DEF 14A 1 proxy2017.htm DEF 14A Document


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
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)





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Notice of 2017 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 by mail.




Table of Contents
P1
P2
P9
P9




Notice of 2017 Annual Meeting of Shareholders

To the holders of Common Stock of Eli Lilly and Company:
The 2017 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:
TIME AND DATE:
11:00 a.m. EDT, Monday, May 1, 2017
LOCATION:
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
 
 
Approval, by non-binding vote, of the compensation paid to the company's named executive officers
 
 
Advisory vote regarding the frequency of future advisory votes on named executive officer compensation
 
 
Ratification of Ernst & Young LLP as the principal independent auditors for 2017
 
 
Proposal to amend the Lilly Directors' Deferral Plan
 
 
Shareholder proposal seeking report regarding direct and indirect political contributions
WHO CAN VOTE:
Shareholders of record at the close of business on February 24, 2017
This proxy statement is dated March 20, 2017, and is first being sent or given to our shareholders on or about the date.
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,
Bronwen L. Mantlo
Secretary
March 20, 2017
Indianapolis, Indiana

Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 1, 2017: The annual report and proxy statement are available at https://www.lilly.com/annualreport2016.



P1



Proxy Statement Summary

General Information

This summary 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 1, 2017
Time:
11:00 a.m. EDT
Location:
The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285
Record Date:
February 24, 2017
 
Items of Business:
Item 1: Election of the five directors listed in this proxy statement to serve three-year terms.
 
Item 2: Approval, by non-binding vote, of the compensation paid to the company's named executive officers.
 
Item 3: Advisory vote regarding the frequency of future advisory votes on named executive officer compensation.
 
Item 4: Ratification of Ernst & Young LLP as the principal independent auditor for 2017.
 
Item 5: Proposal to amend the Lilly Directors' Deferral Plan.
 
Item 6: Shareholder proposal seeking report regarding direct and indirect political contributions.

What Is New In This Year's Proxy Statement

We refined the Shareholder Value Award (SVA), one of the equity compensation programs for our executive officers, to include a Total Shareholder Return (TSR) modifier. The number of shares to be awarded under the SVA will increase or decrease by 1 percent for every percentage point that Lilly's three-year TSR deviates from our peer group's median three-year TSR (capped at +/-20 percent). This change rewards our executive officers for delivering top performance within the industry and increasing shareholder return. Executive officers received a larger portion of their total equity as SVAs (from 50 percent to 60 percent) to incentivize behavior that is aligned with long-term growth.

In December 2016, John C. Lechleiter, Ph.D., retired as President and CEO. David A. Ricks became President and CEO, and a member of the Board of Directors, on January 1, 2017. Dr. Lechleiter will serve as non-executive chairman until May 31, 2017. On June 1, 2017, Mr. Ricks will succeed him as Chairman.

In October 2016, we welcomed Jamere Jackson to the board. Mr. Jackson is CFO of Nielsen Holdings plc.

In February 2017, we welcomed Carolyn R. Bertozzi, Ph.D., to the board. Dr. Bertozzi is the Anne T. and Robert M. Bass Professor of Chemistry and Professor of Chemical and Systems Biology and Radiology at Stanford University. She is an investigator for the Howard Hughes Medical Institute.

In 2017, the board approved an annual compensation cap of $800,000 for non-employee directors, which is reflected in the provisions of the amended Directors' Deferral Plan (see Item 5).



P2



Highlights of 2016 Company Performance

The following provides a brief look at our 2016 performance in three dimensions: operating performance, innovation progress, and shareholder return. See our 2016 annual report on Form 10-K for more details.

Operating Performance
Performance highlights:
2016 revenue increased 6 percent to approximately $21.2 billion.
2016 earnings per share (EPS) increased 14 percent on a reported basis to $2.58, and increased 3 percent on a non-GAAP basis to $3.52.

*A reconciliation of GAAP and externally reported non-GAAP measures is included in Appendix A.

Innovation Progress
We made significant advances with our pipeline in 2016, including:
U.S. approval of a new cardiovascular (CV) indication for Jardiance® (empagliflozin) tablets and an EU label update to include a change to the indication statement regarding the reduction of  risk of CV death in adults with type 2 diabetes and established CV disease.
U.S. approval and conditional EU approval for LartruvoTM (olaratumab) for soft tissue sarcoma.
U.S., EU, and Japan approval for Taltz® (ixekizumab) for moderate-to-severe plaque psoriasis.
Multiple new indications in the EU and Japan for Cyramza.

Shareholder Return
We generated strong TSR (share price appreciation plus dividends, reinvested quarterly) for the three- and five-year periods through year-end 2016. Our returns exceeded both the compensation peer group and the S&P 500 in the three- and five-year periods, but lagged for the one-year period that ended on December 31, 2016:
proxy2015dr_chart-06814a02.jpg


P3





Governance
Further Information
Item 1: Election of Directors
See page 9
 
Name and principal occupation
Public boards
Management recommendation
Vote required 
to pass

mikeeskewa03.jpg
Michael L. Eskew, 67
3M Corporation; IBM Corporation; Allstate Insurance Company
Vote FOR
Majority of
 votes cast
Former Chairman and Chief Executive Officer, United Parcel Service, Inc.
Director since 2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
billkaelinresized140175.jpg
William G. Kaelin, Jr., M.D., 59
 
Vote FOR
Majority of
 votes cast
Professor, Dana-Farber Cancer Institute; Associate Director, Dana-Farber/Harvard Cancer Center
Director since 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
johnlechleiterheadshota01.jpg
John C. Lechleiter, Ph.D., 63
Ford Motor Company; Nike, Inc.
Vote FOR
Majority of
 votes cast
Chairman of the Board, Eli Lilly and Company

Director since 2005
 
 
Retirement on May 31, 2017
 
 
 
 
 
 
 
 
 
 
 
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David A. Ricks, 49


Vote FOR
Majority of
 votes cast
President and Chief Executive Officer, Eli Lilly and Company
Director since 2017
 
 
Chairman, effective June 1, 2017
 
 
 
 
 
 
 
 
 
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Marshall S.Runge, M.D., Ph.D., 62
 
Vote FOR
Majority of
 votes cast
Executive Vice President for Medical Affairs, University of Michigan
Director since 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 



P4



Our Corporate Governance Policies Reflect Best Practices
ü
Our board membership is marked by leadership, experience, and diversity.
ü
All of our non-employee directors, and all board committee members, are independent, with the exception of Dr. John Lechleiter, our former President and CEO. Dr. Lechleiter will retire in May 2017.
ü
We have a strong, independent lead director role.
ü
Our board actively participates in company strategy and CEO/senior executive succession planning, most recently with respect to our new President and CEO.
ü
Our board oversees compliance and enterprise risk management practices.
ü
We have in place meaningful stock ownership requirements.
ü
We have a majority voting standard and resignation policy for the election of directors.

Compensation
Further Information
Item 2: Advisory Vote on Compensation Paid to Named Executive Officers
See page 33
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 2
Approve, by non-binding vote, compensation paid to the company's named executive officers

Vote FOR
Majority of
votes cast

Our Executive Compensation Programs Reflect Best Practices
ü
We have had strong shareholder support of compensation practices: in 2016, over 98 percent of shares cast voted in favor of our executive compensation.
ü
Our compensation programs are designed to align with shareholder interests and link pay to performance through a blend of short- and long-term performance measures.
ü
Our Compensation Committee annually reviews compensation programs to ensure they provide incentives to deliver long-term, sustainable business results while discouraging excessive risk-taking or other adverse behaviors.
ü
We have a broad compensation recovery policy that applies to all executives and covers a wide range of misconduct.
ü
Our executive officers (EOs) are subject to robust stock ownership guidelines and are prohibited from hedging or pledging their company stock.
ü
We do not have "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.
ü
We do not provide tax gross-ups to EOs (except for limited gross-ups related to international assignments).
ü
We have a very restrictive policy on perquisites.
ü
Our severance plans related to change-in-control generally require a double trigger.
ü
We do not have employment agreements with any of our EOs.

Executive Compensation Summary for 2016
At the time the total target compensation was established at the end of 2015, compensation for our named executive officers (the five officers whose compensation is disclosed in this proxy statement) was in the middle range of the company's peer group. Incentive compensation programs paid out above target, consistent with the company's strong performance in 2016, as outlined below under "Pay for Performance."

Pay for Performance
As described more fully in the Compensation Disclosures and Analysis (CD&A) section, we link our incentive pay programs to a balanced mix of measures on three dimensions of company performance: operating performance; progress with our innovation pipeline; and shareholder return.


P5



The summary information below highlights how our incentive pay programs align with company performance. Please also see Appendix A for adjustments that were made to revenue and EPS for incentive compensation programs.

2016 Annual Cash Bonus Multiple
The company exceeded its annual cash bonus targets for revenue and pipeline progress, but narrowly missed its EPS target.

proxy2015dr_chart-08254a02.jpgproxy2015dr_chart-09098a02.jpg

*Performance goal multiples are capped at 2.0.



P6



2016 Performance Award Multiple
We exceeded our EPS growth targets under our Performance Award program, which has targets based on expected EPS growth of peer companies over a two-year period. This performance resulted in a Performance Award multiple in excess of the target.

proxy2015dr_chart-09902a02.jpgproxy2015dr_chart-10847a02.jpg

2016 Shareholder Value Award Multiple
We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which has targets based on expected large-cap company returns over a three-year period. This performance resulted in a Shareholder Value Award multiple in excess of the target.

proxy2015dr_chart-11794a02.jpgproxy2015dr_chart-12643a02.jpg



P7



Item 3: Advisory Vote Regarding Frequency of Named Executive Officer Compensation
Further Information
 
See page 59
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 3
Advisory vote regarding the frequency of future advisory votes on executive compensation
Annual Advisory Votes
Option receiving the highest number of votes cast

Audit Matters
Further Information
Item 4: Ratification of Appointment of Principal Independent Auditor
See page 59
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 4
Ratify the appointment of Ernst & Young LLP as the company's principal independent auditor for 2017

Vote FOR
Majority of
votes cast

Lilly Directors' Deferral Plan
Further Information
Item 5: Amendment of the Lilly Directors' Deferral Plan
See page 62
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 5
Approve the amendment of Lilly's Directors' Deferral Plan
Vote FOR
Majority of
votes cast

The Lilly Directors’ Deferral Plan (the “plan”) provides an ownership position in the company that aligns directors with shareholder interests.

