Proxy_2014_Draft


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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Soliciting Material Pursuant to §240.14a-12

ELI LILLY AND COMPANY
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SEC 1913 (11-01)
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Notice of 2014 Annual Meeting of Shareholders and Proxy Statement










Your vote is important
Please vote by using the Internet, telephone, or by signing, dating, and returning the enclosed proxy card.



Table of Contents
1

2

6

14

16

17

19

19

20

23

36

37

38

47

48

Item 1. Election of Directors
48

Item 2. Proposal to Ratify Appointment of Independent Auditor; Audit Committee Report
49

Item 3. Advisory Vote on Compensation Paid to Named Executive Officers
51

52

54

55

57









Notice of Annual Meeting of Shareholders
To the holders of Common Stock of Eli Lilly and Company:
The 2014 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:
●
WHEN:
11:00 a.m. EDT, Monday, May 5, 2014
●
WHERE:
The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285
 
 
 
 
●
ITEMS OF BUSINESS:
Election of the five directors listed in the proxy statement to serve three-year terms
 
 
Ratification of Ernst & Young LLP as the principal independent auditors for 2014
 
 
Approval, by non-binding vote, of the compensation paid to the company's named executive officers
●
WHO CAN VOTE:
Shareholders of record at the close of business on February 28, 2014
See the back page of this report for information regarding how to attend the meeting. Every shareholder vote is important. If you are unable to attend the meeting in person, please sign, date, and return your proxy and/or voting instructions by mail, telephone or through the Internet promptly so that a quorum may be represented at the meeting.
By order of the Board of Directors,
James B. Lootens
Secretary
March 24, 2014
Indianapolis, Indiana
Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 5, 2014: The annual report and proxy statement are available at http://www.lilly.com/pdf/lillyar2013.pdf


1


Proxy Statement Overview

General Information
This overview highlights information contained elsewhere in this proxy statement. It does not contain all the information you should consider, and you should read the entire proxy statement carefully before voting.
Meeting:
Annual Meeting of Shareholders
Date:
May 5, 2014
Time:
11:00 a.m. EDT
Location:
The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285
Record Date:
February 28, 2014
 
 
 
 

What Is New In This Year's Proxy
Below is a summary of changes to our compensation disclosures since our proxy filing last year, based on dialogue with shareholders:

1.
We redesigned our proxy statement to make it easier for our shareholders and other stakeholders to understand our compensation programs and to highlight important information about our corporate governance and other company practices.

2.
We expanded our compensation recovery policy to cover all executives and to encompass a broader range of executive misconduct.

3.
We reassessed our peer group in 2012 and expanded it to include six smaller biopharmaceutical and medical device companies: Allergan, Inc.; Biogen IDEC Inc., Celgene Corporation, Covidien PLC, Gilead Sciences, Inc., and Medtronic, Inc. We selected a revised peer group that would place Lilly in the middle of the group in terms of revenue.

2013 Business Performance Highlights
2013 falls in the middle of what we call the "YZ" period, during which we lose patent protection for a number of important products, including Zyprexa in the U.S. and Europe in late 2011, Cymbalta in the U.S. in December 2013, and Evista in the U.S. in March 2014. Despite these challenges, we delivered on our financial commitments for 2013, with revenue increasing 2 percent to $23.1 billion, non-GAAP net income increasing 19 percent to $4.5 billion, and non-GAAP earnings per share increasing 22 percent to $4.15. Total operating expenses decreased 1 percent, even as we continued to advance the company's pipeline. Reported net income for 2013 increased 15 percent to $4.68 billion, and reported earnings per share increased 18 percent to $4.32. (See Appendix A for a more detailed summary of adjustments to EPS.) Further information on our financial performance during 2013 is available in our 2013 Form 10-K and fourth-quarter earnings release available on our website at http://investor.lilly.com/financials.cfm.

We also made significant progress in delivering on the pipeline, with regulatory submissions for four products – empagliflozin, dulaglutide, new insulin glargine, and ramucirumab – along with five other new indication or line extension ("NILEX") approvals during 2013. In addition to these submissions, as of March 1, 2014, we also had 12 molecules in Phase III or submission stage and 25 more in Phase II.

Executive Compensation Summary for 2013
Under the leadership of our chairman and chief executive officer (CEO), Dr. John Lechleiter, during the past five years the company has made significant strides in advancing the pipeline, as illustrated by the figures below:
 
Phase II NMEs
Phase III NMEs
Regulatory Submissions
2008
10
5
2
 
 
 
 
 
ò
ò
ò
 
 
 
 
2013
25
8
7*
* Representing four products.

Prior to 2013, Dr. Lechleiter had not received an increase in target compensation since 2009. For 2013, the Compensation Committee decided to increase Dr. Lechleiter's target equity compensation based on the following factors:

•
Dr. Lechleiter's continued strong performance in leading the company during a difficult period of patent expirations to achieve solid financial results, reduce its cost structure, and progress the pipeline
•
The company's strong 2012 financial performance compared to goals; and
•
Peer group CEO pay trends as well as internal pay relativity compared to his direct reports

In keeping with the company's desire to maintain the substantial majority of the CEO's pay long-term focused and linked to company performance and shareholder value, the Compensation Committee only increased
Dr. Lechleiter's target equity compensation. Dr. Lechleiter's base salary and annual bonus targets remained unchanged.

The named executive officers each received base salary increases of between 2 and 3 percent, excluding
Mr. Harrington, who was promoted to Senior Vice President and General Counsel on January 1, 2013. These increases were consistent with those granted to other U.S. employees who were eligible for salary increases. The total compensation paid to the company's named executive officers in 2012 remained in the middle range of the updated peer group. As a result, the committee made no changes to target equity compensation for the other named executive officers for 2013, except for Mr. Harrington, as noted above.

Further information on executive compensation for 2013 can be found in the "Compensation Discussion and Analysis" and "Executive Compensation" sections below.

Voting Proposals
Shareholders will vote on the following items at the annual meeting:
Agenda
Item
Management
recommendation
Vote required to pass
Item 1
Elect the following nominees for director to serve a three-year term that will expire in 2017:
Vote FOR all
Majority of
votes cast
Name and principal occupation
Joined the Board
Age
Public boards
 
 
 
 
 
 
 
 
Michael L. Eskew
2008
64
3M Corp.
Vote FOR
 
Former Chairman and CEO - UPS
IBM Corp.
UPS, Inc.
 
 
 
 
 
 
 
 
Karen N. Horn, Ph.D.
1987
70
T. Rowe Price Mutual Funds
Vote FOR
 
Retired President, Private Client Services, and Managing Director - Marsh, Inc.
Simon Property Group, Inc.
Norfolk Southern Corp.
 
 
 
 
 
 
 
William G. Kaelin, Jr.
2012
56
None
Vote FOR
 
Professor, Department of Medicine and Associate Director, Basic Science - Dana-Farber/ Harvard Cancer Center
 
 
 
 
 
 
 
 
John C. Lechleiter, Ph.D.
2005
60
Nike, Inc.
Vote FOR
 
Chairman, President, and CEO - Eli Lilly and Company
Ford Motor Company
 
 
 
 
 
 
 
 
Marschall S. Runge
2013
59
None
Vote FOR
 
Executive Dean for the School of Medicine at the University of North Carolina at Chapel Hill
 
 
 
 
 
 
 
 
Item 2
Ratify the appointment of Ernst & Young LLP as the company's principal independent auditor for 2014.
Vote FOR
Majority of
votes cast
Item 3
Approve, by non-binding vote, compensation paid to the company's named executive officers.
Vote FOR
Majority of
votes cast

Our Corporate Governance Policies Reflect Best Practices
Ÿ
Board membership marked by leadership, experience, and diversity
Ÿ
All 15 of our nonemployee directors are independent
Ÿ
Strong, independent lead director role
Ÿ
All board committees are fully independent
Ÿ
Executive sessions are held at every regularly-scheduled board meeting
Ÿ
Active board participation in company strategy and CEO succession planning
Ÿ
Board oversight of compliance and enterprise risk management practices
Ÿ
Meaningful director stock ownership guidelines
Ÿ
Majority voting standard and resignation policy for the election of directors
Our Executive Compensation Programs Reflect Best Practices
Ÿ
Strong shareholder support of compensation practices: in 2013, 97 percent of shares cast voted in favor of our executive compensation
Ÿ
Compensation programs are designed to align with shareholder interests and link pay to performance through a blend of short- and long-term performance measures
Ÿ
The Compensation Committee annually reviews compensation programs to ensure appropriate risk mitigation
Ÿ
No "top hat" retirement plans - supplemental plans are open to all employees and are limited to restoring benefits lost due to IRS limits on qualified plans
Ÿ
Broad compensation recovery policy that applies to all executives and covers a wide range of misconduct
Ÿ
Executives and senior management are prohibited from engaging in hedging transactions with company stock or pledging their company stock
Ÿ
Executives are subject to strong stock ownership guidelines
Ÿ
No tax gross-ups provided to executives (except for limited gross-ups related to international assignments)
Ÿ
Very limited perquisites; CEO did not use the corporate aircraft for personal use at any time during 2013. Other named executive officers (NEOs) are not permitted to use the corporate aircraft for personal use
Ÿ
Severance plans related to change-in-control generally require double trigger
Ÿ
No employment agreements with executive officers

How to Vote in Advance of the Meeting
Even if you plan to attend the 2014 Annual Meeting in person, we encourage you to vote prior to the meeting via one of the methods described below. You can vote in advance via one of three ways:

8    Visit the website listed on your proxy card/voting instruction form to vote VIA THE INTERNET

)    Call the telephone number on your proxy card/voting instruction form to vote BY TELEPHONE

*    Sign, date and return your proxy card/voting instruction form to vote BY MAIL

Further information on how to vote is provided at the end of the proxy statement under "Meeting and Voting Logistics".

Voting at our 2014 Annual Meeting
You may also opt to vote in person at the 2014 Annual Meeting, which will be held on Monday, May 5, 2014 at the Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., local time. See the section entitled "Meeting and Voting Logistics" for more information.

2


Board Operations and Governance
Board of Directors
In order of appearance, from left to right: Michael L. Eskew, Katherine Baicker, Alfred G. Gilman, Karen N. Horn, Jackson P. Tai, Franklyn G. Prendergast, J. Erik Fyrwald, R. David Hoover, John C. Lechleiter, Douglas R. Oberhelman, Ellen R. Marram, Sir Winfried Bischoff, William G. Kaelin, Jr., Marschall S. Runge, Kathi P. Seifert, Ralph Alvarez.

Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a nominee is unavailable for election, proxy holders may vote for another nominee proposed by the Board of Directors or, as an alternative, the Board of Directors may reduce the number of directors to be elected at the annual meeting. Each nominee has agreed to serve on the Board of Directors if elected.

Director Biographies
Set forth below is the information as of March 12, 2014, regarding the nominees for election, which has been confirmed by each of them for inclusion in this proxy statement. We have provided the most significant experiences, qualifications, attributes, or skills that led to the conclusion that each director or director nominee should serve as one of our directors in light of our business and structure. Full biographies for each of our directors are available on our website at http://www.lilly.com/about/board-of-directors/Pages/board-of-directors.aspx.

No family relationship exists among any of our director nominees or executive officers. To the best of our knowledge, there are no pending material legal proceedings in which any of our directors or nominees for director, or any of their associates, is a party adverse to us or any of our affiliates, or has a material interest adverse to us or any of our affiliates. See the "Other Matters" section of the proxy for information about shareholder derivative litigation in which certain directors are named as defendants. Additionally, to the best of our knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments, sanctions, or injunctions that are material to the evaluation of the ability or integrity of any of our directors or nominees for director during the past 10 years.

Class of 2014
The following six directors’ terms will expire at this year’s annual meeting. Dr. Gilman will retire from the Board at the end of his term. The other five directors are standing for reelection. See “Item 1. Election of Directors” below for more information.

Michael L. Eskew, age 64, director since 2008
Board Committees: Audit (chair); Finance
Career Highlights
Other Board Service
United Parcel Service, Inc.
•
Public boards: 3M Corporation; IBM Corporation
•
Former Chairman and Chief Executive Officer (2002 - 2007)
•
Non-profit service: Chairman of the board of trustees of The Annie E. Casey Foundation
•
UPS Board of Directors (1998 - present)
•
Vice Chairman (2000 - 2002)
 
 
Qualifications: Mr. Eskew has CEO experience with UPS, where he established a record of success in managing complex worldwide operations, strategic planning, and building a strong consumer-brand focus. He is an Audit Committee financial expert, based on his CEO experience and his service on other U.S. company audit committees. He has extensive corporate governance experience through his service on the boards of other companies.

