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
(Amendment No.     )
 
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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 2018 Annual Meeting of Shareholders and Proxy Statement









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




Table of Contents
P1
P2
Prior Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Management Proposals
Appendix B - Proposed Amendments to the Company's Articles of Incorporation
Appendix C - Proposed Amended and Restated 2002 Lilly Stock Plan



Notice of 2018 Annual Meeting of Shareholders

To the holders of Common Stock of Eli Lilly and Company:
The 2018 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 7, 2018
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
 
 
Ratification of Ernst & Young LLP as the principal independent auditors for 2018
 
 
Approve amendments to the Articles of Incorporation to eliminate the classified board structure
 
 
Approve amendments to the Articles of Incorporation to eliminate supermajority voting provisions
 
 
Approve the Amended and Restated 2002 Lilly Stock Plan
 
 
Shareholder proposal seeking support for the descheduling of cannabis
 
 
Shareholder proposal requesting report regarding direct and indirect political contributions
 
 
Shareholder proposal requesting report on policies and practices regarding contract animal laboratories
 
 
Shareholder proposal requesting report on the extent to which risks related to public concern over drug pricing strategies are integrated into incentive compensation arrangements
WHO CAN VOTE:
Shareholders of record at the close of business on March 12, 2018
This proxy statement is dated March 19, 2018, and is first being sent or given to our shareholders on or about that 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 card or voting instructions by mail, or vote by telephone or online promptly so that a quorum may be represented at the meeting.
By order of the Board of Directors,
Bronwen L. Mantlo
Secretary
March 19, 2018
Indianapolis, Indiana

Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 7, 2018: The annual report and proxy statement are available at https://www.lilly.com/annualreport2017.



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 7, 2018
Time:
11:00 a.m. EDT
Location:
The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285
Record Date:
March 12, 2018
 
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:
Ratification of Ernst & Young LLP as the principal independent auditor for 2018.
 
Item 4:
Approve amendments to the Articles of Incorporation to eliminate the classified board structure.
 
Item 5:
Approve amendments to the Articles of Incorporation to eliminate supermajority voting provisions.
 
Item 6:
Approve the Amended and Restated 2002 Lilly Stock Plan.
 
Item 7:
Shareholder proposal seeking support for the descheduling of cannabis.
 
Item 8:
Shareholder proposal requesting report regarding direct and indirect political contributions.
 
Item 9:
Shareholder proposal requesting report on policies and practices regarding contract animal laboratories.
 
Item10:
Shareholder proposal requesting report on extent to which risks related to public concern over drug pricing strategies are integrated into incentive compensation arrangements.

What Is New In This Year's Proxy Statement

In February 2017, we welcomed Carolyn R. Bertozzi 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 May 2017, John Lechleiter and Franklyn Prendergast retired from the board and on June 1, 2017, Dave Ricks succeeded John Lechleiter as Chairman.

Every year the Directors and Corporate Governance Committee conducts a robust assessment of the board's performance, board committee performance, and all board processes, based on input from all directors. We also conduct a detailed review of individual director performance at least every three years, when considering whether to nominate the director to a new three-year term. In 2017, we updated our process to include an assessment of each director every year.

The board has approved, and recommends that the shareholders approve, the following management proposals at this meeting. The board recommends approval of amendments to the company’s Articles of Incorporation to eliminate the classified board structure (see Item 4 herein) and to eliminate supermajority voting provisions (see Item 5 herein). The board believes these two proposals balance shareholder interests and demonstrate its accountability and willingness to take steps that address shareholder-expressed concerns. Lastly, the board recommends approval of the company’s amended and restated stock plan (see Item 6 herein). Stock incentive plans have been an integral part of the company’s compensation programs

P2



for more than 50 years. The board believes these plans enable the company to attract and retain top talent and focus employees on creating and sustaining shareholder value through increased employee stock ownership.

Highlights of 2017 Company Performance

The following provides a brief look at our 2017 performance in three dimensions: operating performance, innovation progress, and shareholder return. See our 2017 annual report on Form 10-K for more details.

Operating Performance
Performance highlights:
2017 revenue increased 8 percent to approximately $22.9 billion.
2017 earnings per share (EPS) were a loss of $0.19 on a reported basis and reflect charges associated with recently enacted U.S. tax reform legislation, activities associated with reducing the company’s cost structure, and acquired in-process research and development charges.
2017 EPS increased 22 percent on a non-GAAP basis to $4.28.

*A reconciliation of measures prepared in accordance with generally accepted accounting principles
(GAAP) and externally reported non-GAAP measures is included in Appendix A.

Innovation Progress
We made significant advances with our pipeline in 2017, including:
U.S. approval of VerzenioTM (abemaciclib) indicated both as a single agent and in combination with another chemotherapy agent for treatment of certain types of advanced or metastatic breast cancer.
U.S. and EU approval for Taltz® (ixekizumab) for the treatment of adults with active psoriatic arthritis.
EU and Japan approvals for Olumiant® (baricitinib) for the treatment of moderate-to-severe active rheumatoid arthritis and rheumatoid arthritis, respectively. Olumiant is part of the company’s collaboration with Incyte.
U.S. approval of updates to the label for Trulicity® (dulaglutide) to include use in combination with basal insulin for adults with type 2 diabetes.
Submission for regulatory approval of galcanezumab in the U.S. for migraine prevention and resubmission of baricitinib in the U.S. for rheumatoid arthritis.
Phase 3 clinical trial initiations of ultra-rapid insulin for diabetes, empagliflozin for chronic heart failure, and baricitinib for atopic dermatitis.

P3



Shareholder Return
We generated strong total shareholder returns (share price appreciation plus dividends, reinvested quarterly) through year-end 2017. Our returns exceeded the compensation peer group but slightly lagged the S&P 500 across the time periods presented below:

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P4





Governance
Further Information
Item 1: Election of Directors
See page 11
 
Name and principal occupation
Public boards
Management recommendation
Vote required 
to pass

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Katherine Baicker, Ph.D., 46
 
Vote FOR
Majority of
 votes cast
Dean, Harris School of Public Policy, University of Chicago
 
 
 
Director since 2011
 
 
 
 
 
 
 
 
 
 
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J. Erik Fyrwald, 58
 
Vote FOR
Majority of
 votes cast
President and Chief Executive Officer, Syngenta International AG
 
 
 
Director since 2005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Jamere Jackson, 49
 
Vote FOR
Majority of
votes cast
Chief Financial Officer, Nielsen Holdings plc

Director since 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Ellen R. Marram, 71
Ford Motor Company
Vote FOR
Majority of
 votes cast
President, The Barnegat Group LLC
Director since 2002
 
 
Lead Independent Director since 2012
 
 
 
 
 
 
 
 
 
 
 
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Jackson P. Tai, 67
MasterCard Incorporated, Royal Philips NV, HSBC Holdings plc
Vote FOR
Majority of
 votes cast
Former Vice Chairman and Chief Executive Officer, DBS Group Holdings Ltd. and DBS Bank Ltd.
 
 
 
 
Director since 2013
 
 
 
 
 
 
 
 
 
 
 


Our Corporate Governance Policies Reflect Best Practices
The corporate governance practices that are bolded below were new or refreshed in 2017.

