| | Dr. José Manuel Correia de Simas | |
| | | |
Michael-Bryant Hicks
Dr. Simas, 55, serves as our Executive Vice President, General Counsel and Corporate Secretary | 44 | Michael-Bryant Hicks has served as Elanco’s Executive Vice President, General Counsel and Corporate Secretary since July 2018. Mr. Hicks served as General Counsel of theU.S. Farm Animal Business. Dr. Simas rejoined Elanco Animal Health division of Lilly from May 2018 to September 2018. Prior to joining Elanco, Mr. Hicks served in various legal roles, including General Counsel at Mallinckrodt plc, a specialty pharmaceutical company, from 2016 to 2018, Senior Vice President, General Counsel and Corporate Strategy at The Providence Service Corporation, a social services company, from 2014 to 2016 and as Assistant General Counsel at DaVita Inc., a health care company, from 2011 to 2013. |
| | |
David S. Kinard
Executive Vice President, Human Resources
| 52 | David S. Kinard has served as Elanco’s Executive Vice President, Human Resources since January 2019. Mr. Kinard served as Elanco’s Executive Vice President, Human Resources and Corporate Affairs from July 2018 to December 2018 and as Vice President of Human Resources and Global Learning and Development for the Elanco Animal Health division of Lilly from May 2018 to September 2018. Prior to May 2018, Mr. Kinard servedthis role in various leadership roles for Lilly, including Vice President of Human Resources for a variety of Lilly businesses, including Lilly International in 2017, Bio-Medicines and Emerging Markets from 2015 to 2017 and Lilly Diabetes and Global Employee Relations/HR Operations from 2011 to 2015. |
| | |
Sarena S. Lin
Executive Vice President, Elanco USA, Corporate Strategy and Global Marketing
| 48 | Sarena S. Lin has served as Elanco’s Executive Vice President, Elanco USA, Corporate Strategy and Global Marketing since January 2019. Ms. Lin served as Executive Vice President, Elanco USA and Global Strategy from July 2018 to December 2018 and as Senior Vice President of North American Operations and Strategy at the Elanco Animal Health division of Lilly from January 2018 to September 2018. Prior to joining Lilly, Ms. Lin servedApril 2020, after serving as President of Cargill Feed &Trouw Nutrition USA, an animal nutrition company, from 20142018 to 2017. PriorMarch 2020. In this role, he led its strategic change agenda to 2014, Ms. Lin servedimprove business quality and manufacturing productivity while building key capabilities in marketing, innovation, manufacturing and commercial excellence. Dr. Simas originally joined Elanco (then-owned by Lilly) in 2000 as Global Head of Strategyproduct manager for our Rumensin product and Business Development for Cargill from 2011 to 2014. Ms. Lin served on the board of directors for the animal health and dental distributor, Patterson Companies, from 2014 to 2018. |
| | |
Aaron L. Schacht
Executive Vice President, Innovation, Regulatory and Business Development
| 51 | Aaron L. Schachtthroughout his career has served in key roles in the U.S. and Internationally, including senior director of Latin America and Global Aquaculture, senior director of our U.S. Beef business and area director for Central, Eastern Europe, North Africa and Middle East. He received a bachelor’s degree from the Federal University of Lavras in Brazil and holds a master’s degree and a doctorate in animal nutrition and physiology from the University of Arizona, as Elanco’s Executive Vice President, Innovation, Regulatory and Business Development since July 2018. Mr. Schacht servedwell as a post doctorate from the Vice PresidentUniversity of global research and development of the Elanco Animal Health division of Lilly from 2015 to September 2018. Prior to 2015, Mr. Schacht served in various leadership roles for Lilly,
São Paulo, Brazil. | |
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GOVERNANCE
| | including Global Brand Development Leader of Pain in Lilly BioMedicines in 2014, Senior Advisor of Strategy & Business Development for Lilly BioMedicines from 2012 to 2014 and Executive Director of Global External R&D at Lilly from 2008 to 2012 |
| | |
David A. Urbanek | |
| | Mr. Urbanek, 56, serves as our Executive Vice President, Manufacturing and Quality | 52 | David A. Urbanek has served as Elanco’s Executive Vice President, Manufacturing and Quality since July 2018.Quality. In this role, Mr. Urbanek served asand his team have led the rightsizing of our manufacturing footprint and centralization of resources. During his nearly 35-year career with Elanco and our former parent company, Lilly, he has held multiple leadership roles in pharmaceutical manufacturing in both drug product and bulk manufacturing. Mr. Urbanek became our Vice President of Manufacturing at the Elanco Animal Health Manufacturing in February 2017. Before joining Elanco, he held leadership roles in Lilly’s manufacturing division, including senior director of Lilly from November 2017 to September 2018.emerging markets manufacturing, senior director of global diabetes manufacturing and senior director of external drug products operations. Prior to that,those roles, Mr. Urbanek servedwas the general manager of operations for Lilly divisions in various leadership roles for Lilly’s Manufacturing division, including Senior DirectorIreland, England, Germany and the U.S. He received his bachelor’s degree in mechanical engineering from the Rose-Hulman Institute of Emerging Markets ManufacturingTechnology and obtained his Master of Business Administration from 2013 to 2017, Senior Director of Global Diabetes Manufacturing from 2011 to 2013 and Senior Director of External Drug Products Operations from 2009 to 2011.Indiana University. | |
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
This compensation, discussion and analysis (“CD&A”) provides detailed information regarding Elanco’s Chief Executive Officer, Chief Financial Officer, former Chief Financial Officer, former Acting Chief Financial Officer and three most highly-compensated executive officers who are named below (collectively, the “Named Executive Officers”) with respect to 2018 compensation:
Name
| Title
|
Jeffrey N. Simmons
| President, Chief Executive Officer and Director |
Todd S. Young(1) | |
| | Mr. Young, 51, serves as our Executive Vice President and Chief Financial Officer, |
Sarena S. Lin | Executive Vice President, a position he has held since he joined Elanco USA, Corporate Strategy and Global Marketing |
David A. Urbanek | Executive Vice President, Manufacturing and Quality |
David S. Kinard
| Executive Vice President, Human Resources |
Christopher W. Jensen(2)
| Former Chief Financial Officer |
Lucas E. Montarce(3)
| Former Acting Chief Financial Officer
|
| (1) | in November 2018. Mr. Young has servedoversees our financial operations, including our treasury, investor relations and tax functions, information technology, and transformation. He brings significant financial leadership experience in pharmaceutical and healthcare as Elanco’s Chief Financial Officer since November 1, 2018. |
| (2) | Mr. Jensen servedwell as Elanco’s Chief Financial Officer beginninga focus on April 23, 2018, but began a medical leave of absence on or about August 1, 2018strategic and did not returncommercial decision-making to his position. |
| (3) | Mr. Montarce was named Acting Chief Financial Officer on August 1, 2018 and served in that role through October 31, 2018. |
Prior to the IPO, Elanco’s business operated as part of a division of Lilly. As a result, the discussion in this CD&A as it relates to Elanco’s compensation programs prior to the IPO, relates to Lilly’s compensation philosophy because Lilly established and managed the compensation for all of the Named Executive Officers until the completion of the IPO on September 24, 2018. Because Ms. Lin and Messrs. Montarce, Jensen, Kinard and Urbanek were not executive officers of Lilly, their compensation prior to the IPO was determined by Lilly’s senior management consistent with Lilly’s compensation philosophy, but was not specifically determined or reviewed by the Lilly compensation committee. As a Lilly executive officer prior to the IPO, Mr. Simmons’ compensation was reviewed and determined by Lilly’s compensation committee, with the advice of the compensation consultant engaged by Lilly’s compensation committee.
In connection with the IPO, the Prior to joining Elanco, board of directors approved the pay packages for the executive officers of Elanco, including certain of the Named Executive Officers. In connection with his hiring following the IPO, Mr. Young’s compensation was reviewed and approved by the Elanco Compensation Committee. This Elanco compensation for 2018 is more fully described below under “Elanco Compensation Program — Compensation Arrangements.”
This CD&A discusses the compensation programs applicable to Named Executive Officers and their compensation thereunder in 2018, including a description of Lilly’s compensation philosophy, the elements of each compensation program, the factors that Lilly considered in setting compensation, and how results affected incentive payouts for 2018 performance for each of the Named Executive Officers with respect to the period prior to the IPO. This CD&A also describes certain elements of Elanco’s compensation programs and policies following the IPO through December 31, 2018, which largely reflect Elanco’s determination to generally maintain Lilly’s compensation philosophy and other elements of Lilly’s compensation programs and policies through the exchange offer, with certain adjustments to pay packages in connection with the IPO as described under “Elanco Compensation Program” below.
Lilly’s Philosophy on Compensation
Lilly’s compensation programs are designed to help achieve the goals of attracting, engaging and retaining highly talented individuals who are committed to its core values of integrity, excellence and respect for people while balancing the long-term interests of its shareholders and customers.
Lilly’s compensation and benefits programs are based on the following objectives:
| • | Reflect individual and company performance. Lilly reinforces a high-performance culture by linking pay with individual performance and company performance. As Lilly employees assume greater levels of responsibility, the proportion of total compensation based on company performance and shareholder returns increases. Lilly performs an annual review to ensure its programs provide incentives to deliver long-term, sustainable business results while discouraging excessive risk-taking or other adverse behaviors.
|
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Attract and retain talented employees. Lilly aims for compensation opportunities at Lilly to be competitive with its peer group and reflect the level of job impact and responsibility. Retention of talent is an important factor in the design of its compensation and benefit programs.
Implement broad‑based programs. While the amount of compensation paid to employees varies, the overall structure of Lilly’s compensation and benefit programs is broadly similar across the organization to encourage and reward all employees who contribute to its success.
Consider shareholder input. Lilly management and the Lilly compensation committee consider the results of its annual say‑on‑pay vote and other sources of shareholder feedback when designing Lilly’s compensation and benefit programs.
For the time between the completion of the IPO and the end of the performance period on December 31, 2018, Elanco generally continued Lilly’s compensation philosophy. The Elanco Compensation Committee will further review and adjust this philosophy as it deems appropriate in 2019.
Compensation Processes and Analysis
Process for Setting Compensation
The Lilly compensation committee considered individual performance assessments, compensation recommendations from senior leadership, Lilly’s company performance, Elanco performance (as applicable), Lilly’s peer group data, input from its compensation consultant and its own judgment when determining compensation for its executive officers. When determining the compensation for employees who were not executive officers of Lilly, Lilly’s senior management considered similar factors consistent with Lilly’s philosophy, focusing on individual performance assessments, compensation recommendations from senior leadership, Elanco’s performance (as applicable) and their own judgment.
| • | Assessment of individual performance. The applicable Named Executive Officer’s individual performance assessment was based on achievement of objectives established at the start of each year, including the demonstration of Lilly values and leadership behaviors. |
| • | Assessment of company performance. Lilly company performance and Elanco performance, as applicable, were considered in two ways: |
Overall performance of the prior year based on a variety of metrics, which was a factor in establishing target compensation.
Specific performance goals were established at the beginning of each performance year to determine payouts under cash and equity incentive programs.
| • | Peer group analysis. Lilly used data from its peer group as a market check for compensation decisions, but did not use this data as the sole basis for its compensation targets. |
| • | Input from an independent compensation consultant concerning executive pay. Lilly’s compensation committee received the advice of its independent compensation consultant, Frederic W. Cook & Co., Inc., when setting Lilly executive officer compensation. |
Lilly Peer Group
Lilly’s peer group for 2018 was comprised of companies that directly competed with Lilly, operated in a similar business model and employed people with the unique skills required to operate an established biopharmaceutical company. Lilly’s compensation committee selected a peer group whose median market cap and revenues were broadly similar to Lilly’s. Lilly’s peer group for 2018 consisted of the following companies:
Abbvie | Celgene | Merck |
Amgen | Gilead | Novartis |
AstraZeneca | GlaxoSmithKline | Pfizer |
Baxter | Hoffman-La Roche | Sanofi-Aventis |
Biogen | Johnson & Johnson | Shire |
Bristol-Myers Squibb | Medtronic | |
With the exception of Johnson & Johnson, Novartis and Pfizer, peer companies were no greater than three times Lilly’s size on both measures. Lilly’s compensation 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.
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Components of Executive Compensation
The executive compensation program for the Named Executive Officers for 2018, both before and after the IPO, was primarily comprised of base salary, annual cash bonus and equity awards.
Prior to the IPO, the annual cash bonus programs included:
Elanco Corporate Bonus Plan (“Elanco Bonus Plan”), under which bonuses are calculated based on Elanco’s performance as compared to Elanco’s internal targets for revenue and operating margin, Elanco’s innovation progress and Lilly’s performance under The Eli Lilly and Company Bonus Plan (“Lilly Bonus Plan”). Mr. Simmons’ bonus payout under the Elanco Bonus Plan was also subject to the terms of the Lilly Executive Officer Incentive Plan (EOIP) through the date of the IPO; and
Lilly Bonus Plan, under which bonuses are calculated based on Lilly’s performance as compared to Lilly’s internal targets for revenue, earnings per share (“EPS”), and Lilly innovation progress.
Following the IPO, Elanco maintained the Elanco Bonus Plan with the same metrics and eligibility for the remainder of 2018, but adjusted the annual bonus targets for certain Named Executive Officers. Mr. Simmons’ bonus payout for the period following the IPO was no longer subject to the EOIP. See “2018 Compensation — Setting Target Compensation — Annual Cash Bonus Targets” below.
Prior to the IPO, equity incentives included:
Performance awards (“Lilly PAs”), which are Lilly equity awards with a performance component measuring Lilly’s two-year growth in EPS relative to the expected peer group growth. For performance awards granted to Lilly executive officers (“Executive Officer PAs”), including Mr. Simmons, the two-year performance period is immediately followed by a thirteen-month service-vesting period;
Shareholder value awards (“Lilly SVAs”), which are Lilly equity awards with a performance component measuring absolute Lilly stock price growth over a three-year performance period. For shareholder value awards granted to Lilly executive officers (“Executive Officer SVAs”), including Mr. Simmons, Lilly also applies a measure of total shareholder return (“TSR”) relative to peers and a one-year holding period; and
Lilly Restricted Stock Units (“Lilly RSUs”), which are Lilly time-vested equity awards issued to executives for purposes of retention or to partially offset outstanding awards that were forfeited when transitioning their employment to Lilly.
Following the IPO, equity awards included:
Elanco stock options (“Elanco Options”), which are Elanco nonqualified stock options with a three- year vesting period followed by a seven-year exercise period. Elanco Options were issued to certain executive officers of Elanco, including our Named Executive Officers (other than Mr. Montarce and Mr. Young, who joined Elanco on November 1, 2018); and
Elanco Restricted Stock Units (“Elanco RSUs”), which are Elanco time-vesting equity awards issued to certain executive officers of Elanco, including our Named Executive Officers (other than Mr. Montarce).
Lilly employees prior to the IPO, which included the Named Executive Officers (other than Mr. Young), also received a company benefits package, described below under “Other Compensation Practices and Information — Employee Benefits.” Following the IPO, Elanco employees, including the Named Executive Officers, received benefits that were substantially similar to the Lilly benefits package prior to the IPO.
Base salaries for Lilly employees, including for the Named Executive Officers who were Lilly employees prior to the IPO, were reviewed and established annually by Lilly 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 Lilly peer group data.
Base salary increases for 2018 were established based upon a Lilly corporate budget for salary increases, which were set considering Lilly performance over the prior year, expected Lilly performance for the following year and general external trends. In setting salaries, Lilly seeks to retain, motivate and reward successful performers, while maintaining affordability within the company’s business plan.
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EXECUTIVE COMPENSATION
In connection with the IPO, the base salaries of certain of the Named Executive Officers were adjusted as described under “Elanco Compensation Program” below.
The Named Executive Officers participated in the Elanco Bonus Plan during 2018, which was administered by Lilly prior to the IPO and by Elanco for the period from the completion of the IPO through December 31, 2018. The Elanco Bonus Plan for 2018 was designed to reward the achievement of Elanco’s financial goals, innovation objectives and contributions to Lilly’s overall financial success for the year. The bonus is based on four areas that are measured relative to internal targets: Elanco revenue, Elanco operating margin, Elanco innovation progress and Lilly corporate objectives as measured under the Lilly Bonus Plan (referred to as the Lilly Bonus Plan Multiple).
Mr. Kinard also participated in the Lilly Bonus Plan through April 2018 after which he participated in the Elanco Bonus Plan. Mr. Montarce participated in the Elanco Bonus Plan through October 2018, at which time he stepped down from service as Elanco’s Acting CFO to return to Lilly, after which he participated in the Lilly Bonus Plan. The Lilly Bonus Plan is designed to reward the achievement of Lilly’s financial goals and innovation objectives. The bonus is based on three areas that are measured relative to internal targets: Lilly revenue, Lilly EPS and Lilly innovation progress.
Elanco and Lilly performance goals under the Elanco Bonus Plan and the Lilly Bonus Plan and individual bonus targets are set at the beginning of each year. Actual payout can range from 0% to 200% of an individual’s bonus target. Performance targets and the assessment of the relative weighting for each objective is based upon annual operating plans with a threshold, target and maximum set for each objective (with straight line interpolation for achievement between relevant levels). The 2018 weightings were as follows:
Elanco Bonus Plan
Elanco Goals
| Weighting
|
Elanco revenue performance | 25% |
Elanco operating margin performance | 25% |
Elanco innovation progress | 25% |
Lilly Bonus Plan Multiple | 25% |
Based on this weighting, the Elanco Bonus Plan multiple is calculated as follows:
(0.25 × revenue multiple) + (0.25 × operating margin multiple) + (0.25 × innovation multiple) + (0.25 × Lilly Bonus Plan Multiple) = Elanco Bonus Plan multiple
The annual Elanco Bonus Plan payout for each individual is calculated as follows:
Elanco Bonus Plan multiple × individual bonus target × base salary earnings = payout
Lilly Bonus Plan
Lilly Goals
| Weighting
|
Lilly revenue performance | 25% |
Lilly EPS performance | 50% |
Lilly innovation progress | 25% |
Based on this weighting, the Lilly Bonus Plan multiple is calculated as follows:
(0.25 × revenue multiple) + (0.50 × EPS multiple) + (0.25 × innovation multiple)
= Lilly Bonus Plan multiple
The annual Lilly Bonus Plan payout for each individual is calculated as follows:
Lilly Bonus Plan multiple × individual bonus target × base salary earnings = payout
For Mr. Simmons, who was a Lilly executive officer prior to the IPO, the annual bonus was subject to the terms of the Lilly Executive Officer Incentive Plan (EOIP). Under the EOIP, the maximum annual cash bonus allowable is calculated based on Lilly’s non-GAAP net income for the year. For Mr. Simmons, the maximum amount for 2018 was 0.15% of non-GAAP net income, which would only apply for the portion of the year during which he was a Lilly executive officer. None of the Lilly executive officers, which included Mr. Simmons prior to the IPO, receive an annual cash bonus payment unless Lilly has positive non-GAAP net income for the year.
Under the EOIP, once the maximum payout for Mr. Simmons has been determined, the Lilly compensation committee has the discretion to reduce (but not increase) the amount to be paid. In exercising this discretion, the committee’s intent is to award the lesser of (i) the bonus Mr. Simmons would have received under the Elanco Bonus Plan or (ii) the EOIP maximum payout. Accordingly, for
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2018, the Lilly compensation committee, in its discretion, reduced Mr. Simmons’ bonus payout under the EOIP to a level that was based entirely on Elanco performance, which was pro-rated for the period prior to the IPO during which he was a Lilly executive officer. For detail regarding Elanco Bonus Plan payouts before and after the IPO, see “2018 Compensation Payouts — Elanco Bonus Plan” below.
Lilly primarily grants two types of equity incentives to executives and certain other employees during its annual cycle — Lilly PAs and Lilly SVAs. Lilly PAs are designed to focus leaders on multi-year operational performance relative to peer companies. Lilly SVAs align earned compensation with long-term growth in Lilly shareholder value. The Lilly compensation committee has the discretion to adjust downward (but not upward) any equity award payout, including Lilly executive officer’s payout from the amount yielded by the applicable formula.
Executive Officer PAs and Executive Officer SVAs are awarded to Lilly executive officers, which included Mr. Simmons prior to the IPO. The Elanco equity awards granted to the Named Executive Officers following the IPO are described under “Elanco Compensation Program” below.
In connection with the exchange offer, all then-unvested Lilly equity awards held by the Named Executive Officers (other than Mr. Montarce, who will remain employed by Lilly) were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. See “Looking Ahead to 2019 Compensation” below.
Performance Awards (Lilly PAs and Executive Officer PAs)
Messrs. Kinard, Montarce, and Urbanek received Lilly PAs that vest over two years. Potential Lilly shares are based on achieving Lilly EPS growth targets over a two-year performance period. The growth-rate targets are set relative to the median expected EPS growth for Lilly’s peer group. These awards do not accumulate dividends.
Lilly executive officers, including Mr. Simmons, received the Executive Officer PAs, which use the same two-year EPS growth-rate targets as the Lilly PAs for determining the number of Lilly shares; however, the performance period is followed by an additional thirteen-month service-vesting period during which the award is held in the form of Lilly restricted stock units. Executive officers accumulate dividend equivalent units during the thirteen-month service vesting period which are paid upon the vesting of the underlying award.
The Lilly 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 its employees and allows for objective comparisons to its peer group performance. Consistent with its compensation objectives, Lilly company performance exceeding the expected peer group median results in above-target payouts, while Lilly company performance lagging the expected peer group median results in below-target payouts. Possible payouts range from 0% to 150% of the target, depending on Lilly EPS growth over the performance period.
Shareholder Value Awards (Lilly SVAs and Executive Officer SVAs)
Messrs. Kinard, Montarce and Urbanek received Lilly SVAs. These awards are based on Lilly’s share price appreciation over a three-year performance period. Lilly SVAs 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 Lilly 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.
Lilly executive officers, including Mr. Simmons, received Executive Officer SVAs. These awards are the same as Lilly SVAs except executive officers receive no payout if Lilly’s TSR for the three-year period is zero or negative, and a modifier based on Lilly’s three-year cumulative TSR relative to its peer companies’ median TSR performance will be applied to payouts. If Lilly’s TSR is above the median of Lilly’s peers, the payout is increased by 1% for every percentage point that Lilly’s TSR exceeds the median (up to a maximum of 20%). Likewise, if Lilly’s TSR is below the median, the payout will be reduced by up to a maximum of 20%. Adding the relative TSR modifier to the Executive Officer SVAs helps ensure Lilly executive officers’ rewards align with shareholder experience while also rewarding strong performance relative to our peer group.
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EXECUTIVE COMPENSATION
2018 Compensation
Setting Target Compensation
The Named Executive Officers’ 2017 compensation and 2018 compensation through September 19, 2018 were approved by Lilly’s compensation committee or management, as applicable, for the periods that such persons were employed by Lilly. The Named Executive Officers’ compensation from September 20, 2018 through December 31, 2018 was approved by the Elanco board of directors, except for Mr. Young, who joined Elanco on November 1, 2018 and whose compensation was approved by the Elanco Compensation Committee.
The actual compensation received in 2018 is summarized below in “2018 Compensation Payouts.”
Base Salary
The following table includes the actual annual salary earned by the Named Executive Officers in 2017 and 2018, as reflected in the Summary Compensation Table in the section entitled “Executive Compensation Tables” below.
Name | 2017 Annual
Base Salary | 2018 Annual
Base Salary |
| Mr. Simmons | $688,118 | $775,185(1) |
| Mr. Young | N/A | $91,667 |
| Ms. Lin | N/A | $500,556(1) |
| Mr. Urbanek | $297,174 | $381,885(1) |
| Mr. Kinard | $405,632 | $420,972(1) |
| Mr. Jensen | N/A | $390,345 |
| Mr. Montarce | $280,673 | $335,175 |
| (1) | Represents a blend of salary prior to the IPO and a salary increase in connection with the IPO. See “Elanco Compensation Program” below. |
Annual Cash Bonus Targets
Bonus targets for 2017 and 2018 are shown in the table below as a percentage of the Named Executive Officer’s actual base salary earnings. Elanco continued the existing Elanco Bonus Plan for all of the Named Executive Officers for the period from the completion of the IPO through December 31, 2018 and the Elanco board of directors adjusted bonus targets for certain of the Named Executive Officers for that period.
Name | 2017
Bonus
Target(1) | Pre-IPO
2018 Bonus
Target | Post-IPO
2018 Bonus
Target | Weighted
2018 Bonus
Target(2) |
| Mr. Simmons | 80% | 80% | 120% | 91% |
| Mr. Young | N/A | N/A | 70% | 70% |
| Ms. Lin | N/A | 55% | 60% | 56% |
| Mr. Urbanek | 35% | 45% | 60% | 49% |
| Mr. Kinard | 45% | 45% | 60% | 49% |
| Mr. Jensen | N/A | 70% | 70% | 70% |
| Mr. Montarce | 34% | 40% | 40% | 40% |
| (1) | The 2017 bonus targets for Messrs. Montarce and Urbanek are a weighted average resulted from changes in positions held during the year. |
| (2) | The 2018 bonus targets for Ms. Lin and Messrs. Simmons, Urbanek, and Kinard represent a weighted average of the amounts approved by Lilly management for the period prior to the IPO and amounts approved by the Elanco board of directors in connection with the IPO. For additional detail, see “Elanco Compensation Program” below. |
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Lilly Equity Program — Target Grant Values
For 2018 pre-IPO equity grants, Lilly set the total target value for Messrs. Simmons, Urbanek, Kinard and Montarce based on internal pay equity, Lilly and Elanco (as applicable) performance, individual performance and Lilly peer group data (as applicable). Mr. Simmons had 60% of his equity target allocated to Executive Officer SVAs and 40% to Executive Officer PAs. Messrs. Urbanek, Kinard and Montarce had 50% of their equity allocated to Lilly SVAs and 50% to Lilly PAs. Total target values for the 2017 and 2018 equity grants to the applicable Named Executive Officers were as follows:
Name | 2017 Annual
Equity Grant | 2018 Annual
Equity
Grant(1) |
| Mr. Simmons | $2,000,000 | $1,200,000 |
| Mr. Young | N/A | N/A |
| Ms. Lin | N/A | N/A |
| Mr. Urbanek | $80,000 | $500,000 |
| Mr. Kinard | $415,000 | $400,000 |
| Mr. Jensen | N/A | N/A |
| Mr. Montarce | $90,000 | $300,000 |
| (1) | Ms. Lin and Messrs. Young and Jensen were not eligible for an annual Lilly equity grant since they were not active employees on January 1, 2018. |
Performance Goals for 2018 Lilly Incentive Programs
Annual Bonus Goals
Performance targets for the Elanco Bonus Plan and the Lilly Bonus Plan were based on the 2018 operating plan for each of Elanco and Lilly, respectively. These targets are described below under “2018 Compensation Payouts.”
Performance Award (Lilly PAs and Executive Officer PAs)
In February 2018, the Lilly compensation committee established a cumulative, compounded two-year Lilly EPS growth target of 8.1% per year for the 2018-2019 performance period, based on investment analysts’ growth estimates for Lilly’s peer group companies at that time. Payouts for the 2018-2019 Lilly PAs and 2018-2020 Executive Officer PAs range from 0% to 150% of the target, as illustrated below:
Shareholder Value Award (Lilly SVAs and Executive Officer SVAs)
For purposes of establishing the Lilly stock price target for the 2018-2020 Lilly SVAs, the starting price was $84.70 per share, the average Lilly closing stock price for all trading days in November and December 2017. The Lilly target share price was established using the expected annual rate of return for large-cap companies (8%), less an assumed Lilly dividend yield of 2.66%. To determine payouts, the ending price will be the average of the closing prices of Lilly stock for all trading days in November and December 2020.
Lilly SVA
Messrs. Kinard, Montarce and Urbanek received Lilly SVAs with the possible payouts on share price ranges illustrated in the grid below:
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Ending Stock Price
| Less than
$42.35 | $42.35 to
$88.19 | $88.20 to
$99.01 | $99.02 to
$109.83 | $109.84 to
$120.65 | Greater than
$120.65 |
Compounded Annual Share
Price Growth Rate (excluding dividends) | Less than
(20.6%) | (20.6%) to
1.4% | 1.4% to
5.3% | 5.3% to
9.0% | 9.1% to
12.5% | Greater than
12.5% |
| Percent of Target | 0% | 50% | 75% | 100% | 125% | 150% |
Executive Officer SVA
The Executive Officer SVA is designed to deliver no payout if the total shareholder return (including projected dividends) is zero or negative. Mr. Simmons received Executive Officer SVAs with payouts based on share price ranges illustrated in the grid below:
Ending Stock Price
| Less than
$77.38 | $77.38 to
$88.19 | $88.20 to
$99.01 | $99.02 to
$109.83 | $109.84 to
$120.65 | Greater than
$120.65 |
Compounded Annual Share
Price Growth Rate (excluding dividends) | Less than
(3.0%) | (3.0%) to
1.4% | 1.4% to
5.3% | 5.3% to
9.0% | 9.1% to
12.5% | Greater than
12.5% |
| Percent of Target | 0% | 50% | 75% | 100% | 125% | 150% |
Mr. Simmons’ Executive Officer SVAs are subject to a relative TSR modifier, as outlined in the grid below. The number of Lilly shares to be paid will increase or decrease by 1% for every percentage point Lilly’s three-year TSR deviates from Lilly’s peer group’s median three-year TSR, capped at 20%.
2018 Compensation Payouts
The information in this section reflects the amounts paid to the Named Executive Officers under the Elanco Bonus Plan, Lilly Bonus Plan and in respect of Lilly equity awards granted in prior years for which the relevant performance period ended in 2018, as applicable.
Elanco Performance
In 2018, Elanco exceeded its annual operating margin by 0.1%; however, it missed its annual revenue target by 0.9%. Elanco made strong progress on its innovation goals, and ended with an innovation rating above target at 3.6. The two major approvals were Galliprant in the EU and Credelio in the U.S. In addition, Elanco made significant progress on its long-term strategic agenda, improving cost structure, reducing global headcount, rationalizing key assets and products and accelerating important pipeline projects. The 2018 results described below reflect Elanco’s 2018 performance with respect to the Elanco Bonus Plan targets and are not presented on the same basis as, and are not directly comparable to, our combined financial results presented in our financial statements included in our Annual Report on Form 10-K.
Elanco Bonus Plan
Elanco’s performance compared to the 2018 targets for revenue, operating margin, innovation progress and the Lilly Company Bonus Multiple, as well as the resulting bonus multiple, is set forth below.
| | 2018
Elanco Target | 2018
Elanco Results | Multiple |
| Revenue | $3.171B | $3.143B | 0.85 |
| Operating Margin | 20.0% | 20.2% | 1.10 |
| Innovation | 3.00 | 3.60 | 1.30 |
| Lilly Company Bonus Multiple | | | 1.73 |
| Resulting Elanco Bonus Multiple | | | 1.24 |
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EXECUTIVE COMPENSATION
Elanco’s 2018 innovation target was 3.0 on a scale of 1.0 to 5.0. Elanco’s innovation multiple is comprised of the following factors: (i) achievement of product approvals, (ii) entrants into early and late stage development, (iii) adherence to approval timelines and (iv) a qualitative assessment by Elanco’s head of R&D of overall performance. Based on the weighted outcomes of these factors, Elanco achieved a 3.60 score, which correlates to a 1.30 innovation multiple for use in the Elanco bonus calculation.
When combined, the Elanco revenue, operating margin innovation and Lilly Corporate Bonus multiples yielded a 2018 Elanco Bonus Plan multiple of:
(0.25 × 0.85) + (0.25 × 1.10) + (0.25 × 1.30) + (0.25 × 1.73) = 1.24 bonus multiple
The 2018 bonuses to be paid to the applicable Named Executive Officers under the Elanco Bonus Plan are as follows:
Name
| 2018 Bonus ($)
|
Mr. Simmons | $907,450(2) |
Mr. Young(1)
| $79,567 |
Ms. Lin(1)
| $350,552(3) |
Mr. Urbanek | $233,083(3) |
Mr. Kinard(1)
| $180,180(3) |
Mr. Jensen(1)
| $222,439 |
Mr. Montarce(1)
| $138,404 |
| (1) | Pro-rated based upon the actual time-period worked at Elanco. |
| (2) | Represents the sum of a pro-rated EOIP payout of $492,050 through September 19, 2018, which reflects the reduction of Mr. Simmons’ bonus payout under the EOIP by the Lilly compensation committee, in its discretion, to a level that was based entirely on Elanco performance and that was pro-rated for the period prior to the IPO during which Mr. Simmons was a Lilly executive officer, and the Elanco Bonus Plan payout of $415,400 for the remainder of 2018. See “Annual Cash Bonus Targets” above. |
| (3) | Represents a weighted average of the amounts approved by Lilly management for the period prior to the IPO and amounts approved by the Elanco board of directors in connection with the IPO. |
Lilly Performance
In 2018, Lilly exceeded both its annual revenue and EPS targets. Lilly also made significant progress on its pipeline, meeting or exceeding all of its pipeline targets. Key pipeline highlights include first regulatory approval for Emgality, along with eleven other new approvals, indications or line extensions.
