Eli Lilly 2010 Annual Report Download - page 120

PROXY STATEMENT
—Our 2010 incentive programs used a combination of financial metrics (revenue, EPS, and TSR), as
measured against the performance of our peer companies. We design our programs to be simple and
clear, so that employees can understand how their efforts affect their pay.
—We balance the objectives of pay-for-performance and employee retention. Even during downturns in
company performance, the program should continue to motivate and engage successful, high-achieving
employees.
•Foster a long-term focus. In our industry, long-term focus is critical to success and is consistent with our goal of
retaining highly-talented employees as they build their careers. A competitive benefits program aids retention.
As employees progress to higher levels of the organization, a greater portion of compensation is tied to long-
term performance through our equity programs.
•Provide compensation consistent with the level of job responsibility and reflective of the market. We seek internal
pay relativity, meaning that pay differences among jobs should be commensurate with differences in job
responsibility and impact. In addition, the committee compares the company’s programs with a peer group of
global pharmaceutical companies. Pharmaceutical companies’ needs for scientific and sales and marketing
talent are unique to the industry and we must compete with these companies for talent.
•Provide efficient and egalitarian compensation. We seek to deliver superior long-term shareholder returns and to
share value created with employees in a cost-effective manner. While compensation will always reflect
differences in job responsibilities, geographies, and marketplace considerations, the overall structure of
compensation and benefits programs should be broadly similar across the organization.
•Appropriately mitigate risk. The compensation committee reviews the company’s compensation policies and
practices annually and works with management to ensure that program design does not inadvertently create
inappropriate incentives.
Setting Compensation
The compensation committee uses several tools to set compensation targets that meet company objectives. Among
those are:
•Assessment of individual performance. Individual performance has a strong impact on compensation.
—The independent directors, under the direction of the lead director, meet with the CEO at the beginning of
the year to agree upon the CEO’s performance objectives for the year. At the end of the year, the
independent directors meet with the CEO and in executive session to assess the CEO’s performance based
on his achievement of the objectives, contribution to the company’s performance, ethics and integrity, and
other leadership accomplishments. This evaluation is shared with the CEO by the lead director and is used
by the compensation committee in setting the CEO’s compensation for the following year.
—For the other executive officers, the committee receives performance assessments and compensation
recommendations from the CEO and also exercises its judgment based on the board’s interactions with the
executive officers. As with the CEO, an executive officer’s performance assessment is based on his or her
achievement of objectives established between the executive officer and the CEO, contribution to the
company’s performance, ethics and integrity, and other leadership attributes and accomplishments.
•Assessment of company performance. The committee uses company performance measures in two ways:
—In establishing total compensation ranges, the committee uses as a reference the performance of the
company and its peer group with respect to revenue, EPS, return on assets, return on equity, and TSR.
—The committee establishes specific company performance targets that determine payouts under the
company’s cash and equity incentive programs.
•Peer group analysis. The committee reviews peer group data as a market check for compensation decisions, but
does not base compensation targets on peer group data only.
Compensation
Considerations:
•Individual metrics
•Company metrics
•Peer group analysis
•External advisor
•Internal relativity
—Overall competitiveness. The committee uses aggregated market data as a reference point to
ensure that executive compensation is competitive, meaning within the broad middle range of
comparative pay at peer companies when the company achieves the targeted performance
levels. The committee does not target a specific position within the range.
—Individual competitiveness. The committee compares the overall pay of individual executives if
the jobs are sufficiently similar to make the comparison meaningful. The individual’s pay is
driven primarily by individual and company performance and internal relativity; the peer group
data is used as a market check to ensure that individual pay remains within the broad middle
range of peer group pay. The committee does not target a specific position within the range.
The peer group consists of Abbott Laboratories; Amgen Inc.; AstraZeneca plc; Bristol-Myers Squibb Company;
GlaxoSmithKline plc; Hoffmann-La Roche Inc.; Johnson & Johnson; Merck & Co., Inc.; Novartis AG; Pfizer Inc.;
and Sanofi-Aventis (Schering-Plough Corporation and Wyeth are no longer included independently, due to
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