Alfred G. Gilman, M.D., Ph.D., age 72, director since 1995
Board Committees: Public Policy and Compliance; Science and Technology (chair)
Career Highlights
Career Honors
University of Texas Southwestern Medical Center
•
Nobel Prize in Physiology or Medicine (1994)
•
Regental Professor Emeritus (2009 - present)
•
Nadine and Tom Craddick Distinguished Chair in Medical Science
•
Executive Vice President for Academic Affairs and Provost (2006 - 2009)
•
Raymond and Ellen Willie Distinguished Chair of Molecular Neuropharmacology
•
Dean of the Medical School (2004 - 2009)
Other Board Service
Cancer Prevention and Research Institute of Texas
•
Public board: Regeneron Pharmaceuticals, Inc.
•
Chief Scientific Officer (2009 - 2012)
Qualifications: Dr. Gilman is a Nobel Prize-winning pharmacologist, researcher, and professor. He has deep expertise in basic science, including mechanisms of drug action, and experience with pharmaceutical discovery research. As the former dean of a major medical school, he brings to the Board important perspectives of both the academic and practicing medical communities.

Karen N. Horn, Ph.D., Age 70, Director since 1987
Board Committees: Compensation (chair); Directors and Corporate Governance
Career Highlights
Other Board Service
Brock Capital Group, a provider of financial advising and consulting services
•
Public boards: T. Rowe Price Mutual Funds; Simon Property Group, Inc.; and Norfolk Southern Corporation
•
Senior Managing Director (2004 - present)
Marsh, Inc., a global provider of risk and insurance services
•
Prior public board service: Fannie Mae; Georgia-Pacific Corporation
•
President, Private Client Services and Managing Director (1999 - 2003)
 
Bank One, Cleveland, N.A.
 
 
•
Chairman and chief executive officer (1982 - 1987)
 
 
Qualifications: Ms. Horn is a former CEO with extensive experience in various segments of the financial industry, including banking and financial services. Through her for-profit and her public-private partnership work, she has significant experience in international economics and finance. Ms. Horn has extensive corporate governance experience through service on other public company boards in a variety of industries.

William G. Kaelin, Jr., M.D., age 56, director since 2012
Board Committees: Finance; Science and Technology
Career Highlights
Industry Memberships
Dana-Farber/Harvard Cancer Center
•
Institute of Medicine; National Academy of Sciences; Association of American Physicians
•
Professor of Medicine (2002 - present)
•
Associate director, Basic Science (2009 - present)
Career Honors
 
•
Canada Gairdner International Award
 
 
•
Lefoulon-Delalande Prize - Institute of France
Qualifications: Dr. Kaelin is a prominent medical researcher and academician. He has extensive experience at Harvard Medical School, a major medical institution, as well as special expertise in oncology—a key component of Lilly's business. He also has deep expertise in basic science, including mechanisms of drug action, and experience with pharmaceutical discovery research.

John C. Lechleiter, Ph.D., age 60, director since 2005
Board Committees: none
Industry Memberships
Career Highlights
•
American Chemical Society; Pharmaceutical Research and Manufacturers of America; Business Roundtable; President of International Federation of Pharmaceutical Manufacturers & Associations; Chairman of the U.S. - Japan Business Council
Eli Lilly and Company
•
President and CEO (2008 - present)
•
Chairman of the Board (2009 - present)
Career Honors
Other Board Service
•
Honorary doctorates: Marian University, University of Indianapolis, the National University of Ireland, and Indiana University
•
Public boards: Ford Motor Company; Nike, Inc.
 
•
Non-profit boards: United Way Worldwide; Xavier University; the Life Sciences Foundation; and the Central Indiana Corporate Partnership
Qualifications: Dr. Lechleiter is our chairman, president, and chief executive officer. A Ph.D. chemist by training, Dr. Lechleiter has over 30 years of experience with the company in a variety of roles of increasing responsibility in research and development, sales and marketing, and corporate administration. As a result, he has a deep understanding of pharmaceutical research and development, sales and marketing, strategy, and operations. He also has significant corporate governance experience through service on other public company boards.

Marschall S. Runge, M.D., Ph.D., age 59, director since 2013. Dr. Runge is serving under interim election by the board and was referred to the Directors and Corporate Governance Committee by an independent executive search firm.
Board Committees: Science and Technology; Public Policy and Compliance
Career Highlights
Industry Memberships
University of North Carolina, School of Medicine
•
Experimental Cardiovascular Sciences Study Section of the National Institutes of Health
•
Executive Dean (2010 - present); Chair of the Department of Medicine (2000 - present)
•
Principal Investigator and Director of the North Carolina Translational and Clinical Sciences Institute
 
 
Qualifications: Dr. Runge brings the unique perspective of a practicing physician who has a broad background in health care, clinical research, and academia. He has extensive experience as a practicing cardiologist, and has deep expertise in biomedical research and clinical trial design.
Class of 2015
The following five directors will continue in office until 2015.

Katherine Baicker, Ph.D., age 42, director since 2011
Board Committees: Audit; Public Policy and Compliance
Career Highlights
Industry Memberships
Harvard University School of Public Health, Department of Health Policy and Management
•
Commissioner of the Medicare Payment Advisory Commission
•
Professor of health economics (2007 - present)
•
Panel of Health Advisers to the Congressional Budget Office
Council of Economic Advisers, Executive Office of the President
•
Editorial boards of Health Affairs; the Journal of Health Economics; Journal of Economic Perspectives
•
Member (2005 - 2007)
 
•
Senior Economist (2001 - 2002)
•
Member of the Institute of Medicine
Qualifications: Dr. Baicker is a leading researcher in the fields of health economics, public economics, and labor economics. As a valued adviser to numerous health care-related commissions and committees, her expertise in health care policy and health care delivery is recognized by both academia and government.

J. Erik Fyrwald, age 54, director since 2005
Board Committees: Public Policy and Compliance (chair); Science and Technology
Career Highlights
E.I. duPont de Nemours and Company, a global chemical company
Univar, Inc., a leading distributor of industrial and specialty chemicals and provider of related services
•
Group Vice President, agriculture and nutrition (2003 - 2008)
•
President and Chief Executive Officer (2012 - present)
 
Nalco Company, a provider of integrated water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications
Other board service
•
Non-profit boards: Society of Chemical Industry; Amsted Industries; The Chicago Public Education Fund
 
•
Chairman and Chief Executive Officer (2008 - 2011)
Other organizations
 
•
Field Museum of Chicago, Trustee
Qualifications: Mr. Fyrwald has a strong record of operational and strategy leadership in three complex worldwide businesses with a focus on technology and innovation. He is an engineer by training and has CEO experience with Univar and Nalco.

Ellen R. Marram, age 67, director since 2002, Lead director since 2012
Board Committees: Compensation; Directors and Corporate Governance (chair)
Career Highlights
Other Board Service
The Barnegat Group LLC, provider of business advisory services
•
Public boards: Ford Motor Company, The New York Times Company
•
President (2006 - present)
•
Prior public board service: Cadbury plc
Tropicana Beverage Group - Pepsico
•
Non-profit boards: Wellesley College; Institute for the Future; New York-Presbyterian Hospital; Lincoln Center Theater; and Families and Work Institute
•
President and Chief Executive Officer (1993 - 1998)
Nabisco Biscuit Company, a unit of Nabisco, Inc.
•
President and Chief Executive Officer (1988 - 1993)
 
 
Qualifications: Ms. Marram is a former CEO with a strong marketing and consumer-brand background. Through her nonprofit and private company activities, she has a special focus and expertise in wellness and consumer health. Ms. Marram has extensive corporate governance experience through service on other public company boards in a variety of industries.

Douglas R. Oberhelman, age 61, director since 2008
Board Committees: Audit; Finance
Career Highlights
Other Board Service
Caterpillar Inc.
•
Public boards: Caterpillar Inc.
•
Chairman and Chief Executive Officer (2010 - present)
•
Prior public board service: Ameren Corporation
•
Group President (2001 - 2010)
 
•
Chief Financial Officer (1995 - 1998)
•
Non-profit boards: Wetlands America Trust
Memberships and Other Organizations
 
•
Business Roundtable, Executive Committee
 
 
•
Business Council
 
 
•
National Association of Manufacturers, Chairman
 
 
Qualifications: Mr. Oberhelman has a strong strategic and operational background as the CEO of Caterpillar, a leading manufacturing company with worldwide operations and a special focus on emerging markets. He is an audit committee financial expert as a result of his prior experience as CFO of Caterpillar and as a member and chairman of the audit committee of another U.S. public company.

Jackson P. Tai, age 63, director since 2013. Mr. Tai is serving under interim election by the board and was referred to the Directors and Corporate Governance Committee by an independent executive search firm.
 
Board Committees: Audit; Finance
 
Career Highlights
Other Board Service
 
DBS Group Holdings and DBS Bank (formerly the Development Bank of Singapore), one of the largest financial services groups in Asia
•
Public boards: The Bank of China Limited, Singapore Airlines, MasterCard Incorporated, Royal Philips NV
 
 
•
Vice Chairman and Chief Executive Officer (2002 -2007)
•
Prior board service: NYSE Euronext; ING Groep NV; CapitaLand (Singapore); DBS Group Holdings and DBS Bank
 
•
President and Chief Operating Officer (2001 - 2002)
 
J.P. Morgan & Co. Incorporated, a leading global financial institution
 
 
•
25 year career in investment banking, including senior management responsibilities in New York, Tokyo and San Francisco
 
 
Qualifications:  Mr. Tai is a former CEO with extensive experience in international business and finance, and is an audit committee financial expert. He has deep expertise in the Asia-Pacific region, a key growth market for Lilly. He also has broad corporate governance experience from his service on public company boards in the U.S. and Asia.

Class of 2016
The following five directors will continue in office until 2016, with the exception of Sir Winfried Bischoff, who will retire from the Board on May 5, 2014, prior to the annual meeting of shareholders, and the Directors and Corporate Governance Committee does not plan to fill his vacant seat.

Ralph Alvarez, age 58, director since 2009
Board Committees: Compensation; Science and Technology
Career Highlights
Other Board Service
Skylark Co., Ltd., a leading restaurant operator in Japan
•
Public boards: Lowe's Companies, Inc.; Dunkin' Brands Group, Inc.; Realogy Holdings Corp.
•
Executive Chairman (2013 - present)
McDonald's Corporation
•
Private boards: Skylark Co., Ltd.
•
President and Chief Operating Officer (2006 - 2009)
•
Prior public board service: McDonald's Corporation; KeyCorp
Memberships and Other Organizations
•
University of Miami: President's Council; School of Business Administration Board of Overseers; International Advisory Board
 
 
 
 
 
Qualifications: Through his senior executive positions at Skylark Co., Ltd. and McDonald’s Corporation, as well as with other global restaurant businesses, Mr. Alvarez has extensive experience in consumer marketing, global operations, international business, and strategic planning. His international experience includes a special focus on emerging markets.

Sir Winfried Bischoff, age 72, director since 2000
Board Committees: Directors and Corporate Governance; Finance (chair)
Career Highlights
Other Board Service
Lloyds Banking Group plc, a leading UK-based financial institution
•
Public boards: The McGraw-Hill Companies, Inc.
•
Chairman (2009 - present)
Citigroup Inc.
•
Prior board service: Citigroup Inc.; Prudential plc; Land Securities plc; Akbank T.A.S.
•
Chairman (2007 - 2009)
•
Interim Chief Executive Officer (2007)
 
•
Chairman, Citigroup Europe (2000 - 2009)
 
 
Qualifications: Sir Winfried Bischoff has a distinguished career in banking and finance, including commercial banking, corporate finance, and investment banking. He has CEO experience both in Europe and the U.S. He is a globalist, with particular expertise in European matters but with extensive experience overseeing worldwide operations. He has broad corporate governance experience from his service on public company boards in the U.S., UK, and other European and Asian countries.

R. David Hoover, age 68, director since 2009
Board Committees: Finance; Public Policy and Compliance
Career Highlights
Other Board Service
Ball Corporation, a provider of products and other technologies and services to commercial and governmental customers
•
Public companies: Ball Corporation; Energizer Holdings, Inc.; Steelcase, Inc.
 