Lilly Bonus Plan
Lilly’s performance compared to its 2018 targets for revenue, EPS and pipeline progress, as well as the resulting bonus multiple, is illustrated below.
| | 2018
Lilly Target | 2018
Adjusted Results | Multiple |
| Revenue | $23.457B | $24.556B | 1.48 |
| EPS | $4.91 | $5.49 | 2.00 |
| Pipeline Score | 3.00 | 3.90 | 1.45 |
| Resulting Lilly Bonus Multiple | | | 1.73 |
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EXECUTIVE COMPENSATION
Lilly’s Science and Technology Committee assessed Lilly’s progress toward achieving product pipeline goals based on the following factors: (i) achievement of product approvals, (ii) new chemical entity entrants into Phase 1 and Phase 3 clinical trials, (iii) new indication or line extension entrants into Phase 3 clinical trials, (iv) speed of development, (v) adherence to timelines and (iv) a qualitative assessment of overall performance. Based on the recommendation of the Science and Technology Committee, Lilly’s compensation committee certified a pipeline score of 3.90, resulting in a pipeline multiple of 1.45.
When combined, the Lilly revenue, EPS, and pipeline multiples yielded a 2018 Lilly Bonus Plan multiple of:
(0.25 × 1.48) + (0.50 × 2.00) + (0.25 × 1.45) = 1.73 bonus multiple
The 2018 bonuses paid to Messrs. Montarce and Kinard under the Lilly Bonus Plan were as follows:
Name | | 2018 Bonus ($) |
Mr. Kinard | | $107,498 |
Mr. Montarce | | $ 38,845
|
Performance Awards (Lilly PAs and Executive Officer PAs)
The target cumulative Lilly EPS for the 2017-2018 Lilly PAs and the 2017-2019 Executive Officer PAs was set in the first quarter of 2017, reflecting expected industry growth of 5.3% each year over the two-year performance period of 2017-2018. Lilly’s actual annual EPS growth for the two-year period was 22.5%. This outcome was largely driven by volume growth from newer Lilly products.
For the Named Executive Officers, the number of Lilly shares earned under the 2017-2018 Lilly PAs or, for Mr. Simmons, the 2017-2019 Executive Officer PAs, is set forth in the table below. Mr. Simmons’ shares earned under the 2017-2019 Executive Officer PA are subject to an additional thirteen-month service-vesting period at Lilly or Elanco following vesting.
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Name | Target Shares | Shares Earned |
| Mr. Simmons | 10,878 | 16,317 |
| Mr. Young(1) | N/A | N/A |
| Ms. Lin(1) | N/A | N/A |
| Mr. Urbanek | 544 | 816 |
| Mr. Kinard | 2,822 | 4,233 |
| Mr. Jensen(1) | N/A | N/A |
| Mr. Montarce | 612 | 918 |
| (1) | Ms. Lin and Messrs. Young and Jensen were not eligible for a 2017-2018 Lilly PA since they were not active Lilly employees on January 1, 2017. |
Shareholder Value Award (Lilly SVAs and Executive Offer SVAs)
The target Lilly stock price range of $98.55 to $109.06 (17.7% to 30.2% stock price growth) for the 2016-2018 Lilly SVAs was set in 2016 based on a beginning Lilly stock price of $83.74, which was the average closing price for Lilly stock for all trading days in November and December 2015. The ending Lilly stock price of $112.38 represents a stock price growth of approximately 34.2% over the relevant three-year period. Lilly’s performance compared to target for 2016-2018 Lilly SVAs is shown below.
The performance multiple of 1.25 was modified for Mr. Simmons by the relative total shareholder return metric. The cumulative total shareholder return median for the Lilly peer group was 16.6%, and Lilly’s total shareholder return over the same period was 44.9% as depicted on the chart below:
Given this positive relative performance, the Executive Officer SVA payout multiple was increased by 20% making the final performance multiple a 1.50.
The shares earned by the Named Executive Officers during 2018 under the 2016-2018 Lilly SVAs (Executive Officer SVAs for Mr. Simmons) were as follows:
Name | Target Shares | Shares Paid Out |
| Mr. Simmons | 29,190 | 43,785 |
| Mr. Young(1) | N/A | N/A |
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Ms. Lin(1) | N/A | N/A |
| Mr. Urbanek | 819 | 1,024 |
| Mr. Kinard | 3,854 | 4,818 |
| Mr. Jensen(1) | N/A | N/A |
| Mr. Montarce | 1,012 | 1,265 |
| (1) | Ms. Lin and Messrs. Young and Jensen were not eligible for a 2016-2018 Lilly SVA grant since they were not active Lilly employees on January 1, 2016. |
Other Lilly Compensation Practices and Information
Lilly Employee Benefits
Lilly offers core employee benefits coverage to:
provide the Lilly workforce with a reasonable level of financial support in the event of illness or injury;
provide post-retirement income; and
enhance productivity and job satisfaction through benefit programs that focus on overall well-being.
The benefits that were available to the Named Executive Officers during their employment with Lilly were generally the same as those available to all U.S. Lilly employees and included medical and dental insurance, disability insurance and life insurance. In addition, The Lilly Employee 401(k) plan (“Lilly 401(k) Plan”) and The Lilly Retirement Plan provide U.S. Lilly employees a reasonable level of retirement income reflecting employees’ careers with Lilly.
To the extent that any Lilly employee’s retirement benefit exceeds Internal Revenue Service (IRS) limits for amounts that can be paid through a qualified plan, Lilly also offers a nonqualified pension plan and a nonqualified savings plan. The Named Executive Officers participated in these nonqualified plans in 2018. These plans provide only the difference between the calculated benefits and the IRS limits, and the formula is the same for all U.S. Lilly employees. The cost of Lilly employee benefits is partially borne by the employee, which included the Named Executive Officers who received Lilly employee benefits.
The Lilly Deferred Compensation Plan
Lilly executive officers, which, prior to the IPO, included Mr. Simmons, may defer receipt of all or part of their cash compensation. Other U.S. Lilly executives may defer receipt of all or part of their cash bonus under The Lilly Deferred Compensation Plan, which allows participants to save for retirement in a tax-effective way at minimal cost to Lilly. Under this unfunded plan, amounts deferred by the participant are credited at an interest rate of 120% of the applicable federal long-term rate, as described in more detail following the “Nonqualified Deferred Compensation in 2018” table.
Elanco Compensation Program
The following section describes Elanco’s current compensation program, which continues to be developed by the Elanco Compensation Committee.
Elanco Compensation Committee
Elanco’s Compensation Committee determines and approves executive officer compensation and provides oversight of Elanco’s compensation philosophy. The Elanco Compensation Committee will annually review and evaluate Elanco’s executive compensation plans and programs to ensure they are aligned with its compensation philosophy. The Elanco Compensation Committee determined to generally maintain Lilly’s compensation philosophy through the exchange offer and anticipates reviewing its philosophy and pay programs following the exchange offer.
Elanco Peer Group
Based on the advice of Willis Towers Watson, the compensation consultant engaged by Lilly management to provide advice on the Elanco peer group in connection with the IPO, the following group of 18 companies were identified as Elanco’s “core” peers:
Agilent Technologies | Endo International | PerkinElmer |
Alexion Pharmaceuticals | Hologic | Perrigo Company |
Boston Scientific | IDEXX Laboratories | Steris |
Catalent | Jazz Pharmaceuticals | Varian Medical Systems |
DENTSPLY SIRONA | Mallinckrodt | West Pharmaceutical Services |
Edwards Lifesciences | OPKO Health | Zoetis |
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To determine the elements of Elanco’s compensation programs for its Named Executive Officers, the Elanco board approved compensation packages derived from following benchmarks, among others:
Proxy statement data for the “core” peer group as disclosed in each company’s prior year compensation discussion and analysis and executive compensation tables; and
Survey data from similarly-sized companies within the life sciences industry, in particular, from the Willis Towers Watson survey that encompassed life-science companies with annual revenues of less than or equal to $20 billion.
The Elanco Compensation Committee expects to periodically review the peer group and make adjustments to its size and composition, when appropriate, within its discretion.
Compensation Arrangements
In connection with the IPO, the Elanco board of directors approved new pay packages for each of Messrs. Simmons, Urbanek, Kinard and Ms. Lin. Mr. Jensen’s pay package was not modified as he joined Elanco in March 2018 and began a medical leave on or about August 1, 2018. Mr. Jensen did not return to his position with Elanco following his medical leave. Following his death on December 14, 2018, Mr. Jensen’s estate received benefits pursuant to the terms of his employment arrangement with Elanco (see “Payments Upon Termination or Change in Control (as of December 31, 2018)” below).
Mr. Montarce was named Acting Chief Financial Officer from August 1, 2018 through October 31, 2018, during which time his pay package also did not change. As of November 1, 2018, Mr. Montarce returned to his position at Lilly and received a one-time cash award of $200,000 from Lilly in connection with the transition to his new role. Mr. Young’s compensation was determined by the Elanco Compensation Committee in connection with his hiring on November 1, 2018.
The following pay packages of the Named Executive Officers were developed based on the experience profile of the executive and competitive positioning against peer group benchmarking as described above. All of the Named Executive Officers’ compensation packages reflect the consideration of benchmarking data from the Willis Towers Watson life sciences survey regressed for relative company size, and the compensation package for Mr. Simmons was also benchmarked against the compensation of the 18 core peer companies listed above.
Mr. Simmons: | As the President and Chief Executive Officer, Mr. Simmons receives $1,000,000 in base salary and is eligible to participate in the Elanco Bonus Plan with a target of 120% of base salary. |
Mr. Young | As the Chief Financial Officer, Mr. Young receives $550,000 in base salary and is eligible to participate in the Elanco Bonus Plan with a target of 70% of base salary. Mr. Young received a one-time cash payment of $200,000 less applicable taxes upon starting his Elanco employment. He also received a one-time equity award of $300,000 in December 2018 in connection with joining Elanco. |
Ms. Lin: | As the Executive Vice President, Elanco USA, Corporate Strategy and Global Marketing, Ms. Lin receives $530,000 in base salary and is eligible to participate in the Elanco Bonus Plan with a target of 60% of base salary. Ms. Lin received a one-time cash payment of $500,000 less applicable taxes upon starting her Elanco employment. She also received a one-time equity award of $900,000 in February 2018 in connection with joining Elanco. |
Mr. Urbanek: | As the Executive Vice President, Manufacturing and Quality, Mr. Urbanek receives $385,000 in base salary and is eligible to participate in the Elanco Bonus Plan with a target of 60% of base salary. |
Mr. Kinard: | As the Executive Vice President, Human Resources, Mr. Kinard receives $430,000 in base salary and is eligible to participate in the Elanco Bonus Plan with a target of 60% of base salary. |
Mr. Montarce: | Mr. Montarce receives $336,810 in base salary and participates in an annual cash incentive program with a target of 40%. Mr. Montarce’s compensation was not adjusted during the time he served as Acting Chief Financial Officer of Elanco. |
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2018 Founders AwardsElanco Named Executive Officers, except Messrs. Montarce and Young, received a Founders Award on October 20, 2018. The Founders’ Awards were allocated evenly (based on grant date fair value) between Elanco RSUs and Elanco Options that each vest on that date that is three years after the grant date, subject to continued service. The number of shares granted are as set forth below:
| Name | Elanco RSUs
| Elanco Options |
| Mr. Simmons | 36,287
| 109,642
|
| Ms. Lin | 6,979 | 21,086 |
| Mr. Urbanek | 6,979 | 21,086 |
| Mr. Kinard | 6,979 | 21,086 |
| Mr. Jensen | 19,449 | 58,766 |
Stock Ownership and Holding Requirements
Elanco’s board of directors has adopted equity ownership requirements for executive officers, which require the Chief Executive Officer of Elanco to hold the number of shares of Elanco common stock equal to six times (6x) his or her base salary and other officers to hold the number of shares of Elanco common stock equal to three times (3x) their base salaries. All Named Executive Offers were compliant with the annual award share retention guideline, which requires the retention of 50% of all equity awards until their stock ownership requirements are satisfied, as they each build toward their respective ownership requirements. Mr. Montarce has a holding requirement of 5,000 Lilly shares under the Lilly share ownership and retention guidelines and he was compliant with the Lilly share retention guideline as he built toward his respective ownership requirement.
Hedging/Pledging Policy
Elanco’s Compensation Committee adopted a hedging and pledging policy under which our non-employee directors and employees are not permitted to hedge their economic exposures to Elanco stock through short sales or derivative transactions. Non-employee directors and all members of senior management are prohibited from pledging any Elanco stock (i.e., using Elanco stock as collateral for a loan or trading shares on margin).
Executive Compensation Recovery Policy
All Elanco incentive awards generally 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 Elanco Compensation Committee has adopted an Elanco executive compensation recovery policy that gives the Elanco Compensation Committee broad discretion to claw back Elanco incentive payouts from any member of Elanco senior management, which includes our Named Executive Officers, whose misconduct results in a material violation of law or company policy that causes significant harm to Elanco or who fails in his or her supervisory responsibility to prevent such misconduct by others. The Elanco recovery policy covers any Elanco incentive compensation awarded or paid to an employee at a time when he or she is a member of Elanco senior management. Subsequent changes in status, including retirement or termination of employment, do not affect Elanco’s rights to recover compensation under the policy. Recoveries under the Elanco plan can extend back as far as three years.
Looking Ahead to 2019 Compensation
The Elanco Compensation Committee approved the continuance of the existing Elanco Bonus Plan for all of the Named Executive Officers for the period from the completion of the IPO through December 31, 2018. The Compensation Committee subsequently adopted a new Elanco Bonus Plan for 2019 that includes three measures: Revenue (30%), EBIT (40%) and progress of the innovation pipeline (30%).
Lilly equity awards previously granted to the Named Executive Officers continue to vest in accordance with their terms, with their service to Elanco counting as service to Lilly for all purposes until the exchange offer. Upon the exchange offer, unvested Lilly equity awards terminated in accordance with their terms for no consideration paid to the Named Executive Officers (other than Mr. Montarce, who remained employed by Lilly). The Elanco Compensation Committee has authorize the issuance of Elanco equity awards of similar value and duration subject to the requirements of applicable law and the terms of the 2018 Elanco Stock Plan and applicable award agreements.
Elanco provides retirement income to eligible employees, which includes the Named Executive Officers, through The Elanco 401(k) Plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Participants may elect to contribute a portion of their base salary to the plan, and Elanco provides matching contributions on employees’ contributions up to 6% of base salary up to IRS limits. In addition, Elanco provides a non-elective contribution in the amount of 3% of base salary, pending active employment on December 31 of each year. The employee contributions, Elanco contributions and earnings thereon are paid out in accordance with elections made by the participant under the terms and conditions of the Plan.
Neither Elanco nor its subsidiaries sponsor (1) a defined benefit retirement plan for U.S. employees, however, eligible employees may receive transition service credit for vesting and eligibility purposes under certain retirement plans sponsored by Eli Lilly and Company or (2) a nonqualified deferred compensation plan or (3) a nonqualified savings plan.
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EXECUTIVE COMPENSATION
Executive Compensation Tables
All amounts included in the tables below represent compensation paid to or earned by the applicable Named Executive Officers for 2018 or the year indicated in the applicable table. Ms. Lin and Messrs. Young and Jensen joined Elanco in 2018 and therefore do not have any compensation from Lilly in 2017.
Summary Compensation Table
Name and Principal
Position
| Year
| Salary
($)
| Bonus
($)(1)
| Stock
Awards
($)(2)
| Option
Awards
($)(3)
| Non-Equity
Incentive
Plan
Compensation
($)(4)
| Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)(5)
| All Other
Compensation
($)(6)
| Total
Compensation
($)
|
Jeffrey Simmons
President and Chief Executive Officer | 2018
2017
| $775,185
$688,118
| $0
$0
| $2,530,654
$2,400,000
| $1,119,445
$0
| $907,450
$379,841
| $0
$1,261,845
| $46,511
$41,287
| $5,379,245
$4,771,091
|
Todd Young
Executive Vice President and Chief Financial Officer | at ACADIA Pharmaceuticals Inc., a biopharmaceutical company, from August 2016 to October 2018, 2017
| $91,667
N/A
| $200,000
N/A
| $300,032
N/A
| $0
N/A
| $79,567
N/A
| $1,102
N/A
| $8,285
N/A
| $680,653
N/A
|
Sarena Lin
Executive Vice President, Elanco USA, Corporate Strategy and Global Marketing | 2018
2017
| $500,556
N/A
| $500,000
N/A
| $1,115,384
N/A
| $215,288
N/A
| $350,552
N/A
| $5,742
N/A
| $171,338
N/A
| $2,858,860
N/A
|
David Urbanek
Executive Vice President, Manufacturing and Quality | 2018
2017
| $381,885
$297,174
| $0
$0
| $825,302
$300,040
| $215,288
$0
| $233,083
$76,887
| $202,856
$333,402
| $22,913
$17,830
| $1,881,328
$1,025,333
|
David Kinard
Executive Vice President, Human
Resources | 2018
2017
| $420,972
$405,632
| $0
$0
| $703,302
$518,750
| $215,288
$0
| $180,180
$244,596
| $0
$379,379
| $25,258
$24,338
| $1,652,499
$1,572,696
|
Christopher Jensen
Former Chief Financial Officer | 2018
2017
| $390,345
N/A
| $200,000
N/A
| $600,002
N/A
| $600,001
N/A
| $222,439
N/A
| $7,135
N/A
| $75,676
N/A
| $2,095,597
N/A
|
Lucas Montarce
Former Acting Chief Financial Officer | 2018
2017
| $335,175
$280,673
| $200,000
$0
| $616,019
$112,500
| $0
$0
| $138,404
$83,976
| $5,5674
$24,896
| $20,111
$16,200
| $1,354,228
$518,245
|
| (1) | Ms. Lin and Messrs. Young and Jensen received one-time cash bonus payments of $500,000, $200,000 and $200,000, respectively, as part of where he oversaw their employment offers. Mr. Montarce received a one-time cash bonus payment of $200,000 from Lilly in connection with his transition from Elanco to his new role at Lilly as of November 1, 2018. |
| (2) | This column shows the grant date fair value of the Lilly PAs, Executive Officer PAs, Lilly SVAs, Executive Officer SVAs, Lilly RSUs and Elanco RSUs, as applicable, awarded to the Named Executive Officers in 2017 and 2018 computed in accordance with FASB ASC Topic 718, based upon the probable outcome of the performance conditions as of the grant date and the assumptions in Note 13: Stock-Based Compensation to Elanco’s consolidated and combined financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 filed by Elanco on February 20, 2019, Note 11: Stock-Based Compensation footnote to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed by Lilly on February 19, 2019, and “Note 11 — Stock Based Compensation” footnote to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed by Lilly on February 20, 2018. The grant date fair value for the Lilly PAs, Executive Officer PAs, Lilly SVAs and Executive Officer SVAs included in the “Stock Awards” column are based on the probable payout outcome anticipated at the time of grant, which for the Lilly PAs and Executive Officer PAs was at 144% of target and for the Lilly SVAs and Executive Officer SVAs was target value. |
The “Stock Awards” column also includes one-time Lilly RSU and Elanco RSU awards as follows:
Ms. Lin received a Lilly Restricted Stock Unit award, which was granted on February 1, 2018 with a grant date fair value of $900,082. She received this as a one-time award to partially offset compensation forfeited from a previous employer. One-third of her grant is scheduled vest on February 1, 2019, one-third on February 1, 2020 and the remaining one-third on February 1, 2021.
Mr. Young received an Elanco Restricted Stock Unit award, which was granted on December 3, 2018 with a grant date fair value of $300,032. He received this as a one-time award to partially offset compensation forfeited from a previous employer. One-half of this grant will vest on December 3, 2019 and the remaining one-half will vest on December 3, 2020.
Mr. Montarce received a Lilly Restricted Stock Unit award, which was granted on May 1, 2018 with a grant date fair value of $250,019. He received this award in recognition of his contributions to Lilly and to help secure his services as vice president, CFO Lilly International through May 2023. One-third of his grant will vest on May 1, 2021 and the remaining two-thirds will vest on May 1, 2023.
These one-time restricted stock unit awards will be forfeited if Ms. Lin or Messrs. Young or Montarce terminate employment with Lilly or Elanco, as applicable, prior to the vesting dates, other than the event of certain qualifying terminations.
The “Stock Awards” column also includes Founders’ Award Elanco RSUs for Ms. Lin and Messrs. Simmons, Urbanek, Kinard and Jensen. These awards were granted after the IPO on October 20, 2018, which will vest on October 20, 2021. The grant date fair values were $1,119,454 for Mr. Simmons and $215,302 for Ms. Lin and Messrs. Urbanek and Kinard.
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EXECUTIVE COMPENSATION
The supplemental table below shows the total target grant date fair values of the annual equity awards approved by the Lilly compensation committee for Mr. Simmons and approved by Lilly management for the remaining Named Executive Officers, as applicable:
Name | 2017
Total Equity | 2018
Total Equity |
| Mr. Simmons | $2,000,000 | $1,200,000 |
| Mr. Young* | N/A | N/A |
| Ms. Lin* | N/A | N/A |
| Mr. Urbanek | $80,000 | $500,000 |
| Mr. Kinard | $415,000 | $400,000 |
| Mr. Jensen* | N/A | N/A |
| Mr. Montarce | $90,000 | $300,000 |
| * | Ms. Lin and Messrs. Young and Jensen were not eligible for an annual Lilly equity grant since they were not active employees of Lilly on January 1, 2018. |
The table below shows the minimum, target and maximum payouts (using the grant date fair value) for the 2018-2019 Lilly PAs (2018-2020 Executive Officer PA for Mr. Simmons) included in this column of the “Summary Compensation Table.”
Name | Payout
Date | Minimum
Payout | Target
Payout | Maximum
Payout |
| Mr. Simmons | January 2021 | $0 | $480,000 | $720,000 |
| Mr. Urbanek | January 2020 | $0 | $250,000 | $375,000 |
| Mr. Kinard | January 2020 | $0 | $200,000 | $300,000 |
| Mr. Montarce | January 2020 | $0 | $150,000 | $225,000 |
The table below shows the minimum, target and maximum payouts (using the grant date fair value) for the 2018-2020 Lilly SVAs (2018-2020 Executive Officer SVAs for Mr. Simmons) included in this column of the “Summary Compensation Table.”
Name | Payout Date | Minimum
Payout | Target
Payout | Maximum
Payout |
| Mr. Simmons | January 2021 | $0 | $720,000 | $1,296,000 |
| Mr. Urbanek | January 2021 | $0 | $250,000 | $375,000 |
| Mr. Kinard | January 2021 | $0 | $200,000 | $300,000 |
| Mr. Montarce | January 2021 | $0 | $150,000 | $225,000 |
| (3) | The “Option Awards” column includes Founders’ Awards of Elanco options for Ms. Lin and Messrs. Simmons, Urbanek, Kinard and Jensen. These nonqualified stock option awards were granted after the IPO on October 20, 2018. Generally, they vest on the third anniversary of the grant date, followed by a seven-year exercise period, except for Mr. Jensen whose option award immediately vested upon his death on December 14, 2018 and expires on March 14, 2019. The grant date fair values were $1,119,445 for Mr. Simmons, $600,001 for Mr. Jensen and $215,288 for Ms. Lin and Messrs. Urbanek and Kinard. The grant date fair value of such awards is based upon the assumptions described in Note 13: Stock Based Compensation to Elanco’s consolidated and combined financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 filed by Elanco on February 20, 2019. |
| (4) | This column shows payments under the Elanco Bonus Plan and/or the Lilly Bonus Plan for performance in 2018. See “— 2018 Compensation Payouts” above for details on 2018 payouts for the Named Executive Officers under the applicable cash bonus plan. |
| (5) | The amounts in this column reflect the change in Lilly pension value, calculated by Lilly’s actuary, and are affected by additional service accruals and pay earned,functions as well as actuarial assumption changes. The 2018 changeinformation technology and facilities. Prior to that, he served in pension values was driven toroles of increasing responsibility at Baxter International Inc. and its spin-off company, Baxalta, a large extent bybiopharmaceutical leader in hematology, immunology and oncology, most recently as Baxalta’s Senior Vice President and Treasurer. Mr. Young received his bachelor’s degree in economics from Grinnell College and a higher discount rate which decreasedJuris Doctor from the net present valueUniversity of the applicable Named Executive Officers’ pension. The design of the pension benefit did not change. See “— Pension Benefits” below for information about the actuarial assumptions used. None of the Named Executive Officers received any preferential or above-market earnings on deferred compensation. |
| (6) | The amounts in this column consist solely of Lilly matching contributions for each individual’s 401(k) plan and nonqualified savings plan contributions. There were no reportable perquisites, personal benefits or tax reimbursements or gross-ups paid to any of the Named Executive Officers for 2018.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy StatementMichigan.
| 41
|
EXECUTIVE COMPENSATION
Grants of Plan-Based Awards During 2018
The following table reflects grants of plan-based awards described in the CD&A under each of the following plans: the Elanco Bonus Plan and Lilly Bonus Plan (each plan is a non-equity incentive plan), the 2002 Lilly Stock Plan (which provides for the grant of performance awards (PAs), shareholder value awards (SVAs), restricted stock units (RSUs) and the 2018 Elanco Stock Plan. To receive a payout under the Lilly PAs, Executive Officer PAs, Lilly SVAs or Executive Officer SVAs, a participant must remain employed with Lilly through the end of the relevant award period (except in the case of death, disability, retirement or redundancy). No dividends accrue on either performance awards or shareholder value awards during the performance period. For the Executive Officer PAs, dividend equivalents units accrue during the thirteen-month service-vesting period (following the two-year performance period) and are paid upon vesting. In connection with the exchange offer, all then-unvested Lilly equity awards held by the Named Executive Officers (other than Mr. Montarce, who remained employed by Lilly) were forfeited for no consideration. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration to the forfeited awards.
| | | |
Lilly/ Elanco
compensation
committee
| Estimated Future Payouts Under
Non-Equity Incentive
Plan Awards(1) | Estimated Future Payouts
Under Equity Incentive
Plan Awards | All
Other
Stock
Awards:
Number
of Shares
of Stock or Units
(#) | All Other
Option
Awards:
Number
of
Securities | Exercise
or Base
Price of Option
Awards ($/Sh) | Grant
Date
Fair Value
of Stock
and Option
Awards(9) |
Name | Award | Grant
Date(2) | Action
Date | Threshold
($) | Target
($) | Maximum
($) | Threshold
(#) | Target
(#) | Maximum
(#) |
| Mr. Simmons | Elanco Bonus Plan | | | $182,954 | $731,815 | $1,463,629 | | | | | | | |
| | 2018- 2020 Executive Officer PAs(3) | 2/9/2018 | 12/11/2017 | | | | 3,351 | 6,701 | 10,052 | | | | $691,200 |
| | 2018 - 2020 Executive Officer SVAs(4) | 2/9/2018 | 12/11/2017 | | | | 6,988 | 17,471 | 31,448 | | | | $720,000 |
| | Elanco RSUs(5) | 10/20/2018 | 9/5/2018 | | | | | | | 36,287 | | | $1,119,454 |
| | Elanco Options(5) | 10/20/2018 | 9/5/2018 | | | | | | | | 109,642 | $31.61 | $1,119,445 |
| Mr. Young | Elanco Bonus Plan | | | $16,042 | $64,167 | $128,333 | | | | | | | |
| | Elanco RSUs(6) | 12/3/2018 | 11/12/2018 | | | | | | | 8,983 | | | $300,032 |
| Ms. Lin | Elanco Bonus Plan | | | $70,676 | $282,703 | $565,407 | | | | | | | |
| | Lilly RSU(7) | 2/1/2018 | N/A | | | | | | | 10,922 | | | $900,082 |
| | Elanco RSUs(5) | 10/20/2018 | 9/5/2018 | | | | | | | 6,979 | | | $215,302 |
| | Elanco Options(5) | 10/20/2018 | 9/5/2018 | | | | | | | | 21,086 | $31.61 | $215,288 |
| Mr. Urbanek | Elanco Bonus Plan | | | $46,993 | $187,970 | $375,940 | | | | | | | |
| | 2018- 2020 Lilly PAs(3) | 2/9/2018 | N/A | | | | 1,745 | 3,490 | 5,235 | | | | $360,000 |
| | 2018 - 2020 Lilly SVAs(4) | 2/9/2018 | N/A | | | | 2,442 | 4,883 | 7,325 | | | | $250,000 |
| | Elanco RSUs(5) | 10/20/2018 | 9/5/2018 | | | | | | | 6,979 | | | $215,302 |
| | Elanco Options(5) | 10/20/2018 | 9/5/2018 | | | | | | | | 21,086 | $31.61 | $215,288 |
| Mr. Kinard | Elanco Bonus Plan | | | $36,327 | $145,306 | $290,612 | | | | | | | |
| | Lilly Bonus Plan | | | $15,534 | $62,138 | $124,275 | | | | | | | |
| | 2018- 2020 Lilly PAs(3) | 2/9/2018 | N/A | | | | 1,396 | 2,792 | 4,188 | | | | $288,000 |
| | 2018 - 2020 Lilly SVAs(4) | 2/9/2018 | N/A | | | | 1,953 | 3,906 | 5,859 | | | | $200,000 |
| | Elanco RSUs(5) | 10/20/2018 | 9/5/2018 | | | | | | | 6,979 | | | $215,302 |
| | Elanco Options(5) | 10/20/2018 | 9/5/2018 | | | | | | | | 21,086 | $31.61 | $215,288 |
| Mr. Jensen | Elanco Bonus Plan | | | $44,847 | $179,386 | $358,772 | | | | | | | |
| | Elanco RSUs(5) | 10/20/2018 | 9/5/2018 | | | | | | | 19,449 | | | $600,002 |
| | Elanco Options(5) | 10/20/2018 | 9/5/2018 | | | | | | | | 58,766 | $31.61 | $600,001 |
| Mr. Montarce | Elanco Bonus Plan | | | $27,904 | $111,616 | $223,232 | | | | | | | |
| | Lilly Bonus Plan | | | $5,614 | $22,454 | $44,908 | | | | | | | |
| | 2018- 2020 Lilly PAs(3) | 2/9/2018 | N/A | | | | 1,047 | 2,094 | 3,141 | | | | $216,000 |
| | 2018 - 2020 Lilly SVAs(4) | 2/9/2018 | N/A | | | | 1,465 | 2,930 | 4,395 | | | | $150,000 |
| | Lilly RSU(8) | 5/1/2018 | N/A | | | | | | | 3,162 | | | $250,019 |
| (1) | These columns show the threshold, target and maximum payouts for performance under the Elanco Bonus Plan and/or Lilly Bonus Plan. Bonus payouts range from 0% to 200% of target. The threshold, target and maximum amounts represents a weighted average of the amounts approved by Lilly management for the period prior to the IPO and amounts approved by the Elanco board of directors or Compensation Committee, as applicable, in connection with the IPO. |
| (2) | To assure grant timing is not manipulated for employee gain, the annual grant date for Lilly awards is established in advance by the Lilly compensation committee. Lilly equity awards to new hires and other off-cycle grants are generally effective on the first trading day of the following month. |
| (3) | This row shows the possible payouts for 2018-2019 Lilly PAs and the 2018-2020 Executive Officer PAs, ranging from 0% to 150% of target. The Lilly PAs, to the extent earned and vested, will pay out in January 2020, and the Executive Officer PAs, to the extent earned and vested, will pay out in January 2021. The grant date fair value of the Lilly PAs and Executive Officer PAs is based on the probable payout outcome at the time of grant, which assumes payout at 144% of target value. The target and maximum values are listed for these awards in Note 2 to the Summary Compensation Table, above. For all Named Executive Officers other than Mr. Montarce (who remains employed by Lilly), these awards were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
| (4) | This row shows the range of payouts for 2018-2020 Lilly SVAs and the 2018-2020 Executive Officer SVAs. These shareholder value awards will pay out in January 2021, with payouts for the 2018-2020 Lilly SVAs ranging from 0% to 150% and the payouts for the 2018-2020 Executive Officer SVAs ranging from 0% to 180% of target. Lilly measures the fair value of Lilly SVAs and the Executive Officer SVA awards on the grant date using a Monte Carlo simulation model. The grant date fair value of these shareholder value awards is based on the probable payout outcome at the time of grant, which assumes payout at the target value. The target and maximum values are listed for these awards in Note 2 to the Summary Compensation Table, above. For all Named Executive Officers other than Mr. Montarce (who will remain employed by Lilly), these awards, to the extent not then vested, were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
| (5) | Following the IPO, Ms. Lin and Messrs. Simmons, Urbanek, Kinard and Jensen received a Founder’s Award in the form of 50% Elanco Options and 50% Elanco RSUs. Generally, the Elanco Options will vest in three years, followed by a seven-year exercise period and the Elanco RSUs will vest on October 20, 2021, except for Mr. Jensen, whose Founders’ Awards accelerated upon his death. |
| (6) | The Elanco RSU represents a one-time award to partially offset compensation forfeited from a previous employer. Mr. Young was granted the award on December 3, 2018; one-half of this grant will vest on December 3, 2019 and the remaining one-half will vest on December 3, 2020. |
| (7) | The Lilly RSU represents a one-time award to partially offset compensation forfeited from a previous employer. Ms. Lin was granted on February 1, 2018; one-third of this grant will vest on February 1, 2019, one-third will vest on February 1, 2020 and the remaining one-third will vest on February 1, 2021. In connection with the exchange offer, the then-unvested portion of this award was forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
| (8) | The Lilly RSU represents the award Mr. Montarce received in recognition of his contributions to Eli Lilly and Company and to help secure his services through May 2023. The award was granted on May 1, 2018; one-third of this grant will vest on May 1, 2021, and the remaining two-thirds will vest on May 1, 2023. The grant date fair value of the award was $250,019.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
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EXECUTIVE COMPENSATION
| (9)
| This column shows the grant date fair value of the Lilly PAs, Executive Officer PAs, Lilly SVAs and Executive Officer SVAs computed in accordance with FASB ASC Topic 718, based upon the probable outcome of the performance conditions as of the grant date as well as the grant date fair value of the Lilly RSU and Elanco RSU awards granted to Ms. Lin and Messrs. Young and Montarce. See notes 3 through 8 to this table. |
Outstanding Lilly and Elanco Equity Awards at December 31, 2018
The 2018 Elanco closing stock price of $31.53 and the Lilly closing stock price of $115.72 were used to calculate the values in the table below.
