Eli Lilly 2012 Annual Report Download - page 138

34
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 in
2012
The company has adopted a change-in-control severance pay plan for nearly all
employees, including the executive officers. The plan is intended to preserve
employee morale and productivity and encourage retention in the face of the
disruptive impact of an actual or rumored change in control. In addition, 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 plan's intent 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. 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 would be 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.
—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 two 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. The company does not
reimburse employees for any excise or income taxes paid or other severance benefits related to change in
control severance. However, the amount of change in control-related benefits will be reduced to the 280G limit
if the employee would receive a greater after-tax benefit when compared to the payment net of all income and
excise taxes that would be owed as a result of all change in control payments.
Share Ownership and Retention Guidelines; Hedging Prohibition and Pledging Shares
Share ownership and retention guidelines help to foster a focus on long-term growth. The CEO is required to own
company stock valued at least six times his or her annual base salary. Other executive officers are required to own a
fixed number of shares based on their position. The fixed number of shares eliminates volatility in the share
ownership requirements that can occur with sharp movements in share price. Until the guideline level is reached,
the executive officer must retain all existing holdings as well as 50 percent of net shares resulting from new equity
payouts. Our executives have a long history of maintaining extensive holdings in company stock, and all named
executive officers already meet or exceed the guideline. All new executive officers are on track to meet or exceed