Under the plan, a portion of directors' annual compensation is awarded in deferred shares:

ü
all shares must be held until the second January following the director's departure from board service
ü
no stock options can be issued under the plan.

Changes to the plan include:

ü
authorizing an additional 750,000 shares (the same amount approved in 2003)
ü
an annual compensation cap of $800,000 for non-employee directors.

P8



Shareholder Proposals
Further Information
Item 6: Shareholder proposal seeking report regarding direct and indirect political contributions
See page 64
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 6
Proposal seeking report regarding direct and indirect political contributions
Vote AGAINST
Majority of
votes cast

Other Information
Further Information
 
See page 66
How to Vote in Advance of the Meeting
Even if you plan to attend the 2017 Annual Meeting in person, we encourage you to vote prior to the meeting via one of the methods described below.

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 2017 Annual Meeting
You may also opt to vote in person at the 2017 Annual Meeting, which will be held on Monday, May 1, 2017, at the Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., local time. See the section titled "Meeting and Voting Logistics" for more information.

Governance
Item 1. Election of Directors

Under the company’s articles of incorporation, the board is divided into three classes with approximately one-third of the directors standing for election each year. The term for directors to be elected this year will expire at the annual meeting of shareholders held in 2020. Each of the nominees listed below has agreed to serve that term, with the exception of John C. Lechleiter, who will retire from the board on May 31, 2017. At that time, the board expects to reduce its size. The following sections provide information about our directors, including their qualifications, the director nomination process, and director compensation.


P9



Board Recommendation on Item 1

The Board recommends that you vote FOR each of the following nominees:
Michael L. Eskew
William G. Kaelin, Jr., M.D.
John C. Lechleiter, Ph.D.
David A. Ricks
Marschall S. Runge, M.D., Ph.D.

Board Operations and Governance

Board of Directors


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.

Director Biographies

Set forth below is information as of March 8, 2017, 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 directors, director nominees, or EOs. 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. 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 during the past 10 years that are material to the evaluation of the ability or integrity of any of our directors or nominees for director. There is no arrangement between any director or director nominee and any other person pursuant to which he or she was or is to be selected as a director or director nominee.

Class of 2017

The following five directors will be seeking election at this year's annual meeting. Four of these directors are standing for reelection; David A. Ricks is seeking election for the first time. Dr. Lechleiter will retire from the board on May 31, 2017. At that time, the board expects to reduce its size. See “Item 1. Election of Directors” above for more information.

P10



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Michael L. Eskew
Age: 67, Director since 2008
Board Committees: Audit (chair); Directors and Corporate Governance; Finance
 
 
 
Public Boards: 3M Corporation; IBM Corporation; Allstate Insurance Company
 
Nonprofit Boards: Chairman of the board of trustees of The Annie E. Casey Foundation
 
 
 
 
 
 
 
Career Highlights
 
United Parcel Service, Inc., a global shipping and logistics company
 
 
• Chairman and Chief Executive Officer (2002 - 2007)
 
 
• Vice Chairman (2000 - 2002)
 
 
• UPS Board of Directors (1998 - 2014)
 
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.
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William G. Kaelin, Jr., M.D.
Age: 59, Director since 2012
Board Committees: Finance, Science and Technology (chair)
 
 
 
Industry Memberships: Institute of Medicine; National Academy of Sciences; Association of American Physicians; American Society of Clinical Investigation
 
 
 
Honors: Canada Gairdner International Award; Lefoulon-Delalande Prize - Institute of France; Albert B. Lasker Prize
 
 
 
 
 
Career Highlights
 
Dana-Farber/Harvard Cancer Center

 
 
• Professor of Medicine (2002 - present)
 
 
Brigham and Women's Hospital
 
 
• Professor (2002 - present)
 
 
Howard Hughes Medical Institute
 
 
• Investigator (2002 - present)
 
 
• Assistant Investigator (1998 - 2002)
 
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.


P11



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John C. Lechleiter, Ph.D.
Age: 63, Director since 2009
Board Committees: none
 
 
 
Industry Memberships: American Chemical Society
 
 
 
Honorary Degrees: Marian University, University of Indianapolis, the National University of Ireland, Indiana University, Franklin College, and Purdue University

 
 
 
 
Public Boards: Ford Motor Company; Nike, Inc.
 
 
Non-profit Boards: United Way Worldwide, chairman; Chemical Heritage Foundation; and the Central Indiana Corporate Partnership (member emeritus)
 
 
 
Career Highlights
 
Eli Lilly and Company

 
 
• Chairman of the Board (2009 - present)
 
 
• Past President and CEO (2008 - 2016)
 
Qualifications: Dr. Lechleiter serves as Lilly's non-executive chairman. He will retire from the board on May 31, 2017. Dr. Lechleiter served as President and CEO from April 1, 2008 until his retirement on December 31, 2016. Prior to his retirement, Dr. Lechleiter had over 37 years of experience with the company in a variety of roles of increasing responsibility in research and development, pharmaceutical operations, and corporate administration. As a result, he has a sound understanding of pharmaceutical research and development, sales and marketing, and manufacturing. He also has significant corporate governance experience through his service on other public company boards.



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David A. Ricks
Age: 49, Director since 2017
Board Committees: none
 
 
 
Industry Memberships: European Federation of Pharmaceutical Industries and Associations (EFPIA); Pharmaceutical Research and Manufacturers of America (PhRMA)
 
 
 
Non-profit Boards: Board of Governors for Riley Children's Foundation
 
 
 
 
 
Career Highlights
 
Eli Lilly and Company
 
 
• President and CEO (2017 - present)
 
 
• Senior Vice President and President, Lilly Bio-Medicines (2012 - 2016)
 
Qualifications: Mr. Ricks was named President and CEO on January 1, 2017, and became a director at that time. He will be named Chairman on June 1, 2017. Mr. Ricks joined Lilly in 1996 and most recently served as president of Lilly Bio-Medicines. He has deep expertise in product development, global sales and marketing, as well as public policy. He has significant global experience in the company's commercial operations.


P12



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Marschall S. Runge, M.D., Ph.D.
Age: 62, Director since: 2013
Board Committees: Public Policy and Compliance; Science and Technology

 
 
 
Industry Memberships: Experimental Cardiovascular Sciences Study Section of the National Institutes of Health
 
 
 
 
 
 
 
 
 
Career Highlights
 
University of Michigan
 
 
• CEO, Michigan Medicine (2015 - present)
 
 
• Executive Vice President for Medical Affairs (2015 - present)
 
 
• Dean, Medical School (2015 - present)
 
 
University of North Carolina, School of Medicine
 
 
• Executive Dean (2010 - 2015); Chair of the Department of Medicine (2000 - 2015)
 
 
• 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, a strong understanding of health care facility systems, and deep expertise in biomedical research and clinical trial design.


Class of 2018

The following four directors will continue in office until May 2018.
katebaickerresized140175.jpg
 
Katherine Baicker, Ph.D.
Age: 45, Director since: 2011
Board Committees: Audit; Public Policy and Compliance

 
 
 
Industry Memberships: Commissioner of the Medicare Payment Advisory Commission; Chair of the Group Insurance Commission of Massachusetts; Panel of Health Advisers to the Congressional Budget Office; Editorial boards of Health Affairs and the Journal of Health Economics; and Member of the National Academy of Medicine
 
 
 
 
 
 
 
 
 
Career Highlights
 
Harvard T.H. Chan School of Public Health, Department of Health Policy and Management

 
 
• Professor of health economics (2007 - present)
 
 
• C. Boyden Gray Professor and Acting Chair, Department of Health Policy and Management (2014 - present)
 
 
Council of Economic Advisers, Executive Office of the President

 
 
• Member (2005 - 2007)
 
 
• Senior Economist (2001 - 2002)
 
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 in both academia and government.


P13



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J. Erik Fyrwald
Age: 57, Director since: 2005
Board Committees: Public Policy and Compliance (chair); Science and Technology

 
 
 
Non-profit Boards: UN World Food Program Farm to Market Initiative; Crop Life International; and Swiss American Chamber of Commerce
 
 
 
 
 
 
 
 
 
Career Highlights
 
Syngenta International AG, a global Swiss-based agriculture technology company that produces agrochemicals and seeds
 
 
• Chief Executive Officer (2016 - present)
 
 
Univar, Inc., a leading distributor of industrial and specialty chemicals and provider of related services
 
 
• President and Chief Executive Officer (2012 - 2016)
 
 
Nalco Company, a leading provider of water treatment products and services
 
 
• Chairman and Chief Executive Officer (2008 - 2011)
 
 
Ecolab, a leading provider of cleaning, sanitization, and water treatment products and services
 
 
• President (2012)
 
 
E.I. duPont de Nemours and Company, a global chemical company

 
 
• Group Vice President, agriculture and nutrition (2003 - 2008)
 
Qualifications: Mr. Fyrwald has a strong record of operational and strategic leadership in three complex worldwide businesses with a focus on technology and innovation. He is an engineer by training and has significant CEO experience with Syngenta, Univar, and Nalco.

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Jamere Jackson
Age: 47, Director since 2016
Board Committees: Audit; Finance
 
 
 
Non-profit Boards: Future 5

 
 
 
 
 
 
 
 
 
Career Highlights
 
Nielsen Holdings plc, a global information, data, and measurement company
 
 
• Chief Financial Officer (2014 - present)
 
 
GE
 
 
• Vice President and CFO, GE Oil & Gas, drilling and surface division
(2013 ‑ 2014)
 
 
• Senior Executive, Finance, GE Aviation (2007 - 2013)
 
 
• Finance Executive, GE Corporate (2004 - 2007)
 
 
 
Qualifications: Through his senior financial roles at Nielsen and GE, Mr. Jackson brings to the board significant global financial expertise and strong background in strategic planning, having spent his professional career in a broad range of financial and strategic planning roles. He is an audit committee financial expert, based on his CFO experience and his training as a certified public accountant.