| | Option Awards
| Stock Awards
|
Name
| Award
| Number of
Securities
Underlying
Options
Exercisable
(#)
| Number of
Securities
Underlying
Options
Unexercisable
(#)
| Option
Exercise
Price
| Option
Expiration
Date
| Number of
Shares
or Units of
Stock
That Have
Not Vested
(#)
| Market Value
of Shares or
Units of
Stock That
Have Not
Vested
($)
| Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units,
or Other
Rights That
Have Not
Vested
(#)
| Equity
Incentive Plan
Awards:
Market or
Payout Value of
Unearned
Shares, Units,
or Other
Rights
That Have
Not Vested
($)
|
Mr. Simmons | 2018 - 2020 Executive Officer SVA | | | | | | | 31,448(1) | $3,639,163 |
| 2017 - 2019 Executive Officer SVA | | | | | | | 33,074(2) | $3,827,323 |
| 2018 - 2020 Executive Officer PA | | | | | | | 10,052(3) | $1,163,217 |
| 2017 - 2019 Executive Officer PA | | | | | 16,317(4) | $1,888,203 | | |
| 2016 - 2018 Executive Officer PA | | | | | 11,111(5) | $1,285,765 | | |
| Elanco RSUs | | | | | 36,287(6) | $1,144,129 | | |
| Elanco Options | | 109,642(7) | $31.61 | 10/20/2028 | | | | |
Mr. Young | Elanco RSUs | | | | | 8,983(8) | $283,234 | | |
Ms. Lin | Lilly RSUs | | | | | 10,922(9) | $1,263,894 | | |
| Elanco RSUs | | | | | 6,979(6) | $220,048 | | |
| Elanco Options | | 21,086(7) | $31.61 | 10/20/2028 | | | | |
Mr. Urbanek | 2018 - 2020 Lilly SVA | | | | | | | 7,325(1) | $847,649 |
| 2017 - 2019 Lilly SVA | | | | | | | 902(2) | $104,379 |
| 2018 - 2020 Lilly PA | | | | | | | 5,235(3) | $605,794 |
| Lilly RSU | | | | | 2,498(10) | $289,069 | | |
| Elanco RSUs | | | | | 6,979(6) | $220,048 | | |
| Elanco Options | | 21,086(7) | $31.61 | 10/20/2028 | | | | |
Mr. Kinard | 2018 - 2020 Lilly SVA | | | | | | | 5,859(1) | $678,003 |
| 2017 - 2019 Lilly SVA | | | | | | | 4,676(2) | $541,107 |
| 2018 - 2020 Lilly PA | | | | | | | 4,188(3) | $484,635 |
| Elanco RSUs | | | | | 6,979(6) | $220,048 | | |
| Elanco Options | | 21,086(7) | $31.61 | 10/20/2028 | | | | |
Mr. Jensen | Elanco Options | 58,766(11) | | $31.61 | 3/14/2019 | | | | |
Mr. Montarce | 2018 - 2020 Lilly SVA | | | | | | | 4,395(1) | $508,589 |
| 2017 - 2019 Lilly SVA | | | | | | | 1,014(2) | $117,340 |
| 2018 - 2020 Lilly PA | | | | | | | 3,141(3) | $363,477 |
| Lilly RSUs | | | | | 3,162(12) | $365,907 | | |
ELANCO ANIMAL HEALTH INCORPORATED - 44 2023 Proxy Statement
| 43 | | |
EXECUTIVE COMPENSATION
TABLE OF CONTENTS
(1) | Lilly SVAs and Executive Officer SVAs granted for the 2018-2020 performance period, to the extent earned, are scheduled to vest on December 31, 2020. The number of Lilly shares reported reflects the maximum payout, which will be made if the average closing Lilly stock price in November and December 2020 is over $120.65. Actual payouts may vary from 0% to 180% of target for the Executive Officer SVAs and 0% to 150% for the Lilly SVAs. Net Lilly shares received in respect of Executive Officer SVA payouts must be held by Mr. Simmons for a minimum of one year. For all Named Executive Officers other than Mr. Montarce (who will remain employed by Lilly), these awards, to the extent not then vested, were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
(2) | Lilly SVAs and Executive Officer SVAs granted for the 2017-2019 performance period are scheduled to vest on December 31, 2019. The number of Lilly shares reported reflects the maximum payout, which will be made if the average closing Lilly stock price in November and December 2018 is over $101.79. Actual payouts may vary from 0% to 180% of target for the Executive Officer SVA and 0% to 150% for the Lilly SVA. Net Lilly shares from any payout must be held by the applicable Named Executive Officer for a minimum of one year. For all Named Executive Officers other than Mr. Montarce (who will remain employed by Lilly), these awards, to the extent not then vested, were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
(3) | For Mr. Simmons, this number represents the maximum value of Executive Officer PA shares that could pay out for 2018-2019 performance period provided performance goals are met. Once the combined cumulative Lilly EPS result and associated payout level is determined at the end of the performance period, the resultant number of shares owed to Mr. Simmons will be issued as Lilly RSUs that vest in February 2021. For Messrs. Urbanek, Kinard and Montarce, this number represents the maximum value of Lilly PA shares that could pay out for 2018-2019 performance period provided performance goals are met. Actual payouts for both Lilly PAs and Executive Officer PAs may vary from 0% to 150% of target. For all Named Executive Officers other than Mr. Montarce (who will remain employed by Lilly), these awards, to the extent not then vested, were forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
(4) | The performance period ending December 31, 2018 for the 2017-2019 Executive Officer PA resulted in Mr. Simmons being issued Lilly RSUs for 150% of target shares. The RSUs are scheduled to vest in February 2020. |
(5) | RSUs vesting in February 2019 from the 2016-2018 Executive Officer PA, which is expected to be prior to the exchange offer. |
(6) | Elanco RSUs grant made after Elanco’s IPO with a three-year vest vesting on October 20, 2021. |
(7) | Elanco nonqualified stock options grant made after Elanco’s IPO with a three-year vest vesting on October 20, 2021 followed by a seven-year exercise period ending October 20, 2028. |
(8) | Elanco RSU granted on December 3, 2018. One-half of this grant will vest on December 3, 2019 and the remaining one-half will vest on December 3, 2020. |
(9) | Lilly RSU granted on February 1, 2018. One-third of this grant vested on February 1, 2019, one-third will vest on February 1, 2020 and the remaining one-third will vest on February 1, 2021. This award, to the extent not then vested, was forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
(10) | Lilly RSU grant made in 2017 outside of the normal annual cycle. This grant will vest on September 1, 2020. This award, to the extent not then vested, was forfeited for no consideration in connection with the exchange offer. The Elanco Compensation Committee has authorized the issuance of Elanco equity awards of similar value and duration of the forfeited awards following the exchange offer. |
(11) | Upon Mr. Jensen’s death, this Elanco nonqualified stock option grant made after Elanco’s IPO immediately vested on December 14, 2018. The option to exercise this option expires on March 14, 2019. |
(12) | Lilly RSU grant made on May 1, 2018 outside of the normal annual cycle. One-third of this grant will vest on May 1, 2021, and the remaining two-thirds will vest on May 1, 2023. |
Lilly and Elanco Stock Vested in 2018
| Lilly Stock Awards
| Elanco Stock Awards
|
Name
| Number of
Shares
Acquired on
Vesting (#)
| Value
Realized on
Vesting ($)(1)
| Number of
Shares
Acquired on
Vesting (#)
| Value
Realized on
Vesting ($)(1)
|
Mr. Simmons | 20,000(2) | $1,621,400 | — | — |
| 21,326(3) | $1,737,003 | — | — |
| 43,785(4) | $5,261,643 | — | — |
Mr. Young | — | — | — | — |
Ms. Lin | — | — | — | — |
Mr. Urbanek | 816(5) | $98,059 | — | — |
| 1,024(6) | $123,054 | — | — |
Mr. Kinard | 4,233(5) | $508,680 | — | — |
| 4,818(6) | $578,979 | — | — |
| 6,726(7) | $718,001 | — | — |
Mr. Jensen | — | — | 19,449(8) | $629,564 |
Mr. Montarce | 918(5) | $110,316 | — | — |
| 1,265(6) | $152,015 | — | — |
Proposal No. 2:
Ratification of Selection
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statementof Independent Auditor
| 44 |
EXECUTIVE COMPENSATION
(1) | Amounts reflect the market value of the Lilly stock on the day the Lilly stock vested or the market value of the Elanco stock on the day the Elanco stock vested as applicable. |
(2) | The last installment of a one-time RSU awarded to Mr. Simmons in 2008 outside of the normal grant cycle. |
(3) | Lilly restricted stock units resulting from the 2015-2017 Executive Officer PA that vested in February 2018. |
(4) | Payout of the 2016-2018 Executive Officer SVA at 125% of target with +20% TSR modifier, resulting in an overall 150% payout. |
(5) | Payout of the 2017-2018 Lilly PA at 150% of target. |
(6) | Payout of the 2016-2018 Lilly SVA at 125% of target. |
(7) | The last installment of a one-time RSU awarded to Mr. Kinard in 2008 outside of the normal grant cycle. |
(8) | Payout of Mr. Jensen’s Elanco RSU using the closing price of Elanco stock on December 14, 2018 of $32.37. |
Retirement Benefits
Lilly provides retirement income to eligible U.S. Lilly employees, which included certainThe Audit Committee has reappointed Ernst & Young LLP (“EY”) as our independent registered public accounting firm for 2023. EY has served as our independent auditor since 2017, when we were still a wholly owned subsidiary of the Named Executive Officers prior to the IPO, through the following plans:
The Lilly 401(k) Plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. Participants may elect to contribute a portion of their base salary to the plan, and Lilly provides matching contributions on employees’ contributions up to 6% of base salary up to IRS limits. The employee contributions, Lilly contributions and earnings thereon are paid out in accordance with elections made by the participant. See the “All Other Compensation” column in the Summary Compensation Table for information about Lilly contributions under the 401(k) Plan for the applicable Named Executive Officers.
The Lilly Retirement Plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the Pension Benefits table below for additional information about the value of these pension benefits.
Sections 401 and 415 of the Code generally limit the amount of annual pension that can be paid from a tax-qualified plan to $275,000 in 2018 as well as the amount of annual earnings that can be used to calculate a pension benefit. However, since 1975 Lilly has maintained a nonqualified pension plan that pays retirees the difference between the amount payable under the Retirement Plan and the amount they would have received without the Code limits. The Lilly nonqualified pension plan is unfunded and subject to forfeiture in the event of bankruptcy. Likewise, Lilly maintains a nonqualified savings plan that allows participants to contribute up to 6% of base salary exceeding the IRS limit. Lilly matches these contributions as described in the 401(k) Plan. For more information, see the disclosure immediately following the footnotes to the Nonqualified Deferred Compensation in 2018 table.
The following table shows benefits that the applicable Named Executive Officers have accrued under the Lilly Retirement Plan and the Lilly nonqualified pension plan.
Pension Benefits
Name | Plan | Number of
Years of
Credited
Service | Present
Value of
Accumulated
Benefit ($)(1) | Payments
During
Last
Fiscal
Year ($) |
| Mr. Simmons | Lilly retirement plan (pre-2010) | 21 | $1,019,096 | |
| | Lilly retirement plan (post-2009) | 9 | $207,040 | |
| | Lilly nonqualified plan (pre-2010) | 21 | $4,344,161 | |
| | Lilly nonqualified plan (post-2009) | 9 | $849,148 | |
| | | | $6,419,745 | $0 |
| Mr. Young | Lilly retirement plan (post-2009) | 0 | $551 | |
| | Lilly nonqualified plan (post-2009) | 0 | $551 | |
| | | | $1,102 | $0 |
| Ms. Lin | Lilly retirement plan (post-2009) | 1 | $3,300 | |
| | Lilly nonqualified plan (post-2009) | 1 | $2,442 | |
| | | | $5,742 | $0 |
| Mr. Urbanek | Lilly retirement plan (pre-2010) | 22 | $1,113,304 | |
| | Lilly retirement plan (post-2009) | 9 | $223,687 | |
| | Lilly nonqualified plan (pre-2010) | 22 | $467,061 | |
| | Lilly nonqualified plan (post-2009) | 9 | $88,407 | |
| | | | $1,892,459 | $0 |
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
| 45 |
EXECUTIVE COMPENSATION
Name
| Plan
| Number of
Years of
Credited
Service
| Present
Value of
Accumulated
Benefit ($)(1)
| Payments
During
Last
Fiscal
Year ($)
|
| Mr. Kinard | Lilly retirement plan (pre-2010) | 13
| $488,132 | |
| | Lilly retirement plan (post-2009) | 9 | $207,040 | |
| | Lilly nonqualified plan (pre-2010) | 13 | $738,879 | |
| | Lilly nonqualified plan (post-2009) | 9 | $301,492 | |
| | | | $1,735,543 | $0 |
| Mr. Jensen | Lilly retirement plan (post-2009) | 1 | $3,300 | |
| | Lilly nonqualified plan (post-2009) | 1 | $3,835 | |
| | | | $7,135 | $0 |
| Mr. Montarce | Lilly retirement plan (post-2009) | 6 | $18,675 | |
| | Lilly nonqualified plan (post-2009) | 6 | $3,556 | |
| | | | $22,231 | $0 |
| (1) | The following actuarial assumptions were used to calculate the present value of the applicable Named Executive Officer’s accumulated pension benefit: |
Discount rate: | 4.52% for the qualified plan and 4.36% for non-qualified plan |
Mortality (post-retirement decrement only): | RP2006 with generational projection using Scale MP2018 |
Pre-2010 joint and survivor benefit (% of pension): | 50% until age 62; 25% thereafter |
Post-2009 benefit payment form: | life annuity |
The Lilly Retirement Plan benefits shown in the table are net present values. The benefits are not payable as a lump sum; they are generally paid as a monthly annuity for the life of the retiree and, if elected, any qualifying survivor. The annual benefit under the Lilly retirement plan is calculated using years of service and the average of the annual earnings (salary plus bonus) for the highest five out of the last 10 calendar years of service (final average earnings).
Post-2009 Lilly Plan Information: Following amendment of the Lilly Retirement Plan formulas, employees hired by Lilly on or after February 1, 2008 have accrued retirement benefits only under the new Lilly plan formula. Employees hired before that date have accrued benefits under both the old Lilly and new Lilly plan formulas. All eligible employees, including those hired on or after February 1, 2008, can retire at age 65 with at least five years of service and receive an unreduced benefit. The annual benefit under the new Lilly plan formula is equal to 1.2% of final average earnings multiplied by years of service. Early retirement benefits under this Lilly plan formula are reduced 6% for each year under age 65. Transition benefits were afforded to employees with 50 points (age plus service) or more as of December 31, 2009. These benefits were intended to ease the transition to the new Lilly retirement formula for those employees who were closer to retirement or had been with Lilly longer at the time the Lilly plan was changed. For the transition group, early retirement benefits are reduced 3% for each year from age 65 to age 60 and 6% for each year under age 60. Messrs. Simmons, Urbanek and Kinard are in this transition group.
Pre-2010 Lilly Plan Information: Employees hired by Lilly prior to February 1, 2008, accrued benefits under both Lilly plan formulas. For these employees, benefits that accrued before January 1, 2010 were calculated under the old Lilly plan formula. The amount of the benefit is calculated using actual years of service through December 31, 2009, while total years of service is used to determine eligibility and early retirement reductions. The benefit amount is increased (but not decreased) proportionately, based on final average earnings at termination compared to final average earnings at December 31, 2009. Full retirement benefits are earned by employees with 90 or more points (the sum of his or her age plus years of service). Employees electing early retirement receive reduced benefits as described below:
The benefit for Lilly employees with between 80 and 90 points is reduced by 3% for each year under 90 points or age 62.
The benefit for Lilly employees who have fewer than 80 points, but who reached age 55 and have at least 10 years of service, is reduced as described above and is further reduced by 6% for each year under 80 points or age 65.
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EXECUTIVE COMPENSATION
Nonqualified Deferred Compensation
| Name | Plan | | Executive
Contributions
in Last Fiscal
Year
($)(1) | | Registrant
(Lilly)
Contributions
in Last Fiscal
Year
($)(2) | | Aggregate
Earnings
in Last
Fiscal Year
($) | | Aggregate
Withdrawals/
Distributions
in Last
Fiscal Year
($) | | Aggregate
Balance at
Last Fiscal
Year End
($) |
| Mr. Simmons | Lilly nonqualified savings | | $30,011 | | $30,011 | | $21,215 | | $0 | | $803,403 |
| | Lilly deferred compensation | | $0 | | $0 | | $54,151 | | | | $1,789,759 |
| | Total | | $30,011 | | $30,011 | | $75,366 | | $0 | | $2,593,162 |
| Mr. Young | Lilly nonqualified savings | | $0 | | $0 | | $0 | | $0 | | $0 |
| | Lilly deferred compensation | | $0 | | $0 | | $0 | |
| | $0 |
| | Total | | $0 | | $0 | | $0 | | $0 | | $0 |
| Ms. Lin | Lilly nonqualified savings | | $13,533 | | $13,533 | | $(2,092) | | $0 | | $24,974 |
| | Lilly deferred compensation | | $0 | | $0 | | $0 | | | | $0 |
| | Total | | $13,533 | | $13,533 | | $(2,092) | | $0 | | $24,974 |
| Mr. Urbanek | Lilly nonqualified savings | | $6,413 | | $6,413 | | $(51) | | $0 | | $16,034 |
| | Lilly deferred compensation | | $0 | | $0 | | $0 | | | | $0 |
| | Total | | $6,413 | | $6,413 | | $(51) | | $0 | | $16,034 |
| Mr. Kinard | Lilly nonqualified savings | | $8,758 | | $8,758 | | $(7,196) | | $0 | | $181,348 |
| | Lilly deferred compensation | | $61,149 | | $0 | | $20,957 | | | | $703,833 |
| | Total | | $69,907 | | $8,758 | | $13,761 | | $0 | | $885,181 |
| Mr. Jensen | Lilly nonqualified savings | | $5,796 | | $5,796 | | $(456) | | $0 | | $11,136 |
| | Lilly deferred compensation | | $0 | | $0 | | $0 | | | | $0 |
| | Total | | $5,796 | | $5,796 | | $(546) | | $0 | | $11,136 |
| Mr. Montarce | Lilly nonqualified savings | | $3,611 | | $3,611 | | $(131) | | $0 | | $7,090 |
| | Lilly deferred compensation | | $0 | | $0 | | $0 | | | | $0 |
| | Total | | $3,611 | | $3,611 | | $(131) | | $0 | | $7,090 |
(1) | The amounts in this column are also included in the Summary Compensation Table, in the “Salary” column (nonqualified savings) or the “Lilly Non‑Equity Incentive Plan Compensation” column (deferred compensation).
|
(2) | The amounts in this column are also included in the Summary Compensation Table, in the “All Other Compensation” column as a portion of the savings plan match.
|
The Nonqualified Deferred Compensation table above shows information about two Lilly programs: the Lilly nonqualified savings plan and the Lilly Deferred Compensation Plan. The Lilly nonqualified savings plan is designed to allow each employee to contribute up to 6% of his or her base salary and receive a Lilly company match beyond the contribution limits prescribed by the IRS with regard to 401(k) plans. The Lilly plan is administered in the same manner as the 401(k) Plan, with the same participation and investment elections. Lilly executive officers may defer receipt of all or part of their cash compensation and other U.S. Lilly executives may defer receipt of all or part of their cash bonus under the Lilly Deferred Compensation Plan. Amounts deferred by executives under the Lilly plan are credited with interest at 120% of the applicable federal long‑term rate as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Code with monthly compounding, which was 3.1% for 2018. Participants may elect to receive the funds in a lump sum or in up to 10 annual installments following termination of employment, but may not make withdrawals while employed by Lilly, except in the event of hardship as approved by the Lilly compensation committee. All deferral elections and associated distribution schedules are irrevocable. Both Lilly plans are unfunded and subject to forfeiture in the event of bankruptcy.
Payments Upon Termination or Change in Control (as of December 31, 2018)
The following table describes the potential payments and benefits under Elanco’s compensation and benefit plans and arrangements to which the applicable Named Executive Officers would have been entitled upon a hypothetical termination of employment on December 31, 2018 in the circumstances described in the table. The narrative following the tabular disclosure below contains more details on the treatment of certain equity awards upon a qualifying termination of employment for the Named Executive Officers. Other than the payments and benefits described below, any agreement to provide severance payments or benefits (other than following a change in control) would be at the discretion of our Compensation Committee.
| | Cash
Severance
Payment(1) | Continuation of
Medical /
Welfare
Benefits
(present value) | Value of
Acceleration
of Equity
Awards | Total
Termination
Benefits |
| Mr. Simmons | | | | |
• Involuntary retirement or termination
without cause | $0 | $0 | $4,318,097(3) | $4,318,097 |
• Involuntary or good reason
termination after change in control | $4,400,000 | $47,892(2) | $12,341,104(5) | $16,788,996 |
| Mr. Young | | | | |
• Involuntary retirement or termination
without cause | $0 | $0 | $283,234(4) | $283,234 |
• Involuntary or good reason
termination after change in control | $1,870,000 | $47,892(2) | $283,234(4) | $2,201,126 |
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
| 47 |
EXECUTIVE COMPENSATION
| Ms. Lin | | | | |
• Involuntary retirement or termination
without cause | $0 | $0 | $1,483,942(3) | $1,483,942 |
• Involuntary or good reason
termination after change in control | $1,696,000 | $31,039(2) | $1,483,942(5) | $3,210,981 |
| Mr. Urbanek | | | | |
• Involuntary retirement or termination
without cause | $0 | $0 | $509,116(3) | $509,116 |
• Involuntary or good reason
termination after change in control | $1,232,000 | $47,892(2) | $1,925,558(5) | $3,205,450 |
| Mr. Kinard | | | | |
• Involuntary retirement or termination
without cause | $0 | $0 | $220,048(3) | $220,048 |
• Involuntary or good reason
termination after change in control | $1,376,000 | $41,386(2) | $1,810,735(5) | $3,228,121 |
| (1) | As of December 31, 2018, the Named Executive Officers (other than Messrs. Montarce and Jensen), were entitled to severance under The Elanco Change-in-Control Severance Pay Plan for Select Employees upon an involuntary retirement or termination without cause (see below). |
| (2) | See “Elanco Change-in-Control Severance Pay Plan for Select Employees” below for a discussion of payments following a change in control. |
| (3) | Includes amounts for Mr. Simmons that would be paid under the 2016-2018 Executive Officer PAs, 2017-2019 Executive Officer PAs and the founders’ award Elanco RSUs. For Ms. Lin, the amount includes the founders’ award Elanco RSUs and the Lilly RSU granted on February 1, 2018. For Mr. Urbanek, the amount includes the founders’ award Elanco RSUs and the Lilly RSU granted in 2017. For Mr. Kinard, the amount includes the founders’ award Elanco RSUs. Does not include amounts that would be paid under the 2018-2020 Lilly PAs, 2018-2020 Executive Officer PA, 2017-2019 Lilly SVAs, 2017-2019 Executive Officer SVA, 2018-2020 Lilly SVAs or 2018-2020 Executive Officer SVAs, which would result in the following estimated amounts, if calculated at target, as of December 31, 2018: Mr. Simmons: $2,479,127; Mr. Urbanek: $436,650 and Mr. Kinard: $552,679. See “Outstanding Lilly Equity Awards at December 31, 2018” table above. |
| (4) | Includes the acceleration of Elanco RSUs related to the one-time Elanco RSU award Mr. Young received as part of his hiring upon the event of certain qualifying terminations. |
| (5) | Includes the acceleration of Elanco RSUs and options and of Lilly SVAs, Executive Officer SVAs, PAs, Executive Officer PAs and RSUs, in each case, upon the event of certain qualifying terminations following a change-in-control. |
Former Chief Financial Officer and Acting Chief Financial Officer
In connection with Mr. Jensen’s death on December 14, 2018, his estate became entitled to certain benefits, including a life insurance and death benefit of $1,300,000 under The Eli Lilly and Company Life Insurance and Death Benefit Plan, which generally provides for a benefit equal to two times an employee’s base salary and was available to all Lilly and Elanco employees in 2018. Mr. Jensen’s Elanco RSU award was accelerated, which resulted in the immediate vesting of 19,449 shares of Elanco stock with a value of $629,564, and his Elanco option award was accelerated and remains exercisable until March 14, 2019. In addition, the matching of his accounts under The Lilly Employee 401(k) Plan and The Lilly Excess Savings Plan was accelerated entitling his estate to payments of $13,886 and $5,796, respectively. Mr. Jensen’s spouse and dependents are entitled to COBRA for a period of six months.
Mr. Montarce was not entitled to any termination payments from Elanco in connection with his transition in employment from Elanco to Lilly on November 1, 2018.
Equity Acceleration in Connection with a Change-in-Control
Upon a Lilly change in control, any then outstanding and unvested Lilly SVAs, Executive SVAs, PAs and Executive PAs would convert into restricted stock units of the new company, with the number of Lilly shares earned under any performance-based awards based on actual performance at the time of the transaction. These converted restricted stock units and other Lilly restricted stock unit awards (which would also convert into restricted stock units of the new company) will continue to vest and pay out upon the earlier of the completion of the original award period, upon a covered termination of employment (generally the same as is described below for Elanco), or if the successor entity does not assume, substitute or otherwise replace the award.
Upon an Elanco change in control, unvested Elanco RSUs and options will continue to vest and pay out upon the earlier of the completion of the original award period, upon a covered termination of employment as described below, or if the successor entity does not assume, substitute or otherwise replace the award.
Elanco Change-in-Control Severance Pay Plan for Select Employees
In connection with the IPO, Elanco’s board of directors adopted Elanco change-in-control severance pay plans for nearly all Elanco employees, including a plan that applies to the Named Executive Officers. The Elanco plans are intended to preserve Elanco 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 Elanco plans are intended to align participating Elanco employee and Elanco shareholder interests by enabling executives to evaluate corporate transactions that may be in the best interests of the Elanco shareholders and other constituents of Elanco without undue concern over whether the transactions would jeopardize the participating employee’s own employment. Outside of a change in control, Elanco was not obligated to pay severance to its Named Executive Officers upon termination of employment, but severance could have been paid at the discretion of the Elanco Compensation Committee.
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The basic elements of the select plan applicable to the Named Executive Officers include:
Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the select plan requires a “double trigger” — a change in control followed by an involuntary loss of employment within two years. This is consistent with Elanco’s intent to provide employees with financial protection upon loss of employment.
Covered terminations. Our participating Named Executive Officers are eligible for payments under our select plan if, within two years of the change in control, their employment is terminated (i) without cause by Elanco or (ii) for good reason by the employee, each as is defined in the plan.
Severance payment. Named Executive Officers are eligible for up to two years’ base salary plus two times their target bonus for the then-current year.
Benefit continuation. Basic employee benefits such as health and life insurance would continue for 18 months following a participating Named Executive Officer’s termination of employment, unless they become eligible for coverage with a new employer before then.
No gross-ups. In some circumstances, the payments or other benefits received by a participating employee in connection with a change in control could exceed limits established under Section 280G of the Code resulting in an excise tax payment. Elanco would not reimburse or gross-up employees for these taxes. However, the amount of change in control-related benefits would be reduced to the maximum amount that would not result in an excise tax if the effect would be to deliver a greater after-tax benefit than the employee would receive if his or her benefits were not so reduced.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
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oWNERSHIP OF COMPANY STOCK
The following table sets forth, as of March 22, 2019, beneficial ownership of shares of Elanco common stock by each Elanco director, each of Elanco’s named executive officers and all directors and executive officers as a group, as well as their total stock-based holdings. As of such date, there was no person or group known to Elanco to be the beneficial owner of more than 5% of outstanding shares of Elanco common stock. Shares are beneficially owned when an individual has voting and/or investment power over the shares or could obtain voting and/or investment power over the shares within 60 days. Voting power includes the power to direct the voting of the shares and investment power includes the power to direct the disposition of the shares. Percentage of beneficial ownership is based on 365,702,757 shares of common stock outstanding as of March 22, 2019.
Unless otherwise indicated, the address for each holder listed below is 2500 Innovation Way, Greenfield, Indiana 46140. Except as noted by footnote, and subject to community property laws where applicable, Elanco believes based on the information provided to it that the persons and entities named in the table below have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
None of the Elanco directors and executive officers, individually or as a group, beneficially owns greater than 1% of Elanco’s outstanding shares of Elanco common stock. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
| | Shares of common stock
beneficially owned | | |
Name | Number of
shares(1) | Percentage of
shares | | Total stock-based holdings(2) |
| Jeffrey N. Simmons | 59,301 | * | | 503,898 |
| David S. Kinard | 10,477 | * | | 77,883 |
| Sarena S. Lin | 20,000 | * | | 82,899 |
| Lucas E. Montarce | — | — | | — |
| David A. Urbanek | 2,521 | * | | 70,519 |
| Todd S. Young | — | — | | 18,883 |
| R. David Hoover | 30,920(3) | * | | 32,176 |
| Kapila K. Anand | 1,200 | * | | 2,996 |
| John P. Bilbrey | — | — | | — |
| Michael J. Harrington | — | — | | — |
| Deborah T. Kochevar | — | — | | — |
| Lawrence E. Kurzius | 10,000 | * | | 11,796 |
| Kirk McDonald | — | — | | — |
| Deborah Scots-Knight | — | — | | — |
All directors and executive officers as a group
(17 persons) | 143,498 | * | | 984,416 |
(1) Includes shares of our common stock beneficially owned as calculated under SEC rules, including shares that may be acquired upon settlement of RSUs within 60 days, or upon exercise of stock options that are currently exercisable or will become exercisable within 60 days. As of March 22, 2019, no such RSUs or options were outstanding.
(2) This column shows the individual’s total Elanco stock-based holdings, including securities shown in the “Shares of common stock beneficially owned” columns (as described above), plus stock-based holdings that cannot be converted into shares of our common stock within 60 days, including, as applicable, RSUs subject to time-based vesting conditions, stock options, and deferred stock units held by directors. The number does not include (i) performance-based awards granted to executive officers that are subject to performance-based vesting conditions, (ii) a one-time deferred stock unit award approved by the Board and to be credited to each non-employee director as of April 11, 2019, valued at $90,000, subject to three-year vesting period, or (iii) the annual award of deferred stock units to be credited to non-employee directors in November 2019 under the Directors’ Deferral Plan based on service during 2019.
(3) Includes 920 shares held in trust over which Mr. Hoover shares voting and investment power.