ü
Our board membership is marked by leadership, experience, and diversity.
ü
13 of our 14 directors, and the members of all board committees, are independent.
ü We have a strong, independent, clearly defined lead director role.
ü We are committed to board refreshment, and seek to balance continuity and fresh perspectives.
ü    We conduct director orientation and continuing education programs for directors.
ü    We have an annual cap on director compensation.

P5



ü
Our board conducts a robust annual assessment of board performance - in 2017, we added an annual assessment of individual directors to this process.
ü
We have a majority voting standard and resignation policy for the election of directors in uncontested elections.
ü
Our board values active shareholder engagement. As a result we have put forward for consideration at this year's annual meeting management proposals to eliminate our classified board structure and supermajority voting provisions.
ü    We have no shareholder rights plan (“poison pill”).
ü    The charters of the committees of the board clearly establish the committees’ respective
    roles and responsibilities.
ü
Our board holds executive sessions of the independent directors at every regular board meeting and most committee meetings.
ü
Our independent directors have direct access to management and sole discretion to hire independent advisors at the company’s expense.
ü
Our independent directors select, evaluate, and compensate our CEO. Our board compensates our other executive officers and ensures we have a strong succession plan for executive officer roles. This was particularly evident as we welcomed Dave Ricks as President, CEO, and board chair and three new executive committee members in 2017 and named four additional executive committee members effective 2018.
ü    Our board actively oversees and approves our corporate strategy.
ü    Our board has a longstanding commitment to corporate responsibility.
ü    Our board oversees compliance and enterprise risk management practices.
ü
We have a comprehensive code of ethical and legal business conduct applicable to our board and all employees worldwide. This code is reviewed and approved annually by the board.
ü
We have 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.
ü    We have strong governance and disclosure of corporate political spending.
ü    We have transparent public policy engagement.
ü    We have meaningful stock ownership guidelines for our directors and executive officers.

Compensation
Further Information
Item 2: Advisory Vote on Compensation Paid to Named Executive Officers
See page 34
 
 
 
 
 
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 2017, over 97 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 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.

P6



ü
We do not provide tax gross-ups to executive officers (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 executive officers.

Executive Compensation Summary for 2017
At the time the total target compensation was established at the end of 2016, target 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 at or above target, consistent with the company's strong performance in 2017.

Pay for Performance
As described in the Compensation Disclosures and Analysis (CD&A), 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 (both absolute and relative).

The summary 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.

2017 Annual Cash Bonus Multiple
The company exceeded its annual cash bonus targets for revenue, EPS, and pipeline progress.

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*Performance goal multiples are capped at 2.0.



P7



2017 Performance Award Multiple
We met the 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 payout at target.

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2017 Shareholder Value Award Multiple
Our stock price growth was in the target range (16.2% to 26.6%) under our Shareholder Value Award program, which is based on expected large-cap company returns over a three-year period. This performance resulted in a Shareholder Value Award payout at target.

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P8



Audit Matters
Further Information
Item 3: Ratification of Appointment of Principal Independent Auditor
See page 62
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 3
Ratify the appointment of Ernst & Young LLP as the company's principal independent auditor for 2018

Vote FOR
Majority of
votes cast

Management Proposals
Further Information
Item 4: Approve Amendments to the Articles of Incorporation to Eliminate the Classified Board Structure
See page 65
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 4
Approve amendments to the articles of incorporation to eliminate the classified board structure
Vote FOR
80% of outstanding shares

 
Further Information
Item 5: Approve Amendments to the Articles of Incorporation to Eliminate Supermajority Voting Provisions
See page 66
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 5
Approve amendments to the articles of incorporation to eliminate supermajority voting provisions


Vote FOR
80% of outstanding shares




Further Information
Item 6: Approve the Amended and Restated 2002 Lilly Stock Plan
See page 68
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 6
Approve the amended and restated 2002 Lilly stock plan
Vote FOR
Majority of
votes cast




P9



Shareholder Proposals
Further Information
Item 7: Shareholder Proposal Seeking Support for the Descheduling of Cannabis
See page 77
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 7
Proposal seeking support for the descheduling of cannabis
Vote AGAINST
Majority of
votes cast


 
Further Information
Item 8: Shareholder Proposal Requesting Report Regarding Direct and Indirect Political Contributions
See page 78
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 8
Proposal requesting report regarding direct and indirect political contributions
Vote AGAINST
Majority of
votes cast




Further Information
Item 9: Shareholder Proposal Requesting Report on Policies and Practices Regarding Contract Animal Laboratories

See page 80
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 9
Proposal requesting report on policies and practices regarding contract animal laboratories
Vote AGAINST
Majority of
votes cast




Further Information
Item 10: Shareholder Proposal Requesting Report on the Extent to Which Risks Related to Public Concern Over Drug Pricing Strategies are Integrated into Incentive Compensation Arrangements

See page 82
 
 
 
 
 
Management recommendation
Vote required
 to pass

Item 10
Proposal requesting report on the extent to which risks related to public concern over drug pricing strategies are integrated into incentive compensation arrangements
Vote AGAINST
Majority of
votes cast



P10



 
Further Information
Other Information

See page 83

How to Vote in Advance of the Meeting

Even if you plan to attend the 2018 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 or voting instruction form to vote ONLINE

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

*    Sign, date, and return your proxy card or 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 2018 Annual Meeting
You may also opt to vote in person at the 2018 Annual Meeting, which will be held on Monday, May 7, 2018, at the Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., EDT. 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 2021. Each of the director nominees listed below has agreed to serve that term. The following sections provide information about our directors, including their qualifications, the director nomination process, and director compensation.

Board Recommendation on Item 1

The Board of Directors recommends that you vote FOR each of the following nominees:
Katherine Baicker, Ph.D.
J. Erik Fyrwald
Jamere Jackson
Ellen R. Marram
Jackson P. Tai

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.

P11




Director Biographies

Set forth below is information as of March 8, 2018, 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 executive officers. To the best of our knowledge, there are no pending material legal proceedings in which any of our directors or nominees for director, or any of their associates, is a party adverse to us or any of our affiliates, or has a material interest adverse to us or any of our affiliates. 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 2018

The following five directors will seek election at this year's annual meeting. Four of these directors are standing for reelection; Jamere Jackson is seeking election for the first time. See “Item 1. Election of Directors” above for more information.

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Katherine Baicker, Ph.D.
Age: 46, Director since 2011
Board Committees: Audit; Public Policy and Compliance

 
 
 
Industry Memberships: Panel of Health Advisers to the Congressional Budget Office; Editorial boards of Health Affairs and the Journal of Health Economics; Research Associate of the National Bureau of Economic Research; and Member of the National Academy of Medicine
 
 
 
 
 
 
 
 
 
Career Highlights
 
Harris School of Public Policy, University of Chicago
 
 
• Dean and the Emmett Dedmon Professor (2017 - present)
 
 
Harvard T.H. Chan School of Public Health, Department of Health Policy and Management

 
 
• Professor of health economics (2007 - 2017)
 
 
• C. Boyden Gray Professor (2014 - 2017) and Acting Chair, Department of Health Policy and Management (2014 - 2016)
 
 
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 policy and health care delivery is recognized in both academia and government.


