Eli Lilly 2008 Annual Report Download - page 116

PROXY STATEMENT
114114
Background of Proposal
The proposal is a result of ongoing review of corporate governance matters by the board. The board, assisted by the
directors and corporate governance committee, considered the advantages and disadvantages of maintaining the
classifi ed board structure. The board considered the view of some shareholders who believe that classifi ed boards
have the effect of reducing the accountability of directors to shareholders because classifi ed boards limit the ability
of shareholders to evaluate and elect all directors on an annual basis. The election of directors is the primary means
for shareholders to infl uence corporate governance policies. The board gave considerable weight to the approval at
the 2006 annual meeting of a shareholder proposal requesting that the board take all necessary steps to elect the
directors annually, and to the 77 percent favorable vote for management’s proposal in 2008 (75 percent in 2007).
The board also considered benefi ts of retaining the classifi ed board structure, which has a long history in
corporate law. Proponents of a classifi ed structure believe it provides continuity and stability in the management
of the business and affairs of a company because a majority of directors always have prior experience as directors
of the company. Proponents also assert that classifi ed boards may enhance shareholder value by forcing an entity
seeking control of a target company to initiate arms-length discussions with the board of that company, because
the entity cannot replace the entire board in a single election. While the board recognizes those potential benefi ts,
it also notes that even without a classifi ed board, the company has other means to compel a takeover bidder to
negotiate with the board, including certain “supermajority” vote requirements in its amended articles of incorpora-
tion (as described in the company’s response to Item 5 on page 117), other provisions of its articles and bylaws, and
certain provisions of Indiana law.
On the recommendation of the directors and corporate governance committee, the board approved the
amendments, and now recommends that the shareholders approve them. Although this proposal did not pass in
2008, the board continues to support this change and believes that by taking this action, it can provide sharehold-
ers further assurance that the directors are accountable to shareholders while maintaining appropriate defenses
to respond to inadequate takeover bids.
Vote Required
The affi rmative vote of at least 80 percent of the outstanding common shares is needed to pass this proposal.
The board recommends that you vote FOR amending the company’s articles of incorporation to provide for
annual election of all directors.
Item 4. Reapproval of Material Terms of Performance Goals for the Eli Lilly and Company Bonus Plan
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), limits the amount of compensa-
tion expense that the company can deduct for income tax purposes. In general, a public corporation cannot deduct
compensation in excess of $1 million paid to any of the named executive offi cers in the proxy statement. However,
compensation that qualifi es as “performance-based” is not subject to this deduction limitation.
The Eli Lilly and Company Bonus Plan (the plan) allows the grant of cash bonuses that qualify as performance-
based compensation under Section 162(m) of the Code. One of the conditions to qualify as performance-based is that
the material terms of the performance goals must be approved by the shareholders at least every fi ve years. The
last such approval for the plan was when the plan itself was approved in 2004. To preserve the tax status of compa-
ny bonuses as performance-based, and thereby to allow the company to continue to fully deduct the compensation
expense related to the awards, we are now asking the shareholders to reapprove the performance goals. We are
not amending or altering the plan. If this proposal is not adopted, the committee will continue to grant cash bonuses
under the plan, but certain executive offi cer bonuses would no longer be fully tax deductible by the company.
Purpose of the Plan
The purpose of the plan is to motivate superior performance and teamwork by employees at all levels of the com-
pany by linking annual cash bonuses to important corporate performance measures. Bonus payments are linked
directly to both individual and corporate performance. Exceptional performance by individuals and the company
will lead to increases in bonuses, and shortfalls in performance will lead to bonus reductions.
Principal Features of the Plan
The following is a summary of the material features of the plan:
• Administration. The plan is administered by the compensation committee of the board, which is composed