•
Non-profit companies: Boulder Community Hospital; Children's Hospital Colorado
•
Chairman (2002 - 2013)
•
President and Chief Executive Officer (2001 - 2010)
 
•
Chief Operating Officer (2000 - 2001)
•
Prior public board service: Irwin Financial Corporation; Qwest International, Inc.
•
Chief Financial Officer (1998 - 2000)
 
Memberships and Other Organizations
 
 
•
Board of Trustees of DePauw University
 
 
•
Indiana University Kelley School of Business, Dean's Council
 
 
 
Qualifications: Mr. Hoover has extensive CEO experience at Ball Corporation, with a strong record of leadership in operations and strategy. He has deep financial expertise as a result of his experience as CEO and CFO of Ball. He also has extensive corporate governance experience through his service on other public company boards.

Franklyn G. Prendergast, M.D., Ph.D., age 69, director since 1995
Board Committees: Public Policy and Compliance; Science and Technology
Career Highlights
 
 
Mayo Medical School
 
 
•
Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology (1986 - present)
•
Professor of Molecular Pharmacology and Experimental Therapeutics (1987 - present)
•
Mayo Clinic Center for Individualized Medicine, Director Emeritus (2006 - 2012)
Qualifications: Dr. Prendergast is a prominent medical clinician, researcher, and academician. He has extensive experience in senior-most administration at Mayo Clinic, a major medical institution, and as director of its renowned cancer center. He has special expertise in two critical areas for Lilly—oncology and personalized medicine. As a medical doctor, he brings an important practicing-physician perspective to the Board’s deliberations.

Kathi P. Seifert, age 64, director since 1995
 
Board Committees: Audit; Compensation
 
Career Highlights
Other Board Service
 
Kimberly-Clark Corporation, a global consumer products company
•
Public companies: Revlon Consumer Products Corporation; Lexmark International, Inc.
 
 
•
Executive Vice President (1999 - 2004)
 
 
Katapult, LLC, a provider of pro bono mentoring and consulting services to non-profit organizations
•
Private companies: Appvion, Inc.
 
•
Prior public board service: Supervalu Inc.; Appleton Papers, Inc.
 
•
Chairman (2004 - present)
 
 
 
 
•
Non-profit companies: Fox Cities Performing Arts Center; Community Foundation for the Fox Valley Region; Fox Cities Building for the Arts
 
 
 
 
 
 
 
 
 
Qualifications: Ms. Seifert is a retired senior executive of Kimberly-Clark. She has strong expertise in consumer marketing and brand management, having led sales and marketing for several worldwide brands, with a special focus on consumer health. She has extensive corporate governance experience through her other board positions.

Director Qualifications and Nomination Process
Director Qualifications
Experience: The Board seeks independent directors who represent a mix of experiences that will enhance the quality of the Board's deliberations and decisions. The Board is particularly focused on maintaining a mix of individuals with CEO, international business, medical/science, government/policy or other health care experience.

Diversity: The Board considers diversity as an important factor in selecting potential Board candidates but does not have a stand-alone diversity policy. The Board strives to achieve diversity in the broadest sense, including persons diverse in geography, gender, ethnicity, and experiences. Although the Board does not establish specific diversity goals, the Board's overall diversity is a significant consideration in the director selection and nomination process. The Directors and Corporate Governance Committee assesses the effectiveness of board diversity efforts in connection with the annual nomination process as well as in new director searches. The company's current Board includes members whose experiences cover a wide range of geographies and industries, and includes members with experience in academic research, healthcare, and governmental consulting. The company's directors range in age from 42 to 72, and include four women and three ethnically diverse members.

Character: Board members should possess the personal attributes necessary to be an effective director, including unquestioned integrity, sound judgment, independence, a collaborative spirit, and commitment to the company, our shareholders, and other constituencies.

Director Nomination Process
The Board delegates the director screening process to the Directors and Corporate Governance Committee, which receives input from other Board members.

Potential directors are identified from several sources, including incumbent directors, management, shareholders, and executive search firms. The committee employs the same process for evaluating all shareholder candidates, including those submitted by shareholders.

The committee employs the same process for evaluating all candidates, including those submitted by shareholders. The committee initially evaluates a candidate based on publicly available information and any additional information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection criteria and the committee’s initial evaluation is favorable, the committee, assisted by management or the search firm, gathers additional data on the candidate’s qualifications, availability, probable level of interest, and any potential conflicts of interest. If the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the Chairman of the Board and one or more of the independent directors for direct discussions to determine the mutual levels of interest in pursuing the candidacy. If these discussions are favorable, the committee makes a final recommendation to the board to nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable).

Shareholder Recommendations and Nominations for Director Candidates
A shareholder who wishes to recommend a director candidate for evaluation should forward the candidates name and information about the candidate's qualifications to:

Chair of the Corporate Governance Committee
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, IN 46285

The candidate must meet the selection criteria described above and must be willing and expressly interested in serving on the Board.

Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candidate at the 2015 annual meeting (i.e., to propose a candidate for election who is not otherwise nominated by the Board through the recommendation process described above) must give the company written notice by November 24, 2014 and no earlier than September 21, 2014. The notice should be addressed to the corporate secretary at the address provided above. The notice must contain prescribed information about the candidate and about the shareholder proposing the candidate as described in more detail in Section 1.9 of the bylaws. A copy of the bylaws is available online at http://investor.lilly.com/governance.cfm. The bylaws will also be provided by mail upon request to the corporate secretary.

We have not received any shareholder nominations for board candidates for the 2014 meeting.

Communication with the Board of Directors
You may send written communications to one or more members of the Board, addressed to:
Board of Directors
Eli Lilly and Company
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, IN 46285

Director Compensation
Director compensation is reviewed and approved annually by the Board, on the recommendation of the Directors and Corporate Governance Committee. Directors who are employees receive no additional compensation for serving on the Board.

Cash Compensation
In 2013, the company provided nonemployee directors with an annual retainer of $100,000 (payable in monthly installments). In addition, certain Board roles receive additional annual retainers:

Lead director: $30,000

Committee chairs: $12,000 ($18,000 for Audit Committee chair; $15,000 for Science and Technology Committee chair)

Audit Committee/Science and Technology Committee members: $3,000

Directors are reimbursed for customary and usual travel expenses. Directors may also receive additional cash compensation for serving on ad hoc committees that may be assembled from time-to-time.

Stock Compensation
Directors should hold meaningful equity ownership positions in the company; accordingly, a significant portion of director compensation is in the form of Lilly stock. Directors are required to hold Lilly stock, directly or through company plans, valued at not less than five times their annual cash retainer; new directors are allowed five years to reach this ownership level.

Nonemployee directors receive $145,000 of stock compensation, deposited annually in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below), payable after service on the Board has ended.

Lilly Directors’ Deferral Plan: allows nonemployee directors to defer receipt of all or part of their cash compensation until after their service on the Board has ended. Each director can choose to invest the funds in one or both of the following two accounts:

Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash compensation in company stock. In addition, the annual award of shares to each director as noted below is credited to this account on a pre-set annual date. The number of shares credited is calculated by dividing the $145,000 annual compensation figure by the closing stock price on that date. Funds in this account are credited as hypothetical shares of company stock based on the market price of the stock at the time the compensation would otherwise have been earned. Hypothetical dividends are “reinvested” in additional shares based on the market price of the stock on the date dividends are paid. Actual shares are issued or transferred after the director ends his or her service on the Board.

Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term rate, compounded monthly, as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code). The aggregate amount of interest that accrued in 2013 for the participating directors was $130,990, at a rate of 2.85 percent. The rate for 2014 is 3.92 percent.

Both accounts may be paid in a lump sum or in annual installments for up to 10 years, beginning the second January following the director’s departure from board service. Amounts in the deferred stock account are paid in shares of company stock.

2013 Director Compensation
Name
Fees Earned
or Paid in Cash ($)
Stock Awards ($) 1
All Other
Compensation
and Payments ($)2
Total ($) 3
Mr. Alvarez
$106,000

$145,000

$0

$251,000

Dr. Baicker
$103,000

$145,000

$0

$248,000

Sir Winfried Bischoff
$112,000

$145,000

$10,196
4 
$267,196

Mr. Eskew
$121,000

$145,000

$0

$266,000

Mr. Fyrwald
$115,000

$145,000

$30,000

$290,000

Dr. Gilman
$118,000

$145,000

$28,576

$291,576

Mr. Hoover
$106,000

$145,000

$30,000

$281,000

Ms. Horn
$112,000

$145,000

$5,550

$262,550

Dr. Kaelin
$103,000

$145,000

$23,700

$271,700

Ms. Marram
$142,000

$145,000

$30,000

$317,000

Mr. Oberhelman
$106,000

$145,000

$30,000

$281,000

Dr. Prendergast
$103,000

$145,000

$0

$248,000

Dr. Runge
$34,333

$48,333

$0

$82,666

Ms. Seifert
$103,000

$145,000

$10,250

$258,250

Mr. Tai
$17,167

$24,167

$30,000

$71,334


1 
Each nonemployee director received an award of stock valued at $145,000 (approximately 2,841 shares), except Dr. Runge and Mr. Tai, who received shares proportionately for a partial year of service. This stock award and all prior stock awards are fully vested in that they are not subject to forfeiture; however, the shares are not issued until the director ends his or her service on the Board, as described above under “Lilly Directors’ Deferral Plan.” The column shows the grant date fair value for each director’s stock award. Aggregate outstanding stock awards are shown in the “Common Stock Ownership by Directors and Executive Officers” table in the “Stock Units Not Distributable Within 60 Days” column. Aggregate outstanding stock options as of December 31, 2013 are shown in the table below. These options, which were granted in 2004, expired in February 2014 with no value.
Name
Outstanding Stock Options (Exercisable)
Exercise Price
Sir Winfried Bischoff
2,800
$73.11
Dr. Gilman
2,800
$73.11
Ms. Horn
2,800
$73.11
Ms. Marram
2,800
$73.11
Dr. Prendergast
2,800
$73.11
Ms. Seifert
2,800
$73.11

2 
This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. ("Foundation") under its matching gift program, which is generally available to U.S. employees as well as the outside directors. Under this program, the Foundation matched 100 percent of charitable donations over $25 made to eligible charities, up to a maximum of $30,000 per year for each individual. The Foundation matched these donations via payments made directly to the recipient charity.

3 
Directors do not participate in a company pension plan or non-equity incentive plan.

4 For Sir Winfried Bischoff, this column includes $10,196 for expenses for his spouse to travel to and participate in board functions that included spouse participation.

Director Independence
The Board annually determines the independence of directors based on a review by the Directors and
Corporate Governance Committee. No director is considered independent unless the Board has determined that he or she has no material relationship with the company, either directly or as a partner, significant shareholder, or officer of an organization that has a material relationship with the company. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among others. To evaluate the materiality of any such relationship, the Board has adopted categorical independence standards consistent with the New York Stock Exchange (NYSE) listing standards, except that the “look-back period” for determining whether a director’s prior relationship(s) with the company impairs independence is extended from three to four years.
The company's process for determining director independence is set forth in our Standards for Director Independence which can be found on our website at http://www.lilly.com/about/corporate-governance/Pages/guidelines.aspx along with our Corporate Governance Guidelines.
On the recommendation of the Directors and Corporate Governance Committee, the Board determined that all 15 nonemployee directors are independent, and that the members of each committee also meet the independence standards referenced above. The Board determined that none of the 15 nonemployee directors has had during the last four years (i) any of the relationships referenced above or (ii) any other material relationship with the company that would compromise his or her independence. The table below includes a description of categories or types of transactions, relationships, or arrangements the Board considered in reaching its determinations.
Director
Organization
Type of Organization
Relationship to Organization
Primary Type of Transaction / Relationship / Arrangement
2013 Aggregate Magnitude of Organization's Revenue
K. Baicker
Harvard University
Educational Institution
Employee
Research grants
Less than 0.1 percent
J. E. Fyrwald
Univar, Inc.
For-profit Corporation
Executive Officer
Purchases of products
Less than 0.1 percent
W. G. Kaelin, Jr.
Harvard University
Educational Institution
Employee
Research grants
Less than 0.1 percent
Brigham and Women's Hospital
Health Care Institution
Employee
Research grants
Less than 0.1 percent
Dana-Farber Cancer Institute
Health Care Institution
Employee
Research grants
Less than 0.1 percent
F. G. Prendergast
Mayo Clinic and Mayo Medical School
Health Care and Educational Institution
Employee
Research grants
Less than 0.1 percent
Mayo Foundation
Charitable Organization
Employee of affiliated Mayo Clinic and Mayo Medical School
Contributions
Less than 0.1 percent
M. S. Runge
University of North Carolina Medical School
Educational Institution
Executive Officer
Research grants
Less than 0.1 percent
All of the transactions described above were entered into at arm’s length in the normal course of business and, to the extent they are commercial relationships, have standard commercial terms. Aggregate payments to each of the relevant organizations, in each of the last four fiscal years, did not exceed the greater of $1 million or 2 percent of that organization's consolidated gross revenues in a single fiscal year for the relevant four-year period. No director had any direct business relationships with the company or received any direct personal benefit from any of these transactions, relationships, or arrangements.