P14



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Ellen R. Marram
Age: 70, Director since 2002, lead director since 2012
Board Committees: Compensation, Directors and Corporate Governance (chair)
 
 
 
Public Boards: Ford Motor Company, The New York Times Company
Prior Public Boards: Cadbury plc
Private Boards: Newman's Own, Inc.
 
 
 
Non-profit Boards: Wellesley College; New York-Presbyterian Hospital; Lincoln Center Theater; and Newman's Own Foundation
 
 
 
 
 
Career Highlights
 
The Barnegat Group LLC, provider of business advisory services
 
 
• President (2006 - present)
 
 
North Castle Partners, LLC, private equity firm
 
 
• Managing Director (2000 - 2006)
 
 
Tropicana Beverage Group
 
 
• 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.


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Jackson P. Tai
Age: 66, Director since 2013
Board Committees: Audit; Finance
 
 
 
Public Boards: MasterCard Incorporated, Royal Philips NV, HSBC Holdings plc
Prior Boards: The Bank of China Limited; Singapore Airlines; NYSE Euronext; ING Groep NV; CapitaLand (Singapore); DBS Group Holdings and DBS Bank
 
 
 
Other (non publicly listed) Boards: Russell Reynolds Associates; Canada Pension Plan Investment Board; Metropolitan Opera; Rensselaer Polytechnic Institute
 
 
 
 
 
Career Highlights
 
DBS Group Holdings and DBS Bank (formerly the Development Bank of Singapore), one of the largest financial services groups in Asia

 
 
• Vice Chairman and Chief Executive Officer (2002 - 2007)
 
 
• 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., Europe, and Asia.
.




P15



Class of 2019
The following five directors are serving terms that will expire in May 2019. Dr. Prendergast will retire from the board on May 1, 2017. At that time, the board expects to reduce its size.
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Ralph Alvarez
Age: 61, Director since 2009
Board Committees: Compensation (chair); Science and Technology
 
 
 
Memberships and Other Organizations: University of Miami: President's Council; School of Business Administration Board of Overseers; International Advisory Board
 
 
 
Public Boards: Skylark Co., Ltd.; Lowe's Companies, Inc.; Dunkin' Brands Group, Inc.; Realogy Holdings Corp.
 
Prior Public Boards: McDonald's Corporation; KeyCorp
 
 
 
Career Highlights
 
Skylark Co., Ltd., a leading restaurant operator in Japan
 
 
• Chairman of the Board (2013 - present)
 
 
McDonald's Corporation
 
 
• President and Chief Operating Officer (2006 - 2009)
 
 
 
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 Japan and emerging markets. He also has extensive corporate governance experience through his service on other public company boards.


carolynbertozzi.jpg
 
Carolyn R. Bertozzi, Ph.D.
Age: 50, Director since 2017
Board Committees: Public Policy and Compliance; Science and Technology
 
 
 
Industry Memberships and Other Organizations: American Chemical Society; American Society for Biochemistry and Molecular Biology; American Chemical Society Publications, Editor-in-Chief of ACS Central Science; Institute of Medicine; National Academy of Sciences; American Academy of Arts and Sciences
 
 
 
Honors: MacArthur Genius Award; Lemelson MIT Prize; Heinrich Wieland Prize, National Academy of Sciences Award in the Chemical Sciences
 
 
 
 
 
Career Highlights
 
Stanford University
 
 
• Anne T. and Robert M. Bass Professor of Chemistry, Professor of Chemical and Systems Biology and Radiology by courtesy (2015 - present)
 
 
Howard Hughes Medical Institute
 
 
• Investigator (2000 - present)
 
 
University of California, Berkeley
 
 
• T.Z. and Irmgard Chu Professor of Chemistry and Professor of Molecular and Cell Biology
 (1996 - 2015)
 
 
 
Qualifications: Dr. Bertozzi is a prominent researcher and academician. She has extensive experience at Stanford University and the University of Berkeley, California, two major research institutions. Her deep expertise spans the disciplines of chemistry and biology, with an emphasis on studies of cell surface glycosylation associated with cancer, inflammation and bacterial infection, and exploiting this knowledge for development of diagnostic and therapeutic approaches.


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davehooverpaint.jpg
 
R. David Hoover
Age: 71, Director since 2009
Board Committees: Finance (Chair); Directors and Corporate Governance
 
 
 
 
 
Memberships and Other Organizations: Indiana University Kelley School of Business, Dean's Council
 
 
 
 
 
Public Boards: Ball Corporation; Edgewell Personal Care Co.
 
 
Prior Public Boards: Qwest International, Inc.; Steelcase, Inc.
 
 
Non-profit Boards: Children's Hospital Colorado; DePauw University
 
 
 
 
 
 
 
 
 
 
 
Career Highlights
 
Ball Corporation, a provider of packaging products, aerospace and other technologies and services to commercial and governmental customers
 
 
 
 
• Chairman (2002 - 2013)
 
 
 
• Chairman and CEO (2010 - 2011)
 
 
 
• President and Chief Executive Officer (2001 - 2010)
 
 
 
• Chief Operating Officer (2000 - 2001)
 
 
 
• Chief Financial Officer (1998 - 2000)
 
 
 
 
 
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.




 
juanlucianopaint.jpg
 
Juan R. Luciano
Age: 55, Director since 2016
Board Committees: Finance; Public Policy and Compliance
 
 
 
 
 
Public Boards: Archer Daniels Midland Company; Wilmar
 
 
Non-profit Boards: Boys and Girls Clubs of America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Career Highlights
 
Archer Daniels Midland Company, a global food-processing and commodities-trading company

 
 
 
 
• Chairman (January 2016 - present)
 
 
 
• Chief Executive Officer and President (2015 - present)
 
 
 
• President (2014 - 2015)
 
 
 
• Executive Vice President and Chief Operating Officer (2011 - 2014)
 
 
 
The Dow Chemical Company, a multinational chemical company

 
 
 
 
• Executive Vice President and President, Performance Division (2010 - 2011)
 
 
 
 
 
Qualifications: Mr. Luciano has CEO and global business experience with Archer Daniels Midland Company, where he has established a reputation for strong result-oriented and strategic leadership, as well as many years of global leadership experience at The Dow Chemical Company. He brings to the board a strong technology and operations background, along with expertise in the food and agriculture sectors, an expanding area of focus for Lilly and its Elanco business.


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frankprendergasta01.jpg
 
Franklyn G. Prendergast, M.D., Ph.D.
Age: 72, Director since 1995
Board Committees: Public Policy and Compliance; Science and Technology
 
 
 
Public Boards: Cancer Genetics Incorporated
 
 
 
 
 
 
 
 
 
Career Highlights
 
Mayo Medical School
 
 
• Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology (1986 - 2014)
 
 
• Professor of Molecular Pharmacology and Experimental Therapeutics
   (1987 - 2014)
 
 
• Mayo Clinic Center for Individualized Medicine, Director Emeritus
   (2006 - 2012)
 
 
Mayo Clinic Cancer Center
 
 
• Director Emeritus (1995 - 2006)
 
 
 
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 retired from Mayo at the end of 2014. 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.


kathiseifertpainta01.jpg
 
Kathi P. Seifert
Age: 67, Director since 1995
Board Committees: Audit; Compensation
 
 
 
Public Boards: Investors Community Bank
Private Boards: Appvion, Inc.
Prior Public Boards: Albertsons; Revlon Consumer Products Co.; Supervalue Inc.; Lexmark International, Inc.

 
 
 
Non-profit Boards: Community Foundation for the Fox Valley Region; Fox Cities Building for the Arts; Fox Cities Chamber of Commerce; New North
 
 
 
 
 
Career Highlights
 
Kimberly-Clark Corporation, a global consumer products company


 
 
• Executive Vice President (1999 - 2004)
 
 
Katapult, LLC, a provider of pro bono mentoring and consulting services to non-profit organizations
 
 
• Chairman (2004 - present)
 
 
 
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.



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Director Qualifications and Nomination Process
Director Qualifications
The board assesses board candidates by considering the following:

Experience: Our directors are responsible for overseeing the company's business consistent with their fiduciary duties. This significant responsibility requires highly skilled individuals with various qualities, attributes, and professional experience. The board is well-rounded, with a balance of relevant perspectives and experience, as illustrated in the following charts:
CEO Experience:
 
8

 
 
Financial Expertise:
 
7

 
 
Relevant Scientific/Academic Expertise:
 
6

 
 
 
 
Healthcare Experience:
 
7

 
 
Operational/Strategic Expertise:
 
10

International Experience:
 
8

 
Marketing and Sales Expertise:
 
7

 
 

Board Tenure and Refreshment:
In 2016 and 2017, the board added three new non-employee members: Mr. Juan Luciano, Mr. Jamere Jackson, and Dr. Carolyn R. Bertozzi, as well as Mr. David A. Ricks. Also in 2016 and 2017, three members retired or will retire from the board: Ms. Karen Horn, Dr. John Lechleiter, and Dr. Frank Prendergast.

As the following chart demonstrates, our director composition also reflects a mix of tenure on the board, which provides an effective balance of historical perspective and an understanding of the evolution of our business with fresh perspectives and insights.

2 Years Tenure or Less:
 
4

 
 
 
3-5 Years:
 
4

 
 
 
6-10 Years:
 
3

 
 
 
 
More than 10 Years:
 
5

 
 

Diversity: 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 or have a stand-alone diversity policy, the board's overall diversity is an important 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 sixteen directors range in age from 45 to 72, and include four women and five ethnically diverse members.

Character: Board members should possess the personal attributes necessary to be an effective director, including unquestioned integrity, sound judgment, 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 executive search firms retained by the committee, incumbent directors, management, and shareholders.

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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 a 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, including the lead director, for direct discussions to determine the mutual level 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).

