Eli Lilly 2011 Annual Report Download - page 126

PROXY STATEMENT
The Lilly Deferred Compensation Plan
Executives may defer receipt of part or all of their cash compensation under The Lilly Deferred Compensation Plan
(the deferred compensation plan), which allows executives to save for retirement in a tax-effective way at minimal
cost to the company. Under this unfunded plan, amounts deferred by the executive are credited at an interest rate of
120 percent of the applicable federal long-term rate, as described in more detail following the “Nonqualified
Deferred Compensation in 2011” table.
Severance Benefits
Except in the case of a change in control of the company, the company is not obligated to pay severance to named
executive officers upon termination of their employment; any such payments are at the discretion of the compensa-
tion committee.
Change in Control
Severance:
• All regular employees
covered
• Double trigger
• Two-year cash pay
protection for
executives
• 18-month benefit
continuation
• Tax gross-up eliminated
effective October 2012
The company has adopted a change-in-control severance pay plan for nearly all
employees of the company, including the executive officers. The plan is intended to pre-
serve employee morale and productivity and encourage retention in the face of the dis-
ruptive impact of an actual or rumored change in control. In addition, for executives, the
plan is intended to align executive and shareholder interests by enabling executives to
consider corporate transactions that are in the best interests of the shareholders and
other constituents of the company without undue concern over whether the transactions
may jeopardize the executives’ own employment.
Although benefit levels may differ depending on the employee’s job level and
seniority, the basic elements of the plan are comparable for all regular employees:
•Double trigger. Unlike “single trigger” plans that pay out immediately upon a change
in control, the company plan generally requires a “double trigger”—a change in control followed by an
involuntary loss of employment within two years thereafter. This is consistent with the purpose of the plan,
which is to provide employees with financial protection upon loss of employment. A partial exception is made for
outstanding PAs, a portion of which would be paid out upon a change in control on a pro-rated basis for time
worked based on the forecasted payout level at the time of the change in control. The committee believes this
partial payment is appropriate because of the difficulties in converting the company EPS targets into an award
based on the surviving company’s EPS. Likewise, if Lilly is not the surviving entity, a portion of outstanding SVAs
is paid out on a pro-rated basis for time worked up to the change in control based on the merger price for
company 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
defined in the plan. See “Potential Payments Upon Termination or Change in Control” for a more detailed
discussion, including a discussion of what constitutes a change in control.
• Employees who suffer a covered termination receive up to two years of pay and 18 months of benefits
protection. These provisions assure employees a reasonable period of protection of their income and core
employee benefits upon which they depend for financial 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 two times
the then-current year’s target bonus.
—Benefit continuation. Basic employee benefits such as health and life insurance would be continued for
18 months following termination of employment, unless the individual becomes eligible for coverage with a
new employer. All employees would receive an additional 2 years of both age and years-of-service credit
for purposes of determining eligibility for retiree medical and dental benefits.
•Accelerated vesting of equity awards. Any unvested equity awards at the time of termination of employment would
vest.
•Excise tax. In some circumstances, the payments or other benefits received by the employee in connection with
a change in control could exceed 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 and associated gross-ups would be borne
by the company. (Employees would pay income tax resulting from severance payments.) To avoid triggering the
excise tax, payments that would otherwise be due under the plan that are up to 5 percent over the IRS limit will
be cut back to the limit. Effective October 2012, this tax gross-up will be eliminated.
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