Committees of the Board of Directors
The duties and membership of the six board-appointed committees are described below. All committee members are independent as defined in the NYSE listing requirements, and the members of the Audit and Compensation Committees each meet the additional independence requirements applicable to them as members of those committees.

Committee membership and selection of committee chairs are recommended to the Board by the Directors and Corporate Governance Committee after consulting the chairman of the Board and after considering the backgrounds, skills, and desires of the Board members. The Board has no set policy for rotation of committee members or chairs but annually reviews committee memberships and chair positions, seeking the best blend of continuity and fresh perspectives.

Each committee reviews and approves its own charter annually, and the Directors and Corporate Governance Committee reviews and approves all committee charters annually. The chair of each committee determines the frequency and agenda of committee meetings. The Audit, Compensation, and Public Policy and Compliance Committees meet alone in executive session on a regular basis; all other committees meet in executive session as needed.

All six committee charters are available online at http://investor.lilly.com/governance.cfm, or upon request to the company's corporate secretary.

Audit Committee
Assists the Board of Directors in fulfilling its oversight responsibilities by monitoring:

•
The integrity of financial information which will be provided to the shareholders and others;
•
The systems of internal controls and disclosure controls which management has established;
•
The performance of internal and independent audit functions; and
•
The company's compliance with legal and regulatory requirements.

The Board of Directors has determined that Mr. Eskew, Mr. Oberhelman, and Mr. Tai are Audit Committee financial experts, as defined in the SEC rules.

Compensation Committee
•
Oversees the company’s global compensation philosophy and policies;
•
Establishes the compensation of our chief executive officer and other executive officers; and
•
Acts as the oversight committee with respect to the company’s deferred compensation plans, management stock plans, and other management incentive compensation programs.

The committee delegates authority to the appropriate company management for day-to-day plan administration and interpretation, including selecting participants, determining award levels within plan parameters, and approving award documents. However, the committee may not delegate any authority for matters affecting the executive officers.

Directors and Corporate Governance Committee
•
Recommends to the Board candidates for membership on the Board and Board committees and for lead director; and
•
Oversees matters of corporate governance, including Board performance, director independence and compensation, and the corporate governance guidelines.

Finance Committee
Reviews and makes recommendations to the Board regarding financial matters, including:

•
Capital structure and strategies;
•
Dividends;
•
Stock repurchases;
•
Capital expenditures;
•
Investments, financings and borrowings;
•
Financial risk management; and
•
Significant business-development projects.

Public Policy and Compliance Committee
•
Oversees the processes by which the company conducts its business so that the company will do so in a manner that complies with laws and regulations and reflects the highest standards of integrity; and
•
Reviews and makes recommendations regarding policies, practices, and procedures of the company that relate to public policy and social, political, and economic issues.

Science and Technology Committee
•
Reviews and makes recommendations regarding the company’s strategic research goals and objectives;
•
Reviews new developments, technologies, and trends in pharmaceutical research and development;
•
Reviews the progress of the company's new product pipeline; and
•
Oversees matters of scientific and medical integrity and risk management.

3


Membership and Meetings of the Board and Its Committees
In 2013, each director attended more than 85 percent of the total number of meetings of the Board and the committees on which he or she serves. In addition, all Board members are expected to attend the annual meeting of shareholders, and all the directors attended in 2013. Current committee membership and the number of meetings of the Board and each committee in 2013 are shown in the table below.
Name
Board
Audit
Compensation
Directors and
Corporate Governance
Finance
Public Policy and
Compliance
Science and
Technology
Mr. Alvarez
Member

Member



Member
Dr. Baicker
Member
Member



Member

Sir Winfried Bischoff
Member


Member
Former Chair


Mr. Eskew
Member
Chair


Member


Mr. Fyrwald
Member




Chair
Member
Dr. Gilman
Member




Member
Former Chair
Mr. Hoover
Member



Chair
Member

Ms. Horn
Member

Chair
Member



Dr. Kaelin
Member



Member

Chair
Dr. Lechleiter
Chair






Ms. Marram
Lead Director

Member
Chair



Mr. Oberhelman
Member
Member


Member


Dr. Prendergast
Member




Member
Member
Dr. Runge
Member




Member
Member
Ms. Seifert
Member
Member
Member




Mr. Tai
Member
Member


Member


Number of 2013 Meetings
8
11
7
5
8
8
6

Board Oversight of Compliance and Risk Management
The Board takes an active role in overseeing the company's compliance and enterprise risk management programs to ensure the company operates with the highest level of integrity and that the company is appropriately managing both current and potential future areas of risk.

Code of Ethics
The board approves the company's code of ethics, which is set out in:

The Red Book: a comprehensive code of ethical and legal business conduct applicable to all employees worldwide and to our Board of Directors. The Red Book is reviewed and approved annually by the Board.

Code of Ethical Conduct for Lilly Financial Management: a supplemental code for our CEO and all members of financial management, in recognition of their unique responsibilities to ensure proper accounting, financial reporting, internal controls, and financial stewardship.

Both documents are available online at: http://www.lilly.com/about/business-practices/ethics-compliance, or upon request to the company's corporate secretary.

Compliance and Risk Management
The Board, in concert with the Audit and Public Policy and Compliance Committees, oversee the processes by which the company conducts its business to ensure the company operates in a manner that complies with laws and regulations and reflects the highest standards of integrity.

The company also has an enterprise risk management program overseen by its chief ethics and compliance officer and senior vice president of enterprise risk management, who reports directly to the CEO. Enterprise risks are identified and prioritized by management, and the top priorities are assigned to a Board committee or full Board for oversight.

Company management is charged with managing risk through robust internal processes and controls. The enterprise risk management program as a whole is reviewed annually at a joint meeting of the Audit and Public Policy and Compliance Committees, and enterprise risks are also addressed in periodic business unit reviews and at the annual board and senior management strategy session.

Highlights of the Company’s Corporate Governance
The company is committed to good corporate governance, which promotes the long-term interest of shareholders and other company stakeholders, builds confidence in our company leadership, and strengthens accountability for the Board and company management. The board has adopted corporate governance guidelines that set forth basic principles of corporate governance by which the company operates. The section that follows outlines a few key elements of the guidelines and other governance matters. Investors can learn more by reviewing the full corporate governance guidelines document, which is available online at http://investor.lilly.com/governance.cfm or upon request to the company’s corporate secretary.

Role of the Board
The directors are elected by the shareholders to oversee the actions and results of the company’s management. The Board exercises oversight over a broad range of areas, but the Board's key responsibilities include:

•
Providing general oversight of the business;
•
Approving corporate strategy;
•
Approving major management initiatives;
•
Selecting, compensating, evaluating, and, when necessary, replacing the chief executive officer, and compensating other senior executives;
•
Ensuring that an effective succession plan is in place for all senior executives;
•
Overseeing the company’s ethics and compliance program and management of significant business risks; and
•
Nominating, compensating, and evaluating directors.

Board Composition
Mix of Independent Directors and Officer-Directors
There should always be a substantial majority (75 percent or more) of independent directors. The CEO should be a Board member.

Voting for Directors
In an uncontested election, directors are elected by a majority of votes cast. An incumbent nominee who fails to receive a majority of the votes cast will tender his or her resignation. The Board, on recommendation of the Directors and Corporate Governance Committee, will decide whether to accept the resignation. The company will promptly disclose the Board's decision, including, if applicable, the reasons why the Board rejected the resignation.

Director Tenure and Retirement Policy
The company has in place policies for director tenure and retirement, which include the limitation that non-employee directors must retire no later than the date of the annual meeting that follows their seventy-second birthday. The Directors and Corporate Governance Committee, with input from all Board members, also considers the contributions of the individual directors at least every three years when considering whether to nominate the director to a new three-year term.

Other Board Service
No director may serve on more than three other public company boards. The Directors and Corporate Governance Committee may approve exceptions if it determines that the additional service will not impair the director's effectiveness on the Lilly Board.

Leadership Structure; Oversight of Chairman, CEO, and Senior Management
Leadership Structure
The Board currently believes that combining the role of chairman of the board and the CEO, coupled with a strong lead director position, is the most efficient and effective leadership model for the company, fostering clear accountability, effective decision-making, and alignment on corporate strategy. The Board periodically reviews its leadership structure and developments in the area of corporate governance in order to ensure that the company's approach continues to strike the appropriate balance for the company and our stakeholders.

Board Independence
The Board has put in place a number of governance practices to ensure effective independent oversight, including:

•Executive sessions of the independent directors: held after every regular board meeting.

•Annual performance evaluation of the chairman and CEO: conducted by the independent directors, the results of which are reviewed with the chief executive officer and considered by Compensation Committee in establishing the CEO’s compensation for the next year.

•A strong, independent, clearly defined lead director: The lead director's responsibilities include:
◦
Leading the Board’s processes for selecting and evaluating the CEO;
◦
Presiding at all meetings of the Board at which the chairman is not present;
◦
Serving as a liaison between the chairman and the independent directors;
◦
If requested by major shareholders, ensures that she is available for consultation and direct communication;
◦
Approving meeting agendas and schedules and generally approving information sent to the Board;
◦
Conducting executive sessions of the independent directors; and
◦
Overseeing the independent directors' annual performance evaluation of the chairman and CEO.

The lead director also has authority to call meetings of the independent directors and to retain advisers for the independent directors.

The lead director is appointed annually by the Board. Currently Ms. Marram is the lead director.

•Director access to management and independent advisors: Independent directors have direct access to members of management whenever they deem it necessary; and the company's executive officers attend at least part of each regularly scheduled Board meeting. The independent directors and all committees are also free to retain their own independent advisors, at company expense, whenever they feel it would be desirable to do so.

CEO Succession Planning
The lead director, Board and CEO maintain and annually review the company's succession plans for the CEO and other key senior leadership positions. During these reviews, the CEO and independent directors discuss future candidates for the CEO and other senior leadership positions, succession timing, and development plans for the highest-potential candidates. The company ensures that the directors have multiple opportunities to interact with the company's top leadership talent in both formal and informal settings in order to allow them to most effectively assess the candidates' qualifications and capabilities.

The CEO maintains in place at all times, and reviews with the independent directors, a confidential plan for the timely and efficient transfer of his responsibilities in the event of an emergency or his sudden departure, incapacitation, or death.

Board Education and Annual Performance Assessment
The company engages in a comprehensive orientation process for incoming new directors. Directors also receive ongoing continuing educational sessions on areas of particular relevance or import to our company and we hold periodic mandatory training sessions for the Audit Committee.

Additionally, the Directors and Corporate Governance Committee conducts an annual assessment of the Board's performance, Board committee performance, and all Board processes based on input from all directors.

Prior Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Between 2006 - 2012, each year we submitted management proposals to eliminate the company's classified board structure. The proposals did not pass because they failed to receive a “supermajority vote” of 80 percent of the outstanding shares, as required in the company's articles of incorporation. In addition, in 2010, 2011, 2012, we submitted management proposals to eliminate the supermajority voting requirements themselves. Those proposals also fell short of the required 80 percent vote.   

Prior to 2012, these proposals received support ranging from 72 to 77 percent of the outstanding shares. In 2012, the vote was even lower, approximately 63 percent of the outstanding shares, driven in part by a 2012 NYSE rule revision prohibiting brokers from voting their clients' shares on corporate governance matters absent specific instructions from such clients. We have concluded that the proposals would achieve a similar result in 2014 and therefore we are not resubmitting them.  We will continue to monitor this situation and engage in dialogue with our shareholders on these and other governance topics to ensure that Lilly continues to demonstrate strong corporate governance and accountability to shareholders.

