Eli Lilly 2008 Annual Report Download - page 93

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PROXY STATEMENT
9191
The peer group is reviewed for appropriateness at least every three years. The group was reviewed in June 2008,
and the new group will be used to assess company performance for purposes of 2009 compensation decisions.
• CEO compensation. To provide further assurance of independence, the compensation recommendation for
the CEO is developed by an independent consultant (Frederic W. Cook and his fi rm, Frederic W. Cook & Co.)
without the input or knowledge of the CEO and with limited support from company staff. The Cook fi rm prepares
analyses showing median CEO compensation among the peer group in terms of base salary, target annual
incentive award, most recent equity grant value, and resulting total direct compensation. Mr. Cook develops
a range of recommendations for any change in the CEO’s base salary, annual incentive target, equity grant
value, and mix. Mr. Cook’s recommendations for target CEO pay take into account the peer competitive pay
analysis and, importantly, the position of the CEO in relation to other senior company executives and proposed
pay actions for all key employees of the company. The range allows for the committee to exercise its discretion
based on the CEO’s individual performance. The CEO has no prior knowledge of the recommendations and takes
no part in the recommendations, committee discussions, or decisions.
Executive Compensation for 2008
Overview—Establishment of Overall Pay
In making its pay decisions for 2008, the committee reviewed 2007 company performance data and peer group data
as discussed above, and also considered expected competitive trends in executive pay. That review showed:
• Company performance. In 2007, Lilly performed in the upper tier of the peer group in adjusted earnings per share
growth, sales growth, return on assets, and return on equity and in the lower tier in fi ve-year total shareholder
return.
• Pay relative to peer group. Lilly’s total pay to executive offi cers for 2007 was in the broad middle range.
The committee determined the following:
• Program elements. The 2008 program consisted of base salary, a cash incentive bonus award, and two forms
of performance-based equity grants: performance awards and shareholder value awards (SVAs). Executives
also received the company employee benefi t package. This program balances the mix of cash and equity
compensation, the mix of current and longer-term compensation, the mix of fi nancial and market goals, and the
security of foundational benefi ts in a way that furthers the compensation objectives discussed above.
• Pay ranges and mix of pay elements. The company generally maintained the same pay ranges and mix of pay
elements as in 2007. The committee believes this overall program continues to provide a cost effective delivery
of total compensation that:
—encourages retention and employee engagement by delivering competitive cash and equity components
—maintains a strong link to company performance and shareholder returns through a balanced equity incentive
program without encouraging excessive risk-taking
—maintains appropriate internal pay relativity
—provides opportunity for total pay within the broad middle range of expected peer group pay given company
performance comparable to that of our peers.
Base Salary
In setting base salaries for 2008, the committee considered the following:
• The corporate “merit budget,” the company’s overall budget for merit-based salary increases. The corporate
merit budget was established based on company performance for 2007, expected performance for 2008, and
a reference to general external merit trends. The objective of the merit budget is to allow
salary increases to retain, motivate, and reward successful performers while maintaining
affordability within the company’s business plan. Individual pay increases can be more or
less than the budget amount depending on individual performance, but aggregate increases
must stay within the budget. The aggregate merit increases for all executive offi cers were
within the corporate merit budget of four percent.
• Individual performance. As described above under “The Committee’s Processes and
Analyses,” base salary increases were driven largely by individual performance
assessments.
—
The independent directors assessed Mr. Taurel’s 2007 performance. They considered the company’s and
Mr. Taurel’s accomplishment of objectives that had been established at the beginning of the year and their own
subjective assessment of his performance. They noted that under Mr. Taurel’s leadership in 2007, the company:
Base Salary
Considerations:
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