Until our initial public offering on September 24, 2018, Eli Lilly & Company held all of our outstanding shares. Pursuant to the initial public offering, we issued and sold 19.8% of our total outstanding shares, with Lilly retaining the remaining shares which Lilly held until the completion of the exchange offer on March 11, 2019. Following the exchange offer, Lilly no longer owns any shares in us.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
| 50 |
PROXY ITEM NO. 2: PROPOSAL TO RATIFY THE APPOINTMENT OF PRINCIPAL INDEPENDENT AUDITORLilly.
The Audit Committee, is responsiblewhich consists entirely of independent directors, reviews the performance of our independent registered public accounting firm annually. In making the determination to reappoint EY for the appointment, compensation, retention, and oversight of the independent auditor, and oversees the process for selecting, reviewing, and evaluating the lead audit partner. Further information regarding the committee’s oversight of the independent auditor can be found in2023, the Audit Committee charter, available on our website at investor.elanco.com under “Governance.”
In connection withconsidered, among other factors, the decision regarding whether to reappoint the independent auditor each year (subject to shareholder ratification), the committee assesses the independent auditor’s performance. This assessment examines three primary criteria: (1) the independent auditor’sfirm’s qualifications and experience; (2)experience, the communication and interactions with the auditorfirm over the course of the year;year and (3) the auditor’sfirm’s independence, objectivity and professional skepticism. These criteria are assessed against an internal and an external scorecard and are discussed with management during a private session as well as in executive session. The committeeAudit Committee also periodically considers whether a rotation of the company’sour independent auditorregistered public accounting firm is advisable.
Ernst & Young LLP (EY) has served as the principal independent auditor for the company since 2017 when we were still a wholly-owned subsidiary of Lilly. Based on this year’s assessment of EY’s performance, the Audit Committee believes that the continued retention of EY to serve as the company’s principalour independent auditorregistered public accounting firm is in theour best interests as well as those of the company and its shareholders, and has therefore reappointed the firm of EY as principal independent auditor for the company for 2019. In addition to this year’s favorable assessment of EY’s performance, we recognize that there are several benefits of retaining a longer-tenured independent auditor.our shareholders. EY has gained institutional knowledge and expertise regarding the company’sour global operations, accounting policies and practices and internal control over financial reporting.reporting, in particular through our separation from Lilly in 2018 and our becoming an independent company. The Audit Committee believes that our audit and other fees are also competitive with those of our peer companies in part because of EY’s familiarity with us and our operations.
At the company and its operations. ThisAnnual Meeting, our shareholders are being asked to ratify the appointment of EY as our independent registered public accounting firm for 2023. Although ratification of this appointment is being submitted tonot required, we value the opinion of our shareholders for ratification.
and, in the event of a negative vote on this proposal, the Audit Committee will reconsider its selection. Even if this appointment is ratified, the Audit Committee may, in its discretion, appoint a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in our best interests.
Representatives of EY are expected to attend the annual meetingAnnual Meeting and will be available to respond to questions. Those representatives will have the opportunity to make a statement if they wish to do so.
| | Recommendation of the Board
The Board unanimously recommends a vote FOR“FOR” the ratification of the appointment
of Ernst & Young LLP as our
principal independent auditor for 2019.2023. | |
45 2023 Proxy Statement | | | |
The Audit Committee reviews the company’s financial reporting process on behalf of the Board. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls and disclosure controls. In this context, the Audit Committee has met and held discussions with management and the independent auditor. Management represented to the Audit Committee that the company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles (GAAP), and the Audit Committee has reviewed and discussed the audited financial statements and related disclosures with management and the independent auditor, including a review of the significant management judgments underlying the financial statements and disclosures.
The independent auditor reports to the Audit Committee, which has sole authority to appoint and to replace the independent auditor (subject to shareholder ratification).
The Audit Committee has discussed with the independent auditor matters required to be discussed with the Audit Committee by the generally accepted auditing standards (GAAS), the Public Company Accounting Oversight Board (PCAOB) and the NYSE, including the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements. In addition, the Audit Committee has received the written disclosures and the letter from the independent auditor required by applicable requirements of the PCAOB regarding communications with the Audit Committee concerning independence, and has discussed with the independent auditor the auditor’s independence from the company and its management. In concluding that the auditor is independent, the Audit Committee determined, among other things, that the nonaudit services provided by EY (as described below) were compatible with its independence, and were pre-approved. Consistent with the requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Audit Committee has adopted policies to ensure the independence of the independent auditor, such as prior committee approval of nonaudit services and required audit partner rotation.
The Audit Committee discussed with the company’s internal auditor, chief compliance offer, and independent auditors the overall scope and plans for their respective audits. The Audit Committee periodically meets with the internal and independent auditors, with and without management present, and in private sessions with members of senior management (such as the chief financial officer and the
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statemen 51
Proxy Item No. 2
chief accounting officer) to discuss the results of their examinations, their evaluations of the company’s internal controls, and the overall quality of the company’s financial reporting. The Audit Committee also periodically meets in executive session.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board subsequently approved the recommendation) that the audited financial statements be included in the company’s annual report on Form 10-K for the year ended December 31, 2018, for filing with the SEC. The Audit Committee has also appointed the company’s independent auditor, subject to shareholder ratification, for 2019.
TABLE OF CONTENTS
| Respectfully submitted,
|
| | Kapila K. Anand (Chair)
Lawrence E. Kurzius (committee member until March 11, 2019)Proposal No. 2
|
| |
| March 20, 2019 |
FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Report offollowing table shows the Audit Committee will not be deemed incorporatedfees incurred for services rendered on a worldwide basis by reference by any general statement incorporating by reference this proxy statement or portions thereof into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that we specifically incorporate this information by reference,EY for 2022 and will not otherwise be deemed filed under such Acts.2021.
| | Audit Fees(1) | | | 11,561,448 | | | 11,509,055 | |
| | Audit-Related Fees(2) | | | 146,334 | | | 490,546 | |
| | Tax Fees(3) | | | 83,902 | | | 23,490 | |
| | All Other Fees | | | — | | | — | |
| | Total Fees | | | 11,791,684 | | | 12,023,091 | |
(1)
| Fees primarily related to professional services rendered in connection with the audit of Elanco’s annual consolidated and subsidiary financial statements and internal control over financial reporting, reviews of quarterly financial statements and audit services provided in connection with statutory and regulatory filings and audit procedures related to our acquisitions of Bayer Animal Health and Kindred Biosciences, Inc. (“KindredBio”). |
(2)
| Fees primarily related to professional services that are reasonably related to the performance of the audit or review of Elanco’s financial statements, including services related to employee benefit plan, audit, or attestation services required by statutes or regulations; and services related to a pre-implementation review of our new enterprise resource planning software system. |
(3)
| Fees primarily related to tax compliance services. |
Services Performed by the Independent Auditor
SERVICES PERFORMED BY THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee pre-approves all services performed by theElanco’s independent auditor,registered public accounting firm, in part to assess whether the provision of such services might impair the auditor’s independence. The committee’sAudit Committee’s policy and procedures are as follows:
●
• | Audit services:Services. The committeeAudit Committee approves the annual audit services engagement and, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, company structure, or other matters. Audit services for 20192022 and 2023 included and will include internal controls attestation work under Section 404 of the Sarbanes-Oxley Act.Act of 2002. The committeeAudit Committee may also preapprovepre-approve other audit services, which are those services that only the independent auditorregistered public accounting firm can reasonably can provide. |
●
• | Audit-related services:Audit-Related Services. Audit-related services are assurance and related services that are reasonably related to the performance of the audit or reviews of the financial statements and that are traditionally performed by the independent auditor.registered public accounting firm. The committeeAudit Committee believes that the provision of these services does not impair the independence of the auditor.firm.
|
●
• | Tax services:Services. The committeeAudit Committee believes that, in appropriate cases, the independent auditorregistered public accounting firm can provide tax compliance services, tax planning and tax advice without impairing the auditor’sits independence. |
●
• | Other services:Services. The committeeAudit Committee may approve other services to be provided by the independent auditorregistered public accounting firm if (i) the services are permissible under SEC and PCAOBPublic Company Accounting Oversight Board (“PCAOB”) rules, (ii) the committee believes the provision of the services would not impair the independence of the auditor and (iii) management believes that the auditor is the best choice to provide the services. |
●• | Approval process:Process. At the beginning of each audit year, management requests prior committee approval of the annual audit, statutory audits and quarterly reviews for the upcoming audit year as well as any other services known at that time. Management will also present at that time an estimate of all fees for the upcoming audit year. As specific engagements are identified thereafter, they are brought forward to the committee for approval. |
For each engagement, management provides the committeeAudit Committee with information about the services and fees, sufficiently detailed to allow the committee to make an informed judgment about the nature and scope of the services and the potential for the services to impair the independence of the auditor.
firm. After the end of the audit year, management provides the committeeAudit Committee with a summary of the actual fees incurred for the completed audit year.
Independent Auditor Fees46 2023 Proxy Statement | | | |
TABLE OF CONTENTS
To the extent that this Proxy Statement has been or will be specifically incorporated by reference into any other filing of Elanco under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, this section entitled “Audit Committee Report” will not be deemed to be so incorporated, unless specifically provided otherwise in such filing.
Four independent directors comprise the Audit Committee. The Audit Committee operates under a written charter adopted by our Board. In addition, our Board has determined that each of our Audit Committee members satisfy the financial expertise requirements of the NYSE and that the Chair of the Audit Committee, Ms. Anand, has the requisite experience to be designated as an “audit committee financial expert” as that term is defined by the rules of the SEC.
The following table showsAudit Committee reviews Elanco’s financial reporting process on behalf of our Board. Management has the fees incurredprimary responsibility for services rendered onthe financial statements and the reporting process, including the systems of internal controls and disclosure controls. In this context, the Audit Committee has met and held discussions with management and the independent auditor. Management represented to the Audit Committee that Elanco’s consolidated financial statements were prepared in accordance with GAAP and the Audit Committee has reviewed and discussed the audited financial statements and related disclosures with management and the independent registered public accounting firm, including a worldwide basisreview of the significant management judgments underlying the financial statements and disclosures.
The independent registered public accounting firm reports to the Audit Committee, which has sole authority to approve and replace the firm (subject to shareholder ratification).
The Audit Committee has discussed with Elanco’s independent registered public accounting firm the matters required to be discussed with the Audit Committee by Ernst & Young for 2018. All audit fees incurred during 2017 were includedgenerally accepted auditing standards, the PCAOB and the NYSE, including the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of the disclosures in the financial statements. In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding communications with the Audit Committee concerning independence and has discussed with the firm the auditor’s independence from Elanco and its management. In concluding that the auditor is independent, the Audit Committee determined, among other things, that the non-audit services provided by the auditor were compatible with its independence and were pre-approved. Consistent with the requirements of the Sarbanes-Oxley Act of 2002, the Audit Committee has adopted policies to ensure the independence of Elanco’s independent registered public accounting firm, such as prior committee approval of non-audit services and required audit partner rotation.
The Audit Committee discussed with Elanco’s internal auditor, chief compliance officer and independent auditors the overall scope and plans for their respective audits. The Audit Committee periodically meets with the internal and independent auditors, with and without management present and in private sessions with members of senior management (such as the chief financial officer and the chief accounting officer) to discuss the results of their examinations, their evaluations of Elanco’s internal controls and the overall quality of Elanco’s financial reporting. The Audit Committee also meets at least quarterly in executive session.
Based on the reviews and discussions described in this report and subject to the limitations on the roles and responsibilities of the Audit Committee referred to above and in its charter, the Audit Committee recommended to our Board that the audited consolidated financial statements of Lilly.Elanco be included in Elanco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, for filing with the SEC.
Respectfully submitted,
Kapila K. Anand (Chair)
John P. Bilbrey
Art A. Garcia
Paul Herendeen
| | 2018 | 2017 |
| Audit Fees(1) | $4,598,109 | N/A |
| Audit-Related Fees(2) | $27,652 | N/A |
| Tax Fees(3) | $81,338 | N/A |
| All Other Fees | - | N/A |
| Total Fees | $4,707,099 | N/A |
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement 52April 6, 2023
47 2023 Proxy Statement | | | |
(1) | Includes annual audit of consolidated and subsidiary financial statements, reviews of quarterly financial statements and other services normally provided by the auditor in connection with statutory and regulatory filings.
| | | Proposal No. 3:
Advisory Vote to Approve
Executive Compensation | |
(2) | Primarily related to services related to employee benefit plan, audit or attestation servicesAs required by statutes or regulations and certain other services.
|
(3) | Primarily related to tax compliance services
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ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement 53
PROXY ITEM NO. 3: NON-BINDING VOTE ON THE COMPENSATION OF NAMED EXECUTIVE OFFICERSSection 14A of the Exchange Act, requires that we include in this proxy statement a non-binding voteour shareholders are being asked to approve, on an advisory basis, the compensation of theour named executive officers (“NEOs”), as describeddisclosed pursuant to the SEC’s compensation disclosure rules in this proxy statement.
We encourage shareholders to review the Compensationsections entitled “Compensation Discussion and Analysis, or “CD&A,Analysis” and the section entitled “Executive Compensation Tables,” beginning on page 26. The CD&A provides additional details of ourwhich include both the executive compensation program, includingtables and the accompanying narrative disclosure.
Our executive compensation programs are designed to help achieve the goals of attracting, engaging and retaining highly talented individuals who are committed to our compensation philosophycore values of integrity, excellence and objectives,respect for people, while balancing the individual elementslong-term interests of shareholders and customers. The Compensation and Human Capital Committee, which consists entirely of independent directors, has examined our executive compensation program and how our executive compensation program is administered.
The Board believes that the executive compensation as disclosed in the CD&A, tabular disclosures, and other narrative executive compensation disclosures in this proxy statementit aligns with our compensation philosophy and objectives as well as the pay practices of our peer group. The Board strongly endorsesCompensation and Human Capital Committee has also determined that the Company’s executive compensation programspecific pay decisions for the NEOs are appropriate given our performance, the executives’ contributions and recommends that shareholders vote to approve the compensation of the named executive officers, as disclosed inour shareholders’ interests.
While this proxy statement, including the Compensation Discussion and Analysis section and the tabular and narrative disclosures included herein.
Although the vote is advisory and non-binding, the Board values the opinions of the Company’s shareholders as expressed through their votes and other communications. Theour Board and the Compensation and Human Capital Committee value the opinion of our shareholders and will considertake into account the outcome of the advisory vote on executive compensationvoting results when making future compensation decisions. We currently intendask our shareholders to holdvote on NEO compensation on an annual basis.
We encourage shareholders to read the sections entitled “Compensation Discussion and Analysis” and “Executive Compensation Tables” for more information about the details of our executive compensation program and the decisions made by the Compensation and Human Capital Committee in 2022.
| | Recommendation of the Board
The Board unanimously recommends a vote “FOR” the approval of the compensation of the company’s named executive officers on an advisory basis. | |
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| | | Compensation Discussion
and Analysis | |
This section describes the compensation program applicable to our NEOs and their compensation thereunder in 2022, including a non-bindingdescription of our compensation philosophy, the elements of each program, the factors that the Compensation and Human Capital Committee considered in setting NEO compensation and how our financial results affected payouts to each NEO for service in 2022. The NEOs for 2022 are:
| | • | | | Jeffrey Simmons, President, CEO and Director | |
| | • | | | Todd Young, Executive Vice President, Chief Financial Officer | |
| | • | | | Ellen de Brabander, Executive Vice President, Innovation, Regulatory, and Business Development | |
| | • | | | Ramiro Cabral, Executive Vice President and President, Elanco International | |
| | • | | | Rajeev (Bobby) Modi, Executive Vice President, U.S. Pet Health and Global Digital Transformation | |
2022 PERFORMANCE AND RESULTS(1)
In 2022, Elanco’s financial results were negatively impacted by significant macro factors, including inflation, foreign exchange rates, China COVID lockdowns, supply chain disruptions and the economic slowdown impacting Europe and U.S. pet retail, as well as competitive innovation.
Despite topline pressure and significant environmental and competitive headwinds, we maintained our consistent Innovation, Portfolio, and Productivity (IPP) strategy in 2022. With regard to innovation, we had a productive year with eight product approvals in major markets and made significant advancements for our late-stage potential blockbuster assets. We believe that the progress on our innovation pipeline, our ability to grow price and the right-sizing of our infrastructure post the Bayer Animal Health acquisition have laid the foundation for our future success.
Our 2022 results included the following:
| | • | | | Revenue was $4,411 million, representing a year-over-year decline of 3% at constant currency, with Farm Animal flat and Pet Health declining 5% | |
| | • | | | Our GAAP net loss was $78 million, representing an improvement of $405 million over the prior year as we continued to execute on our value capture initiatives and reduced expenses related to our public company standup and Bayer Animal Health integration | |
| | • | | | Gross margin was flat year-over-year at 56.6% with productivity improvements and price growth offsetting high inflation and revenue mix headwinds | |
| | • | | | Adjusted EBITDA was $1,017 million, a 4% year-over-year decline; Adjusted EBITDA margin expansion of 80 basis points to 23.1% | |
| | • | | | Adjusted EPS was $1.11, representing 4% growth year-over-year | |
| | • | | | We realized approximately $140 million of incremental Adjusted EBITDA synergies related to the Bayer Animal Health acquisition, exceeding our initial expectations by approximately $75 million | |
| | • | | | We finished the year with a net leverage ratio of 5.5x Adjusted EBITDA, with gross debt paydown of approximately $500 million | |
(1)
| Includes non-GAAP financial measures. See Appendix A to this Proxy Statement for a description and reconciliation of these non-GAAP financial measures relative to reported GAAP financial measures. |
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EXECUTIVE COMPENSATION PHILOSOPHY AND PRACTICES
The purpose of our compensation philosophy is to ensure alignment between the Company, our executives and shareholders. Our compensation program is designed to achieve the following three objectives:
| • | Attract, retain, motivate and reward top talent. Program has clear line-of-sight to financial and operational goals that support the business strategy of innovation and profitable growth |
| • | Pay for performance. Program provides the opportunity to earn above median compensation if superior results are achieved and below median compensation if below target results are achieved. If the threshold performance is not met, no performance-related associated compensation is paid |
| • | Create sustained, long-term shareholder value. Program emphasizes sustainable performance, such that employees’ interests are aligned with shareholders |
We achieve these objectives by:
Providing an executive compensation program that includes base salaries, annual cash incentives and equity incentives similar to programs provided to Elanco’s other employees or similarly situated executives in a competitive talent market.
Targeting compensation, in aggregate, at the median (50th percentile) of the competitive market, which is comprised of similarly sized companies within the life sciences industry, with consideration of other industries, as appropriate.
| ○ | In certain situations, where there is scarcity of talent for a critical role and there is a need to offer a more competitive compensation package to attract such scarce talent, we may exceed the targeted median positioning of the market. |
Delivering pay with a greater emphasis on equity and lower weighting on cash to promote an ownership mentality and ensure shareholder votealignment.
Promoting a team-based approach through the alignment of pay with Elanco’s results while enabling leadership to differentiate pay throughout the year to recognize performance.
Requiring that senior executives maintain a meaningful stock ownership interest to align their financial interests with those of shareholders.
Limiting perquisites and other non-performance-based elements of compensation.
Ensuring the program does not incentivize excessive risk taking.
Considering shareholder feedback through annual say-on-pay results and other sources when designing our compensation and benefit program.
Designing the program with consideration of the industry in which we operate and the impact of market conditions.
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In addition to strong alignment of pay with our performance, we maintain sound governance practices, including the following:
| | ✔ Balance short- and long-term strategic objectives and directly link compensation to shareholder value
✔ Tie more than 90% of target CEO compensation to our performance
✔ Maintain robust stock ownership guidelines for NEOs and senior management
✔ Maintain a robust clawback policy
✔ Regularly engage with shareholders to obtain feedback on executive compensation and other matters
✔ Engage an independent compensation consultant that performs no other work for us or our senior management | | | ✘ No pay design features that may have the potential to encourage excessive risk-taking
✘ No excise tax gross-ups on NEO compensation
✘ No employment agreements with any NEO
✘ No hedging or pledging of our securities by any NEO
✘ No single trigger change in control vesting or payments
✘ No repricing of stock options without shareholder approval
✘ No supplemental executive retirement, health or insurance benefits for NEOs
✘ No significant perquisites
✘ No guaranteed short-term incentives or equity awards
✘ No dividends or dividend equivalents paid on unvested equity awards | |
EXECUTIVE COMPENSATION PROCESS
We seek to maintain a market-competitive executive compensation program that is consistent with our compensation philosophy and attracts and retains executives who perform at a high level and contribute to our success.
The Compensation and Human Capital Committee, which consists entirely of independent directors, determines our compensation philosophy and executive compensation program design and is the decision-making body on all matters relating to the compensation paid to the NEOs. The Compensation and Human Capital Committee recognizes that at the time of our initial separation from Lilly, most of our executive officers received compensation at levels substantially below our peer group median compensation level relative to their roles in a newly independent public company. This discrepancy became more acute after our acquisition of Bayer Animal Health when the size and complexity of the Company dramatically increased. In order to smooth the impact on our executive compensation each yearbudget and at the advice of the Compensation and Human Capital Committee’s independent compensation consultant, the committee utilized a “glidepath” approach to gradually bring these executives closer to market median compensation over a several-year period. The Compensation and Human Capital Committee continues to adjust the compensation of our NEOs along this glidepath because our NEOs continue to lag behind the median compensation level of our peer group.
Each year, the Compensation and Human Capital Committee considers individual performance assessments, compensation recommendations from senior leadership, our company performance, our peer group data and input from its compensation consultant when making executive compensation determinations and setting pay levels for NEOs. Based upon the most recent shareholder advisory vote on executive compensation, the Compensation and Human Capital Committee did not make any substantive changes to the design of the Company’s executive compensation program.
For 2022, each NEO’s compensation was set, in part on an assessment of the NEO’s individual performance against achievement of objectives established at the start of the year. “Individual performance” included the NEO’s demonstration of our values and leadership behaviors. Company performance was considered in two ways: (1) in setting 2022 compensation, a comparison to overall performance in 2021 based on a variety of metrics and (2) in determining achievement of 2022 bonus compensation, measured against specific goals established at the beginning of the year. We consider peer group data in a benchmarking review. After this benchmarking review, the Compensation and Human Capital Committee attempts to establish compensation relative to the peer group median for each NEO. However, consistent with our compensation philosophy, the Compensation and Human Capital Committee can differentiate pay levels from those at peer companies based on the results of the aforementioned assessments as well as other factors the Compensation and Human Capital Committee believes are relevant, including, but not limited to, scarcity of talent for a critical role. See “—Compensation Benchmarking” below for more information about how the Compensation and Human Capital Committee uses peer group data in making executive compensation decisions.
Finally, the Compensation and Human Capital Committee determines the specific metrics to be used to measure company performance for purposes of the annual cash incentive program and long-term performance share awards. The specific metrics
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selected for 2022 are described further in “—2022 NEO Compensation” below. The Compensation and Human Capital Committee believes that the use of certain non-GAAP metrics, such as Adjusted EBITDAR, to measure company performance is appropriate because it aligns pay with performance objectives that are commonly used by shareholders and other members of the investment community to evaluate our performance and helps avoid inappropriate windfalls or penalties due to factors outside of management’s control. Both the goals and the financial performance are presented on a consistent non-GAAP basis.
Role of Shareholders
| | Shareholders are provided the opportunity to cast an annual advisory vote on the compensation of NEOs. | | | Most recently, 93% of votes cast supported the say-on-pay proposal at our 2022 annual meeting of shareholders. | |
We are committed to continued engagement with our shareholders on various corporate governance topics, including ESG matters, executive compensation and related trends. The Compensation and Human Capital Committee considers the feedback we receive during these discussions, as well as the results of say-on-pay votes, when reviewing our executive compensation program. Based on the feedback from the most recent say-on-pay vote, the Compensation and Human Capital Committee decided to not make any changes to the design of our compensation program. For more information about our shareholder engagement efforts, see “Corporate Governance—Shareholder Outreach” above.
Role of the Compensation Consultant
The Compensation and Human Capital Committee directly engages an independent compensation consultant, WTW, that reports directly to the chair of the Compensation and Human Capital Committee. The consultant meets regularly and as needed, with the Compensation and Human Capital Committee and has direct access to the chair during and between meetings. Among other duties, the consultant advises the Compensation and Human Capital Committee on competitive pay practices, assists with the determination of the peer group for compensation purposes and provides and analyzes compensation levels relative to market benchmarks. During 2022, WTW performed no other services for us or our executive officers.
The Compensation and Human Capital Committee has the sole authority to retain and terminate its independent compensation consultant and approve its fees, which the Company pays. The Compensation and Human Capital Committee also considers the independence of the consultant in accordance with SEC and NYSE rules.
Role of the Chief Executive Officer and Senior Management
The Compensation and Human Capital Committee also works with Mr. Simmons, our Chief Executive Officer, as well as our Executive Vice President, Human Resources, Corporate Communications and Administration and other members of senior management, to oversee our executive compensation program. At the Compensation and Human Capital Committee’s request, Mr. Simmons plays a key role in the process as it relates to executive officers other than himself. For the NEOs other than Mr. Simmons, he:
recommends adjustments to annual base salaries and target annual cash incentive amounts;
recommends equity incentive awards under our long-term incentive plan; and
prepares an evaluation of each executive officer, including achievement of set objectives.
The Compensation and Human Capital Committee considers Mr. Simmons’ evaluation and his direct knowledge of each NEO’s performance and contributions when making compensation decisions. However, Mr. Simmons is not present during Compensation and Human Capital Committee voting or deliberations regarding his own compensation and the Compensation and Human Capital Committee solely determines and approves (subject to ratification by the independent members of our Board) each element of Mr. Simmons’ compensation.
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Compensation Benchmarking
To provide the appropriate context for executive pay decisions, the Compensation and Human Capital Committee, in consultation with WTW, assesses the compensation practices and pay levels of our peer group. In general, the committee uses the peer group to benchmark:
| | Base Salary | | | Bonus | | | Long-Term Incentives (equity) | | | Executive Program Design | | | Industry Trend
Analysis | |
For 2022 executive compensation benchmarking, the Compensation and Human Capital Committee used a peer group selected in 2021 whose median revenues were broadly similar to ours after our acquisition of Bayer Animal Health, with revenue of roughly one-half to two times Elanco’s revenue, with some companies having greater revenue but are in very comparable businesses. The Compensation and Human Capital Committee also believed these companies share important characteristics with us, such as being our direct competitors, operating in a similar business model, or employing people with the unique skills required to operate an established biopharmaceutical company like ours.
Based on the advice of WTW, the following group of 19 companies was identified by the Compensation and Human Capital Committee as our peer group for 2022 executive compensation benchmarking.
| | Agilent Technologies, Inc. | | | Endo International plc | | | Regeneron Pharmaceuticals, Inc. | |
| | Alexion Pharmaceuticals, Inc. | | | Hologic, Inc. | | | STERIS plc | |
| | Baxter International Inc. | | | IDEXX Laboratories, Inc. | | | Varian Medical Systems, Inc. | |
| | Boston Scientific Corporation | | | Incyte Corporation | | | Vertex Pharmaceuticals, Inc. | |
| | Charles River Laboratories International, Inc. | | | Jazz Pharmaceuticals plc | | | Zimmer Biomet Holdings, Inc. | |
| | DENTSPLY SIRONA Inc. | | | Perrigo Company plc | | | Zoetis Inc. | |
| | Edwards Lifesciences Corporation | | | | | | | |
The Compensation and Human Capital Committee periodically reviews our peer group and adds or removes companies in the peer group when appropriate to help ensure companies in the peer group are similar in size to us and appropriately reflect how we conduct our business. In August 2022, the Compensation and Human Capital Committee revised the peer group to remove Alexion Pharmaceuticals and Varian Medical Systems – both of which were acquired – and Endo International because it recently filed for bankruptcy. The committee added Horizon Therapeutics because it is in a comparable industry (biotechnology); has comparable revenue, was identified as being a peer of Elanco by a shareholder services organization and has an innovation focus. This updated peer group of 17 companies will be the peer group used for 2023 executive compensation benchmarking.
2022 NEO COMPENSATION
Our executive pay program consists of three primary components:
Annual Base Salary
Within a range of competitive pay and targeted to the median of the peer group. Base salaries are based on each person’s level of contribution, responsibility, and expertise, and are competitive with respect to base salaries in our peer group.
| ○ | To ensure that we can attract, retain, motivate and reward a leadership team that will sustain long-term growth for shareholders while maintaining affordability within our business plan. |
Annual Cash Incentive
Performance based and determined by achievement of a change in Elanco Cash Earnings (as defined below) from the prior year.
| ○ | To provide focus and reward for the achievement of fiscal year financial goals. |
Long-Term Equity Incentive Awards
Performance Awards (50% of total award opportunity): These awards have the potential to vest at 0% to 200% of target after a two-year performance period beginning on the first day of the calendar year of grant and are earned based on our Adjusted EBITDAR over the performance period, subject to continued employment with us.
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Restricted Stock Units (25% of total award opportunity): These awards have the potential to vest in roughly one-third increments on each of the first three annual anniversaries of the grant date, subject to continued employment with us.
Stock Options (25% of total award opportunity): These awards have the potential to vest in roughly one-third increments on each of the first three annual anniversaries of the grant date, subject to continued employment with us.
| ○ | To provide an incentive for delivering long-term shareholder value and to align the interests of executives and shareholders over the long-term. |
These components have each been tailored to incentivize and reward specific aspects of company performance that the Compensation and Human Capital Committee believes are central to delivering long-term value.
Specifically, the Compensation and Human Capital Committee is dedicated to ensuring that a substantial portion of executive compensation is “at-risk” and variable. A substantial majority of the NEOs’ total target direct compensation is directly affected by our company-wide performance. The charts below show the percentage of 2022 fixed (base salary) and variable (annual cash bonus and equity award) for our CEO and an average of the other NEOs at target.
2022 Annual Base Salary
During 2022, base salaries for the NEOs were increased on average by 8%. These increases were established based on several factors, including peer group benchmarking, general external trends and experience in their roles. Base salaries were increased to align with median peer group benchmarks as a culmination of the several-year glidepath exercise to align executive compensation with market peers. This glidepath approach began after our separation from Lilly and was revised due to our updates to our peer group since the acquisition of Bayer Animal Health in 2020.
| | Mr. Simmons | | | 1,125,000 | | | 1,046,000 | |
| | Mr. Young | | | 639,000 | | | 580,000 | |
| | Dr. de Brabander(1) | | | 667,819 | | | 709,672 | |
| | Dr. Cabral | | | 572,000 | | | 475,000 | |
| | Mr. Modi(2) | | | 525,000 | | | — | |
(1)
| Dr. de Brabander’s compensation is paid in Euros and was 634,000 Euros and 600,000 Euros in 2022 and 2021, respectively. Her 2022 salary has been converted to USD using the 2022 Euro to USD daily average rate of 1.053343, and her 2021 salary has been converted to USD using the 2021 Euro to USD daily average rate of 1.182787. Dr. de Brabander joined the organization on October 18, 2021. Her 2021 salary is annualized for a full year of employment. |
(2)
| Mr. Modi joined the organization on March 14, 2022. His salary above is annualized for a full year of employment. Mr. Modi was not employed with Elanco in 2021. |
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2022 Annual Cash Incentive
During 2022, the Compensation and Human Capital Committee increased the bonus target as a percentage of salary for Messrs. Simmons and Young. The increases were based on several factors, including peer group benchmarking and to support the glidepath for compensation described above.
For 2022, the Compensation and Human Capital Committee approved a new financial metric, “Elanco Cash Earnings” (also known as “ECE”), as the sole company performance measure under our annual cash incentive program. The annual cash incentive payout is based on the change in ECE compared to the prior year’s ECE, with the prior year’s ECE as the target for the subsequent year.
This measure replaced the 2021 metrics of revenue, adjusted EBITDA and innovation performance compared to an agreed upon level of achievement. The Compensation and Human Capital Committee selected this new cash-based economic profit measure because it incentivizes both growth and return on capital invested in our business and the committee believes that it will positively correlate with total shareholder return.
ECE encourages and rewards the NEOs for making decisions that benefit the business and its shareholders over the prior year. While ECE is a short-term metric, the cumulative effect of positive ECE over the long-term creates shareholder value. If ECE improves, shareholder value has been created. The Compensation and Human Capital Committee believes that this metric better aligns with our growth and value creation strategy, which is to drive innovation over relatively long product cycles through ongoing prudent investments in R&D. By requiring our business to earn more than our cost of capital on our investments on an annual basis over time, the Compensation and Human Capital Committee believes leadership will be further incentivized to invest in and deliver profitable innovation to drive revenue growth, prudently manage expenses, efficiently use our assets and otherwise take actions designed to create long-term, sustainable shareholder value. This is also designed to create a more significant ownership mentality within Elanco by further aligning management’s interests with those of our shareholders. To ensure our calculated capital charge of 8.5% creates rigorous accountability that is aligned with our core business model, we use a base of “Gross Investments.” We define Gross Investments as (i) an average of our gross operating assets over the four calendar quarters of the performance year combined with (ii) the prior eight years, including the performance year, of adjusted R&D expenses. Using gross operating assets, which excludes depreciation, ensures that year-over-year EBITDAR growth is required to exceed our cost of capital. Categorizing our R&D expenses as investments required to drive long-term value, rather than as short-term costs, reinforces the commitment to consistently deliver pipeline milestones over time and strengthens the ownership mindset. We utilize eight years of prior R&D expense to closely align our Gross Investment base with our product cycle timing.