P12



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J. Erik Fyrwald
Age: 58, 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
 
 
• President and Chief Executive Officer (2016 - present)
 
 
Univar, Inc., a leading distributor of chemicals and provider of related services
 
 
• President and Chief Executive Officer (2011 - 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 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: 49, Director since 2016
Board Committees: Audit; Finance
 
 
 
Non-profit Board: 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 a strong background in strategic planning. He has 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.


P13



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Ellen R. Marram
Age: 71, Director since 2002, Lead Independent Director since 2012
Board Committees: Compensation; Directors and Corporate Governance (chair)
 
 
 
Public Board: Ford Motor Company
Prior Public Boards: Cadbury plc; The New York Times Company
Private Board: 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 non-profit 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: 67, Director since 2013
Board Committees: Audit; Finance
 
 
 
Public Boards: MasterCard Incorporated; Royal Philips NV; and HSBC Holdings plc
Prior Public Boards: The Bank of China Limited; Singapore Airlines; NYSE Euronext; ING Groep NV; CapitaLand (Singapore); DBS Group Holdings and DBS Bank
Private Board: Canada Pension Plan Investment Board
Non-profit Boards: 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.
.




P14



Class of 2019

The following five directors are serving terms that will expire in May 2019. Mr. Hoover will retire from the board on May 7, 2018. At that time, the board expects to reduce its size.
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Ralph Alvarez
Age: 62, Director since 2009
Board Committees: Compensation (chair); Science and Technology
 
 
 
Public Boards: Skylark Co., Ltd. (Mr. Alvarez is retiring from the Skylark board effective March 29, 2018); Lowe's Companies, Inc.; Dunkin' Brands Group, Inc.; and Realogy Holdings Corp.
Prior Public Boards: McDonald's Corporation; KeyCorp


 
 
 
Memberships and Other Organizations: University of Miami: President's Council; School of Business Administration Board of Overseers

 
 
 
 
 
Career Highlights
 
Advent International Corporation, a leading global private equity firm
 
 
• Operating Partner (2017 - present)
 
 
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 and board 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.



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http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=6
 
Carolyn R. Bertozzi, Ph.D.
Age: 51, Director since 2017
Board Committees: Public Policy and Compliance; Science and Technology
 
 
 
Public Board: Catalent
Non-profit Boards: Broad Institute; Grace Science Foundation
 
 
 
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; and American Academy of Arts and Sciences
 
 
 
Honors: MacArthur Genius Award; Lemelson MIT Prize; Heinrich Wieland Prize, and 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.

 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=7
 
R. David Hoover
Age: 72, Director since 2009
Board Committees: Finance (chair); Directors and Corporate Governance
 
 
 
 
 
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




 
 
 
 
 
Memberships and Other Organizations: Indiana University Kelley School of Business, Dean's Council
 
 
 
 
 
 
 
 
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.





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http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=17
 
Juan R. Luciano
Age: 56, 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; Economic Club of Chicago; Commercial Club of Chicago; and The Business Council
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=18
 
Kathi P. Seifert
Age: 68, Director since 1995
Board Committees: Audit; Compensation
 
 
 
Public Board: Investors Community Bank
Private Board: Appvion, Inc.
Prior Public Boards: Albertsons; Revlon Consumer Products Co.; Supervalue Inc.; and 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; Greater Fox Cities Area Habitat for Humanity; and Riverview Gardens
 
 
 
 
 
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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Class of 2020

The following four directors are serving terms that will expire in May 2020.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=22
 
Michael L. Eskew
Age: 68, Director since 2008
Board Committees: Audit (chair); Compensation; Directors and Corporate Governance
 
 
 
Public Boards: 3M Corporation; IBM Corporation; and Allstate Insurance Company
 
Non-profit 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.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=5
 
William G. Kaelin, Jr., M.D.
Age: 60, Director since 2012
Board Committees: Finance; Science and Technology (chair)
 
 
 
Industry Memberships: National Academy of Medicine; National Academy of Sciences; Association of American Physicians; and American Society of Clinical Investigation
 
 
 
Honors: Canada Gairdner International Award; Lefoulon-Delalande Prize - Institute of France; and 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.



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http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=8
 
David A. Ricks
Age: 50, Director since 2017
Board Committees: none
 
 
 
Industry Memberships: Pharmaceutical Research and Manufacturers of America (PhRMA)
 
 
 
Non-profit Boards: Board of Governors for Riley Children's Foundation; Central Indiana Community Partnership
 
 
 
 
 
Career Highlights
 
Eli Lilly and Company
 
 
• Chairman of the Board, 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 joined the board at that time. He became Chairman of the Board 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.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12136582&doc=21
 
Marschall S. Runge, M.D., Ph.D.
Age: 63, Director since 2013
Board Committees: Public Policy and Compliance; Science and Technology

 
 
 
Industry Membership: Experimental Cardiovascular Sciences Study Section of the National Institutes of Health
 
 
 
Non-profit Board: UMHS
 
 
 
 
 
 
 
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.


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:

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CEO Experience:
 
7

 
 
 
Financial Expertise:
 
7

 
 
 
Relevant Scientific/Academic Expertise:
 
4

 
 
 
 
 
 
Healthcare Experience:
 
5

 
 
 
 
 
Operational/Strategic Expertise:
 
9

 
International Experience:
 
7

 
 
 
Marketing and Sales Expertise:
 
6

 
 
 
 

Board Tenure: In 2016 and 2017, the board added three new independent members: Mr. Juan R. Luciano, Mr. Jamere Jackson, and Dr. Carolyn R. Bertozzi, as well as Mr. David A. Ricks. Also in 2016 and 2017, three members retired from the board: Ms. Karen Horn, Dr. John Lechleiter, and Dr. Frank Prendergast. Mr. David Hoover will retire in May 2018.

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 or Less:
 
4

 
 
 
3-5 Years:
 
3

 
 
 
 
6-10 Years:
 
3

 
 
 
 
More than 10 Years:
 
4

 
 
 

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 standalone 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 14 directors range in age from 46 to 72 and include four women and four 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 Refreshment
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 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.

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 2018 class be elected at the 2018 annual meeting.

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 independent director, for direct discussions to determine the mutual level of interest in pursuing the candidacy. If these discussions are favorable, the committee recommends that the board nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable).

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 2017.
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 Committee; Finance Committee; Public Policy and Compliance Committee members (including the chairs)
$3,000
 
Lead Independent 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 in connection with their travel to and from board meetings and other company events. 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, and may not sell the equity compensation they earn as a director until after leaving the board. A significant portion of director compensation is in the form of deferred Lilly stock payable after they leave the board. 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.

In 2017, non-employee directors received $160,000 of equity compensation (but no more than 7,500 shares), deposited annually in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below). This award is prorated for time served and payable beginning the second January following the director's departure from board service.