The committee performs periodic assessments of the overall composition and skills of the board in order to ensure that the board and management are actively engaged in succession planning for directors, and that our board reflects the appropriate viewpoints, diversity, and expertise necessary to support our complex and evolving business. The 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. The results of these assessments inform the board's recommendations on nominations for directors at the annual meeting each year and help provide us with insight on the types of experiences, skills, and other characteristics we should be seeking for future director candidates. Based on this assessment, the committee has recommended that the directors in the 2017 class be elected at the 2017 annual meeting.

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
The following table shows the retainers and meeting fees for all non-employee directors in effect in 2016.
Board Retainers (annual, paid in monthly installments)
 
 
Committee Retainers (annual, paid in monthly installments)
 
 
 
 
Annual Board Retainer
$110,000
 
Audit Committee; Science and Technology Committee members (including the chairs)
$6,000
 
 
 
 
Annual Retainers (in addition to annual board retainer):
 
 
Compensation Committee; Directors and Corporate Governance; Finance Committee; Public Policy and Compliance Committee members (including the chairs)
$3,000
 
Lead Director
$30,000
 
 
 
Audit Committee Chair
$18,000
 
 
 
 
Science and Technology Committee Chair
$15,000
 
 
 
 
Compensation Committee Chair; Directors and Corporate Governance Committee Chair; Finance Committee Chair; Public Policy and Compliance Committee Chair
$12,000
 
 
 

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 are required to hold meaningful equity ownership positions in the company; accordingly, a significant portion of director compensation is in the form of deferred Lilly stock. Directors are required to hold Lilly stock, directly or through company plans, valued at not less than five times their annual board retainer; new directors are allowed five years to reach this ownership level. All directors serving at least five years have satisfied these guidelines, and all other directors are making progress toward these requirements.


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Non-employee directors received $160,000 of compensation (but no more than 7,500 shares), deposited annually in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below), payable beginning the second January following the director's departure from board service.

Lilly Directors’ Deferral Plan: In addition to stock compensation, the Lilly Directors' Deferral Plan allows non-employee 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 amounts deferred 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. Funds in this account are credited as hypothetical shares of company stock based on the closing stock price on pre-set monthly dates. In addition, the annual stock compensation award as described above is also credited to this account. The number of shares credited is calculated by dividing the $160,000 annual compensation figure by the closing stock price on a pre-set annual date. 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 on the second January following the director's departure from board service.

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 2016 for the participating directors was $124,379, at a rate of 3.1 percent. The rate for 2017 is 2.7 percent.

Both accounts may generally only 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.

See Item 5, Amendment of the Lilly Directors' Deferral Plan, for more information regarding this plan.

2016 Compensation for Non-employee Directors

Name1
Fees Earned
or Paid in Cash ($)
Stock Awards ($)2
All Other
Compensation
and Payments ($)
3
Total ($)4
Mr. Alvarez
$124,250
 
$160,000
 
$0
 
$284,250
 
Dr. Baicker
$119,000
 
$160,000
 
$0
 
$279,000
 
Mr. Eskew
$140,000
 
$160,000
 
$0
 
$300,000
 
Mr. Fyrwald
$131,000
 
$160,000
 
$17,434
 
$308,434
 
Mr. Hoover
$128,000
 
$160,000
 
$30,000
 
$318,000
 
Ms. Horn
$53,333
 
$66,667
 
$14,050
 
$134,050
 
Mr. Jackson
$29,750
 
$40,000
 
$0
 
$69,750
 
Dr. Kaelin
$134,000
 
$160,000
 
$20,500
 
$314,500
 
Mr. Luciano
$106,333
 
$146,667
 
$0
 
$253,000
 
Ms. Marram
$158,000
 
$160,000
 
$30,000
 
$348,000
 
Dr. Prendergast
$119,000
 
$160,000
 
$0
 
$279,000
 
Dr. Runge
$123,500
 
$160,000
 
$0
 
$283,500
 
Ms. Seifert
$119,000
 
$160,000
 
$10,800
 
$289,800
 
Mr. Tai
$123,500
 
$160,000
 
$0
 
$283,500
 

1 Carolyn R. Bertozzi, Ph.D., is not included in this chart as she became a board member effective February 2017.
     
2 Each non-employee director received an award of stock valued at $160,000 (approximately 2,088 shares), except Ms. Horn, who retired from the board in May 2016; Mr. Luciano, who joined the board in

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February 2016; and Mr. Jackson, who joined the board in October 2016. All received a pro-rated award for a partial year of service. This stock award and all prior stock awards are fully vested; however, the shares are not issued until the second January following the director's departure from board service, 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.

3 
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 non-employee 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. The amounts for Mr. Fyrwald, Ms. Horn, Mr. Kaelin, Ms. Marram, and Ms. Seifert include matching contributions for donations made at the end of 2015 (Mr. Fyrwald - $17,434; Ms. Horn - $7,150; Mr. Kaelin - $19,500; Ms. Marram - $8,000; and Ms. Seifert - $2,550), for which the matching contribution was not paid until 2016.

4 
Directors do not participate in a company pension plan or non-equity incentive plan.

2017 Director Compensation
In 2017, the board approved an annual compensation cap of $800,000 for non-employee directors, which is reflected in the provisions of the amended Directors' Deferral Plan (see Item 5). Directors' compensation remains unchanged from 2016.

Dr. Lechleiter will continue serving as non-executive chairman until May 31, 2017, at which time he will leave the board. He will be eligible for the director compensation described above, as well as an additional retainer of $200,000 for his service as chairman of the board. His total compensation will be prorated for his partial period of service on the board.

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 https://www.lilly.com/who-we-are/governance, along with our Corporate Governance Guidelines.
On the recommendation of the Directors and Corporate Governance Committee, the board determined that each current non-employee director, other than Dr. Lechleiter, is independent. Prior to expiration of her board term in 2016, the board reached the same conclusion regarding Ms. Horn, and determined that the members of each committee also meet our independence standards. The board determined that none of the non-employee directors, other than Dr. Lechleiter, 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 that follows includes a description of categories or types of transactions, relationships, or arrangements the board considered in reaching its determinations.

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Director
Organization
Type of Organization
Director Relationship to Organization
Primary Type of Transaction/ Relationship/ Arrangement between Lilly and Organization
2016 Aggregate Percentage of Organization's Revenue
Dr. Baicker
Harvard University
Educational Institution
Employee
Research grants
Less than 0.1 percent
Dr. Bertozzi
Stanford University
Educational Institution
Employee
Research grants
Less than 0.1 percent
Mr. Fyrwald
Syngenta International AG
For-profit Corporation
Executive Officer
Purchases of products
Less than 0.1 percent
Univar, Inc.
For-profit Corporation
Former Executive Officer
Purchases of products
Less than 0.1 percent
Mr. Jackson
Nielsen Holdings plc
For-profit Corporation
Executive Officer
Purchase of products
Less than 0.1 percent
Dr. Kaelin
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 1 percent
Mr. Luciano
Archer Daniels Midland
For-profit Corporation
Executive Officer
Purchases of products
Less than 0.1 percent
Sales of products
Less than 0.1 percent of Lilly's revenue
Dr. Prendergast
Mayo Clinic and Mayo Medical School
Health Care and Educational Institution
Retired Employee
Research grants
Less than 0.1 percent
Mayo Foundation
Charitable Organization
Retired employee of affiliated Mayo Clinic and Mayo Medical School
Contributions
Less than 0.1 percent
Dr. Runge
University of Michigan Medical School
Educational Institution
Executive Officer
Research grants
Less than 0.1 percent
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 in 2016 and currently are independent as defined in the NYSE listing requirements, and Lilly's independence standards, and the members of the Audit and Compensation Committees each meet the additional independence requirements applicable to them as members of those committees.

The Directors and Corporate Governance Committee makes recommendations to the board regarding director committee membership and selection of committee chairs. 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.

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.


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All six committee charters are available online at https://www.lilly.com/who-we-are/governance, or upon request to the company's corporate secretary.

Audit Committee

Assists the board in fulfilling its oversight responsibilities by monitoring:

The integrity of financial information provided to the shareholders and others;
Management's systems of internal controls and disclosure controls;
The performance of internal and independent audit functions; and
The company's compliance with legal and regulatory requirements.

The committee has sole authority to appoint or replace the independent auditor, subject to shareholder ratification.

The Board of Directors has determined that Mr. Eskew, Mr. Jackson, 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 (CEO) and other EOs;
Acts as the oversight committee with respect to the company’s deferred compensation plans, management stock plans, and other management incentive compensation programs; and
Reviews succession plans for the CEO and other senior leadership positions.

Compensation Committee Interlocks and Insider Participation

None of the Compensation Committee members:
has ever been an officer or employee of the company;
is or has been a participant in a related-person transaction with the company (see “Review and Approval of Transactions with Related Persons” for a description of our policy on related-person transactions); or
has any other interlocking relationships requiring disclosure under applicable SEC rules.

Directors and Corporate Governance Committee

Together with the lead director, leads the process for director recruitment;
Recommends to the board candidates for membership on the board and its committees, as well as for the role of lead director; and
Oversees matters of corporate governance, including board performance, director independence and compensation, the corporate governance guidelines, and shareholder engagement on governance matters.

Finance Committee

Reviews and makes recommendations to the board regarding financial matters, including:

capital structure and strategies;
dividends;
stock repurchases;
capital expenditures;
investments, financing, and borrowings;
benefit plan funding and investments;
financial risk management; and
significant business development opportunities.

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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 product pipeline;
Reviews the scientific aspects of significant business development opportunities; and
Oversees matters of scientific and medical integrity and risk management.