ECE is calculated by subtracting a Capital Charge on Gross Investments from Gross Cash Earnings as illustrated below:
| | | Adjusted EBITDA | | | | | | | | | Average Gross Operating Assets |
+ | | | Adjusted R&D Expense | | | | | | + | | | 8 years of Adjusted R&D Expense |
| | | | | | | | | | | | Gross Investments |
- | | | Taxes | | | | | | x | | | Required Rate of Return |
| | | Gross Cash Earnings | | | - | | | | | | Capital Charge on Gross Investments |
| | In words, we start with Adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), add back Adjusted R&D expense and then subtract taxes to give us Gross Cash Earnings (“GCE”), a measurement of profit. | | | We multiply the sum of our average Gross Operating Assets and eight years of Adjusted R&D expense by 8.5% to determine the Capital Charge on Gross Investments. | | | Subtracting the Capital Charge from GCE gives us ECE, which tells us whether we are generating a return greater or less than the Required Rate of Return. | |
Each NEO was eligible to and did participate in our annual cash incentive program for 2022. The program objective was linearly interpolated for achievement between threshold, target, and maximum goals of 0%, 100%, and 200%, respectively.
Our annual cash incentive program allows the Compensation and Human Capital Committee to make adjustments based on the effects of acquisitions, divestitures, restructurings or special charges or gains, changes in corporate capitalization, accounting changes,
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and/or events that are treated as extraordinary items for accounting purposes. The Compensation and Human Capital Committee may also reduce (but not increase) the actual payout of any individual’s annual cash incentive based on our performance and the Compensation and Human Capital Committee’s subjective assessment of the NEO’s overall individual performance.
Bonus targets for 2022 and 2021 are shown in the table below as a percentage of the NEO’s base salary.
| | Mr. Simmons | | | 130 | | | 125 | |
| | Mr. Young | | | 80 | | | 75 | |
| | Dr. de Brabander | | | 70 | | | 70 | |
| | Dr. Cabral | | | 70 | | | 70 | |
| | Mr. Modi(1) | | | 70 | | | — | |
(1)
| Mr. Modi did not have a 2021 bonus target because he joined Elanco in 2022. |
2022 Bonus Payments
The Compensation and Human Capital Committee, due to global processing deadlines and its custom, calculated ECE based upon the financials released on February 21, 2023 with our earnings release for the fourth quarter and full year of 2022. Subsequent to that release, an immaterial change was made to those financials which was included in our Annual Report on Form 10-K for the year ended December 31, 2022. The 2022 calculation as set forth below will be used as the base for the determination of the change in ECE when determining the bonus for 2023.
2022 ECE Calculation
(All numbers $M except %s)
| | | | | | | | | | | | | | | Average Gross Operating Assets | | | 15,672 | | | | | | |
| | | Adjusted EBITDA(1) | | | 1,023 | | | | | | + | | | 8 Years of Adjusted R&D Expense | | | 2,268 | | | | | | |
+ | | | Adjusted R&D Expense(2) | | | 310 | | | | | | | | | Gross Investments | | | 17,940 | | | | | | |
- | | | Taxes | | | (147) | | | | | | x | | | Required Rate of Return | | | 8.5% | | | | | | |
| | | Gross Cash Earnings | | | 1,186 | | | - | | | | | | Capital Charge on Gross Investments | | | 1,525 | | | = | | | ECE ($339) million |
(1)
| Current Report on Form 8-K/A filed on March 1, 2023 contains the reconciliation from Elanco’s Adjusted EBITDA used to determine the 2022 ECE calculation to Adjusted EBITDA of $1,017 million presented in our Annual Report on Form 10-K for the year ended December 31, 2022. |
(2)
| Adjusted R&D expense in the ECE calculation excludes depreciation and amortization to align with the Adjusted EBITDA calculation that excludes such items. |
The 2022 ECE was ($339) million, a change of ($27) million versus the ECE of ($312) million in 2021. The primary contributing factor to the reduction in 2022 ECE was lower year-over-year Adjusted EBITDA.
The decline in ECE for 2022 shows that we generated less ECE than in 2021. Because our corporate bonus plan requires our cash earnings to match prior year attainment for a target payout, our corporate bonus paid out at less than the 1.0 target. The payouts are linearly interpolated, from the minimum payout of 0 to the maximum of 200%. Our 2022 change in ECE of ($27) million resulted in a corporate bonus multiple of 93% of the target payout opportunity.
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Consequently, the 2022 annual cash incentive payments paid to the NEOs were as follows:
| | Mr. Simmons | | | 1,125,000 | | | 130 | | | 93 | | | 1,360,125 | |
| | Mr. Young | | | 639,000 | | | 80 | | | 93 | | | 475,416 | |
| | Dr. de Brabander(1) | | | 667,819 | | | 70 | | | 93 | | | 434,750 | |
| | Dr. Cabral | | | 572,000 | | | 70 | | | 93 | | | 372,372 | |
| | Mr. Modi(2) | | | 525,000 | | | 70 | | | 93 | | | 274,356 | |
(1)
| Dr. de Brabander’s bonus payout was 412,734 Euros. Her 2022 payout has been converted to USD using the 2022 Euro to USD daily average rate of 1.053343. |
(2)
| Mr. Modi’s bonus payout is based on pro-rated eligible earnings of $421,438 based on his start date of March 14, 2022 as determined by Elanco’s automated daily proration bonus calculation methodology which caused bonus-eligible earnings to differ immaterially from base salary. |
Long-Term Incentive Awards
To further incentivize shareholder value creation, beginning in 2022, we changed the mix of equity awards granted to our executive leadership under our long-term incentive plan. In 2022, the mix changed from 75% performance awards and 25% RSUs to 50% performance stock units, 25% RSUs and 25% stock options. The inclusion of stock options rewards overperformance in relation to value creation and aligns our internal pay-for-performance strategy with continued equity appreciation for shareholders. This mix of equity awards is aligned with those of several companies in the peer group we use to benchmark our executive compensation program, as further described in “—Executive Compensation Process—Compensation Benchmarking” above.
The long-term incentive component of the NEOs’ compensation is designed to align this critical compensation element with our key financial incentives and focus leaders on achieving certain determined company performance objectives. In 2022, NEOs received the following annual grant equity awards:
| • | Performance Awards (“PAs”) (50% of total award opportunity): These awards have the potential to vest at 0% to 200% of target after a two-year performance period beginning on the first day of the calendar year of grant and are earned based on our Adjusted EBITDAR over the performance period, subject to continued employment with us. |
| • | Restricted Stock Units (“RSUs”) (25% of total award opportunity): These awards have the potential to vest in roughly one-third increments on each of the first three annual anniversaries of the grant date, subject to continued employment with us. |
| • | Stock Options (“Stock Options”) (25% of total award opportunity): These awards have the potential to vest in roughly one-third increments on each of the first three annual anniversaries of the grant date, subject to continued employment with us. |
The Compensation and Human Capital Committee has the discretion to adjust Performance Awards to take into account certain situations as set forth in the stock plan as follows:
the impact from the operations of any business divestiture, such as a major product or geography;
the impact of any acquisitions, significant collaborations, restructuring or external litigation;
foreign currency fluctuation impact greater than a 2% change to applicable plan rates;
the impact of any non-GAAP adjustment provided each adjustment is approved by the Committee; and/or
any unforeseen adjustment provided such adjustment is approved by the committee.
No dividends or dividend equivalents accrue on either the PAs or the RSUs.
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2022 Target Grant Values
Our policy with respect to the annual equity award for all eligible employees, including the NEOs, is to grant the award and set the grant price at the Compensation and Human Capital Committee’s regularly scheduled meeting during the first quarter of each year. For the 2022 equity awards, we set the total target values for the NEOs based on internal pay equity, our company-wide performance, individual performance and our peer group data. As described in “Executive Compensation Process” above, we continue to work to better align our executive compensation with market practices to reflect the glidepath approach for each NEO. Total target values for the 2022 equity grants to the NEOs were set as follows, the levels of which remained below the peer group medians:
| | Mr. Simmons | | | 10,200,000 | |
| | Mr. Young | | | 2,510,000 | |
| | Dr. de Brabander | | | 1,678,000 | |
| | Dr. Cabral | | | 1,470,000 | |
| | Mr. Modi(1) | | | 900,000 | |
(1)
| Mr. Modi received a sign-on restricted stock unit grant with a target grant value of $900,000 on April 1, 2022. |
Performance Awards
In March 2022, each NEO received PAs under the 2018 Stock Plan. These awards represent a substantial, at-risk component of NEO compensation directly tied to our long-term financial performance. The PAs granted in 2022 have a two-year performance period from the beginning of 2022 through the end of 2023 and the final payout multiple per grant is determined by averaging the payout multiple of each of the two performance years. Due to the transformational nature of our 2018 initial public offering, our 2019 full separation from Lilly, our former parent company, and our 2020 acquisition of Bayer Animal Health, the Compensation and Human Capital Committee believes it is appropriate to set the performance period at two years until a more consistent pattern of performance can be better established. The Compensation and Human Capital Committee regularly evaluates the two-year performance period to determine whether it continues to be appropriate. The Compensation and Human Capital Committee believes that this multi-year linkage will further reinforce a culture of long-term ownership and rewards year-over-year improvement and efficient use of capital and aligns award payouts with long-term shareholder returns.
The Compensation and Human Capital Committee approved Adjusted EBITDAR as the sole company performance measure for Elanco performance awards under our long-term incentive program. This measure was selected to replace Adjusted Net Income, which was used for Elanco performance awards in 2021 and 2020. Target Adjusted EBITDAR is defined as the prior year’s adjusted EBITDAR (Adjusted EBITDA plus R&D expense, excluding depreciation), plus the pre-tax required return on the year-over-year change in Gross Investments, as defined in the “2022 Annual Cash Incentive” section above.
The target number of PAs granted to an NEO was determined by dividing 50% of the target equity grant value applicable to such NEO by the closing stock price at the date of grant. The grant date fair values for these awards are reported in the table below.
| | Mr. Simmons | | | February 2024 | | | 5,100,009 | |
| | Mr. Young | | | February 2024 | | | 1,255,012 | |
| | Dr. de Brabander | | | February 2024 | | | 839,028 | |
| | Dr. Cabral | | | February 2024 | | | 735,018 | |
| | Mr. Modi(2) | | | | | | — | |
(1)
| All awards had a fair market value of $28.94 per share based on their grant date of March 1, 2022. Mr. Simmons’ award was approved during the meeting of the Board on February 22, 2022. All other NEO awards were approved by the Compensation and Human Capital Committee at its meeting on February 21, 2022. |
(2)
| Mr. Modi did not receive a 2022 PA grant as he joined Elanco after the 2022 on-cycle equity awards were granted. |
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Payouts for the PAs granted in 2022 range from 0% to 200% of target based on our achievement of the Target Adjusted EBITDAR and subject to continuous employment through the vesting date. Because the gross operating asset total used for the required return on investment is an average of the four quarters of the performance year, the Target Adjusted EBITDAR, which would result in a 1.0 payout, cannot be determined until the end of a given performance year. In addition, each year’s target is set relative to the prior year’s results, so the 2023 target is dependent on 2022 EBITDAR performance. We believe that this required return on investment and multi-year linkage are key metric differentiators that encourage an efficient use of assets as well as a long-term ownership mindset. The final award payout is an average of Adjusted EBITDAR achieved, relative to Target, for each of the two performance years.
PAs Granted in 2021 That Were Paid Based Upon Performance at December 31, 2021 and 2022
In 2021, we granted PAs to the NEOs (other than Dr. de Brabander and Mr. Modi who were not with Elanco at that time) that were subject to a two-year performance cycle that ended on December 31, 2022. The following describes the performance objectives, outcomes and shares earned under these 2021 PA grants.
The 2021 Adjusted Net Income attainment approved by the Compensation and Human Capital Committee was, and continues to be, based upon the Company’s original audited financials for the year ended December 31, 2021 even though those financials were revised in connection with the audit of the Company’s fiscal year ended December 31, 2022. As indicated in the applicable plan, the awards based upon 2021 Adjusted Net Income had been previously certified and were not subject to change absent a situation provided for in the Company’s clawback policy. In any event, the revisions would have increased Adjusted Net Income to $522 million, which would have increased the PA award by approximately 4%.
For the performance period ended on December 31, 2022, the Compensation and Human Capital Committee approved an attainment adjustment based on fluctuations related to foreign currency rates, as permitted by the Performance Award Agreements. We calculated this adjustment based on the foreign currency rate impact on revenue that exceeded a threshold of +/- 2%, and then applied any offsetting savings driven by those same rate fluctuations. For 2022, this approach yielded a positive $33 million adjustment to Adjusted Net Income. The Compensation and Human Capital Committee believes that this approach is fair and balanced, as the committee would apply a downward adjustment in the event of a positive impact from foreign currency rates above 2% threshold. This approach adjusts for a material macroeconomic factor not related to core business performance, which aligns with our pay-for-performance compensation philosophy.
For the NEOs who participated in these 2021 awards, the number of our shares earned under the performance-based awards is the average of the two payout multiples (1.666 for 2021 and 1.171 for 2022) times the target number of shares and is set forth in the table below. Details on the vesting schedule of these awards are set forth below in “Executive Compensation Tables—Outstanding Equity Awards at December 31, 2022.”
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| | Mr. Simmons | | | 223,121 | | | 316,386 | |
| | Mr. Young | | | 47,006 | | | 66,655 | |
| | Dr. Cabral | | | 28,507 | | | 40,423 | |
Restricted Stock Units
On March 1, 2022, each NEO also received RSUs under the 2018 Stock Plan. These time-based awards are designed to align the interests of the NEOs with the interests of our shareholders by promoting the retention of our NEOs over the longer term.
RSUs vest over a three-year period, with 33% of the award vesting on the first anniversary of the grant date, 33% of the award vesting on the second anniversary of the grant date and 34% of the award vesting on the third anniversary of the grant date, subject to continuous service through each vesting date. The number of RSUs granted to an NEO was determined by dividing 25% of the target equity grant value applicable to such NEO by the closing stock price at the date of grant. The grant date fair values for these awards are reported in the table below.
| | Mr. Simmons | | | March 2025 | | | 2,550,019 | |
| | Mr. Young | | | March 2025 | | | 627,506 | |
| | Dr. de Brabander | | | March 2025 | | | 419,514 | |
| | Dr. Cabral | | | March 2025 | | | 367,509 | |
| | Mr. Modi(2) | | | | | | — | |
(1)
| All awards had a fair market value of $28.94 per share based on their grant date of March 1, 2022, Mr. Simmons’ award was approved during the meeting of the Board on February 22, 2022. All other NEO awards were approved by the Compensation and Human Capital Committee at its meeting on February 21, 2022. |
(2)
| Mr. Modi did not receive a 2022 target grant as he joined Elanco after the 2022 on-cycle equity awards were granted. He did receive a sign-on restricted stock unit grant with a grant date fair market value of $900,017 on April 1, 2022. |
Stock Options
On March 1, 2022, each NEO also received stock options under the 2018 Stock Plan. These time-based awards are designed to incentivize management to drive increases in stock price and align the interests of the NEOs with the interests of our shareholders.
The stock options each NEO receives is determined by each person’s stock option equity target divided by the fair market value based on Black-Scholes modeling as of the grant date. Because the option exercise price is equivalent to the market close price on the grant date, the options require the stock to appreciate for our NEOs to realize any compensation. For the 2022 grants, based on the option fair market valuation of $10.89 and the exercise price of $28.94, our stock price would have to increase approximately 38% above the exercise price for our NEOs to realize the grant date fair market values shown in the table below.
Stock options vest over a three-year period, with 33% of the award vesting on the first anniversary of the grant date, 33% of the award vesting on the second anniversary of the grant date and 34% of the award vesting on the third anniversary of the grant date, subject to continuous service through each vesting date. The number of stock options granted to an NEO was determined by dividing 25% of the target equity grant value applicable to such NEO by the closing stock price at the date of grant. The grant date fair values for these awards are reported in the table below.
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| | Mr. Simmons | | | March 2025 | | | 2,550,002 | |
| | Mr. Young | | | March 2025 | | | 627,504 | |
| | Dr. de Brabander | | | March 2025 | | | 419,505 | |
| | Dr. Cabral | | | March 2025 | | | 367,505 | |
| | Mr. Modi(2) | | | | | | — | |
(1)
| All awards had a fair market value of $10.89 per option based on Black-Scholes modeling as of their grant date of March 1, 2022. The grant date fair value of the above awards is based upon the assumptions described in Note 15: Stock Based Compensation to Elanco's consolidated and combined financial statements in its Annual Report on Form 10-K for the year ended December 31, 2022 filed by Elanco on March 1, 2023. Mr. Simmons’ award was approved during the meeting of the Board on February 22, 2022. All other NEO awards were approved by the Compensation and Human Capital Committee at its meeting on February 21, 2022. |
(2)
| Mr. Modi did not receive a 2022 stock option grant as he joined Elanco after the 2022 on-cycle equity awards were granted. |
OTHER BENEFITS
Benefits are an important part of retention and financial security for all employees and each of the benefits described below are designed to provide a market-competitive executive compensation program. In addition to the benefits described below, the NEOs are eligible to participate in our health and welfare programs, matching gifts program and other employee benefit programs on the same basis as other employees.
Elanco Executive Severance Plan
Each NEO is eligible to participate in the Elanco Executive Severance Pay Plan. This Plan defines the circumstances where an NEO is entitled to receive severance benefits in the event his or her employment with us is terminated. A description of the Elanco Executive Severance Plan and the benefits to which an NEO may be entitled is set forth in the narrative disclosure accompanying the table in “Executive Compensation Tables—Potential Payments Upon Termination or Change in Control (as of December 31, 2022)” below.
2018 Change in Control Severance Pay Plan for Select Employees
Each NEO is eligible to participate in the Elanco 2018 Change in Control Severance Pay Plan for Select Employees, which provides severance benefits to an NEO in the event his or her employment with us is terminated following a change in control. A description of the Elanco 2018 Change in Control Severance Pay Plan for Select Employees and the benefits to which an NEO may be entitled is set forth in “Executive Compensation Tables — Payment Upon Termination or Change in Control (as of December 31, 2022) — Elanco Change in Control Severance Pay Plan for Select Employees” below.
The Elanco 401(k) Plan
We provide retirement benefits to eligible employees, which includes our NEOs, through the Elanco 401(k) Plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Code. Participants may elect to contribute a portion of their base salary to the plan and we match employee contributions up to 6% of base salary (subject to IRS limits). In addition, we provide a non-elective contribution in the amount of 3% of base salary earnings, contingent on active employment on December 31 of each year. The employee contributions, our contributions and earnings thereon are paid out in accordance with elections made by the participant under the terms and conditions of the Elanco 401(k) Plan.
The Elanco Deferred Compensation Program
The NEOs may defer receipt of all or part of their annual cash incentive bonus under the Elanco Deferred Compensation Plan, which allows participants to save for retirement in a tax-effective way at minimal cost to us. Under this unfunded and non-qualified plan, amounts deferred by the participant are credited at an interest rate of 120% of the applicable federal long-term rate, as described in more detail in “Executive Compensation Tables—Nonqualified Deferred Compensation” below. In 2022, the Compensation and Human Capital Committee approved new plan features for the Elanco Deferred Compensation Plan to both promote ownership and ensure that our offerings are in line with our peer group. The revised Deferred Compensation Plan will include company stock and 401(k)-type fund options for deferrals of base and bonus. Elections of employer stock will be eligible for a match on the first 6% of each NEO’s
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base and bonus and will have a two-year cliff vest. We believe further incentivizing stock ownership among our NEOs will reinforce our ownership culture and align management's interests with shareholders. The initial elections and deferrals using these revised plan features will occur in 2023 and 2024, respectively.
GOVERNANCE AND OTHER MATTERS
Employment Agreements
We do not have employment agreements with any of the NEOs. We do not provide excise tax payments, reimbursements, or gross-ups to any of the NEOs.
Stock Ownership and Holding Guidelines
Our Board has adopted stock ownership guidelines for our executive officers, which are designed to further promote long-term shareholder value creation and help ensure our senior executives remain focused on both short- and long-term objectives. The individuals have a period of five years from the date of starting in his/her current role to meet the guidelines. Shares of Elanco stock and outstanding RSU awards held by the individual are counted toward the requirement. PAs and stock options do not count toward the requirement. Mr. Simmons, our Chief Executive Officer, is required to own Elanco common stock with a value equal to at least six times his annual base salary. Each of the other NEOs is required to own Elanco common stock with a value equal to at least three times their annual base salary. All of the NEOs are required to hold at least 50% of all equity awards granted until their stock ownership requirements are satisfied, which allows them to build toward their respective ownership requirements. As of the Compensation and Human Capital Committee’s most-recent annual governance review in May 2022, each of the NEOs was in compliance with the stock ownership guidelines or was making appropriate progress towards meeting the applicable ownership level within a reasonable period of time.
ANTI-HEDGING AND ANTI-PLEDGING POLICY
We have a formal policy under which Non-Employee Directors and employees are not permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars and exchange funds) or otherwise engage in transactions that hedge or offset any decrease in the market value of a company’s equity securities granted to the employee or director as compensation or held directly or indirectly by the employee or director. Additionally, our Corporate Governance Guidelines state that our directors are prohibited from hedging their Elanco stock and from pledging, or using as collateral, their Elanco stock.
EXECUTIVE COMPENSATION RECOVERY POLICY
All of our incentive awards generally 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 and Human Capital Committee has adopted an executive compensation recovery policy that gives the Compensation and Human Capital Committee broad discretion to claw back incentive payouts from any member of our senior management, which includes the NEOs, whose misconduct caused or contributed to Elanco having to restate all or a portion of its financial statements or resulted in a material violation of law or policy that causes significant harm to Elanco (or who failed in his or her supervisory responsibility to manage or monitor conduct or risks appropriately and such failure contributed materially to the harm caused to Elanco).
Our recovery policy covers any incentive compensation awarded or paid to an employee at a time when he or she is a member of our senior management. Subsequent changes in status, including retirement or termination of employment, do not affect our rights to recover compensation under the policy. Recovery can extend back as far as three years.
We expect to update our compensation recovery policy in the next year to comply with new NYSE listing rules regarding clawback policies.
TAX DEDUCTIBILITY OF COMPENSATION EXPENSE
Section 162(m) of the Code generally places a $1 million limit on the amount of compensation a publicly held company can deduct in any tax year on compensation paid to “covered employees,” including the NEOs. While the Compensation and Human Capital Committee may consider tax deductibility as one of many factors in determining executive compensation, the Compensation and Human Capital Committee will award compensation that it determines is consistent with the goals of our executive compensation program even if such compensation is not tax deductible by us, if it determines that payment of such compensation is consistent with our business needs.
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COMPENSATION RISK OVERSIGHT
We monitor the risks associated with our compensation program and individual executive compensation decisions on an ongoing basis. The Compensation and Human Capital Committee, in collaboration with its independent compensation consultant, WTW, identified no material risks in our executive compensation programs in 2022. In their 2022 annual risk analysis of our incentive compensation plans, WTW used certain evaluation criteria for incentive awards to determine whether or not these incentive plans were reasonably likely to incentivize risk-taking among those who participate in them, including, among others, the following:
The metrics used to determine payout under the incentive plans;
Whether or not the metrics used to determine payout under the incentive plans were balanced;
The maximum incentive pay multiple;
The funding thresholds under the incentive plans;
The performance period for each plan;
The level of management that may exercise discretion as to the ultimate payout under the incentive plans; and
Any deferrals, holdbacks, or clawback mechanisms under the incentive plans.
The Compensation and Human Capital Committee believes that there are several features in our compensation programs and policies that mitigate excessive risk-taking. For instance, the Compensation and Human Capital Committee has discretion to adjust incentive payments, if needed, including to reflect decisions that executives make that may impact our reputation. A large percentage of senior management compensation has historically been paid in the form of long-term equity awards over a multiple-year cycle, a compensation structure that is intended to align incentives with appropriate risk taking. Moreover, senior management is subject to share ownership and retention policies and we retain broad discretion to recover incentive awards in the event of certain significant misconduct. Our general risk management controls also serve to preclude our decision makers from taking excessive risk to earn the incentives provided under our compensation programs.
Compensation and Human Capital Committee Report To the extent that this Proxy Statement has been or will be specifically incorporated by reference into any other filing of Elanco under the Securities Act or the Exchange Act, this section entitled “Compensation and Human Capital Committee Report” will not be deemed to be so incorporated, unless specifically provided otherwise in such filing.
The Compensation and Human Capital Committee is primarily responsible for reviewing, approving and overseeing Elanco’s compensation plans and practices and works with management and the Committee’s independent compensation consultant to establish Elanco’s compensation philosophy and programs. The Compensation and Human Capital Committee has reviewed and discussed the “Compensation Discussion and Analysis” section of this Proxy Statement with management. Based on this review and discussion, the Compensation and Human Capital Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” section be included in Elanco’s 2022 Annual Report on Form 10-K for the year ended December 31, 2022 (incorporated by reference) and in this Proxy Statement.
Respectfully submitted,
Lawrence E. Kurzius (Chair)
R. David Hoover
Kirk P. McDonald
Denise Scots-Knight
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The following table summarizes compensation awarded to, earned by and/or paid to our NEOs in connection with their service to Elanco during 2022, 2021 and 2020, as applicable.
SUMMARY COMPENSATION TABLE
Jeffrey Simmons
President and CEO | | | 2022 | | | 1,125,000 | | | — | | | 7,650,029 | | | 2,550,002 | | | 1,360,125 | | | 28,476 | | | 12,713,632 |
| | 2021 | | | 1,046,000 | | | — | | | 9,261,019 | | | — | | | 1,725,900 | | | 27,096 | | | 12,060,015 |
| | 2020 | | | 1,025,000 | | | — | | | 6,860,048 | | | — | | | 1,045,500 | | | 28,272 | | | 8,958,820 |
Todd Young
Executive Vice President and Chief Financial Officer | | | 2022 | | | 639,000 | | | — | | | 1,882,518 | | | 627,504 | | | 475,416 | | | 30,046 | | | 3,654,484 |
| | 2021 | | | 580,000 | | | — | | | 2,109,014 | | | — | | | 574,200 | | | 28,696 | | | 3,291,910 |
| | 2020 | | | 568,000 | | | — | | | 1,649,020 | | | — | | | 337,960 | | | 28,960 | | | 2,583,940 |
Ellen de Brabander(1)
Executive Vice President, Innovation, Regulatory, and Business Development | | | 2022 | | | 667,819 | | | — | | | 1,258,543 | | | 419,505 | | | 434,750 | | | 29,426 | | | 2,810,043 |
Ramiro Cabral(2)
Executive Vice President, Elanco International | | | 2022 | | | 572,000 | | | — | | | 1,102,527 | | | 367,505 | | | 372,372 | | | 28,446 | | | 2,442,850 |
| | 2021 | | | 475,000 | | | — | | | 1,279,037 | | | — | | | 438,900 | | | 27,209 | | | 2,220,146 |
Bobby Modi(3)
Executive Vice President, U.S. Pet Health and Global Digital Transformation | | | 2022 | | | 419,602 | | | 600,000 | | | 900,017 | | | — | | | 274,356 | | | 28,446 | | | 2,222,421 |
(1)
| Dr. de Brabander joined Elanco in 2021. She was not an NEO prior to 2022. Amounts paid in Euros have been converted to USD using the average daily rate of €1 to $1.053 |
(2)
| Dr. Cabral was not an NEO prior to 2021. |
(3)
| Mr. Modi joined Elanco in 2022. |
(4)
| Mr. Modi received a $600,000 one-time sign-on bonus as part of his employment offer. |
(5)
| This column shows the grant date fair value of the RSUs and PAs awarded to the NEOs in 2020, 2021 and 2022, computed in accordance with FASB ASC Topic 718, based upon the probable outcome of the performance conditions as of the grant date and the assumptions in Note 15: Stock-Based Compensation to our consolidated and combined financial statements included in our 2022 Annual Report. The grant date fair value for PAs included in the “Stock Awards” column are based on the probable payout outcome anticipated at the time of grant which, for the PAs, was at target value. |
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The table below shows the target and maximum payouts for the 2022 PAs included in this column of the “Summary Compensation Table.”