Conflicts of Interest and Transactions with Related Persons
Conflicts of Interest
Directors must disclose to the company all relationships that create a conflict or an appearance of a conflict. The Board, after consultation with counsel, takes appropriate steps to identify actual or apparent conflicts and ensure that all directors voting on an issue are disinterested. A director may be excused from discussions on the issue, as appropriate.

Review and Approval of Transactions with Related Persons
The board has adopted a policy and procedures for review, approval, and monitoring of transactions involving the company and related persons (directors and executive officers, their immediate family members, or shareholders of 5 percent or greater of the company’s outstanding stock). The policy covers any related-person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest).

Policy: Related-person transactions must be approved by the Board or by a committee of the Board consisting solely of independent directors, who will approve the transaction only if they determine that it is in the best interests of the company. In considering the transaction, the Board or committee will consider all relevant factors, including:

•
The company’s business rationale for entering into the transaction;
•
The alternatives to entering into a related-person transaction;
•
Whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally;
•
The potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and
•
The overall fairness of the transaction to the company.

The Board or relevant committee will periodically monitor the transaction to ensure there are no changed circumstances that would render it advisable to amend or terminate the transaction.

Procedures:
•
Management or the affected director or executive officer will bring the matter to the attention of the chairman, the lead director, the chair of the Directors and Corporate Governance Committee, or the secretary.
•
The chairman and the lead director shall jointly determine (or, if either is involved in the transaction, the other shall determine) whether the matter should be considered by the Board or by one of its existing committees.
•
If a director is involved in the transaction, he or she will be recused from all discussions and decisions about the transaction.
•
The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.
•
The Board or relevant committee will review the transaction annually to determine whether it continues to be in the company’s best interests.

The Directors and Corporate Governance Committee has approved the following employment relationships which are considered related-party transactions under the SEC rules.

Dr. John Bamforth, vice president, chief marketing officer, Lilly Bio-Medicines, is the spouse of Dr. Susan Mahony, one of the company's executive officers, and has been employed by the company for over 20 years. In 2013, he was paid approximately $381,000 in cash compensation, and he received grants under the company’s performance-based equity program valued at approximately $60,000 based upon the fair value computed in accordance with stock-based compensation accounting rules (FASB ASC Topic 718). Similarly, Mr. Myles O’Neill, senior vice president, global drug products, is the spouse of Dr. Fionnuala Walsh, a Lilly executive officer, and has been employed by the company for over 10 years. His cash compensation in 2013 was approximately $700,000 and his equity grants were valued at approximately $375,000. Both Dr. Bamforth and Mr. O’Neill participate in the company’s benefit programs generally available to U.S. employees, and their compensation was established in accordance with the company’s compensation practices applicable to employees with equivalent qualifications and responsibilities and holding similar positions.
Compensation Discussion and Analysis
This Compensation Discussion and Analysis (CD&A) provides a detailed description of our executive compensation philosophy, the Compensation Committee's process for setting executive compensation, the elements of our compensation program, the factors the committee considered when setting executive compensation in 2013, and how the company's results impacted incentive payouts for 2013.

Say on Pay Results for 2013
At last year's annual meeting, 97 percent of the shares cast voted in favor of the company's Say on Pay proposal on executive compensation. Management and the Compensation Committee view this vote as supportive of the company's overall approach toward executive compensation. We communicate directly with shareholders on executive compensation matters and seek to ensure our programs are aligned with shareholder values and concerns.

Our Philosophy on Compensation
At Lilly, we aim to discover, develop, and market innovative therapies – medicines that make a real difference for patients and deliver clear value for payers. In order to accomplish our mission, we must attract, engage, and retain highly-talented individuals who are committed to the company's core values of integrity, excellence, and respect for people. Our compensation programs are designed to help us achieve these goals while balancing the long-term interests of our customers and shareholders.

Objectives
Our compensation and benefits program is based on the following principles:

•
Reflect both individual and company performance. We reinforce a high-performance culture by linking pay with individual performance and company performance. As employees assume greater responsibilities, the proportion of total compensation based on company performance and shareholder returns increases. We perform an annual review to ensure the programs provide incentive to deliver long-term, sustainable business results while discouraging excessive risk-taking, or other adverse behaviors.

•
Consider employee retention. Compensation should be competitive with our peer group and reflect the level of job impact and responsibilities. Employee retention is an important factor in the design of our compensation and benefit programs.

•
Broad-based program design. While the amount of compensation paid to employees varies, the overall structure of our compensation and benefit programs is broadly similar across the organization to encourage and reward all employees who contribute to our success.

•
Consider shareholder input. Management and the Compensation Committee consider the results of our annual Say on Pay vote and other sources of shareholder feedback when designing compensation and benefit programs.

Compensation Committee's Processes and Analyses
Process for setting compensation
The Compensation Committee considers the following in determining executive compensation:

•
Assessment of the executive's individual performance and contribution.
•
Chief Executive Officer ("CEO"): The independent directors, under the direction of the lead director, meet with the CEO at the beginning of each year to agree upon the CEO's performance objectives for the year, and at the end of each year to assess the CEO's achievement of those objectives along with other factors, including contribution to the company's performance and ethics and integrity. The year-end evaluation is used in setting the CEO's potential compensation for the next year.
•
Other Executive Officers ("EOs"): The committee receives individual performance assessments and compensation recommendations from the CEO and also exercises its judgment based on the Board's knowledge and interactions with the EOs. As with the CEO, each EO's performance assessment is based on his or her achievement of objectives established between the EO and the CEO at the start of the year as well as other factors.

•
Assessment of company performance. The Compensation Committee considers company performance in two ways:
•
Prior to establishing total potential compensation for the coming year, the committee considers overall company performance during the prior year across a variety of metrics.
•
To determine payouts under the cash and equity incentive programs, the committee establishes specific company performance goals related to revenue, EPS, delivery of our pipeline portfolio, and stock price growth.

•
Peer-group analysis. The committee uses peer-group data as a market check for compensation decisions, but does not use this data as the sole basis for its compensation targets. The company does not target a specific position within the range of market data.

•
The Compensation Committee seeks input from an independent compensation consultant concerning CEO pay. The role of the independent compensation consultant is described in more detail under "Compensation Committee Matters" that follows the CD&A.

Competitive pay assessment
Our peer group is comprised of companies that directly compete with us, operate in a similar business model, and employ people with the unique skills required to operate an established biopharmaceutical company. In selecting the peer group, the committee considers market cap and revenue as measures of size. The committee reviews the peer group at least every three years. The group includes: Abbott, Allergan, Amgen, AstraZeneca, Biogen, Baxter, Bristol-Myers Squibb, Celgene, Covidien (prior to the spin off of Mallinckrodt), Gilead, GlaxoSmithKline, Hoffman-La Roche, Johnson & Johnson, Medtronic, Merck, Novartis, Pfizer, and Sanofi-Aventis. Lilly fell in the middle of this peer group in terms of both revenue and market cap when the peer group was established in 2012. With the exception of Johnson & Johnson, Novartis, and Pfizer, peer companies were no greater than three times our size with regard to both measures. The committee included these three companies despite their size because they compete directly with Lilly, have similar business models, and seek to hire from the same pool of management and scientific talent. In the aggregate, the company’s total compensation to named executive officers for 2012 was in the middle range of the peer group.

Components of Our Compensation
We have three elements of compensation for executive officers: (1) base salary; (2) an annual bonus, which is calculated based on company performance on revenue, EPS, and the progress of the pipeline relative to internal targets; and (3) two different forms of equity incentives: (i) "Performance Awards" (PAs) - performance-based equity awards that pay out as restricted stock units based upon the company's two-year earnings per share (EPS) growth relative to the expected industry growth over the period; and (ii) "Shareholder Value Awards" (SVAs) - performance-based equity awards that pay out based on company stock price growth over a three-year period. Executives also receive the company benefits package, described below under "Employee Benefits".

The Compensation Committee has authority to adjust the reported earnings per share (EPS) on which PAs and the annual bonus are determined in order to eliminate the distorting effect of unusual income or expense items that may occur during a given year that impact year-over-year growth percentages. Further details on the adjustments for 2013 and the rationale for making these adjustments are set forth in Appendix A ("Summary of Adjustments to EPS Related to the Annual Bonus and PA") to this proxy. For ease of reference, throughout the CD&A and the other compensation disclosures we refer simply to "EPS" but we encourage you to review the information in Appendix A to understand the adjustments that may have been made to EPS.

1.
Base Salary
Base salaries are reviewed and established annually, and may be adjusted upon promotion, following a change in job responsibilities, or to maintain market competitiveness. Salaries are based on each person's level of contribution, responsibility, expertise, and market data.

Base salary increases, if granted during a given year, are established based upon a corporate budget for salary increases, which is set considering company performance over the prior year, expected company performance for the following fiscal year, and general external trends. In setting salaries, the Compensation Committee seeks to retain, motivate, and reward successful performers while maintaining affordability within the company's business plan.

2.
Annual Bonus
The Eli Lilly and Company Bonus Plan ("Bonus Plan") is designed to align employees' individual goals with the company's financial plans and pipeline delivery objectives for the year. The bonus is based on company performance in three areas over the course of the year, relative to internal targets: (1) revenue performance; (2) EPS performance; and (3) progress on advancing our product pipeline.

Individual bonus targets and company performance goals are set at the beginning of each year. In establishing the goals, the Compensation Committee references the annual operating plan. Each year, the Compensation Committee reviews the relative weighting for each of the factors. For 2013, the weightings were set as follows:
Goal
Weighting
Revenue performance
25%
EPS performance
50%
Pipeline progress
25%

Based on this weighting, the company bonus multiple is calculated as follows:

(0.25 x revenue multiple) + (0.50 x EPS multiple) + (0.25 x pipeline multiple)
= company bonus multiple

Individual payouts are calculated according to the following formula:

company bonus multiple x individual bonus target x base salary earnings
= payout

EOs are subject to the Executive Officer Incentive Plan ("EOIP"), which sets further limits on the allowable bonus amounts. Under the EOIP, the maximum annual bonus allowable is calculated based on non-GAAP net income (as defined under "Adjustments to Reported Results" in Appendix A to this proxy statement) for the year. For the CEO, the maximum bonus award is 0.3 percent of non-GAAP net income. For other EOs, the maximum amount is 0.15 percent of non-GAAP net income. EOs will not receive any annual cash incentive payments unless the company has a positive non-GAAP net income for the year.

Once the maximum payout for an EO is determined, the Compensation Committee has the discretion to reduce (but not increase) the amount of the bonus to be paid. In exercising this discretion, the committee intends to generally award EOs the lesser of (i) the bonuses they would have received under the Bonus Plan or (ii) the EOIP maximum amounts.

3.
Equity Incentives
The company has two equity incentive programs - PAs and SVAs. The PAs are designed to focus company leaders on multi-year operational performance relative to peer companies and the SVAs align compensation with long-term growth in shareholder value. The Compensation Committee has the discretion to adjust downward (but not upward) any executive officer's equity award payout from the amount yielded by the applicable formula.

Performance Awards
PAs are structured as a schedule of potential shares earned based on cumulative, aggregated annual growth in EPS over a two-year period. The growth rate targets are set relative to the median expected EPS growth for the peer group for the period. As reflected in the chart below, following the two-year performance period, PAs pay out to EOs in restricted stock units that vest 13 months after the end of the performance period. These awards do not accumulate dividends during the two-year performance period, but do accumulate dividends during the one-year restriction period.
Performance and Holding Periods for PAs
2011
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
 
 
 
 
 
2011-2012 PA
 
 
 
 
 
Performance Period
 
2012-2013 PA
 
 
 
 
Restricted Stock Units
 
 
2013-2014 PA
 
 
 
 
 
 
 
2014-2015 PA
 
 
 
 

The Compensation Committee believes that EPS growth is an effective measure of performance because it is closely linked to shareholder value, is broadly communicated to the public, is easily understood by employees, and allows for objective comparisons to peer-group performance. Consistent with our compensation objectives, company performance exceeding the expected peer-group median will result in above-target payouts, while company performance lagging the expected peer-group median will result in below-target payouts.