Membership and Meetings of the Board and Its Committees

In 2016, each director attended at least 80 percent of the total number of meetings of the board and the committees on which he or she served during his or her tenure as a board or committee member. In addition, all board members are expected to attend the annual meeting of shareholders, and all directors then serving attended the meeting in 2016. Current committee membership and the number of meetings of the board and each committee in 2016 are shown in the table below.
Name
Board
Audit
Compensation
Directors and
Corporate Governance
Finance
Public Policy and
Compliance
Science and
Technology
Mr. Alvarez
ü

C



ü
Dr. Baicker
ü
ü



ü

Dr. Bertozzi
ü




ü
ü
Mr. Eskew
ü
C

ü
ü


Mr. Fyrwald
ü




C
ü
Mr. Hoover
ü


ü
C


Mr. Jackson
ü
ü


ü


Dr. Kaelin
ü



ü

C
Dr. Lechleiter
C






Mr. Luciano
ü



ü
ü

Ms. Marram
LD

ü
C



Dr. Prendergast
ü




ü
ü
Mr. Ricks
ü






Dr. Runge
ü




ü
ü
Ms. Seifert
ü
ü
ü




Mr. Tai
ü
ü


ü


Number of 2016 Meetings
7
10
7
6
4
4
5

C
Committee Chair
LD
Lead Director


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Board Oversight of Compliance and Risk Management
The board, together with the Audit and Public Policy and Compliance Committees, oversees 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, who reports directly to the CEO. Enterprise risks are identified and prioritized by management through both top-down and bottom-up processes. 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 full board meeting, and enterprise risks are also addressed in periodic business function reviews and at the annual board and senior management strategy session.

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.

These documents are available online at: https://www.lilly.com/who-we-are/governance/ethics-and-compliance-program and https://www.lilly.com/ethical-conduct-for-financial-management, or upon request to the company's corporate secretary. In the event of any amendments to, or waivers from, a provision of the code affecting the chief executive officer, chief financial officer, chief accounting officer, controller, or persons performing similar functions, we intend to post on the above website within four business days after the event a description of the amendment or waiver as required under applicable Securities and Exchange Commission rules. We will maintain that information on our website for at least 12 months.

Highlights of the Company’s Corporate Governance

The company is committed to good corporate governance, which promotes the long-term interests 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 the company's basic principles of corporate governance. The section that follows outlines key elements of the guidelines and other governance matters. Investors can learn more by reviewing the corporate governance guidelines, which are available online at https://www.lilly.com/who-we-are/governance 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

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compensating other senior executives;
ensuring that an effective succession plan is in place for all executive officers and reviewing the broader talent management process, including diversity and inclusion;
overseeing the company’s ethics and compliance program and management of significant business risks;
nominating, compensating, and evaluating directors; and
overseeing the company's enterprise risk management program.

Board Composition and Requirements

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
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 has authority to recommend exceptions to this policy. The 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
In general, 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. The Directors and Corporate Governance Committee reviewed an exception request for Mr. Alvarez (who serves on four other company boards), considering his attendance record and continued engagement in board matters. Upon review, the committee determined that he could effectively balance his other board responsibilities and continue to be a strong contributor to the Lilly board.

Board Confidentiality Policy
The board has adopted a Confidentiality Policy, applicable to all current and future members of the board. The policy prohibits a director from sharing confidential information obtained in his or her role as a director with any outside party except under limited circumstances where the director is seeking legal advice or is required to disclose information by order of law. The Confidentiality Policy can be viewed on the company's website here: http://www.lilly.com/about/corporate-governance/Pages/corporate-governance.aspx.

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 this approach continues to strike the appropriate balance for the company and our stakeholders, most recently

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during the succession-management process relating to the retirement of Dr. Lechleiter.

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 CEO and considered by the Compensation Committee in establishing the CEO’s compensation for the next year.

A strong, independent, clearly defined lead director role: 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;
overseeing the independent directors' annual performance evaluation of the chairman and CEO; and
together with the Directors and Corporate Governance Committee, leading the director recruitment process.

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 EOs attend 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 Compensation Committee, board, and CEO annually review the company's succession plans for the CEO and other key senior leadership positions. The independent directors also meet without the CEO to discuss CEO succession planning.
During these reviews, the CEO and directors discuss:
Ÿ
future candidates for the CEO and other senior leadership positions;
Ÿ
succession timing; and
Ÿ
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. In 2016, the board followed this process, and the independent directors also met without the CEO present when selecting Mr. Ricks to succeed Dr. Lechleiter as president and CEO of the company, effective January 1, 2017.

The independent directors and the CEO maintain a confidential plan for the timely and efficient transfer of the CEO's responsibilities in the event of an emergency or his sudden departure, incapacitation, or death.


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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 importance 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.

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 EOs, their immediate family members, or shareholders of more than 5 percent 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.

Procedures:
Management or the affected director or EO will bring the matter to the attention of the chairman, the lead director, the chair of the Directors and Corporate Governance Committee, or the corporate 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, if appropriate, 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 that are considered related-party transactions under the SEC rules.

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We have three current employees who are relatives of current or former EOs. Dr. John Bamforth, vice president, chief marketing officer, global marketing, is the spouse of Dr. Susan Mahony, an EO. Myles O’Neill, senior vice president, global drug products, is the spouse of Dr. Fionnuala Walsh, an EO. Finally, Andrew Lechleiter, general manager, Hong Kong, is the son of Dr. John Lechleiter, Lilly's former CEO. For 2016, these three employees received cash compensation, and equity grants between $195,000 and $1,480,000.

All three individuals participate in the company’s benefit programs generally available to U.S. employees. Their compensation is consistent with the compensation paid to other employees at their levels and with the Company's overall compensation principles based on their years of experience, performance, and positions within the company.

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

Shareholder Engagement on Governance Issues

Each year, the company engages large shareholders and other key constituents to discuss key areas of interest or concern related to corporate governance, as well as any specific issues for the coming proxy season. In 2016, we spoke with a number of our largest investors. Issues discussed included shareholders' perspectives regarding a potential management proposal to eliminate the company's classified board and supermajority voting requirements, proxy access, board composition and recruitment, and the company's executive compensation, among other topics. The overall tone from these conversations was positive and the investors with whom we spoke were generally supportive of our overall compensation and governance policies. We have shared the feedback we received from these conversations with our Compensation Committee and Directors and Corporate Governance Committee. We are committed to continuing to engage with our investors to ensure their diverse perspectives are thoughtfully considered.

Prior Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Between 2007 and 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 decided not to resubmit those proposals in 2016 based on our discussions with large shareholders as described above and our assessment that the proposals would not be successful. We will continue to monitor this situation and engage with our shareholders on these and other topics to ensure that we continue to demonstrate strong corporate governance and accountability to shareholders.

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Shareholder proposals
If a shareholder wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we receive it by November 20, 2017. Proposals should be addressed to the company’s corporate secretary, Lilly Corporate Center, Indianapolis, Indiana 46285. In addition, the company’s bylaws provide that any shareholder wishing to propose any other business at the annual meeting must give the company written notice by November 20, 2017, and no earlier than September 21, 2017. That notice must provide certain other information as described in the bylaws. Copies of the bylaws are available online at https://www.lilly.com/who-we-are/governance or upon request to the company’s corporate secretary.

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

Chair of the Directors and 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 2018 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 20, 2017, and no earlier than September 21, 2017. 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 https://www.lilly.com/who-we-are/governance. The bylaws will also be provided by mail upon request to the corporate secretary.

We have not received any notice regarding shareholder nominations for board candidates or other shareholder business to be presented at the meeting.

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Ownership of Company Stock

Common Stock Ownership by Directors and Executive Officers
The following table sets forth the number of shares of company common stock beneficially owned by the directors, the named executive officers, and all directors and EOs as a group, as of February 17, 2017. None of the stock or stock units owned by any of the listed individuals has been pledged as collateral for a loan or other obligation.
Beneficial Owners
Common Stock 1
Stock Units Not Distributable Within 60 Days 4
Shares Owned 2
 
Stock Units Distributable Within 60 Days 3
Ralph Alvarez

 

35,224

Katherine Baicker, Ph.D.

 

12,758

Enrique A. Conterno
144,173

 

41,326

Michael L. Eskew

 

34,239

J. Erik Fyrwald
100

 

54,701

Michael J. Harrington
85,314

 

24,524

R. David Hoover
1,500

 

33,724

Jamere Jackson

 

522

William G. Kaelin, Jr., M.D.

 

11,309

John C. Lechleiter, Ph.D.
1,068,402

5 

106,625

Juan R. Luciano

 

2,039

Jan M. Lundberg, Ph.D.
156,219

 

36,252

Ellen R. Marram
1,000

 

49,215

Franklyn G. Prendergast, M.D., Ph.D.

 

67,355

Derica W. Rice
424,905

6 

40,518

David A. Ricks
109,620

 

26,822

Marschall S. Runge, M.D., Ph.D.

 

7,222

Kathi P. Seifert
3,533

 

61,594

Jackson P. Tai
42,141

 

6,707

All directors and EOs as a group (28 people)7:
2,762,123

 

816,332


1 
The sum of the "Shares Owned" and "Options Exercisable/Stock Units Distributable Within 60 Days" columns represents the shares considered "beneficially owned" for purposes of disclosure in the proxy statement. Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting and sole investment power with respect to their shares. No person listed in the table owns more than 0.1 percent of the outstanding common stock of the company. All directors and EOs as a group own approximately 0.2 percent of the outstanding common stock of the company.
2 This column includes the number of shares of common stock held individually as well as the number of
401(k) Plan shares held by the beneficial owners indirectly through the 401(k) Plan.
3 
This column sets forth RSUs that vest within 60 days.
4 For the EOs, this column reflects RSUs that will not vest within 60 days. For the independent directors, this column includes the number of stock units credited to the directors' accounts in the Lilly Directors' Deferral Plan.
5 The shares shown for Dr. Lechleiter include 62,582 shares that are owned by a family foundation for which he is a director. Dr. Lechleiter has shared voting power and shared investment power with respect to the shares held by the foundation. Also included are 6,468 shares held in family trusts. Pursuant to the terms of the trusts, Dr. Lechleiter has shared investment power and no voting power over the shares held in the trusts.

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6 The shares shown for Mr. Rice include 11,596 shares that are owned by a family foundation for which he is a director. Mr. Rice has shared voting power and shared investment power with respect to the shares held by the foundation.
7 Carolyn R. Bertozzi, Ph.D., joined the board in February 2017, and currently does not beneficially own any shares.