Annual Compensation Cap for Directors
In 2017, the board approved a cap to the total annual compensation (retainers, fees, and stock allocation) for non-employee directors of $800,000.  The cap is intended to avoid excessive director compensation and is

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included in both our Directors' Deferral Plan and in the Amended and Restated 2002 Lilly Stock Plan being considered by shareholders at this year’s annual shareholders meeting.

Lilly Directors’ Deferral Plan: 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 (the Internal Revenue Code). The aggregate amount of interest that accrued in 2017 for the participating directors was $140,541, at a rate of 2.7 percent. The rate for 2018 is 3.1 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.

2017 Compensation for Non-Employee Directors

Name
Fees Earned
or Paid in Cash ($)
Stock Awards ($)1
All Other
Compensation
and Payments ($)
2
Total ($)3
Mr. Alvarez
$131,000
 
$160,000
 
$0
 
$291,000
 
Dr. Baicker
$119,000
 
$160,000
 
$0
 
$279,000
 
Dr. Bertozzi
$109,083
 
$146,667
 
$0
 
$255,750
 
Mr. Eskew
$140,000
 
$160,000
 
$0
 
$300,000
 
Mr. Fyrwald
$131,000
 
$160,000
 
$17,000
 
$308,000
 
Mr. Hoover
$128,000
 
$160,000
 
$0
 
$288,000
 
Mr. Jackson
$119,000
 
$160,000
 
$0
 
$279,000
 
Dr. Kaelin
$134,000
 
$160,000
 
$13,500
 
$307,500
 
Mr. Luciano
$116,000
 
$160,000
 
$0
 
$276,000
 
Ms. Marram
$158,000
 
$160,000
 
$30,000
 
$348,000
 
Dr. Runge
$119,000
 
$160,000
 
$0
 
$279,000
 
Ms. Seifert
$119,000
 
$160,000
 
$24,000
 
$303,000
 
Mr. Tai
$119,000
 
$160,000
 
$30,000
 
$309,000
 
Retired
 
Dr. Lechleiter
$129,167
 
$66,667
 
$10,000
 
$205,834
 
Dr. Prendergast
$49,583
 
$66,667
 
$0
 
$116,250
 
     
1 Each non-employee director received an award of stock valued at $160,000 (approximately 1,924 shares), except Dr. Lechleiter and Dr. Prendergast, who retired from the board in May 2017, and Dr. Bertozzi, who joined the board in February 2017, who 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 computed in

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accordance with FASB ASC Topic 718, based on the closing stock price on the grant date. See Note 11 of the consolidated financial statements in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for additional detail regarding assumptions underlying the valuation of equity awards. 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.

2 
This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. ("Foundation") under its matching gift program, which is generally available to U.S. employees as well as 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 Dr. Kaelin, Ms. Marram, Ms. Seifert, and Mr. Tai include matching contributions for donations made at the end of 2016 (Dr. Kaelin - $13,500; Ms. Marram - $8,000; Ms. Seifert - $21,750, and Mr. Tai - $30,000), for which the matching contribution was not paid until 2017.

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

2018 Director Compensation
In 2017, the Directors and Corporate Governance Committee reviewed the company’s compensation for independent directors, including a peer group analysis. As a result of this analysis, the committee recommended, and the board approved an increase in the annual stock award for non-employee directors from $160,000 to $175,000 (but retained the cap of 7,500 shares) to be effective starting with the 2018 stock award. The increase reflected a market increase in total director compensation, which the committee proposed as an increase to equity rather than cash compensation. In addition, the committee recommended, and the board approved, an increase to the lead independent director's retainer from $30,000 to $35,000 to reflect increased expectations for the role over time. All other director compensation remains unchanged from 2017.
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 is independent. Prior to expiration of his board term in 2017, the board reached the same conclusion regarding Dr. Prendergast, and determined that the members of each committee also meet our independence standards. The board determined that none of the non-employee directors, has had during the last four years (i) any of the relationships identified in the company’s categorical independence standards 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
2017 Aggregate Percentage of Organization's Revenue
Dr. Baicker
University of Chicago
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
Purchase 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 0.1 percent
Mr. Luciano
Archer Daniels Midland
For-profit Corporation
Executive Officer
Purchase of products
Less than 0.1 percent
Sale of products
Less than 0.1 percent of Lilly's revenue
Dr. Runge
University of Michigan Medical School
Educational Institution
Executive Officer
Research grants
Less than 0.1 percent

In addition to the foregoing relationships, the Directors and Corporate Governance Committee considered a proposed commercial arrangement under discussion by the company and ADM, where Mr. Luciano serves as CEO. Mr. Luciano has not been involved in discussions about the potential transaction and Mr. Luciano would not have any direct personal or financial interest in the commercial arrangement. The anticipated size of the commercial arrangement would be less than 1.5 percent of ADM's annual revenue.
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 organizations, in each of the last four fiscal years, did not exceed the greater of $1 million or 2 percent of that organization's consolidated gross revenues in a single fiscal year for the relevant four-year period. No director had any direct business relationships with the company or received any direct personal benefit from any of these transactions, relationships, or arrangements.

Committees of the Board of Directors

The duties and membership of the six board-appointed committees are described below. All committee members are independent as defined in the NYSE listing requirements and Lilly's independence standards. 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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Membership and Meetings of the Board and Its Committees
In 2017, 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 annual meeting in 2017. Current committee membership and the number of meetings of the board and each committee in 2017 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
Mr. Luciano
ü



ü
ü

Ms. Marram
LD

ü
C



Mr. Ricks
ü






Dr. Runge
ü




ü
ü
Ms. Seifert
ü
ü
ü




Mr. Tai
ü
ü


ü


Number of 2017 Meetings
8
10
8
6
8
4
8

C
Committee Chair
LD
Lead Independent Director


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
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

The Compensation Committee:
oversees the company’s global compensation philosophy and policies

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establishes the compensation of our chief executive officer (CEO) and other executive officers
acts as the oversight committee with respect to the company’s deferred compensation plans, management stock plans, and other management incentive compensation programs
reviews succession plans for the CEO and other key senior leadership positions
reviews, monitors, and oversees stock ownership guidelines for executive officers.

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)
has any other interlocking relationships requiring disclosure under applicable SEC rules.

Directors and Corporate Governance Committee

The Directors and Corporate Governance Committee:
leads the process for director recruitment, together with the lead independent director
recommends to the board candidates for membership on the board and its committees, as well as for the role of lead independent director
oversees matters of corporate governance, including board performance, director independence and compensation, 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
significant business development opportunities.

Public Policy and Compliance Committee

The 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
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

The 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
oversees matters of scientific and medical integrity and risk management.


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Board Oversight of Compliance and Risk Management
The board, together with its 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 overseen by a board committee or the full board. 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 compensating other key senior leadership positions
ensuring that an effective succession plan is in place for all key senior leadership positions and

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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
overseeing the company's enterprise risk management program.

The board takes an active role in its oversight of our corporate strategy. Each year, the board and executive management closely examine the company's strategy, including key risks and decisions facing the company. Decisions reached in this session are updated throughout the year, including as the board discusses the company's financial performance, the performance of our business units, and progress in our pipeline.

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 member of the board.