The measure of EPS used in the PA program differs from the adjusted measure used in our annual bonus program in two ways. First, the bonus program measures EPS over a one-year period, while the PA program measures EPS over a two-year period. Second, the target EPS goal in the bonus program is set with reference to internal goals for the year, while the target EPS goal in the PA program is set relative to expected growth rates among our peer group. Possible payouts range from 0 to 150 percent of the target depending on the EPS growth over the performance period.

Shareholder Value Awards
SVAs are structured as a schedule of shares of company stock that may be earned based on Lilly's share price performance over a three-year period. As reflected in the chart below, SVAs have a three-year performance period and any shares paid out are subject to a one-year holding requirement. No dividends are accrued during the performance period. SVAs pay out above target if Lilly stock outperforms an expected compounded annual rate of return and below target if company stock underperforms that rate of return. The expected rate of return includes dividends and is based on the total three-year shareholder return (TSR) that a reasonable investor would consider appropriate for investing in a basket of large-cap U.S. companies (based on input from external money managers). The share price payout schedule is based on this expected rate of return less the company’s dividend yield, applied to the starting share price. Executive officers receive no payout if TSR for the three-year period is zero or negative.
Performance and Holding Periods for SVAs
2011
2012
2013
2014
2015
2016
2017
 
 
 
 
 
 
 
 
 
 
 
2011-2013 SVA
 
 
 
 
Performance Period
 
2012-2014 SVA
 
 
 
Required Holding Period
 
 
2013-2015 SVA
 
 
 
 
 
 
 
2014-2016 SVA
 
 
 

Possible payouts range from 0 to 140 percent of the target amount, depending on stock performance over the period.

Pay for Performance
The mix of compensation for the CEO and other Named Executive Officers (NEOs) reflects the company's desire to link executive compensation with company performance. As reflected in the charts below, a substantial portion of the target pay for all NEOs is performance-based. Both the equity and annual bonus payouts are determined by company performance, with the bonus factoring in performance over a one-year period, and equity compensation factoring in performance over a longer term (as described above under "Components of Executive Compensation - Equity Incentives").


Individual Executive Performance
The Compensation Committee met at the end of 2012 to set potential EO compensation for 2013. The committee reviewed both individual and company performance during 2012. A summary of the committee's review of the individual EOs is provided below:

Dr. John Lechleiter: In assessing Dr. Lechleiter's performance, the independent directors noted that under his leadership in 2012, the company exceeded corporate goals for growth in revenue, EPS, and cash flow, and continued to advance the product pipeline, with 11 molecules in late-stage development.

The directors also noted Dr. Lechleiter's strong leadership in establishing and executing the company's strategy to manage through the period of patent expirations from 2011-2014 and return to long-term growth following this period.  Dr. Lechleiter set a clear tone throughout the organization emphasizing integrity and quality, and measures of both employee engagement and customer brand equity showed continued gains. In addition,
Dr. Lechleiter continued his effective public advocacy on behalf of the company and the biopharmaceutical industry, and oversaw smooth transitions of two critical leadership roles in the organization during 2012.

Dr. Lechleiter had not received an increase in base salary, target bonus, or target equity since 2009. The Compensation Committee considered Dr. Lechleiter's performance over the past several years in determining whether to increase any components of his potential compensation for 2013. In light of Dr. Lechleiter's excellent leadership, the company's consistent progress during a difficult period, the comparison of peers' CEO pay, and the compensation of his direct reports, the Compensation Committee recommended that Dr. Lechleiter receive an increase in total target compensation. In keeping with the company's desire to maintain the substantial majority of the CEO's pay as performance-based equity compensation, the committee decided to increase
Dr. Lechleiter's target equity compensation by 20 percent but maintained his base salary and target bonus at current levels.

Derica Rice: Mr. Rice made strong contributions in leading the company to meet challenging expense targets and revenue goals for 2012. He served as a key facilitator of collaborative work among the business units and key functions to set strategy and allocate resources. Mr. Rice also successfully oversaw leadership changes in the chief accounting officer and external audit partner roles, and has maintained an excellent external reputation.

Dr. Jan Lundberg: Dr. Lundberg, through his leadership, continued to be a key contributor to strong pipeline progress in 2012. Dr. Lundberg has reinvigorated Lilly's scientific culture, improved employee morale and engagement within Lilly Research Laboratories ("LRL"), and strengthened LRL's partnership with the business unit leaders.

Michael Harrington: The committee established Mr. Harrington's target compensation when he was promoted to Senior Vice President and General Counsel upon the retirement of Robert Armitage at the end of 2012.

Enrique Conterno: Mr. Conterno's leadership was a key factor in the excellent progress with our diabetes business and the progression of our diabetes pipeline. During 2012, he oversaw the successful conclusion of the Amylin relationship, and has been instrumental in leading the alliance with Boehringer Ingelheim.

Company Performance
For 2013, the company met its revenue target with annual revenues of $23.1 billion. The company exceeded its EPS target with earnings of $4.5 billion, resulting in $4.15 of EPS. The company also made significant progress on its pipeline, exceeding most targets for pipeline progress, highlighted by regulatory submissions for four products - empagliflozin, dulaglutide, new insulin glargine, and ramucirumab - along with five other new approvals or new indication or line extensions ("NILEX") during 2013. Further information on the company's performance during 2013 is provided above in the "Proxy Statement Overview".

2013 Target Total Compensation
The information in the section below reflects target total compensation for executive officers for 2013. The actual payouts made to the NEOs in the form of the 2013 annual bonus and equity awards that vested in 2013 are summarized in the next section, under "2013 Compensation Payouts".

Base Salary
For base salary increases granted to the NEOs in 2013, in addition to the considerations set forth above under "Individual Executive Performance," the committee considered the corporate budget for salary increases, which was established at 3 percent for 2013. The aggregate increases for the NEOs and the other executive officers were within this budget, and the increased base salaries for the NEOs remained within the broad middle range of the peer group. The chart below reflects the annualized base salary for each NEO:
Name
2013 (in thousands)
Percentage Increase
Dr. Lechleiter
$1,500
0%
Mr. Rice
$1,020
3%
Dr. Lundberg
$1,008
3%
Mr. Harrington
$765
–
Mr. Conterno
$683
2%

Each executive's full base salary for 2013 is reflected in the "Summary Compensation Table" in the "Executive Compensation" section of the proxy that follows.

Annual Bonus Targets
Based on the fact that the total compensation paid to the company's NEOs in 2012 remained in the middle range of the peer group data, the committee decided to maintain the same bonus targets for the NEOs for 2013, as reflected below (as a percentage of base salary), excluding Mr. Harrington, who was not a NEO in 2012.
Mr. Harrington's target was based on internal pay relativity and market data.
Name
2013
Dr. Lechleiter
140%
Mr. Rice
90%
Dr. Lundberg
90%
Mr. Harrington
75%
Mr. Conterno
75%

The Compensation Committee established the performance targets for 2013 equal to the targets specified in the company's 2013 corporate operating plan.

Total Equity Program - Target Grant Values
For equity program grants made during 2013, the committee set the aggregate target values for NEOs based on internal relativity, individual performance, and peer-group data. The committee determined that a 50/50 split between PAs and SVAs appropriately balances company financial performance with shareholder return. Target values for the 2013 equity grant to the named executive officers were as follows:
Name
2013 Total Equity (in thousands)
Dr. Lechleiter
$9,000
Mr. Rice
$3,800
Dr. Lundberg
$3,000
Mr. Harrington
$1,750
Mr. Conterno
$2,000

The committee's process and rationale for increasing Dr. Lechleiter's equity is set forth above under "Pay for Performance - Dr. John Lechleiter."

Performance Awards – 2013-2014 PA
The committee established the compounded EPS growth target at 7.8 percent across the two-year period (7 percent and 9 percent for 2013 and 2014, respectively), based on investment analysts’ published estimates for the peer group. Possible payouts for the 2013-2014 PA range from 0 to 150 percent of the target, as illustrated in the chart below:
 
 
 
 
50% payout
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Target
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payout Multiple
 
0.00
 
0.50
 
 
0.75
 
 
1.00
 
 
1.25
 
 
1.50
Cumulative 2-Year EPS
≤
$3.39
 
$6.96
 
 
$7.27
 
 
$7.59
 
 
$7.91
 
≥
$8.24+
Aggregated Growth Rate
 
 
 
1.76%
 
 
4.76%
 
 
7.76%
 
 
10.76%
 
 
13.76%

Shareholder Value Awards – 2013-2015 SVA
The starting price was $48.43 per share, representing the average of the closing prices of company stock for all trading days in November and December 2012. The future share price that determines the number of shares awarded was established based on the expected rate of return for large-cap companies, less an assumed dividend yield of 4.05 percent. The ending price to determine payouts will be the average of the closing prices of company stock for all trading days in November and December 2015. There is no payout to EOs if the shareholder return (including dividends) is zero or negative. Possible payouts are illustrated in the grid below.
Ending Stock Price
Less than $42.56
$42.56-$48.85 
$48.86-$55.14 
$55.15-$57.64
$57.65-$60.14
$60.15-$62.64
 Greater than  $62.64
Compounded Annual Share Price Growth Rate (excluding dividends)
Less than (4.2%)
(4.2%)-0.3%
0.3%-4.4%
4.4%-6.0%
6.0%-7.5%
7.5% -9.0%
Greater than 9%
Percent of Target
0%
40%
60%
80%
100%
120%
140%

2013 Compensation Payouts
The information in this section reflects the amounts paid to NEOs for the 2013 annual bonus and payouts from equity awards for which the relevant performance period ended in 2013.

Bonus Award for 2013
The company's 2013 performance compared to targets for revenue, EPS, and pipeline progress, as well as the resulting bonus multiple, are illustrated below.

 
2013 Corporate Target
Actual Results
Multiple
Revenue
$23.1 billion
$23.1 billion
1.0
EPS
$3.94
$4.15
1.62
Pipeline score
3
3.45
1.23
Cumulative Bonus Multiple
1.37


The Science and Technology Committee assessed the company’s progress toward achieving product pipeline goals at 3.45 (on a scale of 1 to 5), noting 5 NILEX approvals versus a goal of 3, and one new molecular entity (NME) entering into Phase III, achieving the goal of one. Additionally, 66 percent of pipeline projects met their milestone goals, which was below the target range of 70 to 80 percent. The Science and Technology Committee also performed a subjective assessment of the quality of the pipeline, considering many factors, including the achievement of four NME regulatory submissions in 2013. Based on the recommendation of the Science and Technology Committee, the Compensation Committee certified a pipeline score of 3.45, resulting in a pipeline multiple of 1.23.

Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.37.
(0.25 x 1.0) + (0.50 x 1.62) + (0.25 x 1.23) = 1.37 bonus multiple

The bonus amounts paid to the executive officers during 2013 are reflected in the "Summary Compensation Table" in the "Executive Compensation" section of the proxy that follows.

Equity Award Payouts in 2013

2012-2013 Performance Award
The target cumulative EPS for the 2012-2013 PA was set in January of 2012 reflecting expected industry growth of 3.3 percent each year. The company's two-year EPS growth was at the bottom of our peer group, as a consequence of the Zyprexa and Cymbalta patent expirations.

The company's performance compared to targets (and the resulting multiple) for the 2012-2013 PA are reflected in the charts below.


For the NEOs, the number of shares paid out under the 2012-2013 PA is reflected in the table below (this information is also included in footnote 5 to the "Outstanding Equity Awards Table" in the "Executive Compensation" section of the proxy, below):
Name
Target Shares
Shares Paid Out
Dr. Lechleiter
104,924
52,462
Mr. Rice
53,162
26,581
Dr. Lundberg
41,970
20,985
Mr. Harrington
6,995
3,498
Mr. Conterno
27,980
13,990

Mr. Harrington's shares reflect amounts granted to him in 2012 before he became an executive officer.

2011-2013 Shareholder Value Award
The target stock price of $39.60 for the 2011-2013 SVA was set in January 2011 based on a beginning stock price of $34.81, which was the average closing price for Lilly stock for all trading days in November and December 2010. The ending stock price of $50.42 represents stock price growth of approximately 45 percent over the relevant three-year period. The company's performance compared to target (and the resulting payout multiple) for the 2011-2013 SVA are shown below.