Mr. Simmons | | | February 2023 | | | 5,100,009 | | | 10,200,019 |
Mr. Young | | | February 2023 | | | 1,255,012 | | | 2,510,024 |
Dr. de Brabander | | | February 2023 | | | 839,028 | | | 1,678,057 |
Dr. Cabral | | | February 2023 | | | 735,018 | | | 1,470,036 |
Mr. Modi | | | February 2023 | | | 0 | | | 0 |
(6)
| This column includes on-cycle Elanco Non-Qualified Stock Options, granted on March 1, 2022. These options vest ratably over three years on the anniversary of the grant date, and expire ten years after the grant date, on March 1, 2032. The grant date fair value of such awards is based upon the assumptions described in Note 15: Stock Based Compensation to Elanco's consolidated and combined financial statements in its Annual Report on Form 10-K for the year ended December 31, 2022 filed by Elanco on March 1, 2023. |
(7)
| This column shows payments under the Elanco Corporate Bonus Plan (the “Elanco Bonus Plan”) for performance in 2022, 2021 and 2020. See “Compensation Discussion and Analysis—2022 Annual Cash Incentive” above for details on 2022 payouts for the NEOs under the Elanco Bonus Plan. |
(8)
| The amounts in this column for Messrs. Simmons, Young and Modi and Dr. Cabral, consist solely of (i) Elanco contributions to the Elanco 401(k) Plan for each NEO, which equaled $27,450 for each NEO ($18,300 of matching contributions and $9,150 of non-elective contributions) and which was consistent with the benefits available to similarly situated, U.S.-based Elanco employees; and (ii) any recognition program awards, imputed life insurance income, or Health Savings Account contributions. For Dr. de Brabander, this column consists solely of (i) Elanco contributions to a retirement pension, which equaled $25,326 and is consistent with benefits available to similarly situated Netherlands-based employees; and (ii) any recognition programs, imputed life insurance income, and local allowances. |
GRANTS OF PLAN-BASED AWARDS DURING 2022
The following table summarizes the grants of plan-based awards to the NEOs during 2022 under each of the following plans: the Elanco Bonus Plan (a non-equity incentive plan) and the 2018 Stock Plan, which provides for the grant of PAs, RSUs and stock options. To receive a payout under the PAs, RSUs or to vest in stock options, a participant must remain employed with Elanco through the end of the relevant performance period or vesting date (except in the case of death, disability, retirement, or redundancy). No dividends or dividend equivalents, if any were to be declared and paid, would accrue on either the PAs or the RSUs.
| | Mr. Simmons | | | 2022 Elanco Bonus Plan | | | — | | | — | | | 1,462,500 | | | 2,925,000 | | | | | | | | | | | | | | | | | | | |
| | 2022 PAs(3) | | | 3/1/2022 | | | 2/22/2022 | | | | | | | | | 176,227 | | | 352,454 | | | | | | | | | | | | 5,100,009 | |
| | 2022 RSUs(4) | | | 3/1/2022 | | | 2/22/2022 | | | | | | | | | | | | | | | 88,114 | | | | | | | | | 2,550,019 | |
| | 2022 Elanco Options(5) | | | 3/1/2022 | | | 2/22/2022 | | | | | | | | | | | | | | | | | | 234,160 | | | 28.94 | | | 2,550,002 | |
| | Mr. Young | | | 2022 Elanco Bonus Plan | | | — | | | — | | | 511,000 | | | 1,022,400 | | | | | | | | | | | | | | | | | | | |
| | 2022 PAs(3) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | 43,366 | | | 86,732 | | | | | | | | | | | | 1,255,012 | |
| | 2022 RSUs(4) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | 21,683 | | | | | | | | | 627,506 | |
| | 2022 Elanco Options(5) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | | | | 57,622 | | | 28.94 | | | 627,504 | |
| | Dr. de Brabander | | | 2022 Elanco Bonus Plan(8) | | | — | | | — | | | 467,473 | | | 934,947 | | | | | | | | | | | | | | | | | | | |
| | 2022 PAs(3) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | 28,992 | | | 57,984 | | | | | | | | | | | | 839,028 | |
| | 2022 RSUs(4) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | 14,496 | | | | | | | | | 419,514 | |
| | 2022 Elanco Options(5) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | | | | 38,522 | | | 28.94 | | | 419,505 | |
| | Dr. Cabral | | | 2022 Elanco Bonus Plan | | | — | | | — | | | 400,400 | | | 800,800 | | | | | | | | | | | | | | | | | | | |
| | 2022 PAs(3) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | 25,398 | | | 50,796 | | | | | | | | | | | | 735,018 | |
| | 2022 RSUs(4) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | 12,699 | | | | | | | | | 367,509 | |
| | 2022 Elanco Options(5) | | | 3/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | | | | 33,747 | | | 28.94 | | | 367,505 | |
| | Mr. Modi | | | 2022 Elanco Bonus Plan(9) | | | — | | | — | | | 295,007 | | | 590,014 | | | | | | | | | | | | | | | | | | | |
| | 2022 Sign-On RSU Award(6) | | | 4/1/2022 | | | 2/21/2022 | | | | | | | | | | | | | | | 34,457 | | | | | | | | | 900,017 | |
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(1)
| Target and maximum payouts for performance under the Elanco Bonus Plan. Bonus payouts range from 0% to 200% of target. The target and maximum amounts represent ECE attainments of $0M and $381M, respectively, per the plan approved by the Compensation and Human Capital Committee. |
(2)
| The annual grant date for Elanco awards is established in advance of the grant date by the Compensation and Human Capital Committee. Elanco equity awards to new hires and other off-cycle grants are generally effective on the first trading day of the quarter the hire or approval date. |
(3)
| Represents the range of payouts for 2022 PAs. These performance awards will pay out in February 2024, with payouts ranging from 0% to 200% of target. The grant date fair value of the PAs is based on the probable payout outcome at the time of grant. The grant date fair value assuming payout at target and maximum are listed for these awards in Note 2 to the “Summary Compensation Table” above. |
(4)
| Represents the shares underlying the 2022 RSUs. One-third of these shares vested on March 1, 2023, one-third of these shares will vest on March 1, 2024 and the remainder of these shares will vest on March 1, 2025. |
(5)
| Represents the shares underlying the 2022 stock options. One-third of these shares vested on March 1, 2023, one-third of these shares will vest on March 1, 2024, and the remainder of these shares will vest on March 1, 2025. |
(6)
| Represents the shares underlying Mr. Modi's 2022 sign-on RSU grant. Half of these shares vested on April 1, 2023, and the remaining half will vest on April 1, 2024. |
(7)
| Represents the grant date fair value of the equity awards granted in 2022 computed in accordance with FASB ASC Topic 718, For PAs, the grant date fair value is based upon the probable outcome of the performance conditions as of the grant date. See also Notes 3 and 4 of this table. |
(8)
| Amounts denominated in Euros have been converted to USD using the average daily rate of €1 to $1.053. |
(9)
| Represents target and maximum payouts based upon pro-rated eligible earnings. |
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OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2022
The closing price of our common stock on December 31, 2022, which was $12.22, was used to calculate the values in the table below.
| | Mr. Simmons | | | 2018 Stock Options(1) | | | 109,642 | | | | | | 31.61 | | | 10/20/2028 | | | | | | | | | | | | | |
| | 2020 RSUs(2) | | | | | | | | | | | | | | | 20,992 | | | 256,522 | | | | | | | |
| | 2021 - 2022 Executive PAs(3) | | | | | | | | | | | | | | | | | | | | | 223,121 | | | 2,726,539 | |
| | 2021 RSUs(4) | | | | | | | | | | | | | | | 49,831 | | | 608,935 | | | | | | | |
| | 2022 - 2023 Executive PAs(5) | | | | | | | | | | | | | | | | | | | | | 176,227 | | | 2,153,494 | |
| | 2022 RSUs(6) | | | | | | | | | | | | | | | 88,114 | | | 1,076,753 | | | | | | | |
| | 2022 Elanco Options(7) | | | | | | 234,160 | | | 28.94 | | | 3/1/2032 | | | | | | | | | | | | | |
| | Mr. Young | | | 2020 RSUs(2) | | | | | | | | | | | | | | | 5,046 | | | 61,662 | | | | | | | |
| | 2021 - 2022 Executive PAs(3) | | | | | | | | | | | | | | | | | | | | | 47,006 | | | 574,413 | |
| | 2021 RSUs(4) | | | | | | | | | | | | | | | 10,499 | | | 128,298 | | | | | | | |
| | 2022 - 2023 Executive PAs(5) | | | | | | | | | | | | | | | | | | | | | 43,366 | | | 529,933 | |
| | 2022 RSUs(6) | | | | | | | | | | | | | | | 21,683 | | | 264,966 | | | | | | | |
| | 2022 Stock Options(7) | | | | | | 57,622 | | | 28.94 | | | 3/1/2032 | | | | | | | | | | | | | |
| | Dr. de Brabander | | | 2021 Sign-On RSU Award(8) | | | | | | | | | | | | | | | 22,818 | | | 278,836 | | | | | | | |
| | 2022 - 2023 Executive PAs(5) | | | | | | | | | | | | | | | | | | | | | 28,992 | | | 354,282 | |
| | 2022 RSUs(6) | | | | | | | | | | | | | | | 14,496 | | | 177,141 | | | | | | | |
| | 2022 Stock Options(7) | | | | | | 38,522 | | | 28.94 | | | 3/1/2032 | | | | | | | | | | | | | |
| | Dr. Cabral | | | 2018 Stock Options(1) | | | 21,086 | | | | | | 31.61 | | | 10/20/2028 | | | | | | | | | | | | | |
| | 2020 RSUs(2) | | | | | | | | | | | | | | | 2,956 | | | 36,122 | | | | | | | |
| | 2021 - 2022 Executive PAs(3) | | | | | | | | | | | | | | | | | | | | | 28,507 | | | 348,356 | |
| | 2021 RSUs(4) | | | | | | | | | | | | | | | 6,368 | | | 77,817 | | | | | | | |
| | 2022 - 2023 Executive PAs(5) | | | | | | | | | | | | | | | | | | | | | 25,398 | | | 310,364 | |
| | 2022 RSUs(6) | | | | | | | | | | | | | | | 12,699 | | | 155,182 | | | | | | | |
| | 2022 Stock Options(7) | | | | | | 33,747 | | | 28.94 | | | 3/1/2032 | | | | | | | | | | | | | |
| | Mr. Modi | | | 2022 Sign-On RSU Award(9) | | | | | | | | | | | | | | | 34,457 | | | 421,065 | | | | | | | |
(1)
| An award of nonqualified stock options granted after our 2018 initial public offering, which vested on October 20, 2021 and has a seven-year exercise period ending October 20, 2028. |
(2)
| RSUs granted on March 2, 2020. 33%, 33% and 34% of the shares underlying this grant vested on March 2, 2021, March 2, 2022, and March 2, 2023, respectively. |
(3)
| PAs granted for the 2021-2022 performance period, to the extent earned, vested following the close of the performance period. |
(4)
| RSUs granted on March 1, 2021. One-third of the shares underlying this grant vested on March 1, 2022, one-third vested on March 1, 2023, and the remainder will vest on March 1, 2024. |
(5)
| PAs granted for the 2022-2023 performance period, to the extent earned, are scheduled to vest as soon as administratively practicable following the close of the performance period. In accordance with SEC regulations, the number of shares and payout value for the PAs reflect the target payout for this grant since our performance over the two-year performance period cannot be determined at this time. |
(6)
| RSUs granted on March 1, 2022. One-third of the shares underlying this grant vested on March 1, 2023, one-third will vest on March 1, 2024, and the remainder will vest on March 1, 2025. |
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(7)
| Elanco nonqualified stock options granted on March 1, 2022. One-third of the options underlying this grant vested on March 1, 2023, one-third will vest on March 1, 2024, and the remainder will vest on March 1, 2025. The grant expires March 1, 2032, ten years after the grant date. |
(8)
| This award was granted to Dr. de Brabander as part of her sign-on compensation package when joining Elanco. Half of the shares underlying this grant vested on November 1, 2022, and the remainder will vest on November 1, 2023. |
(9)
| This award was granted to Mr. Modi as part of his sign-on compensation package when he joined Elanco. Half of the shares underlying this grant vested on April 1, 2023, and the remainder will vest on April 1, 2024. |
STOCK VESTED IN 2022
| | Mr. Simmons | | | 161,441(2) | | | 4,275,519 | |
| | Mr. Young | | | 38,666(3) | | | 1,027,225 | |
| | Dr. de Brabander | | | 11,522(4) | | | 153,012 | |
| | Dr. Cabral | | | 22,187(5) | | | 588,545 | |
| | Mr. Modi | | | —(6) | | | — | |
(1)
| Amounts reflect the market value of Elanco’s common stock on the date of vesting. |
(2)
| For Mr. Simmons, this represents 6,513 shares from the third tranche of the 2019 RSUs, which vested March 1, 2022; 11,493 shares from the second tranche of the 2020 RSUs, which vested March 2, 2022; 13,855 shares from the first tranche of the 2021 RSUs, which vested March 5, 2022; and 129,580 shares from the 2020-2021 PAs, which vested on February 21, 2022 based on the Compensation and Human Capital Committee’s approval of the performance multiple. |
(3)
| For Mr. Young, this represents 1,883 shares from the third tranche of the 2019 RSUs, which vested March 1, 2022; 46 shares from the post-IPO Own Our Future award, which vested March 1, 2022; 2,762 shares from the second tranche of the 2020 RSUs, which vested March 2, 2022; 2,916 shares from the first tranche of the 2021 RSUs, which vested March 1, 2022; and 31,059 shares from the 2020-2021 PAs, which vested on February 21, 2022 based on the Compensation and Human Capital Committee’s approval of the performance multiple. |
(4)
| For Dr. de Brabander, this represents 11,522 shares from the first tranche of her 2021 sign-on RSU award, which vested November 1, 2022. |
(5)
| For Dr. Cabral this represents 678 shares from the third tranche of the 2019 RSUs, which vested March 1, 2022; 1,618 shares from the second tranche of the 2020 RSUs, which vested March 2, 2022; 1,768 shares from the first tranche of the 2021 RSUs, which vested March 1, 2022; and 18,123 shares from the 2020-2021 PAs, which vested on February 21, 2022 based on the Compensation and Human Capital Committee’s approval of the performance multiple. |
(6)
| Mr. Modi did not have any shares vest in 2022. |
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NONQUALIFIED DEFERRED COMPENSATION
| | Dr. Cabral | | | — | | | 10,351 | | | 579,302 | |
(1)
| The amount in this column includes a $438,900 contribution related to Dr.. Cabral’s 2021 bonus, which is included in the “Summary Compensation Table” above in the “Non-Equity Incentive Plan Compensation” column. |
The “Nonqualified Deferred Compensation” table above shows information about the Elanco Deferred Compensation Plan. Our executives may defer receipt of all or part of their cash bonus under the Elanco Deferred Compensation Plan. Of the NEOs, only Dr. Cabral participates in the Elanco Deferred Compensation Plan. Amounts deferred by executives under the plan are credited with interest at 120% of the applicable federal long-term rate as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Code, with monthly compounding. Deferral elections for bonuses earned in 2022, payable in 2023, were made in the fourth quarter of 2021. Participants may elect to receive the funds in a lump sum or in up to ten annual installments following termination of employment, but may not make withdrawals while employed by us, except in the event of hardship as approved by the Compensation and Human Capital Committee. All deferral elections and associated distribution schedules are irrevocable. The Elanco Deferred Compensation Plan is unfunded and amounts deferred under the plan are subject to forfeiture in the event of our bankruptcy.
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PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL (AS OF DECEMBER 31, 2022)
The following table describes the potential payments and benefits under our compensation and benefit plans and arrangements to which the applicable NEOs would have been entitled upon a hypothetical termination of employment on December 31, 2022, in the circumstances described in the table. The closing price of our common stock on December 31, 2022, which was $12.22, was used to calculate the values in the table below. The narrative following the tabular disclosure below contains more detail on the treatment of certain equity awards upon a qualifying termination (defined as a termination due to death, disability, site or plant closing, or restructuring) of employment for the NEOs. Other than the payments and benefits described below, any agreement to provide severance payments or benefits would be at the discretion of the Compensation and Human Capital Committee. These severance benefits are contingent upon each executing a release of claims in favor of Elanco and agreeing to certain other customary post-employment covenants, except in the case of death.
| | Mr. Simmons | | | | | | | | | | | | | |
| | • Termination due to death | | | — | | | — | | | 5,745,502(3) | | | 5,745,502 | |
| | • Termination due to disability, reduction in force, or other qualified reason not in connection with change in control | | | 5,175,000 | | | 46,164(5) | | | 4,561,194(3) | | | 9,782,358 | |
| | • Non-qualified discharge not in connection with change in control | | | 5,175,000 | | | 46,164(5) | | | —(6) | | | 5,221,164 | |
| | • Change in control | | | 5,175,000 | | | 36,567(2) | | | 6,822,243(4) | | | 12,033,809 | |
| | Mr. Young | | | | | | | | | | | | | |
| | • Termination due to death | | | — | | | — | | | 1,294,306(3) | | | 1,294,306 | |
| | • Termination due to disability, reduction in force, or other qualified reason not in connection with change in control | | | 1,150,200 | | | 24,396(5) | | | 1,016,606(3) | | | 2,191,202 | |
| | • Non-qualified discharge not in connection with change in control | | | 1,150,200 | | | 24,396(5) | | | —(6) | | | 1,174,596 | |
| | • Change in control | | | 2,300,400 | | | 38,617(2) | | | 1,559,272(4) | | | 3,898,289 | |
| | Dr. de Brabander(7) | | | | | | | | | | | | | |
| | • Termination due to death | | | — | | | — | | | 633,118(3) | | | 633,118 | |
| | • Termination due to disability, reduction in force, or other qualified reason not in connection with change in control | | | 1,135,293 | | | — | | | 271,822(3) | | | 1,407,114 | |
| | • Non-qualified discharge not in connection with change in control | | | 1,135,293 | | | — | | | —(6) | | | 1,135,293 | |
| | • Change in control | | | 2,270,586 | | | 4,808(2) | | | 810,259(4) | | | 3,085,653 | |
| | Dr. Cabral | | | | | | | | | | | | | |
| | • Termination due to death | | | — | | | — | | | 772,658(3) | | | 772,658 | |
| | • Termination due to disability, reduction in force, or other qualified reason not in connection with change in control | | | 972,400 | | | 23,134(5) | | | 608,434(3) | | | 1,603,967 | |
| | • Non-qualified discharge not in connection with change in control | | | 972,400 | | | 23,134(5) | | | —(6) | | | 995,534 | |
| | • Change in control | | | 1,944,800 | | | 36,649(2) | | | 927,840(4) | | | 2,909,289 | |
| | Mr. Modi | | | | | | | | | | | | | |
| | • Termination due to death | | | — | | | — | | | 421,065(3) | | | 421,065 | |
| | • Termination due to disability, reduction in force, or other qualified reason not in connection with change in control | | | 892,500 | | | — | | | 158,041(3) | | | 1,050,541 | |
| | • Non-qualified discharge not in connection with change in control | | | 892,500 | | | — | | | —(6) | | | 892,500 | |
| | • Change in control | | | 1,785,000 | | | 2,023(2) | | | 421,065(4) | | | 2,208,088 | |
(1)
| As of December 31, 2022, the NEOs were entitled to severance under the Elanco Change in Control Severance Pay Plan for Select Employees upon an involuntary termination without cause under the Elanco Executive Severance Plan. |
(2)
| See “Elanco Executive Change in Control Severance Pay Plan for Select Employees” below for a discussion of payments following a change in control. |
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(3)
| For Mr. Simmons, the amount includes 2020 RSUs, 2021 – 2022 PAs, 2021 RSUs, 2022 – 2023 PAs, 2022 RSUs, and 2022 stock options. For Mr. Young, the amount includes 2020 RSUs, 2021 – 2022 PAs, 2021 RSUs, 2022 – 2023 PAs, 2022 RSUs, and 2022 stock options. For Dr. de Brabander, the amount includes 2021 sign-on RSUs, 2022 – 2023 PAs, 2022 RSUs, and 2022 stock options. For Dr. Cabral, the amount includes 2020 RSUs, 2021 – 2022 PAs, 2021 RSUs, 2022 – 2023 PAs, 2022 RSUs, and 2022 stock options. For Mr. Modi, the amount includes 2022 sign-on RSUs. |
(4)
| Includes the acceleration of RSUs, PAs, stock options and sign-on RSUs, as applicable, upon the event of certain qualifying terminations following a change in control. |
(5)
| See “Elanco Executive Severance Plan” below for a discussion of payments following a termination not related to a change in control. |
(6)
| Termination due to performance is not considered a qualifying termination under the 2018 Stock Plan and the applicable grant agreements. |
(7)
| Amounts paid in Euros have been converted to USD using the average daily rate of €1 to $1.053. |
Equity Acceleration in Connection with a Change in Control
Upon a change in control of Elanco, unvested RSUs will continue to vest and pay out upon the earlier of (i) the completion of the original award period, (ii) upon a covered termination of employment as described below, or (iii) if the successor entity does not assume, substitute or otherwise replace the award, upon the change in control, as dictated by the RSU award agreement. PAs will be deemed earned at target upon a change in control, as dictated by the Performance Award agreement.
Elanco Change in Control Severance Pay Plan for Select Employees
In connection with our initial public offering, our Board adopted change in control severance pay plans for nearly all Elanco employees, including a plan that applies to the NEOs. These severance pay 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, these severance pay plans are intended to align our participating employees’ and our shareholders’ interests by enabling our executives to evaluate corporate transactions that may be in the best interests of our shareholders without undue concern over whether the transactions would jeopardize the participating employee’s own employment.
The basic elements of the select plan applicable to the NEOs include:
| • | Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the select plan requires a “double trigger” — a change in control followed by an involuntary loss of employment within two years. This is consistent with our intent to provide employees with financial protection resulting from a loss of employment. |
| • | Covered terminations. Our participating NEOs are eligible for payments under our severance pay plan if, within two years of the change in control, their employment is terminated (i) without “cause” by Elanco; or (ii) for “good reason” (e.g., a relocation or material reduction in title, work responsibilities, salary, variable pay potential, or benefits coverage) by the employee, each as is defined in the plan. |
| • | Severance payment. NEOs are eligible for two years’ base salary plus two times their target bonus for the then-current year. |
| • | Benefit continuation. Basic employee benefits such as health and life insurance would continue for a period of 18 months following a participating NEO’s termination of employment unless he or she becomes eligible for coverage with a new employer during that 18-month period. |
| • | No gross ups. In some circumstances, the payments or other benefits received by a participating employee in connection with a change in control could exceed limits established under Section 280G of the Code resulting in an excise tax payment. We would not reimburse or gross up employees for these taxes. However, the amount of benefits related to a change in control would be reduced to the maximum amount that would not result in an excise tax if the effect would be to deliver a greater after-tax benefit than the employee would receive if his or her benefits were not so reduced. |
Elanco Executive Severance Pay Plan
In November 2020, we adopted the Elanco Executive Severance Pay Plan for our senior employees, including the NEOs. We adopted this plan following the Compensation and Human Capital Committee’s discussions with its independent compensation consultant, WTW, to fill a gap in our compensation programs and align them with market practices. Under the plan, severance benefits are payable to eligible employees if their employment is terminated by us without cause and in certain other specified circumstances that are not in connection with a change in control. The plan does not provide for benefits upon voluntary separation of service by the employee.
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The severance benefits provided under the plan are as follows:
A lump sum severance payment equal to the sum of (i) two times the amount of base salary for the CEO, or one times the base salary for other executives; plus (ii) two times (with respect to the CEO) or one times (with respect to other executives) the amount of their target annual cash incentive bonus for the year of termination or, if there is no target-based annual cash incentive bonus, then the annual cash bonus paid or payable for the most recently completed calendar year; plus (iii) a lump sum payment equal to 24 months (with respect to CEO) or 12 months (with respect to other executives) of Elanco contributions paid for active employees for medical and dental coverage.
Outplacement services for up to twelve months following the termination date.
We are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of our President and CEO, Jeffrey Simmons.
We have identified our median employee, using our employee population on December 31, 2022, by use of a “consistently applied compensation measure” or “CACM.” We chose a CACM that closely approximates the annual total direct compensation of our non-contingent employees. Specifically, we identified the median employee by looking at annual base pay, bonus opportunity at target and the grant date fair value for standard equity awards. We then identified the median paid employee and calculated his or her total annual compensation in accordance with the requirements of the “Summary Compensation Table” above. We used a new median employee in 2022 due to material changes in our employee population because of our restructuring announced in December of 2021.
In applying the CACM, we did not perform adjustments to the compensation paid to part-time employees to calculate what they would have been paid on a full-time basis and we chose not to include one-time equity awards when choosing the median employee, since the grant of such awards is not a recurring event. We also chose not to exclude any employees when determining our median employee.
For 2022, the annual total compensation of our median employee was $59,388. Mr. Simmons’ annual total compensation for 2022, as reported in the “Summary Compensation Table” above, was $12,713,632. The ratio of Mr. Simmons’ total compensation to the median employee’s total compensation was 214:1.
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| | | Pay Versus Performance | |
Pay Versus Performance Table
| | 2022 | | | 12,713,632 | | | (2,017,094) | | | 2,782,450 | | | 863,887 | | | 41 | | | 126 | | | (78,000,000) | | | 544,000,000 | |
| | 2021 | | | 12,060,015 | | | 16,525,957 | | | 3,202,470 | | | 3,753,652 | | | 96 | | | 149 | | | (483,000,000) | | | 522,000,000 | |
| | 2020 | | | 8,958,820 | | | 9,320,037 | | | 2,151,684 | | | 2,175,973 | | | 104 | | | 132 | | | (574,000,000) | | | 199,000,000 | |
(1)
| For 2022, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Dr. Ellen de Brabander- Executive Vice President, Innovation, Regulatory, and Business Development; Dr. Ramiro Cabral- Executive Vice President, Elanco International; and Mr. Bobby Modi, Executive Vice President, U.S. Pet Health and Global Digital Transformation. |
For 2021, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Mr. Aaron Schacht- Former Executive Vice President, Innovation, Regulatory, and Business Development; Ms. Joyce Lee- Former Executive Vice President, U.S. Pet Health and Commercial Operations; and Dr. Ramiro Cabral- Executive Vice President, Elanco International.
For 2020, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Mr. Aaron Schacht- Former Executive Vice President, Innovation, Regulatory, and Business Development; Sarena Lin- Former Executive Vice President, Transformation and Technology; and Michael Bryant-Hicks- Former Executive Vice President, General Counsel and Corporate Secretary.
(2)
| A reconciliation of Total Compensation from the Summary Compensation Table to Compensation Actually Paid (“CAP”) to our CEO and the average of our Other NEOs is shown below. No dividends are paid on Elanco stock, so the table below does not include any reconciliation related to dividends paid in the years prior to vesting. We do not offer a pension plan, so the reconciliation below consists solely of the re-valuation of stock awards. |
| | Total Compensation from SCT | | | 12,713,632 | | | 2,782,450 | | | 12,060,015 | | | 3,202,470 | | | 8,958,820 | | | 2,151,684 | |
| | Adjustments for stock and option awards: | | | | | | | | | | | | | | | | | | | |
| | Deduct: Grant date fair value of awards granted during fiscal year | | | (10,200,031) | | | (1,639,529) | | | (9,261,019) | | | (1,597,526) | | | (6,860,048) | | | (1,255,531) | |
| | Add: Fair value at year-end of awards granted during the covered fiscal year that are outstanding and unvested at year-end | | | 3,414,070 | | | 578,725 | | | 12,234,618 | | | 1,952,416 | | | 7,022,449 | | | 1,285,249 | |
| | Add: Year-over-year change in fair value of awards granted in prior fiscal year(s) that are outstanding and unvested at year end | | | (7,402,134) | | | (722,112) | | | 1,267,444 | | | 177,458 | | | 19,891 | | | (10,569) | |
| | Add: Change as of the vesting date (from the end of the prior fiscal year) in fair value of awards granted in any prior fiscal year for which vesting conditions were satisfied during such year | | | (542,631) | | | (135,647) | | | 224,899 | | | 18,833 | | | 178,925 | | | 5,139 | |
| | Compensation Actually Paid (as calculated) | | | (2,017,094) | | | 863,887 | | | 16,525,957 | | | 3,753,652 | | | 9,320,037 | | | 2,175,973 | |
a)
| All equity awards used to determine compensation actually paid to NEOs were re-valued according to FASB ASC Topic 718 and use other similar methodologies and assumptions as those used for purposes of grant date fair values reported in the Summary Compensation Table. |
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(3)
| Total shareholder return (“TSR”) is calculated based on a fixed investment of one hundred dollars measured from the market close on December 31, 2019 (the last trading day of 2019) through and including the end of the fiscal year for each year reported in the table. |
(4)
| The peer group used for the TSR calculations reflects the specific peer groups disclosed in the “Compensation Discussion and Analysis” for relevant years. |
For 2020, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; BioMarin Pharmaceutical Inc.; Bio-Rad Laboratories, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Mettler-Toledo International Inc.; PerkinElmer, Inc.; Perrigo Company plc; STERIS plc; United Therapeutics Corporation; Varian Medical Systems, Inc.; West Pharmaceutical Services, Inc.; and Zoetis Inc.
For 2021, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; Baxter International Inc.; Boston Scientific Corporation; Charles River Laboratories International, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Perrigo Company plc; Regeneron Pharmaceuticals, Inc.; STERIS plc; Varian Medical Systems, Inc.; Zimmer Biomet Holdings, Inc.; and Zoetis Inc.
For 2022, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; Baxter International Inc.; Boston Scientific Corporation; Charles River Laboratories International, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Perrigo Company plc; Regeneron Pharmaceuticals, Inc.; STERIS plc; Varian Medical Systems, Inc.; Vertex Pharmaceuticals, Inc.; Zimmer Biomet Holdings, Inc.; and Zoetis Inc.
The return for 2020 reflects the 2020 peer group; the return for 2021 reflects the return of the 2021 peer group, and the return for 2022 reflects the return of the 2022 peer group. Returns for the 2020 peer group over the 3-year period would have been $132, $156, and $113, for 2020, 2021, and 2022, respectively. Returns for the 2021 peer group over the 3-year period would have been $118, $133, and $106, for 2020, 2021, and 2022, respectively. Returns for the 2022 peer group over the 3-year period would have been $115, $139, and $117, for 2020, 2021, and 2022, respectively.
(5)
| For 2022, the most important metric in determining compensation actually paid to our executive officers was our TSR, as headwinds to our share price was the primary driver in our year-over-year change in compensation actually paid. Because approximately 70% of our named executive officer’s compensation is at-risk stock-based compensation, our executives’ compensation actually paid is closely aligned with the returns of our shareholders. However, because TSR is already reported in the table, we have identified our Company Selected Measure as Adjusted Net Income. This measure was selected because it was the performance metric for our 2021 PAs, which comprised 75% of our 2021 executive equity awards and had a performance period that included our 2022 fiscal year. The full reconciliation between our GAAP and Adjusted Net Income can be found in Appendix A: “Reconciliation of GAAP Information to Non-GAAP Information.” |
Relationship between Pay and Performance
CAP and TSR versus Peer Group
The chart below compares our TSR, peer group TSR, and CAP to our CEO and other NEOs (averaged) for the three-year period from 2020 to 2022. The graph compares the return on Elanco’s common stock with that of our market cap-weighted peer group used for executive compensation benchmarking from 2020, 2021, and 2022, respectively, as described in footnote 4 from our Pay Versus Performance Table. The graph assumes a person invested $100 at market close on December 31, 2019 (the last trading day of 2019) in both Elanco and the relevant year’s peer group, and measures TSR, through and including the end of the fiscal year, for each year shown below, adjusted for each year’s respective peer group. This TSR calculation includes both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company’s stock.
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CAP and GAAP Net Income (Loss)
The charts shown below present a graphical comparison of CAP to our CEO and the average compensation actually paid to our other NEOs set forth in the Pay Versus Performance Table above, as compared against the following performance measures: (1) GAAP Net Income, and (2) Adjusted Net Income.
Executive pay is not linked to GAAP Net Income; therefore, there is a limited relationship between this metric and compensation actually paid.
CAP and Adjusted Net Income (Loss)
Tabular List of Important Financial Performance Measures
The following table lists the most important financial measures the Company used to link compensation actually paid to the NEOs for fiscal year 2022 to our performance:
| | Total Shareholder Return
| |
| | Adjusted Net Income
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| | Elanco Cash Earnings
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| | Adjusted EBITDAR
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| |
| | | Proposal No. 4:
Approval of the Amended and Restated Elanco
Animal Health Incorporated Employee Stock Purchase Plan | |
We are asking our shareholders to approve the adoption of the Amended and Restated Elanco Animal Health Incorporated Employee Stock Purchase Plan (the “ESPP”). The ESPP was initially approved by shareholders at the 2022 Annual Meeting, and the first offering period commenced in late 2022 for employees of Elanco domestic subsidiaries only. The Compensation and Human Capital Committee and our Board believe that the ESPP encourages our employees to acquire shares of our common stock, fostering an ownership mentality among our employees and aligning their interests with those of our shareholders, and will help us attract, retain and motivate talent in an increasingly competitive employment market.
Now that the ESPP is in operation in the U.S., the Compensation and Human Capital Committee and our Board have determined that it is in Elanco’s best interests to expand the ESPP to employees outside the U.S. We anticipate that such international expansion will be phased over several years, beginning with countries in which Elanco has the most employees. Accordingly, the Board approved the amended and restated ESPP on March 31, 2023 to increase the number of shares authorized for issuance under the plan and to provide for employees in any designated Elanco subsidiary, including non-U.S. subsidiaries, as determined by the ESPP administrator, to be eligible to participate in the ESPP. If shareholders approve this proposal, the amended and restated ESPP as presented in this Proxy Statement will become effective as of that date. If the amended and restated ESPP is not approved by our shareholders, then the ESPP will not have an increased share reserve and it will not be offered to employees outside the U.S.
The following is a summary of the principal features of the ESPP, as amended and restated, which we believe supports the approval of an expanded plan to provide competitive employee compensation opportunities. This summary does not purport to be a complete description of the ESPP and is qualified in its entirety by reference to the full text of the amended and restated plan, which is included as Appendix B to this Proxy Statement.
Administration. The ESPP is administered by the Compensation and Human Capital Committee and, by delegation, Elanco’s Executive Vice President, Human Resources, Corporate Communications and Administration (the “ESPP Administrator”). The ESPP Administrator may delegate its duties under the ESPP to Elanco employees or to outside firms, banks or other financial institutions. All questions of interpretation or application of the ESPP are determined in the sole discretion of the ESPP Administrator, and its decisions are final, conclusive, and binding upon all persons.
Share Reserve. If shareholders approve this Proposal No. 4, 6,000,000 shares of our common stock will be authorized for issuance under the ESPP. This number includes the 625,000 shares that were initially approved for issuance under the ESPP, and the increased number is recommended to ensure that sufficient shares are available to facilitate expansion of the ESPP to employees outside the U.S.
Eligibility. Any natural person who is regularly employed by us or any of our designated subsidiaries is eligible to participate in the ESPP, excluding employees whose customary employment is (a) fewer than twenty hours per week, (b) as a student or intern, or (c) is not for more than five months in a calendar year. Participation is subject to certain limitations imposed by Section 423(b) of the Code, including (i) the requirement that no person may be granted rights under this ESPP (and all plans qualified under Section 423(b) of the Code maintained by us or any of our subsidiaries) to purchase more than $25,000 worth of shares of our common stock (valued at the time each right is granted) for each calendar year in which rights are outstanding, and (ii) the requirement that no person who owns or holds options to purchase, or who as a result of participation in the ESPP would own or hold options to purchase, five percent or more of our or any of our subsidiaries’ outstanding stock is eligible to participate in the ESPP. Non-Employee Directors are not eligible to participate in the ESPP. The ESPP Administrator may exclude additional categories of employees from the ESPP, including highly compensated employees, Section 16 reporting officers, non-U.S. employees, and employees with fewer than two years of service with us. As of March 31, 2023, approximately 2,500 of our employees were eligible to participate in the ESPP, of which ten were executive officers. Our proposed next phase of ESPP expansion is expected to add approximately 2,200 additional eligible employees during the coming year, and we hope to eventually broaden the ESPP in the next several years.