Voting for Directors
In an uncontested election, directors are elected by a majority of votes cast. An incumbent nominee who fails to receive a greater number of votes “for” than “against” his or her election will tender his or her resignation from the board (following the certification of the shareholder vote). 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 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 annually, with a more robust assessment at least every three years when considering whether to nominate directors to new three-year terms. The company has not adopted term limits because the board believes that arbitrary term limits on a director’s service are not appropriate.

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: 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 CEO, coupled with a strong lead independent director position (see the description of the role below), is the most efficient and effective

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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 to ensure that this approach continues to strike the appropriate balance for the company and our stakeholders. Such a review was conducted most recently during the succession-management process relating to the appointment of Mr. Ricks.

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 independent director role: The lead Independent 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, ensuring 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
together with the Directors and Corporate Governance Committee, leading the director recruitment process.

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

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

Director access to management and independent advisors: Independent directors have direct access to members of management whenever they deem it necessary, and the company's executive officers attend 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:
future candidates for the CEO and other senior leadership positions
succession timing
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 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

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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.

Board Education and Annual Performance Assessment

The company engages in a comprehensive orientation process for incoming new directors. Directors also attend 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.

Every year the Directors and Corporate Governance Committee conducts a robust assessment of the board's performance, board committee performance, and all board processes, based on input from all directors. We also conduct a detailed review of individual director performance at least every three years, when considering whether to nominate the director to a new three-year term. In 2017, we updated our process to include an assessment of each director every year.

Conflicts of Interest and Transactions with Related Persons

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

Review and Approval of Transactions with Related Persons
The board has adopted a policy and procedures for review, approval, and monitoring of transactions involving the company and related persons (directors and executive officers, their immediate family members, or shareholders of 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
the overall fairness of the transaction to the company.

Procedures:
Management or the affected director or executive officer will bring the matter to the attention of the chairman, the lead independent director, the chair of the Directors and Corporate Governance Committee, or the corporate secretary.
The chairman and the lead independent 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.

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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.

We have four current or former employees who are relatives or related persons of current or former executive officers. Dr. John Bamforth, Vice President, Global Marketing, Bio-Medicines, is the spouse of Dr. Susan Mahony, an executive officer. Myles O’Neill, Senior Vice President, and President, Manufacturing Operations, is the spouse of Dr. Fionnuala Walsh, a former executive officer. Andrew Lechleiter, General Manager, Hong Kong and Macau, is the son of Dr. John Lechleiter, Lilly's former chairman of the board. Finally, William Grose, former Consultant Engineer, is the partner of Johna Norton, an executive officer. For 2017, these four employees received cash and equity compensation totaling between $165,000 and $1,780,000.

All four individuals participate or participated 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 areas of interest or concern related to corporate governance, as well as any specific issues for the coming proxy season. In 2017, 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, the company's executive compensation, and shareholders' ability to amend the bylaws, among other topics. The overall tone of these conversations was productive and positive, and the investors with whom we spoke were generally supportive of our performance and our overall compensation and governance policies, although a few shareholders shared differing views on some of our governance practices. This feedback has been discussed by our CEO and chair, the lead independent director, our Compensation Committee, and our Directors and Corporate Governance Committee, and it was a key input into board discussions on corporate governance topics. As a result of these discussions and its own deliberations, the board decided to put forward the two management proposals described below. We are committed to continuing to engage with our investors to ensure their diverse perspectives are thoughtfully considered.

Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Each year between 2007 and 2012, our management put forward 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, and 2012, we submitted management proposals to eliminate the supermajority voting requirements themselves. Those proposals also fell short of the required 80 percent vote.   

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Prior to 2012, these proposals received support ranging from 72 to 77 percent of the outstanding shares. In 2012, the vote was 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 resubmitted both proposals this year for consideration at the 2018 Annual Meeting (see
Items 4 and 5). We will continue to engage with our shareholders on these and other topics to ensure that we continue to demonstrate strong corporate governance and accountability to shareholders.

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 19, 2018. 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 19, 2018, and no earlier than September 20, 2018. 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 2019 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 19, 2018, and no earlier than September 20, 2018. 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 2018 shareholders' 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 executive officers as a group, as of February 16, 2018. 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

 

39,627

Katherine Baicker, Ph.D.

 

15,001

Carolyn R Bertozzi, Ph.D.

 

1,764

Enrique A. Conterno
143,553

 

66,837

Michael L. Eskew

 

37,020

J. Erik Fyrwald
100

 

58,059

Michael J. Harrington
92,363

 

12,778

R. David Hoover
1,500

 

36,492

Jamere Jackson

 

2,459

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

 

13,516

Juan R. Luciano

 

5,428

Jan M. Lundberg, Ph.D.
199,220

 

27,871

Ellen R. Marram
1,000

 

52,373

David A. Ricks
136,553

5 

12,222

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

 

9,327

Kathi P. Seifert
3,533

 

65,061

Joshua L. Smiley
24,868

 

7,947

Jackson P. Tai
42,141

 

8,799

All directors and executive officers as a group (28 people):
1,179,936

 

586,114


1 
The sum of the "Shares Owned" and "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 0.02 percent of the outstanding common stock of the company. All directors and executive officers as a group own approximately 0.11 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 restricted stock units that vest within 60 days of February 16, 2018.
4 For the executive officers, this column reflects restricted stock units that will not vest within 60 days of February 16, 2018. 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 Mr. Ricks include 11,389 shares that are owned by a family foundation for which he is a director. Mr. Ricks has shared voting power and shared investment power with respect to the shares held by the foundation.


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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, 2017, 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, IN 46208
123,075,804
11.2%
 
 
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355
72,222,397
6.5%
 
 
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055
63,854,112
5.8%
 
 
Wellington Management Group LLP
280 Congress Street
Boston, MA 02210
56,663,547
5.1%
 
 

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 1,396,140 of its shares and sole dispositive power with respect to 70,638,700 of its shares.

BlackRock, Inc. provides investment management services for various clients. It has sole voting power with respect to 54,703,471 of its shares and sole dispositive power with respect to all of its shares.

Wellington Management Group LLP provides investment management services for various clients. It has shared voting power with respect to 10,291,969 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 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 dialogue with our shareholders 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.


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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 Compensation Discussion and Analysis (CD&A), the compensation tables, and related narratives provided below in this proxy statement.
Compensation Discussion and Analysis

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 2017, and how the company's results affected incentive payouts for 2017 performance.

Say-on-Pay Results for 2017

At last year's annual meeting, more than 97 percent of the shares cast voted in favor of the company's Say-on-Pay proposal on executive compensation. Management and the Compensation Committee view this vote as supportive of the company's overall approach toward executive compensation.

Our Philosophy on Compensation

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

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.


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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 independent 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, and his 2017 compensation for the role of Chairman, President, and CEO was set at that time.
Other Executive Officers: 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 executive officers. Each executive officer's performance assessment is based on achievement of objectives established between such executive officer 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 executive officers, compensation is set by the Compensation Committee at time of promotion or offer.

Assessment of company performance. The Compensation Committee considers company performance in two ways:
As a factor in establishing target compensation for the coming year, the committee considers overall company performance during the prior year across a variety of metrics.
To determine payouts under the cash and equity incentive programs, the committee establishes specific company performance goals related to revenue, EPS, 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 under the "Compensation Committee Matters" section that follows the CD&A.

