Lilly awards pay increases to top executives

Eli Lilly and Co. Chairman and CEO John C. Lechleiter received $16.4 million in total compensation last year, a 33.6-percent
increase. The rest of Lilly’s executive team got an average 25.4-percent pay hike.

Indianapolis-based drugmaker gave shareholders a first look at its 2009 executive pay in the preliminary version of the company’s
proxy statement, released Monday morning. Lechleiter’s $16.4 million total was a $4.1 million increase over the
$12.3 million he got in 2008.

IBJ uses the Associated Press formula to calculate executive pay. It gauges
the value of compensation such as stock and options grants at the time they are awarded, not the time they are cashed in.

The majority of pay for the top five Lilly executives came in the form of stock-based awards. Each executive received
a pair of “Performance Awards” and a “Shareholder Value Award.” The executives will receive annual
opportunities to cash in those stock-based awards in each of the next three years.

For example, $11.3 million
of Lechleiter’s total came in three stock-based awards worth $3.75 million each, granted on Dec.
15. Those grants have one-, two- and three-year performance periods.

Lilly spokesman Mark Taylor noted that
the company’s decision to give two performance awards to each of its top executives was a one-time event. Lilly historically
has split its equity grants halfway between annual Performance Awards, which are tied to earnings-per-share
growth, and Shareholder Value Awards, which are tied to three-year stock price appreciation.

In future years, Taylor said, Lilly’s Performance Awards will be tied to
a two-year earnings-per-share target. The company awarded each top executive an
extra Performance Award in 2009 to account for the one-year transition and maintain
continuity to the new system.

“From a governance standpoint, we’re doing the right
thing,” Taylor said. “We’re trying to lengthen the period of time,
to have a longer-term performance period around those Performance Awards.”

Steven M. Paul, who is retiring this month as Lilly’s executive vice president of science and technology and president of
Lilly Research Laboratories, was the company’s second-highest paid executive last year, but he
received the smallest pay increase on the management team. In 2009, Lilly awarded
Paul total compensation worth $7.1 million, a 17.1-percent increase over the $6.1 million
he received the year before.

Executive Vice President Bryce D. Carmine, who also serves
as president of the company’s Established Markets Business Unit, received total compensation of $6.9
million last year, 23 percent more than the $5.6 million he received in 2008.

Chief Financial Officer Derica W.
Rice, who also is executive vice president of global service, received the largest pay hike—34.8
percent, from $4.9 million in 2008 to $6.7 million last year.

Senior Vice President and Executive
Counsel Robert A. Armitage had a 26.5-percent pay hike in 2009. His total compensation increased from
$3.9 million in 2008 to nearly $5 million last year.

New York-based Frederic W. Cook and Co. served as Lilly’s
independent executive compensation consultant. Director Karen N. Horn led the board’s five-member Compensation Committee,
which met eight times last year.

Lilly paid more for board guidance last year than it did in 2008, largely because
of the addition of two new board members and the retirement of another. Last year, the company gave 13 independent directors
total compensation worth $3.3 million. In 2008, Lilly gave 12 independent directors total compensation worth $2.9 million.
The majority of Lilly’s board compensation was stock-based. Each director received a stock award worth $145,000.

Lilly’s profits have grown by double-digits each of the past two years. In 2009, the company’s operations
generated a profit of $4.9 billion, up 16 percent from the year before, including extraordinary gains and losses.

In 2008, the company recorded a loss due to its $6.5 billion purchase of the New York-based biotech firm ImClone Systems
Inc. But excluding that and other extraordinary items, Lilly’s profits totaled $4.2 billion, up 14 percent from the
previous year.

Investors, however, are nonplussed by Lilly’s big profits. That’s because they have
their eyes fixed on November 2011, when Lilly’s U.S. and European patent on its bestseller Zyprexa expire. Cheaper generics
are expected to steal away the majority of Zyprexa’s $4.9 billion in annual sales.

Lilly faces a similar
fate on four other bestselling drugs between now and 2014. All told, it could lose more than half its current revenue. And
it has no molecule in its pipeline with promise to fill the gap before the bleeding begins.

Fears of the looming
sales shortfall, exacerbated by a slew of setbacks on bringing new drugs to market, have sent Lilly’s stock price tumbling.
Even counting Lilly’s substantial dividend, investors suffered a 21 percent loss in value in 2008 and
another 6 percent loss in 2009.

Lilly shares rose 26 cents, to $34.78 apiece, on Monday.

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