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Participation in an Offering. While the ESPP Administrator has discretion to establish different offering periods, shares generally will be offered under the ESPP through consecutive offering periods of approximately three months that generally begin with the first business day of each fiscal quarter of each year. To participate in the ESPP, eligible employees must authorize payroll deductions in whole dollar amounts up to ten percent of base salary. Once an eligible employee becomes a participant in the ESPP, the employee may affirmatively elect to participate automatically in each successive offering period until such time as the employee withdraws from, or is no longer eligible to participate in, the ESPP.
Purchase Price. The purchase price per share of our common stock under the ESPP will be determined by the ESPP Administrator but will not be less than 85% of the fair market value of our common stock on the last day of the relevant offering period. The fair market value of a share of our common stock on these measurement dates will be equal to the closing price per share as reported on the NYSE.
Shares Purchased. The number of shares of our common stock a participant purchases during each offering period is determined by dividing the total amount of payroll deductions withheld from the participant’s paychecks during the offering period by the purchase price per share. In the event that the ESPP’s available share reserve limits the number of shares of our common stock that may be issued and sold during any offering period, the number of shares that each participant purchases in that offering period will be reduced in proportion to the respective amounts that otherwise would have been purchasable by each such participant if enough shares had been available to enable all participants to purchase the full amount they elected. Any cash not applied to the purchase of fractional shares will be returned to the participant in a cash lump sum payment within thirty (30) days after the purchase date, without any interest thereon.
Withdrawal. A participant may withdraw from an offering under the ESPP at any time, subject to applicable procedural requirements, without affecting the participant’s eligibility to participate in future offerings. However, once a participant withdraws from an offering, that participant may not subsequently participate in the same offering. A participant will automatically be withdrawn from an offering under the ESPP upon a termination of employment with Elanco or our designated subsidiary and, in certain cases, following a leave of absence or a temporary period of ineligibility.
Transferability. No option grants under the ESPP will be transferable by the participant, except by will or the laws of inheritance following a participant’s death.
Adjustments. If any change is made in our capitalization during an offering period, such as a stock split or stock dividend, that results in an increase or a decrease in the number of shares of common stock outstanding without receipt of consideration by us, appropriate adjustments will be made to the purchase price, the number of shares subject to purchase under the ESPP, the number of shares authorized for issuance under the ESPP, and the maximum number of shares that may be purchased by a participant during any offering period, in each case as determined by the ESPP Administrator, to preserve the economic incentive provided by the ESPP and the offering.
Corporate Transactions. If all or substantially all of our assets or outstanding voting stock are disposed of by means of a sale or merger in which we will not be the surviving corporation, all outstanding options will be assumed or substituted by the successor corporation. If the options are not assumed or substituted, or if we are liquidated, all outstanding options will automatically be exercised immediately prior to the effective date of the transaction. Unless otherwise provided by the ESPP Administrator, the purchase price generally will equal 85% of the fair market value of our common stock on (i) the first day of the relevant offering period or (ii) the date immediately prior to consummation of the transaction, whichever is lower.
Amendments, Suspension, and Termination. Our Board may, at any time, amend, suspend, or terminate the ESPP; however, such amendment, suspension, or termination may not make any change that would adversely affect the rights of any participant. No amendment may be made to the ESPP without the approval or ratification of our shareholders if such amendment would require shareholder approval under Section 423 of the Code or any other applicable law or regulation, such as an amendment to increase the maximum number of shares under the plan or to change the classes of employees eligible to participate in the ESPP. Upon termination of the ESPP, the remaining balance, if any, in each participant’s account under the ESPP will be refunded to the participant as soon as practicable thereafter.
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide as to federal income tax consequences, under current U.S. tax law, of participation in the ESPP, and does not attempt to describe all potential tax consequences. This discussion is intended for the information of our shareholders considering how to vote at the Annual Meeting and not as tax guidance to individuals who participate in the ESPP. The following is not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. Tax consequences are subject to change, and a taxpayer’s particular situation may be such that some variation in application of the desired rules is applicable. Furthermore, ESPP participants who are not subject to U.S. tax law will be subject to the tax rules of their respective jurisdictions, which are not described here. Accordingly, participants are advised to consult their own tax advisors with respect to the tax consequences of participating in the ESPP.
The ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Code for ESPP participants who are subject to U.S. tax law. With respect to these participants, no taxable income will be reportable by a participant, and no deductions will be allowable to us, due to the grant of the option at the beginning of the offering or at the purchase of shares at the end of an offering. A participant subject to U.S. tax law will, however, recognize taxable income in the year in which the shares purchased under the ESPP are sold or otherwise made the subject of disposition.
A sale or other disposition of shares purchased under the ESPP will be a “disqualifying disposition” for a participant subject to U.S. tax law if such sale or disposition occurs prior to the later of (i) two years after the date the option is granted (i.e., the commencement date of the offering period to which the option pertains) and (ii) one year after the date of the purchase of the applicable shares. If the participant makes a disqualifying disposition of shares purchased under the ESPP, the excess of the fair market value of the shares on the date of purchase over the purchase price will be treated as ordinary income to the participant at the time of such disposition, and any additional gain (or loss) on the disposition (after adding the amount treated as ordinary income to the participant’s basis in the shares) will be a capital gain (or loss) to the participant. We will be entitled to an income tax deduction for the amount treated as ordinary income to the participant for the taxable year in which the disposition occurs, although the income tax deduction may be limited by the deductibility of compensation paid to certain of our officers under Section 162(m) of the Code. In no other instance will we be allowed a deduction with respect to the participant’s disposition of the purchased shares based on current U.S. tax law.
If the participant subject to U.S. tax law sells or otherwise disposes of shares purchased under the ESPP after satisfying the holding period outlined above (i.e., a qualifying disposition), then the participant will realize ordinary income in the year of disposition equal to the excess of the lesser of (i) the fair market value of the shares on the date of disposition over the purchase price for the shares, or (ii) the greater of (a) the fair market value of the shares on the date the option relating to the disposed shares was first granted over the purchase price and (b) the fair market value of the shares on the day immediately prior to the consummation of the transaction over the purchase price. Any additional gain (or loss) on the disposition (after adding the amount treated as ordinary income to the participant’s basis in the shares) will be long-term capital gain (or loss) to the participant. We will not be entitled to an income tax deduction for any amount with respect to the issuance or exercise of the option or the sale of the underlying shares.
SPECIFIC BENEFITS
The benefits that will be provided to eligible employees under the ESPP cannot be determined at this time because the amount of contributions set aside to purchase shares of our common stock under the ESPP (subject to the limitations discussed above) is entirely within the discretion of each participant and the value of such stock is subject to change. As of March 31, 2023, the fair market value of a share of our common stock based on the closing stock price on the NYSE was $9.40.
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AWARDS PREVIOUSLY MADE UNDER THE ESPP
| | Jeffrey Simmons - President and CEO | | | 2,045 | |
| | Todd Young - Executive Vice President and Chief Financial Officer | | | — | |
| | Ellen de Brabander(1) - Executive Vice President, Innovation, Regulatory, and Business Development | | | — | |
| | Ramiro Cabral - Executive Vice President, Elanco International | | | — | |
| | Bobby Modi - Executive Vice President, U.S. Pet Health and Global Digital Transformation | | | 1,263 | |
| | All current eligible executive officers as a group | | | 4,007 | |
| | All eligible employees, including all current officers who are not executive officers, as a group (594 persons)(2) | | | 148,327 | |
1)
| Dr. de Brabander was not eligible to participate in the ESPP because she is not a U.S.-based employee. |
2)
| Eligible employees, including all current officers who are not executive officers, who have made purchases from the inception of the plan until the end of the last offering period on December 31, 2022. |
| | Recommendation of the Board
The Board unanimously recommends a vote “FOR ” the approval of the compensation of the Company’s named executive officers.Amended and Restated Elanco Animal Health Incorporated Employee Stock Purchase Plan. | |
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| |
| | | Proposal No. 5:
Approval of the Amended and Restated Elanco Animal Health Incorporated 2018 Stock Plan | |
PROXY ITWe are seeking shareholder approval to amend and restate our 2018 Elanco Stock Plan, as amended and restated (the “2018 Plan” or the “Plan”) to increase the number of shares of common stock reserved for issuance under the 2018 Plan by an additional 20,000,000 shares, extend the term of the 2018 Plan, and make design changes to the 2018 Plan. Our continuing ability to offer equity incentive awards under the 2018 Plan is critical to our ability to attract, motivate and retain qualified personnel, particularly as we grow and in light of the highly competitive market for employee talent in which we operate. If shareholders approve this proposal, the Amended and Restated 2018 Elanco Stock Plan (the “Amended 2018 Plan”) will become effective as of the date of shareholder approval. If shareholders do not approve this proposal, the Amended 2018 Plan described in this proposal will not take effect and our 2018 Plan, as previously amended, will continue to be administered in its current form.
On March 31, 2023, the Board, at the recommendation of our Compensation and Human Capital Committee (the “Committee”), approved the Amended 2018 Plan, subject to approval by our shareholders at the Annual Meeting. The Amended 2018 Plan will become effective on the date it is approved by our shareholders.
As of March 31, 2023, a total of 7,889,297 shares were subject to outstanding awards under the Company’s existing 2018 Plan, of which 1,827,082 shares were subject to outstanding stock options with a weighted average exercise price of $17.98 per share and a weighted average remaining contractual term of 9.2 years and 6,062,165 shares were subject to unvested full value stock awards, of which 4,093,607 shares were subject to unvested restricted stock units and 1,968,558 shares were subject to unvested performance-based awards. As of the same date, 6,560,507 shares were available for future awards under the 2018 Plan.
KEY CHANGES
If approved, in addition to increasing the number of shares available under the 2018 Plan, if the Amended 2018 Plan is approved by our shareholders, the following material changes would be made:
Clarify the 2018 Plan to reflect the Company’s current share recycling practice of providing that the following shares will be counted against, and will not be added back to, the maximum number of shares available for issuance under the Plan:
| ○ | Shares tendered by the participant or withheld by the Company in payment of the exercise price of a stock option issued under the 2018 Plan or to satisfy tax withholding obligations with respect to an award under the Plan; or |
| ○ | Shares that we repurchase using option exercise proceeds and shares subject to a stock appreciation award (“SAR”) that are not issued in connection with the stock settlement of that award upon its exercise. |
Establish the existing Directors’ Deferral Plan, as amended from time to time, as a subplan to the 2018 Plan.
Grant authority to the Committee to:
Establish subplans to the 2018 Plan for the purpose of granting certain types of awards or granting awards to certain populations of eligible individuals;
Permit an award (other than an incentive stock option) to be transferred pursuant to a domestic relations order or by gift to a family member; and
Permit or require the deferral by a participant of shares or cash in settlement of a full value award.
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Modify the definition of “Change in Control” to exclude complete liquidation of the Company as well as any transaction which is not a change in control as defined by Section 409A of the Code.
Remove the limit on the maximum number of shares subject to one or more performance-based awards that may be granted to any one participant during any calendar year.
The term of the Amended 2018 Plan would extend ten years from the date of stockholder approval of the Amended 2018 Plan.
KEY COMPENSATION PRACTICES
The Amended 2018 Plan includes a number of features that we believe are consistent with the interests of our shareholders and sound corporate governance practices, including the following:
No liberal share recycling. We may not add back to the Amended 2018 Plan’s share reserve shares that are delivered or withheld to pay the exercise price of an option award or to satisfy a tax withholding obligation in connection with any awards, shares that we repurchase using option exercise proceeds and shares subject to a SAR award that are not issued in connection with the stock settlement of that award upon its exercise.
Minimum vesting/performance period. The 2018 Plan includes a minimum vesting period of one year for awards, except as related to a change in control and other limited exceptions.
Limits on dividends and dividend equivalents. The 2018 Plan prohibits the payment of dividend equivalents on stock options and SARs and requires that any dividends and dividend equivalents payable or credited on unvested full value awards must be subject to the same restrictions and risk of forfeiture as the underlying shares or share equivalents.
Limits on transfer. Awards under the 2018 Plan may not be pledged, encumbered or hypothecated to or in favor of any party other than Elanco or its affiliates, or shall be subject to any lien, obligation, or liability of such participant to another party other than Elanco or an affiliate thereof, except with regard to a domestic relations order or by gift to a family member.
No repricing of underwater options or SARs without shareholder approval. The 2018 Plan prohibits, without shareholder approval, actions to reprice or cash out underwater options or SARs.
No tax gross-ups. The 2018 Plan does not provide for any gross-up payments to offset any tax expenses.
No discounted option or SAR grants. The 2018 Plan requires that the exercise price of stock options or SARs be at least equal to the fair market value of our common stock on the date of grant (except in the limited case of “substitute awards” as described below).
No liberal definition of “change in control.” No change in control would be triggered by shareholder approval of a business combination transaction, the announcement or commencement of a tender offer, or any Board assessment that a change in control may be imminent.
Clawback. The 2018 Plan requires the recapture or clawback of all or a portion of awards in connection with financial restatements and other events for officers.
Annual limit on compensation to non-employee directors. The 2018 Plan contains an annual limit on the aggregate value of all awards granted during a calendar year to any non-employee director together with any cash fees or retainers paid to such non-employee director during the calendar year.
DESCRIPTION OF THE FREQUENCYAMENDED 2018 PLAN
The Company previously adopted the 2018 Elanco Stock Plan, which was adopted by the Board on September 5, 2018 and approved by the Company’s shareholders on September 18, 2018, and then amended and restated effective May 19, 2021. The following are the material terms of the proposed Amended 2018 Plan. The following summary is qualified in its entirety by the full text of the proposed Amended 2018 Plan, which has been included as Appendix C to this Proxy Statement.
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TABLE OF SHAREHOLDER VOTES ON THE COMPENSATIONCONTENTS
Eligible Participants. Our current and prospective directors, officers and employees, as well as those of our affiliates, are eligible to participate in the Amended 2018 Plan. As of March 31, 2023, there were approximately 6,300 employees, including officers, of the Company and its affiliates and 11 non-employee directors of the Company who would be eligible to receive awards under the Amended 2018 Plan. Incentive stock options may be granted only to our employees and to employees of any of our affiliates meeting the requirements of the Code. Awards other than incentive stock options may be granted to our non-employee directors and to employees of the Company and any of its affiliates.
Administration. The Amended 2018 Plan will be administered by the Committee. The Committee has the sole authority to grant awards and sole and exclusive discretion to interpret and administer the Amended 2018 Plan. To the extent consistent with applicable law, the Board also may delegate to a committee of one or more members of the Board or one or more officers of the Company the authority to grant or amend awards to participants other than employees who are subject to Section 16 of the Exchange Act or officers or directors of the Company to whom authority to grant or amend awards has been delegated.
The Committee has the authority to determine the persons to whom awards will be granted, the number, timing, and type of awards, the number of shares covered by each award, and the terms and conditions of the awards. The Committee may also establish and modify rules to administer the Amended 2018 Plan, adopt subplans applicable to certain awards, interpret the Amended 2018 Plan and any related award agreement, cancel or cause the forfeiture or surrender of an award, accelerate the vesting and/or exercisability of an award and otherwise modify or amend the terms of outstanding awards to the extent permitted under the Amended 2018 Plan, and require or permit the deferral of the settlement of a full value award. Unless an amendment to the terms of an award is necessary to comply with applicable laws or stock exchange rules, a participant who would be adversely affected by such an amendment must consent to it. The Board has adopted the Directors’ Deferral Plan as a subplan of the 2018 Plan.
Except in connection with certain events described below (Share Adjustment Provisions), the Amended 2018 Plan prohibits the Committee from repricing any outstanding “underwater” option or SAR awards without the prior approval of our shareholders. For these purposes, a “repricing” includes amending the terms of an underwater option or SAR award to lower the exercise price, canceling an underwater option or SAR award in conjunction with granting a replacement option or SAR award with a lower exercise price, canceling an underwater option or SAR award in exchange for cash, other property or grant of a new full value award, or otherwise making an underwater option or SAR award subject to any action that would be treated under accounting rules as a “repricing.”
Available Shares and Limitations on Awards. Subject to adjustment in the event of specified capitalization events, the total number of shares of our common stock that will be authorized and available for issuance pursuant to awards granted under the Amended 2018 Plan will be 26,325,395 as of the date the Amended 2018 Plan is approved by the Company’s shareholders. Subject to adjustment in the event of specified capitalization events, no more than 26,325,395 shares may be issued pursuant to the exercise of incentive stock options.
To the extent permitted by applicable law or any stock exchange rule, shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or an affiliate (referred to as “substitute awards”) will not be counted against shares available for grant pursuant to the Amended 2018 Plan. The payment of a dividend equivalent right in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the Amended 2018 Plan.
The following shares will be available for reissuance pursuant to the Plan: (i) shares that are not issued as a result of the termination, expiration or lapsing of any award for any reason; and (ii) shares subject to a full value award that are not issued because the award is settled in cash.
The following shares will count against the maximum number of shares available for issuance and will not be returned to the Amended 2018 Plan: (i) shares that are tendered (either actually or by attestation) by the participant or withheld by the Company in payment of the exercise price of a stock option issued under the Plan; (ii) shares tendered (either actually or by attestation) by the participant or withheld by the Company to satisfy any tax withholding obligation with respect to an award under the Plan; (iii) shares repurchased by the Company with proceeds received from the exercise of a stock option issued under the Plan; and (iv) shares subject to a SAR award issued under the Plan that are not issued in connection with the stock settlement of that award upon its exercise.
Non-Employee Directors will be eligible to receive all types of awards (except for incentive stock options) under the Amended 2018 Plan, including deferred shares pursuant to the Directors’ Deferral Plan. No Non-Employee Director may be granted awards, the grant date fair value of which, when aggregated with cash compensation payable to the director in any calendar year, exceeds $800,000 in any calendar year.
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TABLE OF NAMED EXECUTIVE OFFICERSCONTENTS
Types of Awards. Under the Amended 2018 Plan, the following awards may be granted: stock options (including “incentive stock options” within the meaning of Section 422 of the Code), stock appreciation rights, restricted stock, restricted stock units, performance-based awards, and other share-based awards (all such grants are collectively referred to in this summary as “awards”). These types of awards are described in more detail below:
In accordance withStock Options. The Amended 2018 Plan authorizes the grant of incentive stock options, which are intended to satisfy the requirements of Section 14A422 of the Exchange ActCode, and non-qualified stock options, which are stock options that are not intended to satisfy the requirements of Section 422 of the Code. The exercise price of stock options granted under the Amended 2018 Plan may not be less than 100% (or higher in the case of certain incentive stock options) of the fair market value of a share of our common stock on the date of grant. For as long as the shares are traded on an established stock exchange, “fair market value” means, as of any given date, the closing price of a share as quoted on the principal exchange on which the shares are listed for such date, or if no sale occurred on such date, the first trading date immediately prior to such date during which a sale occurred.
Subject to the one-year minimum vesting requirement described below, stock options granted under the Amended 2018 Plan will vest at the rate specified by the Committee. No stock option will be exercisable for more than ten years after the date it is granted.
The maximum number of shares with respect to which incentive stock options granted to any participant may first become exercisable during any calendar year may not exceed $100,000. Any incentive stock options that become exercisable in excess of this amount will be treated as non-qualified stock options.
Until the shares are issued, no right to vote or receive dividends or dividend equivalents or any other rights as a shareholder will exist with respect to the shares subject to an option, notwithstanding the exercise of an option. If a participant ceases to provide services to the Company or any affiliate, the participant may exercise his or her option within such period of time as is specified in the award agreement to the extent that the option is vested on the date of termination (but in no event later than the expiration of the term of such option as set forth in the award agreement).
Stock Appreciation Rights. Stock appreciation rights, or “SARs,” typically provide for payments to the holder based upon increases in the price of our shares from the date the SAR was granted to the date that the right is exercised. The exercise price of a SAR may not be less than the fair market value of a share on the date of grant of the SAR. The Committee may elect to settle exercised SARs in cash, in shares, or in a combination of cash and shares. Until the shares, if any, are issued, no right to vote or receive dividends or any other rights as a shareholder will exist with respect to the shares subject to a SAR, notwithstanding the exercise of the SAR.
Subject to the one-year minimum vesting requirement described below, the Committee will generally determine when the SAR will vest and become exercisable. The vesting conditions, if any, may be based on, among other conditions, continued service, the attainment of performance conditions, or a combination of both. The Committee determines the term of a SAR, but no SAR will be exercisable more than ten years after the date it is granted. Unless otherwise provided in the Amended 2018 Plan or an award agreement, upon termination of a participant's employment or service, a SAR will generally be subject to the same conditions as apply to stock options. A SAR may be granted as a standalone right or in connection with an option granted under the Amended 2018 Plan.
Restricted Stock Awards. An award of restricted stock is a direct grant of common stock, subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote the underlying shares or the right to receive dividends with respect to the underlying shares). The restrictions, if any, may be based on, among other conditions, continued service, the attainment of performance conditions, or a combination of both.
These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the award or thereafter. Generally, any shares subject to restrictions are forfeited upon termination of employment. The price, if any, that participants are required to pay for each share of restricted stock will be set by the Committee and will be paid in a form approved by the Committee in its sole discretion, which may be cash, services rendered or to be rendered to the Company or an affiliate, or in another form of payment. To the extent that any dividends are payable with respect to a restricted stock award, the dividends will be accumulated and subject to any restrictions and risk of forfeiture to which the underlying restricted stock is subject.
Restricted Stock Units. Restricted stock units are denominated in unit equivalents of shares and are typically awarded to participants without payment of consideration. Subject to the one-year minimum vesting requirement described below, restricted stock units may be subject to vesting conditions based upon continued service, the attainment of performance-based conditions, or both. Except as otherwise determined by the Committee at the time of the grant of the award or thereafter, any restricted stock units that are not vested as of the date of the participant's termination of service will be forfeited.
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Restricted stock units may be settled in shares, cash, or a combination of both. Unlike restricted stock, the stock underlying restricted stock units will not be issued until the restricted stock units have vested. In addition, recipients of restricted stock units generally have no voting or dividend rights until the vesting conditions are satisfied and the related rulesunderlying shares are issued. On the vesting date (or such later date as determined by the Committee and set forth in the agreement evidencing the award), the participant will be issued one unrestricted, fully transferable share for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. Alternatively, settlement of a restricted stock unit may be made in cash (in an amount reflecting the fair market value of shares that would have been issued) or any combination of cash and shares, as determined by the Committee, in its sole discretion. The Committee may authorize dividend equivalents to be paid on outstanding restricted stock units. If dividend equivalents are authorized to be paid, they may be payable in cash or shares, as determined in the discretion of the SEC, shareholders are being askedCommittee, only to recommend,the extent the underlying restricted stock unit vests.
Performance-Based Awards. The Committee may grant to eligible individuals the right to receive performance-based awards. Subject to the one-year minimum vesting requirement described below, performance-based awards vest upon the attainment of performance goals based on business criteria specified by the Committee pursuant to the Amended 2018 Plan over a specified performance period. In determining the amount earned by an eligible individual, the Committee has the right to adjust or eliminate the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the performance period.
Other Share-Based Awards. The Committee is authorized under the Amended 2018 Plan to make any other award that is not inconsistent with the provisions of the Amended 2018 Plan and that involves or might involve the issuance of shares. Awards may be granted pursuant to one or more separate programs or subplans under the Plan for the purpose of issuing particular forms of awards to one or more classes of participants as determined by the Committee. This includes, but is not limited to, share awards granted or deferred under the Director Plan. Other share-based awards may be fully vested, or subject to vesting based on continued service, the attainment of performance conditions, or a combination of both.
The Committee may elect to settle these awards in cash, in shares, or in a non-binding advisory vote, whethercombination of cash and shares. The Committee may establish the exercise price, if any, of any other share-based awards granted under the Plan, except that the exercise price may not be less than the fair market value of a non-bindingshare on the date of grant for an award that is intended to be exempt from Section 409A of the Code. The Committee may authorize dividend equivalents to be paid with respect to a share-based award that is a full value award that are payable only to the extent the underlying award vests. The Committee determines the term of these awards, not to exceed ten years after the date it is granted.
Minimum Vesting Requirements. No award may vest before the first anniversary of the date of grant, subject to certain accelerated vesting contemplated under the Amended 2018 Plan, with the exception of (i) up to five percent (5%) of the number of shares reserved for issuance under the Amended 2018 Plan, (ii) awards granted in connection with the assumption or substitution of awards as part of a transaction, (iii) awards granted to non-employee directors under the Director Plan, and (iv) awards that may be settled only in cash.
Transferability of Awards. Except as otherwise provided by the Committee, no award granted under the Amended 2018 Plan may not be assigned, transferred, or otherwise disposed of by a participant other than by will or the laws of descent and distribution. The Committee may provide in an award agreement or otherwise that an award (other than an incentive stock option) may be transferred pursuant to a domestic relations order or by gift to the participant’s family member.
Adjustments Upon Changes in Capitalization. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, or other distribution (other than normal cash dividends) of the Company’s assets to our shareholders, or any other similar event or other change related to a corporate event affecting our shares or the price of our shares other than certain equity restructurings identified in the Amended 2018 Plan, the Committee has discretion to make appropriate adjustments in the number and type of shares subject to the Amended 2018 Plan, the terms and conditions of any award outstanding under the Amended 2018 Plan, and the grant or exercise price of any such award. In the case of certain equity restructurings as specified in the Amended 2018 Plan, the number and type of securities subject to each outstanding award and the grant or exercise price will be equitably adjusted.
Change in Control. Unless precluded by any applicable award agreement, if a Change in Control of the Company occurs, each award outstanding under the Amended 2018 Plan that vests solely on continued service that is not converted, assumed, substituted, or replaced by the successor or survivor corporation or its parent or subsidiary will vest and become exercisable and/or all forfeiture restrictions will lapse immediately prior to the Change in Control, and following the Change in Control, the awards will immediately terminate. Awards that vest based on the attainment of performance-based conditions will be subject to the award agreement provision governing the impact of a Change in Control, provided the award agreement may not permit vesting of awards at a rate greater than the actual level of attainment and/or will provide for pro-rated vesting based on any reduction to the performance period
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resulting from the Change in Control. Where awards are assumed or continued after a Change in Control, the Committee may provide that the vesting of one or more awards will automatically accelerate upon an involuntary termination of the participant's employment or service without cause within a designated period following the change in control.
“Change in Control” is defined as any of the following:
The acquisition by a person or group of beneficial ownership of more than 20% of the voting power of our stock;
Our incumbent directors ceasing to constitute a majority of our board;
A merger, consolidation, or share exchange involving transfer of controlling voting power; or
A sale of all or substantially more of the assets of the Company.
In addition, a Change in Control must constitute a change control the Company under Section 409A of the Internal Revenue Code to be treated as a Change in Control under the Plan.
Term of the Amended 2018 Plan. The Amended 2018 Plan will become effective on the date that it is approved by the Company’s shareholders. The Plan will continue in effect until the tenth anniversary of the date that the shareholders approve the Amended 2018 Plan, unless earlier terminated by our Board. Any awards that are outstanding at the time the Amended 2018 Plan terminates will remain in force according to the terms of the Amended 2018 Plan and the applicable agreement evidencing the award.
Amendment and Termination of the Plan. The Board, or with the approval of our Board, the Committee, at any time may terminate, amend or modify the Amended 2018 Plan, except that our Board may not, without prior shareholder voteapproval, amend or modify the Amended 2018 Plan in any manner that would require shareholder approval to approvecomply with any applicable laws.
Termination or amendment of the Amended 2018 Plan may not adversely affect any outstanding award without the consent of the affected participant, except for amendments necessary to comply with applicable laws.
Furthermore, absent approval of our shareholders, no option or SAR may be amended to reduce the exercise price or grant price of the shares subject to such option or SAR and (except as permitted under the provisions of the Amended 2018 Plan dealing with certain capitalization adjustments, changes in control, and other events) no option or SAR may be cancelled in exchange for the grant of an option or SAR having a lower per share exercise price or for a cash payment or another award at a time when the option or SAR has a per share exercise price that is higher than the fair market value of the shares.
Clawback/Recovery. Awards are subject to recoupment under any “clawback” policy adopted by the Company providing for the recovery of awards, shares, proceeds, or payments to participants in the event of fraud or as required by applicable laws or governance considerations or in other similar circumstances.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
The following is a summary of U.S. federal income tax consequences of awards under the Amended 2018 Plan, based on current U.S. federal income tax laws. This summary does not constitute legal or tax advice and does not address municipal, state or foreign income tax consequences. Participants in the Amended 2018 Plan are urged to consult their own tax advisors with respect to the particular federal income tax consequences to them of participating in the Amended 2018 Plan, as well as with respect to any applicable municipal, state, or foreign income tax or other tax considerations.
Non-Qualified Stock Options. The grant of a non-qualified stock option will not result in taxable income to the holder. The holder will recognize ordinary income at the time of exercise equal to the excess of the fair market value of the shares on the date of exercise over the exercise price, and the Company will be entitled to a corresponding deduction for tax purposes. Gains or losses realized by the holder upon the sale of the shares acquired on exercise will be treated as capital gains or losses.
Incentive Stock Options. The grant of an incentive stock option will not result in taxable income to the holder. The exercise of an incentive stock option will not result in taxable income to the holder if, at the time of exercise, the holder has been employed by the Company or any of its affiliates at all times beginning on the grant date and ending not more than 90 days before the exercise date. However, the excess of the fair market value of the shares on the date of exercise over the exercise price is an adjustment that is included in the calculation of the holder’s alternative minimum tax liability for the year the shares are sold.
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If the holder does not sell the shares acquired on exercise of an incentive stock option within two years from the grant date and one year from the exercise date, then any gain or loss realized on the sales of the shares in excess of the exercise price will be taxed as capital gain or recognized as a capital loss. If these holding requirements are not met, then the holder will generally recognize ordinary income at the time the shares are sold in an amount equal to the lesser of (a) the excess of the fair market value of the shares on the date of exercise over the exercise price, or (b) the excess, if any, of the amount realized on the sale of the shares over the exercise price, and the Company will be entitled to a corresponding deduction.
SARs. The grant of a SAR will not result in taxable income to the holder. The holder will recognize ordinary income on the exercise date equal to the aggregate amount of cash received or the fair market value of the shares received, and the Company will be entitled to a corresponding deduction. If the SARs are settled in shares and the holder later sells the shares, then the holder will recognize capital gain or loss on the difference between the sale price and the amount of income recognized at exercise. Whether the capital gain or loss is long-term or short-term depends on how long the shares are held.
Restricted Stock. Unless the holder makes an election to accelerate the recognition of income to the grant date (as described below), the grant of restricted stock will not result in taxable income to the participant. When the restrictions lapse, the holder will recognize ordinary income on the excess of the fair market value of the shares on the vesting date over the amount paid for the shares, if any, and the Company will be entitled to a corresponding deduction.
If the holder makes an election under Section 83(b) of the Code within 30 days after the grant date, the holder will recognize ordinary income as of the grant date equal to the fair market value of the shares on the grant date over the amount paid, if any, and the Company will be entitled to a corresponding deduction. Any future appreciation will be taxed as capital gain. However, if the shares are later forfeited, the holder will not be able to recover any taxes paid.
Restricted Stock Units. The grant of a restricted stock unit will not result in taxable income to the holder. When the restricted stock unit is settled, the holder will recognize ordinary income equal to the fair market value of the shares received or the cash provided on settlement, and the Company will be entitled to a corresponding deduction. Any future appreciation with respect to shares received in settlement of a restricted stock unit will be taxed as capital gains.
Section 409A. Section 409A of the Code imposes complex rules on nonqualified deferred compensation arrangements, including with respect to compensation deferral elections and the timing of deferred compensation payments. Certain equity awards may be subject to Section 409A of the Code, while others are exempt. If an award is subject to Section 409A of the Code and a violation occurs, the compensation is includible in income when it is no longer subject to a substantial risk of forfeiture, and the holder may be subject to a 20% penalty tax and, in some cases, interest penalties. The 2018 Plan and awards granted thereunder are intended to be exempt from or conform to the requirements of Section 409A of the Code.
Section 162(m). Section 162(m) of the Code denies deductions to publicly held corporations for compensation paid to our named executive officers (thatcertain senior executives that exceeds $1,000,000.
Withholding. The Company is votes similarentitled to satisfy all applicable income and employment taxes required by federal, state, municipal, or foreign law to be withheld by deducting from the payment or settlement of any award (whether made in shares or cash), withholding from wages, or other cash compensation payable to the non-binding voteparticipant, or requiring the participant to pay such withholding taxes to the Company as a condition of receiving payment or settlement of an award.