Competitive Pay Assessment
Our peer group comprises 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 for purposes of assessing competitive pay in June 2015 and decided to include Abbvie, Amgen, AstraZeneca, Baxter, Biogen, Bristol-Myers Squibb, Celgene, Gilead, GlaxoSmithKline, Hoffman-La Roche, Johnson & Johnson, Medtronic, Merck, Novartis, 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.

When determining pay levels, the committee considers an analysis provided by management of peer group pay for each executive officer position (except CEO) along with internal factors such as the performance and experience of each executive officer. The independent compensation consultant for the committee provides a

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similar analysis when recommending pay levels for the CEO. This analysis includes a comparison of actual total direct compensation for Lilly’s CEO in the prior year to the peer group, as well as a comparison of current target total direct compensation for Lilly’s CEO to the most recent available data for the peer group. In the aggregate, the company’s target total compensation to named executive officers was in the middle range of the peer group at the end of 2017.

Components of Our Compensation

Our executive compensation has three components:
base salary;
annual cash bonus, which is calculated based on company performance relative to internal targets for revenue, EPS, and the progress of the pipeline; and
two different forms of equity incentives:
performance awards-equity awards that vest 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
shareholder value awards, which are performance-based equity awards that pay out based on absolute company stock price growth and 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 upon which incentive compensation payouts are determined to eliminate the distorting effect of unusual income or expense items. These items may affect year-over-year growth percentages or 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 2017 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 be adjusted upon promotion, following a change in job responsibilities, or to maintain market competitiveness. Salaries are based on each person's level of contribution, responsibility, expertise, and competitiveness with peer group data.

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 the achievement of the company's financial plans and pipeline objectives for the year. The bonus is based on three areas of company performance relative to internal targets: revenue, EPS, and pipeline progress.

Company performance goals and individual bonus targets are set at the beginning of each year. Actual payout can range from 0 to 200 percent of an individual's bonus target. The Compensation Committee references the

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annual operating plan to establish performance targets and to assess the relative weighting for each objective. The 2017 weightings remained unchanged from the prior year:

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

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 in 2017, executive officers are subject to the Executive Officer Incentive Plan (EOIP). 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) for the year. For the CEO, the maximum bonus award is 0.3 percent of non-GAAP net income. For other executive officers, the maximum amount is 0.15 percent of non-GAAP net income. None of the executive officers will receive an annual cash bonus payment unless the company has positive non-GAAP net income for the year.

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

3.
Equity Incentives

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

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


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The measure of EPS used in the performance award program differs from the measure used in our annual cash bonus program in two ways. First, the EPS goal in the bonus program is set with reference to internal goals that align to our annual operating plan for the year, while the EPS goal in the performance award program is set based on the expected growth rates of our peer group. Second, the bonus program measures EPS over a one-year period, while the performance award program measures EPS over a two-year period. In a given year, the bonus program may pay out above target while the performance award pays out below target (or vice versa).

Shareholder Value Awards
Shareholder value awards are earned based on Lilly's share price (and beginning with 2016 grants, relative TSR performance). Shareholder value awards have a three-year performance period, and any shares paid are subject to a one-year holding requirement. No dividends are accrued during the performance period. Shareholder value awards pay above target if Lilly's stock outperforms an expected rate of return and below target if Lilly's stock underperforms that expected rate of return. The expected rate of return is based on the three-year TSR that a reasonable investor would consider appropriate when investing in a basket of large-cap U.S. companies, as determined by the Compensation Committee. The minimum price to achieve target is calculated by multiplying the starting share price of Lilly's stock by the three-year compounded expected rate of return less Lilly's dividend yield. Executive officers receive no payout if Lilly's TSR for the three-year period is zero or negative. Possible payouts are based on share price growth and range from 0 to 150 percent of the target amount.

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

Pay for Performance

The mix of compensation for the CEO and other named executive officers 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 two- and three-year periods (as described above under "Components of Our Compensation—3. Equity Incentives").


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2017 Target Total Compensation

Performance Review Process
In setting potential executive officer compensation for 2017, the Compensation Committee considered both individual and company performance during 2016.

2016 Individual Named Executive Officer Performance
A summary of the committee's review of the individual named executive officers is provided below:

David Ricks, Chairman, President and Chief Executive Officer: Mr. Ricks became CEO and President on January 1, 2017, and Chairman on June 1, 2017. Mr. Ricks' 2017 compensation opportunity was determined by the committee with input from its independent consultant and using competitive market data as context. Mr. Ricks was promoted based in part on his experience and success in his prior roles. Prior to his appointment as President and CEO, Mr. Ricks was President, Lilly Bio-Medicines for nearly five years where he successfully guided Lilly Bio-Medicines through a period of profound change. As President, Lilly Bio-Medicines, Mr. Ricks had experience in the areas of product development, global sales and marketing as well as public policy. He is well respected inside and outside the company, consistently builds exceptional teams, and sets high standards of performance. Prior to being named President, Lilly Bio-Medicines, Mr. Ricks led Lilly's business operations in Canada, China, and the U.S.

Enrique Conterno, Senior Vice President and President, Lilly Diabetes and President Lilly USA: Under Mr. Conterno's leadership, the Diabetes business had a very strong year in 2016 with volume growth of 28 percent. Mr. Conterno effectively partnered across the value cycle to drive the Diabetes business's strategic plan and provided leadership across our human health commercial businesses. Additionally, effective January 2017, Mr. Conterno assumed additional geographic responsibilities and was named President, Lilly USA. In this role, he led the U.S. affiliate through organization and structural changes as Lilly Diabetes became the host for the company's human pharmaceutical commercial operations in the U.S., China, Japan, and Canada.

Derica Rice (retired), Executive Vice President, Global Services and Chief Financial Officer: Mr. Rice demonstrated strong partnership with business leaders in 2016 by facilitating the completion of the acquisition of Vetmedica. Mr. Rice took an active role in partnering with R&D on portfolio management and business development. Mr. Rice also successfully facilitated key leadership transitions in his function.

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Jan Lundberg, Executive Vice President, Science and Technology and President, Lilly Research Laboratories: Under Dr. Lundberg's leadership, Lilly Research Laboratories achieved significant pipeline progression in 2016 including regulatory approvals for Taltz, and Lartruvo®, and the launch of Phase 3 trials for all but one planned program. Dr. Lundberg played a key leadership role in increasing the company's focus on external research and initiatives to expand the company's research presence, which yielded positive results under his leadership.

Michael Harrington, Senior Vice President and General Counsel: Mr. Harrington was effective and influential in his role as General Counsel in 2016 and he was a productive partner with the executive team. Under Mr. Harrington, the company prevailed in several key patent lawsuits, including defending patent protection for Alimta®. Mr. Harrington also led a company initiative to increase protection of Lilly's intellectual property assets and improve cyber security.

Target Compensation
The information below reflects total compensation at target for named executive officers for 2017. The actual compensation received in 2017 is summarized below in "2017 Compensation Payouts."

