SEC pushes Lilly, WellPoint for more info on executive pay: Two Indianapolis companies are among 350 queried

February 25, 2008

The U.S. Securities and Exchange Commission wants to know more about how Eli Lilly and Co. and WellPoint Inc. decide how to pay their top executives.

The two Indianapolis companies exchanged letters last fall with the SEC. The federal agency requested more information about executive compensation from 350 of the nation's largest public companies.

The correspondence led Lilly to include more detailed information in a preliminary version of its proxy statement that it filed Feb. 6. WellPoint officials have promised to do the same when the company files its proxy statement this spring.

But not without some resistance. While both Lilly and WellPoint agreed to disclose more of their decision-making process in this year's proxy statements, they also pushed back against some of the SEC's requests.

"We believe that overdisclosure of individual executive performance assessments would invade employees' reasonable privacy expectations and could cause significant competitive harm to the company. We urge caution in this area," wrote Lilly's corporate secretary, Jim Lootens, in an Oct. 22 letter to the SEC.

WellPoint said some of what the SEC asked for was not "material" to investors.

The letters from the SEC represent its first review of new compensation disclosure rules that took effect last year. The rules, which affect a section of the proxy called the Compensation Discussion and Analysis, or CDA, were adopted in response to rising investor concern over executive pay.

Because the rules are new, it's not surprising the SEC asked for more information from public companies, said Mike Nader, an attorney who chairs the Benefit and Executive Compensation Group at Baker & Daniels.

"In general, it is not surprising that companies try to protect, based upon their goodfaith interpretation of the CDA requirements and facts, information they believe is confidential and which would cause competitive harm if disclosed," Nader said.

Both Lilly and WellPoint officials told the SEC they would add information relating to all comments the SEC made about their disclosures. The SEC made 13 comments to Lilly and five to WellPoint.

Lootens said in an interview that the SEC's comments were a good thing that represent a "kinder and gentler way for the regulator to help corporate America understand what they were really trying to achieve."

One change Lilly made in response to the SEC correspondence was to add concise "executive summaries" at the beginning of its overall compensation discussion and at the start of a section that focuses on the company's top five executives.

In determining 2007 pay, Lilly's board judged the company's 2006 performance against its pharmaceutical peers. It concluded that Lilly "performed in the upper tier of the peer group in adjusted earnings per share growth, return on assets, and return on equity; in the middle tier in sales growth; and in the lower tier in total shareholder return."

But the SEC comments won't prompt Lilly to change the way it structures its executive pay in the future, Lootens said.

"The [compensation] committee has always just tried to put in programs to achieve the business objectives and that withstand scrutiny when published," he said.

WellPoint responded to IBJ's questions with a written statement from spokesman Jim Kappel. He said, "WellPoint's compensation programs have been and will continue to rigorously tie pay to the performance of the company, measured against ambitious pre-set goals and to drive the achievement of the company's mission and strategy."

Yet the SEC pushed WellPoint for more specifics on exactly how it accomplishes such rigorous pay-for-performance compensation. WellPoint's answers repeatedly said its board's decisions rely significantly on "subjective" assessments.

"In future filings, we will clarify that there is no formulaic or target-based assessment for adjustments to base salaries and equity awards," wrote WellPoint's associate general counsel, Kathleen Kiefer, in response to an SEC comment.

Tod Perry, a finance professor at IUPUI and a former compensation attorney, said he thinks corporate boards have a right to make some subjective decisions-and to keep at least some sensitive information private.

"I am a believer that boards, on average, want to do the right thing," Perry said. He added, "Somewhere, they still want some discretion for these choices on the margins."

But he said shareholders would look askance at too much subjective decisionmaking.

"It raises my BS meter," he said. "As a shareholder, if you're going to use a bunch of subjective measures, then I'm going to be skeptical about what they're doing."

What the SEC appears to be pushing for is not philosophy about compensation or assertions that it is tied to performance, but why company boards decided on the exact numbers they did.

"Please include an analysis of what growth levels in your financial and operational metrics the [executives'] target goals are intended to incentivize," SEC attorney Tim Buchmiller wrote to WellPoint.

Kiefer wrote back that WellPoint would include such an analysis in its 2008 proxy statement "to the extent such information is material to an understanding of 2007 compensation."
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