The number of shares paid to NEOs during 2013 for the 2011-2013 SVA were as follows:
Name
Target Shares
Shares Paid Out
Dr. Lechleiter
149,522
209,331
Mr. Rice
75,758
106,061
Dr. Lundberg
54,825
76,755
Mr. Harrington
7,596
10,634
Mr. Conterno
39,872
55,821

Mr. Harrington's shares reflect amounts granted to him in 2011 before he became an executive officer.

Other Compensation Practices and Information

Stock Options
The company stopped granting stock options after 2006. The stock options granted in 2003 expired in 2013 with no value. These awards (and other expired stock options) were not replaced.

Employee Benefits
The company offers core employee benefits coverage to:
•
provide our workforce with a reasonable level of financial support in the event of illness or injury,
•
provide post-retirement income; and
•
enhance productivity and job satisfaction through benefit programs that focus on overall well-being.

The benefits available are the same for all U.S. employees and include medical and dental coverage, disability insurance, and life insurance. In addition, The Lilly Employee 401(k) plan (the 401(k) plan) and The Lilly Retirement Plan (the retirement plan) provide U.S. employees a reasonable level of retirement income reflecting employees’ careers with the company. To the extent that any employee’s retirement benefit exceeds IRS limits for amounts that can be paid through a qualified plan, the company also offers a nonqualified pension plan and a nonqualified savings plan. These plans provide only the difference between the calculated benefits and the IRS limits, and the formula is the same for all U.S. employees. The cost of employee benefits is partially borne by the employee, including each executive officer.

Perquisites
The company provides very limited perquisites to executive officers. The company does not allow personal use of the corporate aircraft except the aircraft is made available for the personal use of Dr. Lechleiter in very rare cases when the security and efficiency benefits to the company outweigh the expense. Dr. Lechleiter did not use the corporate aircraft for personal flights during 2013, nor did he receive any other perquisites. Depending on seat availability, family members and personal guests of executive officers may travel on the company aircraft to accompany executives who are traveling on business. There is no incremental cost to the company for these trips.

The Lilly Deferred Compensation Plan
Executive officers 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 2013” table.

Severance Benefits
Except in the case of a change in control of the company, the company is not obligated to pay severance to executive officers upon termination of their employment; any such payments are at the discretion of the Compensation Committee.

The company has adopted change-in-control severance pay plans for nearly all employees, including the executive officers. The plans are 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 plans are intended to align executive and shareholder interests by enabling executives to evaluate corporate transactions that may be 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.
Highlights of our change-in-control severance plans
Ÿ
All regular employees are covered
Ÿ
Up to two-year pay protection
Ÿ
Double trigger generally required
Ÿ
18-month benefit continuation
Ÿ
No tax gross-ups
 
 

Although benefit levels may differ depending on the employee’s job level and seniority, the basic elements of the plans are comparable for all eligible employees:

•
Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the plans generally require 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 vest at the time of termination of employment.

•
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 these taxes. However, the amount of change in control-related benefits will be reduced to the 280G limit if the effect would be to deliver a greater after-tax benefit than the employee would receive with an unreduced benefit.

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. Until the required number of shares is reached, the executive officer must retain 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 NEOs already meet or exceed the guideline (except for Mr. Harrington, who, as a newly named EO, is on track to meet the share requirements within the next few years). As of February 21, 2014, Dr. Lechleiter held shares valued at approximately 32 times his annual salary. The following table shows the share requirements for each NEO:
Name
Share Requirement
Owns Required Shares
Dr. Lechleiter
six times base salary
Yes
Mr. Rice
75,000
Yes
Dr. Lundberg
75,000
Yes
Mr. Harrington
55,000
No1
Mr. Conterno
50,000
Yes

1 As a new executive officer, Mr. Harrington is required to retain at least half of all equity payouts until he reaches the 55,000 share requirement.

Executive officers are also required to hold all shares received from equity program payouts, net of acquisition costs and taxes, for at least one year, even once share ownership requirements have been met. For PAs, this holding requirement is met by the one-year restriction period on the RSUs paid out pursuant to the program.

Employees are not permitted to hedge their economic exposures to company stock through short sales or derivative transactions, and for 2013, executive officers did not hold any pledged shares. Effective in 2014, the committee adopted a formal policy prohibiting outside directors and all members of senior management from pledging any company stock.

Tax Deductibility Cap on Executive Compensation
U.S. federal income tax law prohibits the company from taking a tax deduction for non-performance based compensation paid in excess of $1,000,000 to named executive officers. However, performance-based compensation is fully deductible if the programs are approved by shareholders and meet other requirements. Our policy is to qualify our incentive compensation programs for full corporate deductibility to the extent feasible and consistent with our overall compensation objectives.

We have taken steps to qualify all incentive awards (bonuses, PAs, and SVAs) for full deductibility as performance-based compensation. The committee may make payments that are not fully deductible if, in its judgment, such payments are necessary to achieve the company's compensation objectives and to protect shareholder interests. For 2013, the non-deductible compensation was approximately $408,000 for
Dr. Lechleiter, less than the portion of his base salary that exceeded $1,000,000.

Executive Compensation Recovery Policy
All incentive awards are subject to forfeiture upon termination of employment prior to the end of the performance period or for disciplinary reasons. In addition, the Compensation Committee has adopted an executive compensation recovery policy, which gives the committee broad discretion to claw back incentive payouts from any executive whose misconduct results in a material violation of law or company policy that causes significant harm to the company, or who fails in his or her supervisory responsibility to prevent such misconduct by others.

Additionally, the company can recover all or a portion of any incentive compensation in the case of materially inaccurate financial statements or material errors in the performance calculation, whether or not they result in a restatement and whether or not the executive officer has engaged in wrongful conduct. Recoveries under the plan can extend back as far as three years. Additionally, as of 2013, the policy applies not only to executive officers, but to all members of senior management (approximately 160 employees).

The recovery policy covers any incentive compensation awarded or paid beginning in 2013 to an employee at a time when he or she is a member of senior management. Subsequent changes in status, including retirement or termination of employment, do not affect the company’s rights to recover compensation under the policy.

Looking Ahead to 2014 Compensation
For 2014, in recognition of an expected substantial decline in revenue due to significant patent expirations, most employees, including executive officers, will not be receiving an increase to base salary to allow the company to fully invest in launching the company's late stage pipeline assets. The company bonus multiple for 2014 will also be reduced by 0.25. For example, if the company hits its performance goals for 2014, the multiple will be reduced from 1.0 to 0.75.

Additionally, although the practice has long been discouraged for EOs, effective in 2014, the company has formally adopted a policy prohibiting all members of senior management (and outside directors) from pledging company shares (i.e., using them as collateral for a loan).

Compensation Committee Matters
Background

Role of the Independent Consultant In Assessing Executive Compensation
The committee has retained Cimi B. Silverberg of Frederic W. Cook & Co., Inc., as its independent compensation consultant to assist the committee. Ms. Silverberg reports directly to the committee. Neither she nor her firm is permitted to have any business or personal relationship with management or the members of the Compensation Committee. The consultant’s responsibilities are to:

•
Review the company’s total compensation philosophy, peer group, and target competitive positioning for reasonableness and appropriateness
•
Review the company’s executive compensation program and advise the committee of evolving best practices
•
Provide independent analyses and recommendations to the committee on the CEO’s pay
•
Review draft “Compensation Discussion and Analysis” and related tables for the proxy statement
•
Proactively advise the committee on best practices for board governance of executive compensation
•
Undertake special projects at the request of the committee chair

Ms. Silverberg interacts directly with members of company management only on matters under the committee’s oversight and with the knowledge and permission of the committee chair.

Role of Executive Officers and Management In Assessing Executive Compensation
With the oversight of the CEO and the senior vice president of human resources and diversity, the company’s global compensation group formulates recommendations on compensation philosophy, plan design, and compensation for executive officers (other than the CEO, as noted below). The CEO gives the committee a performance assessment and compensation recommendation for each of the other executive officers. The committee considers those recommendations with the assistance of its consultant. The CEO and the senior vice president of human resources and diversity attend committee meetings but are not present for executive sessions or for any discussion of their own compensation. Only nonemployee directors and the committee’s consultant attend executive sessions.

The CEO does not participate in the formulation or discussion of his pay recommendations and has no prior knowledge of the recommendations that the consultant makes to the committee.

Risk Assessment Process
As a part of the overall enterprise risk management program, in 2013 the committee reviewed the company’s compensation policies and practices for employees, including executive officers. The committee concluded that the company’s compensation programs are not reasonably likely to have a material adverse effect on the company. The committee noted numerous design features of the company’s cash and equity incentive programs that reduce the likelihood of inappropriate risk-taking, including, but not limited to:

•
Independent Compensation Committee members
•
Compensation Committee engages independent compensation consultant
•
Compensation Committee has downward discretion to lower compensation plan payouts
•
Threshold levels below target that provide for payouts and maximums that cap payouts
•
Different measures and metrics used across multiple incentive plans; appropriate balance of cash/stock, fixed/variable pay, short-term/long-term incentives
•
Performance objectives are appropriately achievable
•
Programs with operational metrics that have a continuum of payout multiples based upon achievement of performance milestones
•
Negative compensation consequences for serious compliance violations and compensation recovery policy in place for all members of senior management
•
Meaningful share ownership requirements for all members of senior management

Compensation Committee Report
The Compensation Committee evaluates and establishes compensation for executive officers and oversees the deferred compensation plan, the company’s management stock plans, and other management incentive and benefit programs. Management has the primary responsibility for the company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, the Compensation Committee has reviewed and discussed with management the CD&A above. The committee is satisfied that the CD&A fairly and completely represents the philosophy, intent, and actions of the committee with regard to executive compensation. The committee recommended to the Board of Directors that the CD&A be included in this proxy statement for filing with the SEC.

Compensation Committee
Karen N. Horn, Ph.D., Chair
Ralph Alvarez
Ellen R. Marram
Kathi P. Seifert

Compensation Committee Interlocks and Insider Participation
None of the Compensation Committee members:
•
Has ever been an officer of the company
•
Has ever been an employee of the company
•
Is or was a participant in a related-person transaction in 2013 (see “Review and Approval of Transactions with Related Persons” for a description of our policy on related-person transactions).

None of our Board members or Compensation Committee members is an executive officer of another entity at which one of our executive officers serves on the Board of Directors.


4


Executive Compensation

Summary Compensation Table
Name and
Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($) 1
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($) 2
Change
in Pension
Value
($) 3
All
Other
Compensation
($) 4
Total
Compensation
($)
John C. Lechleiter, Ph.D.
2013
$1,500,000
$0
$6,750,000
$0
$2,877,000
$0
5 
$90,000
$11,217,000
Chairman, President, and
Chief Executive Officer
2012
$1,500,000
$0
$5,625,000
$0
$2,982,000
$4,423,633

$90,000
$14,620,633
2011
$1,500,000
$0
$5,625,000
$0
$2,625,000
$6,530,094

$90,000
$16,370,094
Derica W. Rice
2013
$1,014,750
$0
$2,850,000
$0
$1,251,187
$0
5 
$60,885
$5,176,822
Executive Vice President,
Global Services and
Chief Financial Officer
2012
$990,000
$0
$2,850,000
$0
$1,265,220
$1,770,767

$59,400
$6,935,387
2011
$984,167
$0
$2,850,000
$0
$1,107,188
$940,589

$59,050
$5,940,993
Jan M. Lundberg, Ph.D.
2013
$1,002,963
$0
$2,250,000
$0
$1,236,653
$224,741

$60,178
$4,774,535
Executive Vice President,
Science and Technology and President, Lilly Research Laboratories
2012
$978,500
$0
$2,250,000
$0
$1,250,523
$307,275

$58,710
$4,845,008
2011
$973,750
$0
$2,062,500
$0
$1,095,469
$232,128

$58,425
$4,422,272
Michael J. Harrington
2013
$765,000
$0
$1,312,500
$0
$786,038
$264,784

$45,900
$3,174,222
Senior Vice President and
General Counsel
2012
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2011
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Enrique A. Conterno
2013
$680,658
$0
$1,500,000
$0
$699,376
$88,167

$40,840
$3,009,041
Senior Vice President and
President, Lilly Diabetes
2012
$669,500
$0
$1,500,000
$0
$713,018
$992,187

$40,170
$3,914,875
2011
$666,250
$0
$1,500,000
$0
$624,609
$887,380

$39,975
$3,718,214

1 This column shows the grant date fair value of PAs and SVAs computed in accordance with FASB ASC Topic 718. Values for awards subject to performance conditions (PAs) are computed based upon the probable outcome of the performance condition as of the grant date. A discussion of assumptions used in calculating award values may be found in Note 11 to our 2013 audited financial statements in our Form 10-K.