Rationale for Changes to Named Executive Officer Target Compensation
The committee established 2017 target total compensation opportunities for each named executive officer based on the named executive officer's 2016 performance, internal relativity, and peer group data. In anticipation of Dr. John Lechleiter’s retirement at the end of 2016, the board appointed Mr. Ricks as President and CEO effective January 1, 2017. The committee set Mr. Ricks’ 2017 base salary and bonus target in August 2016 in conjunction with his appointment and approved the value of his 2017 equity in December 2016 to reflect his promotion. For the other named executive officers, the committee approved salary increases, aligned with the company's annual increase guidelines. Bonus targets as a percentage of base salary for all named executive officers remained unchanged from the prior year. 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 the salary increase for each named executive approved by the committee in December 2016, except for Mr. Ricks, who took the role of President and CEO in January 2017. Each named executive officer's actual base salary earned during 2017 is reflected in the Summary Compensation Table in the "Executive Compensation" section of this proxy.

Name
2016 Annual Base Salary
2017 Annual Base Salary
Increase (effective March 1, 2017)
Mr. Ricks
N/A
$1,400,000
Mr. Conterno
$731,511
$768,100
5%
Mr. Rice (retired)
$1,071,306
$1,092,700
2%
Dr. Lundberg
$1,007,855
$1,028,000
2%
Mr. Harrington
$835,280
$860,300
3%

Annual Cash Bonus Targets
Based on a review of internal relativity, peer group data, and individual performance, the committee decided to retain the same bonus targets for all named executive officers in 2017. Bonus targets are shown in the table below as a percentage of each named executive officer’s base salary earnings:
Name
2016 Bonus Target
2017 Bonus Target
Mr. Ricks
N/A
150%
Mr. Conterno
80%
80%
Mr. Rice (retired)
100%
100%
Dr. Lundberg
100%
100%
Mr. Harrington
80%
80%

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Total Equity Program - Target Grant Values
For 2017 equity grants, the committee set the total target values for named executive officers based on internal relativity, individual performance, and peer group data. Named executive officers have 60 percent of their equity target allocated to shareholder value award and 40 percent to performance award. Total target values for the 2016 and 2017 equity grants to the named executive officers were as follows:
Name
2016 Annual Equity Grant
2017 Annual Equity Grant
Mr. Ricks
N/A
$8,500,000
Mr. Conterno
$2,200,000
$2,500,000
Mr. Rice (retired)
$3,800,000
$3,800,000
Dr. Lundberg
$3,600,000
$3,600,000
Mr. Harrington
$2,300,000
$2,300,000

Performance Goals for 2017 Incentive Programs

Annual Cash Bonus Goals
The Compensation Committee established the company performance targets using the company's 2017 corporate operating plan approved by the Board of Directors in 2016. These targets are described below under "2017 Compensation Payouts."

Performance Awards – 2017-2019 Performance Award (PA)
In February 2017, the committee established a cumulative, compounded two-year EPS growth target of 5.3 percent per year based on investment analysts’ EPS growth estimates for our peer group companies at that time.

Payouts for the 2017-2019 performance award range from 0 to 150 percent of the target, as illustrated in the chart below:
 
 
 
 
50% payout
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Target
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payout Multiple
 
0.00
 
0.50
 
 
0.75
 
 
1.00
 
 
1.25
 
 
1.50
Cumulative 2-Year EPS
$3.52
 
$6.76
 
 
$7.18
 
 
$7.61
 
 
$8.05
 
$8.51+
EPS Annual Growth Rate
 
 
 
(2.7)%
 
 
1.3%
 
 
5.3%
 
 
9.3%
 
 
13.3%

Shareholder Value Awards – 2017-2019 Shareholder Value Award (SVA)
For purposes of establishing the stock price target for the shareholder value awards, the starting price was $72.15 per share, the average closing stock price for all trading days in November and December 2016. The target share price was established using the expected annual rate of return for large-cap companies (8 percent), less an assumed Lilly dividend yield of 2.88 percent. To determine payout, the ending price will be the average of the closing prices of company stock for all trading days in November and December 2019. The award is designed to deliver no payout to executive officers if the shareholder return (including projected dividends) is zero or negative. Possible payouts based on share price ranges are illustrated in the grid below.


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Ending Stock Price
Less than $65.80
$65.80-$74.79
$74.80-$83.79 
$83.80-$92.79
$92.80-$101.79
 Greater than $101.79
Compounded Annual Share Price Growth Rate (excluding dividends)
Less than (3.0%)
(3.0%)-1.2%
1.2-5.1%
5.1%-8.8%
8.8%-12.2%
Greater than 12.2%
Percent of Target
0%
50%
75%
100%
125%
150%

Executive officer awards are subject to a relative TSR modifier, as outlined in 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.

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Special Retention Restricted Stock Unit Grant
The Compensation Committee approved a special retention grant of $3 million in restricted stock units for Enrique Conterno, Senior Vice President and President, Lilly Diabetes and President, Lilly USA. This type of award is rare at Lilly—we have not delivered a special grant to an executive officer (other than an external hire) in a number of years. Mr. Conterno is a talented leader who built the diabetes business into our largest franchise and accepted the additional responsibility as head of Lilly USA. His leadership of diabetes and across the enterprise is critical to delivering on our strategy under our new Chairman and CEO. In particular, we value the continuity of his leadership in a time of significant transition at the company. The award has a four-year vesting period, and it will be forfeited if Mr. Conterno resigns or retires from the company prior to December 11, 2021. 

2017 Compensation Payouts

The information in this section reflects the amounts paid to named executive officers for the annual cash bonus and for equity awards granted in prior years for which the relevant performance period ended in 2017.

Company Performance
In 2017 we exceeded both our annual revenue and EPS targets. We also made significant progress on our pipeline, meeting or exceeding all of our pipeline targets. Key pipeline highlights include first regulatory approval for Verzenio and Olumiant, along with nine other new approvals, indications, or line extensions.

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


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2017 Corporate Target
Adjusted Results*
Multiple
Revenue
$22.3 billion
$22.9 billion
1.30
EPS
$4.15
$4.28
1.37
Pipeline score
3.00
3.65
1.33
Resulting Bonus Multiple
1.34

*See Appendix A, “Summary of Adjustments Related to the Annual Cash Bonus and Performance Award”.


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The Science and Technology Committee's assessment of the company's progress toward achieving product pipeline goals is detailed below:

Activity
Objective
Achievement
Approvals
1 new drug first approval
9 other approvals
2 new drug first approvals
9 other approvals
Potential new drug Phase 3 starts
2
2
Potential new drug Phase 1 starts
9-10
11
Potential new indication or line extension Phase 3 starts
2
4
Plan Boldly
Meet industry benchmark for speed of development
Plans exceeded industry benchmark
Deliver to Launch
Meet planned project timelines
Delivered faster than project plans
Qualitative Assessment
Chief scientific officer's assessment of performance against strategic objectives

Based on the recommendation of the Science and Technology Committee, the Compensation Committee certified a pipeline score of 3.65, resulting in a pipeline multiple of 1.33.

