years following termination of employment. All executives, including
named executive offi cers, are entitled to two years’ benefi t continuation. This period will be
reduced to 18 months beginning in 2010.
—Pension supplement. Under the portion of the program covering executives, a terminated employee would be
entitled to a supplement of two years of age credit and two years of service credit for purposes of calculating
eligibility and benefi t levels under the company’s defi ned benefi t pension plan. This benefi t will be eliminated
beginning in 2010.
• Accelerated vesting of equity awards. Any unvested equity awards at the time of termination of employment would
become vested.
• Excise tax. In some circumstances, the payments or other benefi ts received by the employee in connection with
a change in control may exceed certain limits established under Section 280G of the Internal Revenue Code.
The employee would then be subject to an excise tax on top of normal federal income tax. Because of the way
the excise tax is calculated, it can impose a large burden on some employees while similarly compensated
employees will not be subject to the tax. The costs of this excise tax—but not the regular income tax—would
be borne by the company. To avoid triggering the excise tax, payments that would otherwise be due under the
program that are up to three percent over the IRS limit will be cut back to the IRS limit. Effective in 2010, this
cutback threshold will be raised to fi ve percent above the IRS limit.
Share Ownership and Retention Guidelines; Hedging Prohibition
Share ownership and retention guidelines help to foster a focus on long-term growth. The committee has adopted
a guideline requiring the CEO to own Lilly stock valued at least fi ve times his or her annual base salary, and other
executive offi cers to own at least three times their annual base salary. A phase-in of up to fi ve years is provided
for newly hired or promoted executive offi cers. Individual shareholding requirements were set at the beginning of
2008, and will be reset for each individual periodically or when their job changes signifi cantly. Lilly executives have
a long history of maintaining extensive holdings in Lilly stock, and all executive offi cers already meet or exceed the
guideline, or in the case of new executive offi cers, are on track to meet or exceed the guideline within the phase-in
period. As of his retirement, Mr. Taurel held shares valued at 50 times his salary and Dr. Lechleiter currently holds
shares valued, as of year-end 2008, at seven times his salary.
Executive offi cers are required to retain all shares received from the company equity programs, net of acqui-
sition costs and taxes, for at least one year. In addition, any executive offi cer who does not meet the stock owner-
ship guideline must retain all net shares until the requisite ownership level is achieved.
Employees are not permitted to hedge their economic exposures to the Lilly stock that they own through short
sales or derivative transactions.
Tax Deductibility Cap on Executive Compensation
U.S. federal income tax law prohibits the company from taking a tax deduction for certain compensation paid in
excess of $1,000,000 to certain executive offi cers. However, performance-based compensation is fully deductible
if the programs are approved by shareholders and meet other requirements. Our policy is to qualify our incentive
compensation programs for full corporate deductibility to the extent feasible and consistent with our overall com-
pensation objectives.
Change In Control
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