The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the 2013-2014 PA grant included in this column of the Summary Compensation Table.  
Name
Payout Date
Minimum Payout
Target Payout
Maximum Payout
Dr. Lechleiter
January 2015
$0
$4,500,000
$6,750,000
Mr. Rice
January 2015
$0
$1,900,000
$2,850,000
Dr. Lundberg
January 2015
$0
$1,500,000
$2,250,000
Mr. Harrington
January 2015
$0
$875,000
$1,312,500
Mr. Conterno
January 2015
$0
$1,000,000
$1,500,000

2    Payments for 2013 performance were made in March 2014 under the bonus plan. All bonuses paid to named executive officers were part of a non-equity incentive plan.

3    The amounts in this column reflect the change in pension value for each individual, calculated by our actuary, and are impacted by the discount rate, pay earned in the last ten years, age, and years of service. No named executive officer received preferential or above-market earnings on deferred compensation.
 
4    The amounts in this column are solely company matching contributions for each individual's 401(k) plan contributions. The company does not reimburse executives for taxes outside of the limited circumstance of taxes related to employee relocation or a prior international assignment. There were no perquisites or payments to report in the proxy statement.
 
5    The net present value of the pension benefits for Dr. Lechleiter and Mr. Rice reflect no change from 2012 due to an increase in the discount rate as reflected in footnote 1 to the pension benefits table below. For the other named executive officers, increases in pensionable earnings offset the impact of the increased discount rate.

Grants of Plan-Based Awards During 2013
The compensation plans under which the grants in the following table were made are described in the “Compensation Discussion and Analysis” and include the bonus plan (a non-equity incentive plan) and the 2002 Lilly Stock Plan (which provides for PAs, SVAs, stock options, restricted stock grants, and RSUs).
 
 
 
 
 
Estimated Possible Payouts Under
Non-Equity
Incentive Plan Awards 1
Estimated Future
Payouts Under Equity
Incentive Plan Awards
All Other
Stock or
Option
Awards:
Number
of
Shares
of Stock,
Options,
or Units
Grant
Date Fair
Value of
Equity
Awards
Name
Award
Grant
Date 2
Compensation
Committee
Action Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(# shares)
Target
(# shares)
Maximum (# shares)
Dr. Lechleiter

—

—
$52,500
$2,100,000
$4,200,000






2013-2014 PA
2/5/2013
3 
12/17/2012



44,830
89,659
134,489

$2,250,000

2013-2015 SVA
2/5/2013
4 
12/17/2012



44,302
110,756
155,058

$4,500,000











—

Mr. Rice

—

—
$22,832
$913,275
$1,826,550






2013-2014 PA
2/5/2013
3 
12/17/2012



18,928
37,856
56,784

$950,000

2013-2015 SVA
2/5/2013
4 
12/17/2012



18,705
46,763
65,468

$1,900,000











—

Dr. Lundberg

—

—
$22,567
$902,666
$1,805,333






2013-2014 PA
2/5/2013
3 
12/17/2012



14,943
29,886
44,829

$750,000

2013-2015 SVA
2/5/2013
4 
12/17/2012



14,768
36,919
51,687

$1,500,000











—

Mr. Harrington

—


$14,344
$573,750
$1,147,500






2013-2014 PA
2/5/2013
3 
12/17/2012



8,717
17,434
26,151

$437,500

2013-2015 SVA
2/5/2013
4 
12/17/2012



8,614
21,536
30,150

$875,000











—

Mr. Conterno

—

—
$12,762
$510,494
$1,020,988






2013-2014 PA
2/5/2013
3 
12/17/2012



9,962
19,924
29,886

$500,000

2013-2015 SVA
2/5/2013
4 
12/17/2012



9,845
24,612
34,457

$1,000,000











—

1    These columns show the threshold, target, and maximum payouts for performance under the bonus plan. Bonus payouts range from 0 to 200 percent of target. The bonus payment for 2013 performance was 137 percent of target, and is included in the “Summary Compensation Table” in the column titled “Non-Equity Incentive Plan Compensation.”

2    To assure grant timing is not manipulated for employee gain, the annual grant date is established in advance by the Compensation Committee and consistently falls in the first week of February. Equity awards to new hires and other off-cycle grants are effective on the first trading day of the following month.

3 This row shows the range of payouts for 2013-2014 PA grants. The 2013-2014 PA will pay out in January 2015, with payouts ranging from 0 to 150 percent of target. The grant-date fair value of the PA reflects the probable payout outcome anticipated at the time of grant, which was less than the target value.

4    This row shows the range of payouts for 2013-2015 SVA grants. The 2013-2015 SVA will pay out in January 2016, with payouts ranging from 0 to 140 percent of target. We measure the fair value of the SVA on the grant date using a Monte Carlo simulation model.
To receive a payout under the PA or the SVA, a participant must remain employed with the company through the end of the relevant performance period (except in the case of death, disability, or retirement). In addition, an employee who was an executive officer at the time of the 2013-2014 PA grant will receive payment in RSUs. No dividends accrue on either PAs or SVAs during the performance period. Non-preferential dividends accrue during the earned PA’s one-year restriction period (following the two-year performance period) and are paid upon vesting.

Outstanding Equity Awards at December 31, 2013
The 2013 closing stock price applied to the values in the table below was $51.00.
 
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable 1
Option Exercise Price
($)
Option
Expiration
Date
Award
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested (#)
Equity Incentive
Plan Awards:
Market or
Payout Value of Unearned
Shares, Units,
or Other Rights
That Have Not
Vested ($)
Dr. Lechleiter




2013-2015 SVA




155,058

2 
$7,907,978





2012-2014 SVA




198,713

3 
$10,134,373





2013-2014 PA




44,830

4 
$2,286,305





2012-2013 PA
52,462

5 
$2,675,562









2011-2012 PA
58,778

6 
$2,997,678





140,964


$56.18
02/09/2016










127,811


$55.65
02/10/2015










200,000

7 
$73.11
02/14/2014









Mr. Rice




2013-2015 SVA




65,468

2 
$3,338,878





2012-2014 SVA




100,681

3 
$5,134,731





2013-2014 PA




18,928

4 
$965,328





2012-2013 PA
26,581

5 
$1,355,631









2011-2012 PA
29,781

6 
$1,518,831





30,000


$52.54
04/29/2016










27,108


$56.18
02/09/2016










23,077


$55.65
02/10/2015










25,000

7 
$73.11
02/14/2014









Dr. Lundberg





2013-2015 SVA




51,687

2 
$2,636,017






2012-2014 SVA




79,485

3 
$4,053,735






2013-2014 PA




14,943

4 
$762,093






2012-2013 PA
20,985

5 
$1,070,235





N/A




2011-2012 PA
21,552

6 
$1,099,152




Mr. Harrington





2013-2015 SVA




30,150

2 
$1,537,670






2012-2014 SVA




10,969

3 
$559,419






2013-2014 PA




8,717

4 
$444,567

6,024


$56.18
02/09/2016










2,722


$55.65
02/10/2015










5,200

7 
$73.11
02/14/2014









Mr. Conterno





2013-2015 SVA




34,457

2 
$1,757,297






2012-2014 SVA




52,990

3 
$2,702,490






2013-2014 PA




9,962

4 
$508,062






2012-2013 PA
13,990

5 
$713,490










2011-2012 PA
15,674

6 
$799,374










RSU
20,000

8 
$1,020,000





6,928


$56.18
02/09/2016










7,101


$55.65
02/10/2015










10,700

7 
$73.11
02/14/2014










1    These options vested as listed in the table below by expiration date.
Expiration Date
Vesting Date
 
Expiration Date
Vesting Date
4/29/2016
5/1/2009
 
2/10/2015
2/11/2008
2/9/2016
2/10/2009
 
2/14/2014
2/19/2007

2    SVAs granted for the 2013-2015 performance period. The number of shares reported in the table reflects the maximum payout, which will be made if the average closing stock price in November and December 2015 is over $62.64. Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be held by executive officers for a minimum of one year. Had the performance period ended December 31, 2013, the payout would have been 60 percent of target.

3 SVAs granted for the 2012-2014 performance period. The number of shares reported in the table reflects the maximum payout, which will be made if the average closing stock price in November and December 2014 is over $49.64. Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be held by executive officers for a minimum of one year. Had the performance period ended December 31, 2013, the payout would have been 140 percent of target.

4    This number represents the threshold value of PA shares that could pay out in January 2015 for 2013-2014 performance, provided performance goals are met. Any shares resulting from this award will pay out in the form of RSUs, vesting February 2016. Actual payouts may vary from 0 to 150 percent of target. The number of shares recorded in the table reflects the payout if the combined cumulative EPS for 2013 and 2014 falls between the range of $3.39 and $6.96.

5    The 2012-2013 PA paid out at 50 percent of target in January 2014 in the form of RSUs, vesting February 2015.

6    PA shares paid out in January 2013 for the 2011-2012 performance period. These shares vested in February 2014.

7 These options expired with no value to the holder.

8 This grant was made in 2008 outside of the normal annual cycle and will vest on May 1, 2018.

Options Exercised and Stock Vested in 2013
 
Option Awards
 
Stock Awards
Name
Number of Shares
Acquired on Exercise  (#)
Value Realized
on Exercise ($)
 
Number of  Shares
Acquired on Vesting (#)
Value Realized
on Vesting ($) 1
Dr. Lechleiter    
0
$0

132,367

2 
$7,106,784

209,331

3 
$11,352,020
Mr. Rice
0
$0

52,947

2 
$2,842,724

106,061

3 
$5,751,688
Dr. Lundberg
0
$0

44,122

2 
$2,368,910

76,755

3 
$4,162,424

33,334

4 
$1,789,702
Mr. Harrington
0
$0

3,498

5 
$189,697

10,634

3 
$576,682
Mr. Conterno
0
$0

31,768

2 
$1,705,624

55,821

3 
$3,027,173

10,000

6 
$553,800

1    Amounts reflect the market value of the stock on the day the stock vested.

2    PAs paid out in January 2012 (as RSUs) for company performance during 2010-2011 and subject to forfeiture until vesting in February 2013.

3    Payout of the 2011-2013 SVA at 140 percent of target.

4    The last installment of a one-time RSU awarded to Dr. Lundberg when he joined the company in 2010.

5 This amount reflects shares paid to Mr. Harrington from the 2012-13 PA, which paid out at 50% of target in January 2014.  Since Mr. Harrington was not an executive officer when the award was granted, he received freely traded shares rather than RSUs.  Mr. Harrington must hold the net shares from this payout for one year as required by the Share Ownership and Retention Guidelines.

6    The first installment of a one-time RSU awarded to Mr. Conterno in 2008 outside of the normal grant cycle.

Retirement Benefits
We provide retirement income to U.S. employees, including executive officers, through the following plans:
•
The 401(k) plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Participants may elect to contribute a portion of their salary to the plan, and the company provides matching contributions on employees’ contributions up to 6 percent of base salary. The employee contributions, company contributions, and earnings thereon are paid out in accordance with elections made by the participant. See the "All Other Compensation" column in the “Summary Compensation Table” for information about company contributions for the named executive officers.
•
The retirement plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the “Pension Benefits in 2013” table below for additional information about the value of these pension benefits.

Sections 401 and 415 of the Internal Revenue Code generally limit the amount of annual pension that can be paid from a tax-qualified plan ($210,000 in 2013) as well as the amount of annual earnings that can be used to calculate a pension benefit ($260,000 in 2014). However, since 1975, the company has maintained a nonqualified pension plan that pays retirees the difference between the amount payable under the retirement plan and the amount they would have received without the Internal Revenue Code limits. The nonqualified pension plan is unfunded and subject to forfeiture in the event of bankruptcy.
 
The following table shows benefits that the named executive officers have accrued under the retirement plan and the nonqualified pension plan.

Pension Benefits in 2013
Name
 
Plan
Number of Years of
Credited Service
Present Value of
Accumulated Benefit ($) 1
Payments During
Last Fiscal Year ($)
Dr. Lechleiter
2 
retirement plan (pre-2010)
30
$1,388,042


 
 
retirement plan (post-2009)
4
$108,207