When combined, the revenue, EPS, and pipeline multiples yielded a bonus multiple of 1.34.
(0.25 x 1.30) + (0.50 x 1.37) + (0.25 x 1.33) = 1.34 bonus multiple

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The cash bonus amounts paid to named executive officers for 2017 are reflected in the Summary Compensation Table.

2016-2018 Performance Award
The target cumulative EPS for the 2016-2018 performance award was set in the first quarter of 2016 reflecting expected industry growth of 7.0 percent each year over the two-year performance period of 2016-2017. The company's actual annual EPS growth for the two-year period was 7.0 percent. This outcome was largely driven by volume growth from our newer products.


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For the named executive officers, the number of shares earned and subject to an additional 13-month service-vesting period under the 2016-2018 performance award 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
Mr. Ricks
N/A
N/A
Mr. Conterno
12,222
12,222
Mr. Rice (retired)
21,111
21,111
Dr. Lundberg
20,000
20,000
Mr. Harrington
12,778
12,778

2015-2017 Shareholder Value Award
The target stock price range of $80.30 to $86.17 (16.2% to 24.6% stock price growth) for the 2015-2017 shareholder value award was set in 2015 based on a beginning stock price of $69.13, which was the average closing price for Lilly stock for all trading days in November and December 2014. The ending stock price of $84.70 represents a stock price growth of approximately 22.5 percent over the relevant three-year period.  The company’s performance compared to target (and the resulting payout multiple) for this award is shown below.



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The shares paid to named executive officers during 2018 for the 2015-2017 shareholder value award were as follows:
Name
Target Shares
Shares Paid Out
Mr. Ricks
N/A
N/A
Mr. Conterno
22,507
22,507
Mr. Rice (retired)
42,764
42,764
Dr. Lundberg
38,262
38,262
Mr. Harrington
25,883
25,883

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
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 executive officer.

Perquisites

The company provides very limited perquisites to executive officers. The company generally does not allow personal use of the corporate aircraft. In rare cases when the security and efficiency benefits outweigh the expense, the corporate aircraft is made available to Mr. Ricks for personal use. The company did not incur any expenses for personal use of its aircraft in 2017 by Mr. Ricks, and he did not receive any other

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perquisites. Depending on seat availability, family members and personal guests may accompany executive officers who are traveling for business on the company aircraft. There is no incremental cost to the company for these trips by family members and personal guests.

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 2017” table.

Severance Benefits

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

The company has adopted change-in-control severance pay plans for nearly all employees, including the executive officers. The plans are intended to preserve employee morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change in control. In addition, the plans are intended to align executive and shareholder interests by enabling executives to evaluate corporate transactions that may be in the best interests of the shareholders and other constituents of the company without undue concern over whether the transactions may jeopardize the executives’ own employment.
Highlights of our change-in-control severance plans
Ÿ
all regular employees are covered
Ÿ
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 require a “double trigger”—a change in control followed by an involuntary loss of employment within two years. This is consistent with the plan's intent to provide employees with financial protection upon loss of employment. With respect to unvested equity, accrued performance will be used to determine the number of shares earned under an award, but vesting does not accelerate immediately upon a change in control. Rather the performance-adjusted awards will convert to restricted stock units that continue to vest with the new company. Shares will pay out upon the earlier of the completion of the original award period; upon a covered termination; or if the successor entity does not assume, substitute, or otherwise replace the awards.

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 continue 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. During 2017, the holding requirement for other executive officers ranged from two to three times annual base salary depending on the position. Beginning in 2018, the holding requirement for other executive officers will range from two to four times annual base salary depending on the position. Until the required number of shares is reached, the executive officer 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, 2017, Mr. Ricks held shares valued at approximately 8 times his annual salary. The following table shows the share requirements for the named executive officers:
Name
Share Requirement
2017                              2018

Owns Required 2018 Shares
Mr. Ricks
six times base salary
six times base salary
Yes
Mr. Conterno
three times base salary
four times base salary
Yes
Mr. Rice (retired)
three times base salary

four times base salary
Yes
Dr. Lundberg
three times base salary

four times base salary
Yes
Mr. Harrington
three times base salary

four times base salary
Yes


Executive officers are also required to hold all shares received from equity program payouts, net of acquisition costs and taxes, for at least one year, even once share ownership requirements have been met. For performance awards, 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

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to claw back incentive payouts from any member of senior management (approximately 150 employees) whose misconduct results in a material violation of law or company policy that causes significant harm to the company or who fails in his or her supervisory responsibility to prevent such misconduct by others.

Additionally, the company can recover all or a portion of any executive officer incentive compensation in the case of materially inaccurate financial statements or material errors in the performance calculation, whether or not they result in a restatement and whether or not the executive officer has engaged in wrongful conduct.

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 2018 Compensation

Lilly’s Board of Directors unanimously elected Joshua L. Smiley to assume the role of Senior Vice President and Chief Financial Officer effective January 1, 2018, succeeding Mr. Rice, who retired from the company at the end of 2017. In connection with his appointment, Mr. Smiley will receive a base salary of $875,000 and will be eligible for an annual cash bonus with a target of 95 percent of base salary. Mr. Smiley received an equity award in February 2018 as part of the company’s annual equity incentive program with a grant value of $2.3 million. One hundred percent of this grant value was delivered in the form of performance-based equity: 60 percent in shareholder value awards and 40 percent in performance awards.

The Compensation Committee approved new share ownership guidelines for named executive officers other than the CEO. While the CEO’s requirement remains six times his annual base salary, the named executive officers' requirement increased from three times to four times annual base salary.



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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
($)
4
Total Compensation
($)
David A. Ricks
2017

$1,400,000

$0
$10,200,000
 
$0

$2,814,000

$1,347,991


$84,000


$15,845,991

Chairman, President, and
Chief Executive Officer
2016
N/A
N/A
N/A
 
N/A
N/A
N/A

N/A
N/A
2015
N/A
N/A
N/A
 
N/A
N/A
N/A

N/A
N/A
Enrique A. Conterno
2017

$762,002

$0
$6,000,000

$0

$816,866

$999,426


$45,720


$8,624,014

Senior Vice President and
President, Lilly Diabetes and President, Lilly USA
2016

$727,960

$0
$2,200,000
 
$0

$681,371

$935,408


$43,678


$4,588,417

2015

$705,653

$0
$2,270,000
 
$0

$852,075

$0
5 

$42,339


$3,870,067

Derica W. Rice (retired)
2017

$1,089,134

$0
$4,560,000
 
$0

$1,459,440

$1,719,690


$65,348


$8,893,612

Executive Vice President,
Global Services and
Chief Financial Officer
2016

$1,067,805

$0
$3,800,000
 
$0

$1,249,332

$1,739,429


$64,068


$7,920,634

2015

$1,045,200

$0
$4,313,000
 
$0

$1,514,495

$0
5 

$62,712


$6,935,407

Jan M. Lundberg, Ph.D.
2017

$1,024,643

$0
$4,320,000
 
$0

$1,373,021

$618,333


$61,479


$7,397,476

Executive Vice President, Science
and Technology and President,
Lilly Research Laboratories
2016

$1,007,855

$0
$3,600,000
 
$0

$1,179,190

$627,381


$60,471


$6,474,897