Principal Holders of Stock
To the best of the company’s knowledge, the only beneficial owners of more than 5 percent of the outstanding shares of the company’s common stock, as of December 31, 2016, are the shareholders listed below:
Name and Address
Number of Shares
Beneficially Owned
Percent of Class
Lilly Endowment Inc. (the Endowment)
2801 North Meridian Street
Indianapolis, Indiana 46208
125,575,804
11.4%
 
 
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355
66,415,305
6.0%
 
 
BlackRock, Inc.
55 East 52nd Street
New York, New York 10055
62,755,539
5.7%
 
 
PRIMECAP Management Company
177 E. Colorado Boulevard, 11th Floor
Pasadena, CA 91105
57,501,098
5.2%
 
 
Wellington Management Company, LLP
280 Congress Street
Boston, MA 02210
56,814,140
5.2%
 
 

The Endowment has sole voting and sole dispositive power with respect to all of its shares. The Board of Directors of the Endowment is composed of N. Clay Robbins, chairman, president & chief executive officer; Mary K. Lisher; William G. Enright; Daniel P. Carmichael; Charles E. Golden; Eli Lilly II; David N. Shane; Craig Dykstra; and Jennett M. Hill.

The Vanguard Group provides investment management services for various clients. It has sole voting power with respect to 1,522,948 of its shares and sole dispositive power with respect to 64,711,235 of its shares.

BlackRock, Inc. provides investment management services for various clients. It has sole voting power with respect to 54,096,413 of its shares and sole dispositive power with respect to 62,729,638 of its shares.

PRIMECAP Management Company acts as investment advisor to various clients. It has sole voting power with respect to 12,675,302 shares and sole dispositive power with respect to all of its shares.

Wellington Management Company, LLP provides investment management services for various clients. It has shared voting power with respect to 11,484,836 shares and shared dispositive power with respect to all of its shares.

Compensation

Item 2. Advisory Vote on Compensation Paid to Named Executive Officers

Section 14A of the Securities Exchange Act of 1934 provides the company's shareholders with the opportunity to approve, on an advisory basis, the compensation of the company's named executive officers as disclosed in the proxy statement. Our compensation philosophy is designed to attract and retain highly talented individuals and motivate them to create long-term shareholder value by achieving top-tier corporate

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performance while embracing the company’s values of integrity, excellence, and respect for people.

The Compensation Committee and the Board of Directors believe that our executive compensation aligns well with our philosophy and with corporate performance. Executive compensation is an important matter for our shareholders. We routinely review our compensation practices and engage in ongoing dialog with our shareholders in order to ensure our practices are aligned with stakeholder interests and reflect best practices.

We request shareholder approval, on an advisory basis, of the compensation of the company’s named executive officers as disclosed in this proxy statement. As an advisory vote, this proposal is not binding on the company. However, the Compensation Committee values input from shareholders and will consider the outcome of the vote when making future executive compensation decisions.

Board Recommendation on Item 2

The Board of Directors recommends that you vote FOR the approval, on an advisory basis, of the compensation paid to the named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the CD&A, the compensation tables, and related narratives provided below in this proxy statement.
Compensation Discussion and Analysis (CD&A)

This CD&A describes 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 2016, and how the company's results affected incentive payouts for 2016 performance.

Say-on-Pay Results for 2016

At last year's annual meeting, more than 98 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.

Our Philosophy on Compensation

At Lilly, our mission is to make medicines that help people live longer, healthier, more active lives. 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 shareholders and customers.

Objectives
Our compensation and benefits programs are based on the following objectives:

Reflect 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 incentives to deliver long-term, sustainable business results while discouraging excessive risk-taking or other adverse behaviors.

Attract and retain talented employees. Compensation opportunities should be competitive with our peer group and reflect the level of job impact and responsibilities. Retention of talent is an important factor in the design of our compensation and benefit programs.


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Implement broad-based programs. 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.
CEO: Generally, 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. At the end of the year, the independent directors meet 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 compensation for the next year. In June 2016, David A. Ricks was appointed to serve as CEO, effective January 1, 2017. His compensation for the role of President and CEO was set at the time of his appointment.
Other Executive Officers (EOs): The committee receives individual performance assessments and compensation recommendations from the CEO and exercises its judgment based on the board's knowledge and interactions with the EOs. Each EO's performance assessment is based on achievement of objectives established between such EO and the CEO at the start of the year, as well as other factors, including the demonstration of Lilly values and leadership behaviors. For new EOs, compensation is set at time of promotion or offer.

Assessment of company performance. The Compensation Committee considers company performance in two ways:
As a factor in establishing 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, earnings per share (EPS), progress of our pipeline portfolio, stock price growth, and Total Shareholder Return (TSR) relative to our peer companies.

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 that range of market data.

Input from an independent compensation consultant concerning executive pay. The role of the independent compensation consultant is described in more detail under the "Compensation Committee Matters" section 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. The committee selects a peer group whose median market cap and revenues are broadly similar to Lilly. The committee reviews the peer group at least every three years. The committee reviewed the peer group in 2015. The committee removed Allergan (acquired by Actavis Plc) and replaced Abbott with Shire Plc, lowering the peer group median revenues and market cap. The peer group referenced in December 2015 when assessing competitive pay included: Abbvie, Amgen, AstraZeneca, Baxter, Biogen, Bristol-Myers Squibb, Celgene, Gilead, GlaxoSmithKline, Hoffman-La Roche, Johnson & Johnson, Medtronic, Merck, Novartis,

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Pfizer, Sanofi-Aventis, and Shire Plc. 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, when reviewed at the end of 2015, was in the middle range of the peer group.

Components of Our Compensation

Our executive compensation has three components: (1) base salary; (2) annual cash bonus, which is calculated based on company's performance relative to internal targets for revenue, earnings per share (EPS), and the progress of the pipeline; and (3) two different forms of equity incentives: (i) Performance Awards (PAs)—equity awards vesting over three years, with a performance component measuring the company's two-year growth in EPS relative to the expected peer group growth followed by a 13-month service-vesting period; and (ii) Shareholder Value Awards (SVAs)—performance-based equity awards that pay out based on absolute company stock price growth and total shareholder return (TSR) relative to peers, both measured over a three-year period, followed by a one-year holding period. Executives also receive a company benefits package, described below under "Other Compensation Practices and Information - Employee Benefits."

Adjustments to reported financial results
The Compensation Committee has authority to adjust the reported revenue and EPS on which incentive compensation payouts are determined in order to eliminate the distorting effect of unusual income or expense items. These items may impact year-over-year growth percentages or improve comparability with peer companies. The committee considers the adjustments approved by the Audit Committee for reporting non-GAAP EPS and other adjustments, based on guidelines approved by the committee prior to the performance period. Further details on the adjustments for 2016 and the rationale for making these adjustments are set forth in Appendix A, "Summary of Adjustments Related to the Annual Cash Bonus and Performance Award." For ease of reference, throughout the CD&A and the other compensation disclosures we refer simply to "revenue" and "EPS" but we encourage you to review the information in Appendix A to understand the adjustments from GAAP revenue and EPS that were approved.

1.
Base Salary

Base salaries are reviewed and established annually, and may also 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, and expertise, along with peer group data.

Annual base salary increases 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 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 Cash Bonus

The Eli Lilly and Company Bonus Plan (Bonus Plan) is designed to reward successful achievement of the company's financial plans and pipeline 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; (2) EPS; and (3) pipeline progress.

Company performance goals and individual bonus targets are set at the beginning of each year, and actual bonuses can range from 0 to 200 percent of an individual's bonus target. In establishing performance goals, the Compensation Committee references the annual operating plan. Each year, the committee reviews the relative weighting for each of the factors. The 2016 weightings remained unchanged from the prior year:

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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

Multiples for each performance goal can range from 0—2.0.

The annual cash bonus payout is calculated as follows:

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

To preserve tax deductibility of bonus payouts, EOs are subject to the Executive Officer Incentive Plan (EOIP), which sets limits on allowable bonus amounts. Under the EOIP, the maximum annual cash bonus allowable is calculated based on non-GAAP net income (generally described in "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 bonus 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 annual cash bonus to be paid. In exercising this discretion, the committee intends to award EOs the lesser of (i) the bonuses they would have received under the Bonus Plan or (ii) the EOIP maximum bonuses.

3.
Equity Incentives

The company grants two types of equity incentives to EOs—PAs and SVAs. The PAs are designed to focus company leaders on multiyear operational performance relative to peer companies. The SVAs align earned compensation with long-term growth in shareholder value and relative performance within our industry. The Compensation Committee has the discretion to adjust downward (but not upward) any EO's equity award payout from the amount yielded by the applicable formula.

Performance Awards
PAs vest over three years. Potential shares are earned based on achieving EPS growth targets over a two-year performance period, followed by an additional 13-month service-vesting period in the form of restricted stock units ("RSUs"). The growth-rate targets are set relative to the median expected EPS growth for the peer group. These awards do not accumulate dividends during the two-year performance period, but do accumulate dividends during the service-vesting period.

The Compensation Committee believes EPS growth is an effective measure of operational 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. Possible payouts range from 0 to 150 percent of the target depending on EPS growth over the performance period.

The measure of EPS used in the PA program differs from the measure used in our annual cash bonus program in two ways. First, the target EPS goal in the bonus program is set with reference to internal goals

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that align to our annual operating plan for the year, while the target EPS goal in the PA program is set relative to expected growth rates among our peer group. Second, the bonus program measures EPS over a one-year period, while the PA program measurers EPS over a two-year period. In a given year, as seen in prior years, the bonus program may pay out above target while the PA pays at threshold (or vice versa).

Shareholder Value Awards
SVAs are earned based on Lilly's share price (and beginning in 2016, relative TSR performance). 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 three-year TSR that a reasonable investor would consider appropriate for investing in a basket of large-cap U.S. companies, as determined by the Compensation Committee. The target share price is based on this expected rate of return less the company’s dividend yield, applied to the starting share price. EOs receive no payout if Lilly's TSR for the three-year period is zero or negative.

Possible payouts based on share price growth goals (prior to applying the applicable modifier described below) range from 0 to 150 percent of the target amount, depending on stock performance over the period.

Beginning with the 2016-2018 SVA award, a modifier based on Lilly's three-year cumulative TSR relative to our peer companies' median TSR performance will be applied to payouts for EOs. If Lilly's TSR is above the median of our peers, the payout is increased by 1 percent for every percentage point Lilly's TSR exceeds the median (up to a maximum of 20 percent). Likewise, if Lilly's TSR is below our peers' median, the payout will be reduced by up to a maximum of 20 percent. The committee added the relative TSR modifier to the SVA program because it ensures senior leaders' rewards align with shareholder experience while encouraging strong performance within the industry.

Pay for Performance

The mix of compensation for the CEO and other named executive officers (NEO) reflects our desire to link executive compensation with company performance. As reflected in the charts below, a substantial portion of the target pay for all named executive officers is performance-based. Both the annual cash bonus and equity payouts are contingent upon 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 Our Compensation - 3. Equity Incentives").


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proxy2015dr_chart-07326a02.jpgproxy2015dr_chart-08205a02.jpg

2016 Target Total Compensation

Performance Review Process
In setting potential EO compensation for 2016, the Compensation Committee considered both individual and company performance during 2015.

2015 Individual NEO Performance
A summary of the committee's review of the individual NEOs is provided below:

Dr. John Lechleiter: In accordance with the company’s Corporate Governance Guidelines, the independent directors conducted a review of Dr. Lechleiter’s performance during 2015, which was provided to the Compensation Committee during a private session.  Under Dr. Lechleiter’s leadership, the company increased its growth prospects in the medium and long term and drove near-term volume growth, attributable to new products including Cyramza, Trulicity®, and Jardiance. In 2015, the company launched Basaglar and Portrazza®, following the successful launch of three new molecular entities (NMEs) in 2014. In addition, the company achieved the successful integration of Novartis Animal Health and led an initiative to improve the efficiency and sustainability of the company’s research and development process. Dr. Lechleiter continued to set a positive tone of integrity, inclusiveness, safety, and compliance in his internal and external interactions.

Derica Rice: Mr. Rice demonstrated strong leadership of our portfolio management in partnership with Dr. Lundberg. The committee noted the portfolio review process is far more robust than in past years. His function met very difficult financial targets while continuing to provide outstanding support to the business.

Jan Lundberg: Dr. Lundberg led Lilly Research Laboratories positive pipeline progression, including regulatory approvals for Cyramza in 2nd-line gastric cancer in Japan and 2nd-line metastatic colorectal cancer in the U.S., Trulicity in Japan, Humalog® U-200 Kwikpen, and Glyxambi® in the U.S., and Synjardy® in the U.S. and Europe. In addition, regulatory submissions were completed for Taltz and all planned Phase 3 trial starts were achieved.

Dr. Lundberg played a key leadership role in reorganizing external research. He sponsored the expansion of our research capabilities in San Diego and Boston and progressed our next-generation development strategy.


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Michael Harrington: Mr. Harrington provided thoughtful counsel on a variety of issues including commercial practices, pricing, intellectual property policy, and several other areas. He was instrumental in several successful negotiations with external parties, and the company prevailed in several patent lawsuits including Alimta® in the U.S. and Europe.

Enrique Conterno: Under Mr. Conterno's leadership, the Diabetes business had a very strong year beating revenue and earnings targets. The business successfully launched several new products in the U.S. (Trulicity, Humalog U-200 Kwikpen, Glyxambi, and Synjardy). Mr. Conterno drove improvements in manufacturing our insulin products and forged strong partnerships with other functions.

Target Compensation

The information in the section below reflects target total compensation for NEOs for 2016. The actual payouts made to the named executive officers in the form of the 2016 annual cash bonus and equity awards granted in prior years and vesting in 2016 are summarized in the next section, under "2016 Compensation Payouts."

Rationale for Changes to NEO Target Compensation
The committee established 2016 target total compensation opportunities for each NEO based on the NEO's 2015 performance, internal relativity, and peer-group data. The committee determined that an increase to Dr. Lechleiter’s total compensation was appropriate given overall company results and his strong leadership over several years. The committee decided his increase should be delivered entirely in performance-based equity, leaving his base salary and bonus target unchanged from prior years and increasing the target value of his equity. For Dr. Lundberg, the committee believed his base salary was appropriate but increased his bonus target and equity award reflecting the strategic importance and impact of the R&D organization’s success. Messrs. Conterno, Harrington, and Rice received salary increases, aligned with the company's annual increase guidelines, and increases to their bonus targets, reflecting their contributions over time. In light of the Diabetes business's strong performance, Mr. Conterno also received an increase in his equity award.

Base Salary
The following table outlines salary increases, if any, for each named executive approved by the committee in December 2015. Each executive's actual base salary earned during 2016 is reflected in the "Summary Compensation Table" in the "Executive Compensation" section of this proxy.

Name
2015 Annual Base Salary
2016 Annual Base Salary
Increase (effective March 1, 2016)
Dr. Lechleiter
$1,500,000
$1,500,000
Mr. Rice
$1,050,300
$1,071,306
2%
Dr. Lundberg
$1,007,855
$1,007,855
Mr. Harrington
$788,000
$835,280
6%
Mr. Conterno
$710,205
$731,511
3%

Annual Cash Bonus Targets
Based on a review of internal relativity, peer data, and individual performance, the committee decided to increase bonus targets for all NEOs in 2016, except Dr. Lechleiter, based on the rationale described above. Bonus targets are shown in the table below as a percentage of base salary earnings:
Name
2015 Bonus Target
2016 Bonus Target
Dr. Lechleiter
150%
150%
Mr. Rice
90%
100%
Dr. Lundberg
90%
100%
Mr. Harrington
75%
80%
Mr. Conterno
75%
80%


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Total Equity Program - Target Grant Values
For 2016 equity grants, the committee set the total target values for NEOs based on internal relativity, individual performance, and peer-group data. The committee increased the portion of total equity value allocated to the SVA for all NEOs from 50 percent to 60 percent, as the committee wanted more focus on shareholder return, given the operational focus of both the PA and the annual cash bonus. Total target values for the 2015 and 2016 equity grants to the NEOs were as follows:
Name
2015 Total Equity
2016 Total Equity
Dr. Lechleiter
$10,000,000
$11,000,000
Mr. Rice
$3,800,000
$3,800,000
Dr. Lundberg
$3,400,000
$3,600,000
Mr. Harrington
$2,300,000
$2,300,000
Mr. Conterno
$2,000,000
$2,200,000

Performance Goals for 2016 Incentive Programs

2016 Annual Cash Bonus Goals
The Compensation Committee established the company performance targets for 2016 at the targets specified in the company's 2016 corporate operating plan approved by the Board of Directors in 2015.

These targets are described in 2016 Compensation Payouts under the Bonus Awards for 2016 subsection.

Performance Awards – 2016-2018 PA
In January 2016, the committee established a cumulative, compounded two-year EPS growth target of 7 percent per year based on investment analysts’ peer group estimates at that time.

Possible payouts for the 2016-2018 PA range from 0 to 150 percent of the target, as illustrated in the chart below:
 
 
 
 
50% payout
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
pointera02.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Target
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payout Multiple
 
0.00
 
0.50
 
 
0.75
 
 
1.00
 
 
1.25
 
 
1.50
Cumulative 2-Year EPS
$3.52
 
$6.93
 
 
$7.36
 
 
$7.80
 
 
$8.24
 
$8.70+
EPS Annual Growth Rate
 
 
 
(1)%
 
 
3%
 
 
7%
 
 
11%
 
 
15%

Shareholder Value Awards – 2016-2018 SVA
For purposes of establishing the stock price target for the SVAs, the starting price was $83.74 per share, representing the average of the closing prices of company stock for all trading days in November and December 2015. The target ending share price range was established based on the expected annual rate of return for large-cap companies (8 percent), less an assumed dividend yield of 2.4 percent, rounded to the nearest $0.05. 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 2018. The award is designed to deliver no payout to EOs if the shareholder return (including projected dividends) is zero or negative. The target share price growth of 5.6 percent per year is comparable to a compounded annual TSR of 8 percent over the three-year performance period. Possible payouts based on share price ranges are illustrated in the grid below.


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Ending Stock Price
Less than $77.51
$77.51-$88.02 
$88.03-$98.54 
$98.55-$109.06
$109.07-$119.58
 Greater than $119.58
Compounded Annual Share Price Growth Rate (excluding dividends)
Less than(2.5%)
(2.5%)-1.7%
1.7-5.6%
5.6%-9.2%
9.2%-12.6%
Greater than 12.6%
Percent of Target
0%
50%
75%
100%
125%
150%

EO awards are subject to a relative TSR modifier, which is applied to the payout indicated by the grid below. The number of shares to be paid will increase or decrease by 1 percent for every percentage point Lilly's three-year TSR deviates from our peer group's median three-year TSR, capped at 20 percent.

2016 Compensation Payouts

The information in this section reflects the amounts paid to NEOs for the 2016 annual cash bonus and payouts from equity awards granted in prior years for which the relevant performance period ended in 2016.

2016 Company Performance - Compensation
For 2016, the company exceeded its revenue target with annual revenues of $21.2 billion. The company fell short of its EPS target, with EPS of $3.52. The company also made significant progress on its pipeline, meeting or exceeding most targets for pipeline progress, highlighted by regulatory approval for Lartruvo and Taltz, along with 19 other new approvals, indications, or line extensions during 2016.

Bonus Award for 2016
The company's 2016 performance compared to targets for revenue, EPS, and pipeline progress, as well as the resulting bonus multiple, is illustrated below.

 
2016 Corporate Target
Adjusted Results
Multiple¹
Revenue
$20.6 billion
$21.2 billion
1.33
EPS
$3.55
$3.52
0.91
Pipeline score
3
4.08
1.54
Resulting Bonus Multiple
1.17

¹Performance goal multiples are capped at 2.0.


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proxy2015dr_chart-09153a02.jpgproxy2015dr_chart-10074a02.jpg

The Science and Technology Committee assessed the company's progress toward achieving product pipeline goals at 4.08 (on a scale of 1 to 5) including:

2 new molecular entity (NME) product approvals versus a goal of 2, and 19 other significant approvals versus a goal of 12.
1 NME entering into Phase 3 versus a goal of 2 entrants.
12 NMEs entering into Phase 1 versus a goal of 9-11 entrants.
4 new indications or line extensions (NILEX) entering into Phase 3 versus a goal of 4-5 entrants.
exceeded targets for Speed to Launch: project plans across the portfolio reflected faster time to launch than industry benchmarks scoring a 4 of 5; progressed projects in the portfolio faster than planned timelines scoring a 5 of 5.
subjective assessment of the quality of the pipeline, considering many factors—awarded a score of 4 of 5, recognizing a strong year for innovation.

Based on the recommendation of the Science and Technology Committee, the Compensation Committee certified a pipeline score of 4.08, resulting in a pipeline multiple of 1.54.

Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.17.
(0.25 x 1.33) + (0.50 x 0.91) + (0.25 x 1.54) = 1.17 bonus multiple

The cash bonus amounts paid to NEOs for 2016 are reflected in the "Summary Compensation Table" below.

Equity Award Performance Periods Ending in 2016

2015-2017 Performance Award
The target cumulative EPS for the 2015-2017 PA was set in the first quarter of 2015 reflecting expected industry growth of 1.0 percent each year over the two-year performance period of 2015-2016. The company's annual EPS growth for the two-year period was 7.9 percent, reflecting the positive contribution of our newer products as we return to a period of growth.

The company's performance compared to target (and the resulting multiple) for the 2015-2017 PA is reflected in the charts below.



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proxy2015dr_chart-10910a02.jpgproxy2015dr_chart-11782a02.jpg

For the NEOs, the number of shares subject to an additional 13-month service-vesting period under the 2015-2017 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 below):
Name
Target Shares
RSUs Earned
Dr. Lechleiter
71,083
106,625
Mr. Rice
27,012
40,518
Dr. Lundberg
24,168
36,252
Mr. Harrington
16,349
24,524
Mr. Conterno
14,217
21,326

2014-2016 Shareholder Value Award
The target stock price of $56.95 for the 2014-2016 SVA was set in January 2014 based on a beginning stock price of $50.42, which was the average closing price for Lilly stock for all trading days in November and December 2013. The ending stock price of $72.15 represents stock price growth of approximately 43 percent over the relevant three-year period. The company's performance compared to target (and the resulting payout multiple) for the 2014-2016 SVA is shown below.



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proxy2015dr_chart-12617a02.jpgproxy2015dr_chart-13554a02.jpg

The shares paid to NEOs during 2016 for the 2014-2016 SVA were as follows:
Name
Target Shares
Shares Paid Out
Dr. Lechleiter
122,984
172,178
Mr. Rice
51,927
72,698
Dr. Lundberg
40,995
57,393
Mr. Harrington
25,963
36,348
Mr. Conterno
27,330
38,262

Other Compensation Practices and Information

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 (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 Internal Revenue Service (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 EO.

Perquisites

The company provides very limited perquisites to EOs. The company does not generally allow personal use of the corporate aircraft; however the aircraft was made available for the personal use of Dr. Lechleiter, prior to his retirement, and for Mr. Ricks beginning in 2017, in very rare cases when the security and efficiency benefits to the company outweigh the expense. The company did not incur any expenses for personal use of its aircraft in 2016 by Dr. Lechleiter, and he received no other perquisites. Depending on seat availability,

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family members and personal guests of EOs may travel on the company aircraft to accompany EOs who are traveling on business. There is no incremental cost to the company for these trips.

The Lilly Deferred Compensation Plan

Members of senior management may defer receipt of part or all of their cash compensation under The Lilly Deferred Compensation Plan (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 2016” table.

Severance Benefits

Except in the case of a change in control of the company, the company is not obligated to pay severance to EOs 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 EOs. 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
double trigger generally required
Ÿ
no tax gross-ups
Ÿ
up to two-year pay protection
Ÿ
18-month benefit continuation

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, our 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 it is not possible to convert 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 “Executive Compensation - 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.

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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 would vest at the time of a covered termination.

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; Prohibition on Hedging 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 annual base salary. The holding requirement for other EOs ranges from two to three times annual base salary depending on the position. Until the required number of shares is reached, the EO must retain 50 percent of shares net of taxes received from new equity payouts. Our executives have a long history of maintaining significant levels of company stock. As of December 31, 2016, Dr. Lechleiter held shares valued at approximately 59 times his annual salary. Mr. Ricks will retain at least 50 percent of net shares received from future equity payouts until he satisfies these guidelines. 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
three times base salary

Yes
Dr. Lundberg
three times base salary

Yes
Mr. Harrington
three times base salary

Yes

Mr. Conterno
three times base salary

Yes

EOs 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 13-month service-vesting period that applies after the end of the performance period.

Non-employee directors and employees are not permitted to hedge their economic exposures to company stock through short sales or derivative transactions. Non-employee directors and all members of senior management are prohibited from pledging any company stock (i.e., using company stock as collateral for a loan or trading shares on margin).

Executive Compensation Recovery Policy

All incentive awards are subject to forfeiture upon termination of employment prior to the end of the performance or vesting period or for disciplinary reasons. In addition, the Compensation Committee has adopted an executive compensation recovery policy, that gives the Compensation Committee broad discretion to claw back incentive payouts from any member of senior management (approximately 160 employees) whose misconduct results in a material violation of law or company policy that causes significant

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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 EO 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 EO has engaged in wrongful conduct.

The recovery policy covers any incentive compensation awarded or paid 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. Recoveries under the plan can extend back as far as three years.

Looking Ahead to 2017 Compensation

Lilly's board of directors unanimously elected David A. Ricks to assume the role of president and chief executive officer. He became president, chief executive officer, and a director on January 1, 2017, and will become chairman of the board on June 1, 2017.

In connection with his appointment as president and chief executive officer, Mr. Ricks will receive a base salary of $1.4 million and will be eligible for an annual cash bonus with a target value of 150 percent of base salary. Mr. Ricks received an equity award in February 2017 as part of the company's annual equity incentive program with a grant value of $8.5 million. One hundred percent of this grant value was delivered in the form of performance based equity: 60 percent in SVAs and 40 percent in PAs. He does not receive any compensation for his service as a director of the company.

Beginning with 2017 grants, the treatment of performance-based equity awards (Performance Awards and Shareholder Value Awards) in the event of a change-in-control require a “double trigger” (a change-in-control occurs plus termination of employment) to pay. Accrued performance will be used to determine the number of shares earned under the award. The awards will convert to restricted stock units that continue to vest with the new company. They will payout upon the earlier of the completion of the original award period or upon a covered termination.






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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.
2016

$1,500,000

$0
$11,000,000
$0

$2,632,500

$3,144,633
 

$90,000


$18,367,133

Chairman, President, and
Chief Executive Officer
2015

$1,500,000

$0
$11,350,000
$0

$3,622,500

$0
5 

$90,000


$16,562,500

2014

$1,500,000

$0
$6,750,000
$0

$1,785,000

$4,356,142
 

$90,000


$14,481,142

Derica W. Rice
2016

$1,067,805

$0
$3,800,000
$0

$1,249,332

$1,739,429
 

$64,068


$7,920,634

Executive Vice President,
Global Services, and
Chief Financial Officer
2015

$1,045,200

$0
$4,313,000
$0

$1,514,495

$0
5 

$62,712


$6,935,407

2014

$1,019,700

$0
$2,850,000
$0

$780,071

$2,023,458
 

$61,182


$6,734,411

Jan M. Lundberg, Ph.D.
2016

$1,007,855

$0
$3,600,000
$0

$1,179,190

$627,381
 

$60,471


$6,474,897

Executive Vice President,
Science and Technology, and President, Lilly Research Laboratories
2015

$1,007,855

$0
$3,859,000
$0

$1,460,382

$390,645
5 

$60,471


$6,778,353

2014

$1,007,855

$0
$2,250,000
$0

$771,009

$517,761
 

$60,471


$4,607,096

Michael J. Harrington
2016

$827,400

$0
$2,300,000
$0

$774,446

$1,441,954
 

$49,644


$5,393,444

Senior Vice President and
General Counsel
2015

$784,167

$0
$2,610,500
$0

$946,881

$391,899
5 

$47,050


$4,780,497

2014

$765,000

$0
$1,425,000
$0

$487,688

$1,330,586
 

$45,900


$4,054,174

Enrique A. Conterno
2016

$727,960

$0
$2,200,000
$0

$681,371

$935,408
 

$43,678


$4,588,417

Senior Vice President and
President, Lilly Diabetes
2015

$705,653

$0
$2,270,000
$0

$852,075

$0
5 

$42,339


$3,870,067

2014

$682,890

$0
$1,500,000
$0

$435,342

$1,235,839
 

$40,973


$3,895,044


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. The PA grant values included in the "Stock Awards" column are based on the probable payout outcome anticipated at the time of grant, which was different from the target value in 2014 and 2015. For purposes of comparison, the supplemental table below shows the total target grant values approved by the committee:

Name
2014 Total Equity
2015 Total Equity
2016 Total Equity
Dr. Lechleiter
$9,000,000
$10,000,000
$11,000,000
Mr. Rice
$3,800,000
$3,800,000
$3,800,000
Dr. Lundberg
$3,000,000
$3,400,000
$3,600,000
Mr. Harrington
$1,900,000
$2,300,000
$2,300,000
Mr. Conterno
$2,000,000
$2,000,000
$2,200,000

The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the 2016-2018 PA grant included in this column of the "Summary Compensation Table."  
Name
Payout Date
Minimum Payout
Target Payout
Maximum Payout
Dr. Lechleiter
February 2019
$0
$4,400,000
$6,600,000
Mr. Rice
February 2019
$0
$1,520,000
$2,280,000
Dr. Lundberg
February 2019
$0
$1,440,000
$2,160,000
Mr. Harrington
February 2019
$0
$920,000
$1,380,000
Mr. Conterno
February 2019
$0
$880,000
$1,320,000

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