AWARDS UNDER THE AMENDED PLAN
Because all awards under the Amended 2018 Plan are discretionary with the Committee, neither the number nor types of future Plan awards to be received by or allocated to particular participants or groups of participants is presently determinable. However, on March 31, 2023, the Board approved the adoption of the Directors’ Deferral Plan as a subplan under the Amended 2018 Plan, contingent upon the effectiveness of the Amended 2018 Plan. The Directors’ Deferral Plan provides that Non-Employee Directors will be awarded annual grants of fully vested shares in Proxy Item No. 3the amount of the lesser of (i) 30,000 shares or (ii) the number of shares equal in value to $800,000 minus the director’s total cash compensation for the year (including any cash compensation deferred and paid in shares under the Directors’ Deferral Plan). Under the Directors’ Deferral Plan, Non-Employee Directors may also defer the receipt of some or all of their cash compensation into a book entry deferred share account. Dividend equivalents will be paid on all deferred shares and deemed reinvested in additional deferred shares. Each Non-Employee Director may elect to receive accumulated deferred shares in a lump sum in the second year following the director’s separation from service, or in annual installments. Payment of deferred shares will be accelerated, and such shares will be paid in a lump sum, upon the Non-Employee Director’s death.
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Existing Plan Benefits. In accordance with SEC rules, the following table lists all awards granted to the individuals and groups indicated below since the adoption of the 2018 Plan through March 31, 2023 (all PA awards are reported based on the target number of shares). The awards listed below for the covered executives include the equity awards listed in the executive compensation tables beginning on page 54) should occur every one, two or three years. While the results64 of the votethis Proxy Statement and are non-binding and advisory in nature, the Board intends to carefully consider the results of the vote. Shareholders should consider the value of having the opportunity every year to voice their opinion on the compensation of our named executive officers by way of an advisory vote, weighing that against thenot additional burden and expense to us and shareholders of preparing and responding to proposals annually, as well as the other means available to shareholders to provide input on executive compensation.awards.
The Board supports advisory votes on named executive officer compensation every year. We welcome shareholder input and believe that the value of an annual vote outweighs the burden of preparing annual proposals. We also believe annual advisory votes provide a meaningful way to continue dialogue with shareholders regarding this issue.| | Jeffrey Simmons - President and CEO | | | 3,063,446 | |
| | Todd Young - Executive Vice President and Chief Financial Officer | | | 626,706 | |
| | Ellen De Brabander - Executive Vice President, Innovation, Regulatory, and Business Development | | | 367,208 | |
| | Ramiro Cabral - Executive Vice President, Elanco International | | | 432,184 | |
| | Bobby Modi - Executive Vice President, U.S. Pet Health and Global Digital Transformation | | | 157,642 | |
| | Current executive officers as a group | | | 5,774,189 | |
| | Non-Employee Directors as a group | | | — | |
| | All other employees (including all current officers who are not executive officers) as a group | | | 8,713,263 | |
| |
Recommendation of the Board
The Board unanimously recommends that youa vote for“FOR” the shareholder votes onapproval of the compensation of named
executive officers to occur EVERY YEAR.Amended and Restated 2018 Elanco Stock Plan. | |
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| |
| | | Stock Ownership
Information | |
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANSSecurity Ownership of Directors and Executive Officers
The following table summarizesshows the shares of our common stock beneficially owned as of March 20, 2023 by each director and NEO individually and by all of our executive officers and directors as of such date as a group. Shares reported as beneficially owned include shares held indirectly. It also includes shares subject to stock options exercisable and RSUs subject to conversion in shares of common stock, within sixty days of March 20, 2023. As of such date, none of these shares were pledged as security.
| | Kapila Anand | | | 47,574 | | | * | |
| | John Bilbrey | | | 96,066(2) | | | * | |
| | William Doyle | | | 25,956 | | | * | |
| | Art Garcia | | | 42,421 | | | * | |
| | Michael Harrington | | | 54,120 | | | * | |
| | Paul Herendeen | | | 35,956 | | | * | |
| | R. David Hoover | | | 265,656(3) | | | * | |
| | Deborah Kochevar | | | 40,857 | | | * | |
| | Lawrence Kurzius | | | 68,131 | | | * | |
| | Kirk McDonald | | | 39,857 | | | * | |
| | Denise Scots-Knight | | | 40,844 | | | * | |
| | Jeffrey Simmons | | | 1,374,483(4) | | | * | |
| | Todd Young | | | 233,803(5) | | | * | |
| | Ellen de Brabander | | | 104,518 | | | * | |
| | Ramiro Cabral | | | 170,069 | | | * | |
| | Bobby Modi | | | 66,355 | | | * | |
| | All directors and executive officers as a group (22 persons) | | | 3,166,084 | | | * | |
*
| Less than 1% of the outstanding shares of common stock. |
(1)
| Includes the following shares not currently outstanding but deemed beneficially owned because of the right to acquire them pursuant to non-qualified stock options currently exercisable or that will become exercisable within 60 days: 186,914 shares for Mr. Simmons, 19,015 shares for Mr. Young, 12,712 shares for Dr. de Brabander, 32,222 shares for Dr. Cabral, 0 shares for Mr. Modi and 72,610 shares for the Company’s other executive officers. |
(2)
| Includes 41,722 shares held indirectly through a revocable trust. |
(3)
| Includes 180,920 shares held indirectly through revocable trusts. |
(4)
| Includes 45,000 shares held indirectly through a revocable trust. |
(5)
| Includes 114,309 shares held indirectly through a Living Trust, 6,562 by an IRA, 4,000 as UTMA custodian for minors, and 2,000 by spouse IRA account. |
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| | | Stock Ownership Information
|
Security Ownership of Certain Beneficial Owners
The following table shows all entities that are the beneficial owners of more than 5% of our common stock as of March 20, 2023.
| | Dodge & Cox(1) | | | 84,775,075 | | | 17.2 % | |
| | The Vanguard Group(2) | | | 45,691,838 | | | 9.3 % | |
| | PRIMECAP Management Company(3) | | | 32,983,562 | | | 6.7 % | |
| | BlackRock, Inc.(4) | | | 30,546,195 | | | 6.2 % | |
(1)
| As of December 31, 2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 14, 2023 by Dodge & Cox (“Dodge & Cox”). Dodge & Cox's business address is 555 California Street, 40th Floor, San Francisco, CA 94104. Represents (i) 84,775,075 shares for which Dodge & Cox has sole dispositive power; (ii) no shares for which Dodge & Cox has shared dispositive power; (iii) 80,123,275 shares for which Dodge & Cox has sole voting power; and (iv) no shares for which Dodge & Cox has shared voting power. |
(2)
| As of December 31, 2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 9, 2023 by The Vanguard Group (“Vanguard”). Vanguard’s business address is 100 Vanguard Blvd., Malvern, PA 19355. Represents (i) 44,699,964 shares for which Vanguard has sole dispositive power, (ii) 991,874 shares for which Vanguard has shared dispositive power, (iii) no shares for which Vanguard has sole voting power and (iv) 380,591 shares for which Vanguard has shared voting power. |
(3)
| As of December 31, 2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 9, 2023 by PRIMECAP Management Company (“PRIMECAP”). PRIMECAP’s business address is 177 E. Colorado Blvd., 11th Floor, Pasadena, CA 91105. Represents (i) 32,983,562 shares for which PRIMECAP has sole dispositive power, (ii) no shares for which PRIMECAP has shared dispositive power, (iii) 31,569,832 shares for which PRIMECAP has sole voting power and (iv) no shares for which PRIMECAP has shared voting power. |
(4)
| As of December 31, 2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 18, 2023 by BlackRock, Inc. (“BlackRock”). BlackRock’s business address is 55 East 52nd Street, New York, NY 10055. Represents (i) 30,546,195 shares for which BlackRock has sole dispositive power, (ii) no shares for which BlackRock has shared dispositive power, (iii) 27,293,571 shares for which BlackRock has sole voting power and (iv) no shares for which BlackRock has shared voting power. |
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| | | Stock Ownership Information
|
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in beneficial ownership of such equity securities. To our knowledge, no executive officer or director of Elanco failed to file reports required by Section 16(a) on a timely basis, except as follows due to an administrative oversight: (i) for Mr. Meer, three late Form 4 filings reporting (a) one RSU grant, (b) one acquisition of shares from a PSU settlement and one forfeiture of shares for withholding to cover taxes upon vesting, and (c) one RSU grant and two forfeitures of shares to cover taxes upon vesting; and (ii) for Mr. Modi, his initial Form 3 was filed one day late.
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| |
| | | Equity Compensation Plan
Information | |
The following table shows information, as of December 31, 2018 relating to2022, regarding shares of our common stock authorized for issuance under our equity compensation plans under whichplans. As of such date, other than as described below, no equity securities arewere authorized for issuance:issuance under equity compensation plans not approved by shareholders.
| | | | |
| | Number of securities to
be issued upon
exercise of outstanding
options and rights | Weighted-average
exercise price of
outstanding options
and rights | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) |
| Plan Category | (a) | (b) | (c) |
| Equity Compensation Plans approved by security holders | 550,855(1) | $31.61(2) | 4,940,145 |
| Equity Compensation Plans not approved by security holders | - | - | - |
| Total | 559,855 | $31.61 | 4,940,145 |
| | Equity Compensation Plans approved by security holders | | | 4,110,324(2) | | | $29.77 | | | 12,691,750 | |
(1)
| Includes 421,297The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding stock options 133,170and do not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs, which have no exercise price. |
(2)
| This number includes 662,930 stock options, 2,961,015 shares underlying RSUs granted under the 2018 Elanco Stock Plan and 5,388 deferred RSUs granted under the Directors’ Deferral Plan.486,379 DSUs, which includes 58,968 DSUs earned by directors who have elected to defer their cash compensation into Elanco shares. These shares will be fully vested upon departure from our Board. |
(2)91 2023 Proxy Statement
| | | The weighted-average exercise price is only applicable to stock options. |
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| |
| | | General Information About the Annual Meeting | |
OTHER MATTERSOnline Meeting
We will conduct the Annual Meeting solely via the Internet through a live audio webcast. We continue to use the virtual annual meeting format to facilitate shareholder attendance and participation, as we believe this format enables shareholders to participate fully from any location around the world, at no cost to them.
Other BusinessYou are entitled to attend and participate in the virtual Annual Meeting only if you held your shares as of the close of business on March 20, 2023 (the “Record Date”) or if you hold a valid proxy for the Annual Meeting. If you were not an Elanco shareholder as of such date, you may still view the meeting online. Applicable shareholders who wish to participate in the Annual Meeting, or other interested participants who wish to view but not participate in the Annual Meeting, may do so by visiting www.virtualshareholder
meeting.com/ELAN2023.
To attend online and participate in the Annual Meeting, shareholders of record will need to use their control number on the Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) provided to them, or their proxy card, to log into www.virtualshareholdermeeting.com/ELAN2023. If you are a beneficial shareholder and your voting instruction form or Notice of Internet Availability indicates that you may vote those shares through the www.proxyvote.com website, then you may access, participate in and vote at the Annual Meeting
Management does with the 16-digit access code indicated on that voting instruction form or Notice of Internet Availability. Otherwise, beneficial shareholders who do not intend to bringhave a control number or access code should contact their bank, broker, or other nominee (preferably at least 5 days before the Annual Meeting) and obtain a “legal proxy” in order to be able to attend, participate in, or vote at the Annual Meeting.
We encourage you to access the meeting prior to the start time. Please allow ample time for online check-in, which will begin at 7:45 a.m. Eastern Time. If you have difficulties during the check-in time or during the Annual Meeting, we will have technicians ready to assist you with any matters other than those specifically described above and knows of no matters other thandifficulties you may have accessing the foregoingvirtual meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support number that will be posted on the Virtual Shareholder Meeting log-in page.
Shareholders have multiple opportunities to come beforesubmit questions to us for the Annual Meeting. Shareholders who wish to submit a question in advance may do so at either www.proxyvote.com or on our Annual Meeting website at www.virtualshareholder
meeting.com/ELAN2023. Shareholders also may submit questions live during the meeting. If any
We reserve the right to eject an attendee or cut off speaking privileges for behavior likely to cause disruption or annoyance or for failure to comply with reasonable requests or the rules of conduct for the meeting, including time limits applicable to attendees who are permitted to speak. We also reserve the right to edit profanity or other inappropriate language and to exclude questions regarding topics that are not pertinent to meeting matters or motions properly come beforeElanco business. If we receive substantially similar questions, we may group such questions together and provide a single response to avoid repetition.
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| | | General Information About the Annual Meeting
|
Who Can Vote
You are entitled to vote at the meeting, it is the intentionAnnual Meeting if our records show that you held your shares as of the persons named inRecord Date. At the accompanying proxy to voteclose of business on that date, a total of 492,047,948 shares of our common stock subjectwere outstanding and entitled to suchvote. In addition to shareholders of record of our common stock, “beneficial owners of shares held in street name” as of the Record Date can vote using the methods described below.
| • | Shareholders of Record. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are the shareholder of record with respect to those shares. |
| • | Beneficial Owners of Shares Held in Street Name. If your shares are held in an account at a bank, broker, or other organization, then you are the “beneficial owner of shares held in street name” (a “beneficial shareholder”). As a beneficial shareholder, you have the right to instruct the person or organization holding your shares how to vote your shares. Most individual shareholders are beneficial owners of shares held in street name. |
Voting Before or During the Annual Meeting
There are four ways to vote:
| • | Online Prior to the Annual Meeting. You may vote by proxy by visiting www.proxyvote.com and entering the control number found on your Notice of Internet Availability. The availability of online voting may depend on the voting procedures of the organization that holds your shares. |
| • | Online During the Annual Meeting. You may vote online during the Annual Meeting by visiting www.virtualshareholder meeting.com/ELAN2023, entering the control number found on your Notice of Internet Availability and following the on-screen instructions. The availability of online voting may depend on the voting procedures of the organization that holds your shares. Voting online during the meeting will replace any previous votes. |
| • | Telephone. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by calling the toll-free number found on the card or form. The availability of telephone voting may depend on the voting procedures of the organization that holds your shares. |
| • | Mail. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by filling out the card or form and returning it in the envelope provided. |
Whether you are a shareholder of record or a beneficial shareholder, you may direct how your shares are voted without participating in the Annual Meeting. We encourage shareholders to vote well before the Annual Meeting, even if they plan to attend the virtual meeting, by completing proxies online or by telephone or, if they received printed copies of these materials, by mailing their proxy cards. The online polls will close at 11:59 p.m. Eastern Time on May 17, 2023.
Shareholders of record may revoke their proxy at any time before the electronic polls close by submitting a later-dated vote online during the Annual Meeting, via the Internet, by telephone, by mail, or by delivering instructions to our Corporate Secretary before the Annual Meeting begins. Beneficial shareholders may revoke any prior voting instructions by contacting the broker, bank, or other nominee that holds their shares or, if applicable, by voting online during the virtual Annual Meeting.
Quorum for the Annual Meeting
In order to have a quorum at the Annual Meeting, holders of a majority of the outstanding shares entitled to vote at the Annual Meeting must be present or represented by proxy for the transaction of business. Your shares will be counted for purposes of determining if there is a quorum if you are entitled to vote and you are present at the Annual Meeting, or if you have properly voted by proxy online, by phone, or by submitting a proxy card or voting instruction form by mail prior to the Annual Meeting.
Broker non-votes (as described below) and abstentions are counted for purposes of determining whether a quorum is present. If a quorum is not present, we may propose to adjourn the Annual Meeting and reconvene the Annual Meeting at a later date.
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| | | General Information About the Annual Meeting
|
Voting Standards
Each share of common stock is entitled to one vote at the Annual Meeting. To be elected (Proposal No. 1), the director nominees must receive a plurality of the votes cast by the holders of shares entitled to vote in accordancethe election at the meeting, provided a quorum is present. A “plurality of the votes cast” means that the individuals with the recommendationhighest number of management“for” votes are elected as directors up to the maximum number of directors to be elected. “Votes cast” excludes abstentions and any broker non-votes. Accordingly, abstentions and broker non-votes will have no effect on the election of directors. Brokers do not have discretionary authority with respect to the election of directors.
For Proposal Nos. 2, 3, 4 and 5, each proposal will be approved if the votes cast for the proposal exceed those cast against the proposal at the meeting. Abstentions or broker non-votes with respect to these proposals, if any, will have no effect on the outcome of the vote. Brokers have discretionary authority with respect to Proposal No. 2. Brokers do not have discretionary authority with respect to Proposals Nos. 1, 3, 4 and 5.
The following chart describes the proposals to be considered at the Annual Meeting, the vote required to elect directors and to adopt each other proposal and the manner in which votes will be counted.
| | No. 1 – Election
of Directors | | | For, against, or
abstain on each
nominee. | | | Plurality of votes cast. | | | No effect. | | | No effect. No broker discretion to vote. | |
| | No. 2 – Ratification
of Independent
Auditor | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | Brokers have
discretion to vote. | |
| | No. 3 – Advisory
Vote on Executive
Compensation | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | No effect. No broker discretion to vote. | |
| | No. 4 – Approval of
Amended and
Restated ESPP | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | No effect. No broker discretion to vote. | |
| | No. 5 – Approval of
Amended and
Restated 2018
Plan | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | No effect. No broker discretion to vote. | |
If you complete and submit your proxy voting instructions, the individuals named as proxies will follow your instructions. If you are a shareholder of record and you submit proxy voting instructions but do not direct how to vote on each item, the individuals named as proxies will vote as our Board recommends on each proposal and as they may determine in their best judgment with respect to any other matters properly presented for a vote at the Annual Meeting.
If you are a beneficial shareholder and do not provide the broker that holds your shares with specific voting instructions, then such broker may generally vote your shares in their discretion on “routine” matters or motions, including any matters dealingbut cannot vote on “non-routine matters.” For the Annual Meeting, only Proposal No. 2 is considered a routine matter.
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Cost of Proxy Solicitation
We are providing these proxy materials in connection with the conductsolicitation by our Board of proxies to be voted on at the Annual Meeting. We will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, we expect that a number of our employees will solicit shareholders personally, electronically and by telephone. None of these employees will receive any additional compensation for doing this. We have retained Innisfree M&A Incorporated to assist in the solicitation of proxies for a fee of $20,000 plus reimbursement of expenses. We will, on request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial shareholders and obtaining their voting instructions.
Shareholder List
Our list of shareholders as of the meeting.Record Date will be available for inspection for five business days prior to the Annual Meeting. If you want to inspect the shareholder list, please contact our Investor Relations department at investor@elanco.com to schedule an appointment. In addition, the list of shareholders will also be available during the Annual Meeting through the meeting website for those shareholders who choose to attend.
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| | | Submission of Shareholder Proposals or Nominations | |
Rule 14a-8 Proposals and Nominations Not for Inclusion in the Proxy Statement for the 2024 Annual Meeting
In accordance with our bylaws, aPursuant to Rule 14a-8 under the Exchange Act (“Rule 14a-8”), some shareholder who, at any annual meeting of our shareholders, intends to nominate a personproposals may be eligible for election as a director or present a proposal must so notify our Corporate Secretary, in writing, describing such nominee(s) or proposal and providing certain information concerning such shareholder as describedinclusion in our bylaws, including, among other things, name, address, number of shares beneficially owned, a brief description of any derivative securities or other agreement, arrangement, or understanding (including any swaps, warrants, short positions, profits interests, options, hedging transactions, or borrowed or loaned shares) with respect to our shares, engaged in, directly or indirectly byProxy Statement for the proposing shareholder, and the reasons for and interest of such shareholder in the proposal. Generally, to be timely, such notice2024 Annual Meeting. These proposals must be received by our Corporate Secretary at our principal offices, through one of the means discussed in the “Communicating with Us” section below, by no later than the close of business (5:00 p.m. Eastern Time) on December 8, 2023. Proposals submitted for inclusion in our Proxy Statement for the 2024 Annual Meeting must comply with all requirements of Rule 14a-8.
Director Nominations (Including Proxy Access Nominations) or Other Proposals for Presentation at the 2024 Annual Meeting
Proxy Access. We have adopted proxy access, which permits a shareholder, or group of up to 20 shareholders, owning 3% or more of our outstanding common stock continuously for at least three years, to submit director nominations for up to two individuals or 20% of our Board (whichever is greater) for inclusion in our Proxy Statement if the shareholder(s) and the nominee(s) meet the requirements in our Bylaws.
Director Nominations and Other Proposals, Other Than Proxy Access and Rule 14a-8. Under our Bylaws, a shareholder may nominate a candidate for election to our Board (other than pursuant to the proxy access provisions of our Bylaws) or may propose any business for presentation at the 2024 Annual Meeting (other than proposals presented under Rule 14a-8) pursuant to the advance notice provisions of the Bylaws.
Deadline for Notice. A shareholder who desires to nominate a candidate for election to our Board (whether pursuant to the proxy access provisions of our Bylaws or otherwise) or to propose any business for presentation at the 2024 Annual Meeting (other than proposals presented under Rule 14a-8) pursuant to the advance notice provisions of the Bylaws, must give notice to our Corporate Secretary at our principal executive offices, not less than 120 days nor more than 150 days in advancethrough one of the first anniversary of the proxy statement released to shareholders in connection with the preceding year’s annual meeting, provided thatmeans discussed in the event that“Communicating with Us” section below, by no annual meeting was heldearlier than January 18, 2024 and no later than the previous yearclose of business (5:00 p.m. Eastern Time) on February 17, 2024. The notice must include the information specified in our Bylaws, including information concerning the nominee or proposal (as applicable) and information about the dateshareholder’s ownership of and agreements related to our stock.
If the annual meeting has been changed by2024 Annual Meeting is advanced or delayed more than 30 days from the dateanniversary of the previous year’s meeting,Annual Meeting, a shareholder seeking to nominate a candidate for election to our Board or inpropose any business at our 2024 Annual Meeting pursuant to the eventadvance notice provisions of a special meetingthe Bylaws must submit notice of shareholders calledany such nomination and of any such proposal that is not made pursuant to elect directors, not later thanRule 14a-8 by the close of business (5:00 p.m. Eastern Time) on the tenth daylater of 120 days in advance of the 2024 Annual Meeting or, if later, 10 days following the daydate on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. Forfirst made.
In addition to satisfying the foregoing requirements to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than the Board’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Securities Exchange Act of 1934 no later than March 24, 2024.
Requirements for Director Nominees and Other Proposals. All director nominations and shareholder proposals must comply with the requirements of our Bylaws, including, with respect to director nominations, the eligibility requirements contained therein. A copy of our Bylaws is available on our website at www.elanco.com/en-us/about-us/governance/corporate by clicking on the “Bylaws” link. The Chairman may refuse to acknowledge or introduce any such matter at the 2024 Annual Meeting if notice of the matter is not received within the applicable deadlines or does not comply with our Bylaws. If a shareholder does not meet these deadlines or does not satisfy the requirements of Rule 14a-4 of the Exchange Act, the persons named as proxies will be allowed to use their discretionary voting authority when and if the matter is raised at the 2024 Annual Meeting.
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Communicating with Us
To communicate with our Board (or any individual member), make a proposal or director nomination, introduce business at an annual meeting of shareholders, revoke a prior proxy instruction, or request copies of our governance-related documents, please contact us via e-mail to be held in 2020,elanco_corporate_secretary@elancoah.com or by mail to Elanco Animal Health Incorporated, 2500 Innovation Way, Greenfield, IN 46140, Attention: Corporate Secretary.
The Corporate Secretary regularly forwards to the addressee all correspondence other than mass mailings, advertisements and other materials not relevant to our business. However, we reserve the right not to forward to Board members any such notice must be received by usabusive, threatening, or otherwise inappropriate materials.
Notice of Internet Availability
We use the Internet as the primary means of furnishing proxy materials to shareholders. We are sending a Notice of Internet Availability to our shareholders with instructions on how to access the proxy materials online at our principal executive offices between November 5, 2019 and December 5, 2019 to be considered timely for purposes of the 2020 annual meeting. Any person interested in offering such a nominationwww.proxyvote.com or proposal should request a printed copy of the relevant bylaw provisions frommaterials. Our proxy materials are also available at https://investor.elanco.com/financials/annual-reports/.
Shareholders may follow the instructions in the Notice of Internet Availability to elect to receive future proxy materials in print by mail or electronically by e-mail. We encourage shareholders to take advantage of the availability of the proxy materials online to help reduce the environmental impact of our Corporate Secretary or referannual meetings and reduce our printing and mailing costs.
Householding of Proxy Materials
The SEC has adopted rules that permit companies and intermediaries (such as brokers and banks) to our bylaws as publicly filed withsatisfy the SEC. Please note that these time periods also apply in determining whether notice is timelydelivery requirements for purposes of rules adopted by the SEC relating to the exercise of discretionary voting authority, which rules are separate from and in addition to the SEC requirements that a shareholder must meet in order to have a proposal included in our proxy statement.
Our bylaws also set out specific eligibility requirements that nominees for director must satisfy, which require nominees to:
complete and return a written questionnaireProxy Statements with respect to the background and qualification of the nominee and the background of any other persontwo or entity on whose behalf the nomination is being made; and
provide a written representation and agreement that the nominee:
is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such prospective nominee, if elected as a director, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to us or (2) any Voting Commitment that could limit or interfere with the nominee’s ability to comply, if elected as a director, with the nominee’s fiduciary duties under applicable law;
is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than us with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein; and
if elected as a director, would be in compliance and will comply with all of our applicable corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines.
Proposals for Inclusion in Proxy Statement Pursuant to Rule 14a-8
Shareholder proposals intended to be presented at the 2020 annual meeting must be received by us at our principal executive office no later than December 5, 2019, in order to be eligible for inclusion in our proxy statement and proxy relating to that meeting under Rule 14a-8 of the Exchange Act. Upon receipt of any proposal, we will determine whether to include such proposal in accordance with SEC rules and regulations.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement 57
Householding of Proxy MaterialsWe have adopted a procedure approved by the SEC called “householding.” Under the householding procedure, certain shareholders, whether they own registered shares or shares in street name, who havemore security holders sharing the same address by delivering a single Notice of Internet Availability or Proxy Statement addressed to those security holders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for security holders and cost savings for companies.
Several brokers and banks with accountholders who are Elanco shareholders will receive only one set ofbe “householding” our proxy materials,materials. As indicated in the notice provided by these brokers to Elanco shareholders, a single Proxy Statement will be delivered to multiple shareholders sharing an address unless onecontrary instructions have been received from an affected shareholder. Once you have received notice from your broker that it will be “householding” communications to your address, “householding” will continue until you are notified otherwise or more of the shareholdersuntil you revoke your consent. If, at that address has previously notified us that they wantany time, you no longer wish to participate in “householding” and you prefer to receive a separate copies. Regardless of how you own your shares, if you received a single set of proxy materials as a result of householding, and one or more shareholders at your address would like to have separate copies of these materials with respect to the 2019 annual meeting or in the future,statement, please notify usyour broker, contact Broadridge Financial Solutions at 1-866-540-7095 or by sendingwriting to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or send a written request to Elanco Animal Health Incorporated, Attention: Investor Relations, 2500 Innovation Way, Greenfield, IndianaIN 46140, Attention: Investor Relations or via e-mail at investor@elanco.com. Shareholders who currently receive multiple copies of the Proxy Statement at their address and would like to request “householding” of their communications should contact their broker or bank.
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Legal Matters
This document includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our long-term financial targets and ESG goals and strategies. These statements involve risks and uncertainties. Actual results could differ materially from any future results expressed or implied by telephonethe forward-looking statements for a variety of reasons, including due to the risks and uncertainties that are discussed in our most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings. We assume no obligation to update any forward-looking statements or information, which speak only as of their respective dates.
Website references and their hyperlinks throughout this document are provided for convenience only and the content on the referenced websites, including but not limited to the content contained in our 2021 ESG Summary Report, is not incorporated herein by reference into this Proxy Statement, nor does it constitute a part of this Proxy Statement.
Financial Matters
Our financial statements for the year ended December 31, 2022 are included in our 2022 Annual Report, which we provide to our shareholders at 1-877-352-6261,the same time as this Proxy Statement. Our 2022 Annual Report and this Proxy Statement are also posted on our website at https://investor.elanco.com/financials/annual-reports/. If you have not received or do not have access to the 2022 Annual Report, please send a written request to Elanco Animal Health Incorporated, 2500 Innovation Way, Greenfield, IN 46140, Attention: Investor Relations.
Matters to be Presented
We know of no other matters to be submitted to shareholders at the Annual Meeting, other than the proposals identified in this Proxy Statement. If any other matters properly come before shareholders at the Annual Meeting, it is the intention of the persons named on the proxy to vote the shares represented thereby on such matters in accordance with their best judgment. If the meeting is adjourned or postponed, the persons named on the proxy can vote such shares at the adjournment or postponement as well.
By order of the Board of Directors,
Marcela A. Kirberger
Executive Vice President, General Counsel and
Corporate Secretary
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| | | Appendix A
Reconciliation of GAAP Information to Non-GAAP Information | |
In this Proxy Statement, we will promptly deliveruse non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted gross margin and net debt. We believe these documentsnon-GAAP financial measures are useful to you or start householding, as applicable, followinginvestors because they provide greater transparency regarding our receiptoperating performance. Reconciliation of non-GAAP financial measures and reported GAAP financial measures are included in this Appendix A and are posted on our website at www.elanco.com. The primary material limitations associated with the use of such request.non-GAAP measures as compared to U.S. GAAP results include the following: (i) they may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) they exclude financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) they exclude items or types of items that may continue to occur from period to period in the future and (iv) they may not exclude all unusual or non-recurring items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations. These non-GAAP measures are not and should not be viewed as, substitutes for U.S. GAAP reported measures. We encourage investors to review our unaudited condensed consolidated and combined financial statements in their entirety and caution investors to use U.S. GAAP measures as the primary means of evaluating our performance, value and prospects for the future and non-GAAP measures as supplemental measures.
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GAAP Net Income (Loss) to Adjusted Net Income
We will beardefine adjusted net income as net income (loss) excluding amortization of intangible assets, purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs, tax valuation allowances and other specified significant items, such as unusual or non-recurring items that are unrelated to our long-term operations adjusted for income tax expense associated with the excluded financial items.
The following is a reconciliation of GAAP Revised for the year ended December 31, 2022 and 2021 to Selected Non-GAAP Adjusted information:
| | Cost of sales(1) | | | $1,913 | | | $— | | | $1,913 | | | $2,132 | | | $64 | | | $2,068 | |
| | Amortization of intangible assets | | | $528 | | | $528 | | | $— | | | $556 | | | $556 | | | $— | |
| | Asset impairment, restructuring and other special charges(2)(3) | | | $183 | | | $183 | | | $— | | | $634 | | | $634 | | | $— | |
| | Interest expense, net of capitalized interest(4) | | | $241 | | | $20 | | | $221 | | | $236 | | | $— | | | $236 | |
| | Other (income) expense, net(5)(6) | | | $32 | | | $2 | | | $30 | | | $5 | | | $(14) | | | $19 | |
| | Income (loss) before taxes | | | $(72) | | | $733 | | | $662 | | | $(571) | | | $1,240 | | | $669 | |
| | Provision for taxes(7)(8) | | | $6 | | | $(111) | | | $117 | | | $(88) | | | $(236) | | | $147 | |
| | Net income (loss) | | | $(78) | | | $622 | | | $544 | | | $(483) | | | $1,004 | | | $522 | |
| | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | |
| | basic | | | $(0.16) | | | $1.27 | | | $1.11 | | | $(0.99) | | | $2.06 | | | $1.07 | |
| | diluted | | | $(0.16) | | | $1.26 | | | $1.11 | | | $(0.99) | | | $2.06 | | | $1.07 | |
| | Adjusted weighted average shares outstanding : | | | | | | | | | | | | | | | | | | | |
| | basic | | | 488.3 | | | 488.3 | | | 488.3 | | | 487.2 | | | 487.2 | | | 487.2 | |
| | diluted(9) | | | 488.3 | | | 492.2 | | | 492.2 | | | 487.2 | | | 488.9 | | | 488.9 | |
Numbers may not add due to rounding.
The table above reflects only line items with non-GAAP adjustments.
(a)
| GAAP Revised amounts for the years ended December 31, 2022 and 2021 represent GAAP reported results that have been revised for certain immaterial items, as described in “Revision of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company's February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A. |
(b)
| The company uses non-GAAP financial measures that differ from financial statements reported in conformity with U.S. generally accepted accounting principles (GAAP). The company believes that these non-GAAP measures provide useful information to investors. Among other things, they may help investors evaluate the company’s ongoing operations. They can assist in making meaningful period-over-period comparisons and in identifying operating trends that would otherwise be masked or distorted by the items subject to the adjustments. Management uses these non-GAAP measures internally to evaluate the performance of the business, including to allocate resources. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. |
(c)
| Adjustments to certain GAAP measures for the year ended December 31, 2022 and 2021 include the following: |
(1)
| 2021 excludes amortization of inventory fair value adjustments recorded from the acquisition of Bayer Animal Health ($64 million). |
(2)
| 2022 excludes charges associated with integration efforts and external costs related to the acquisitions of Bayer Animal Health and KindredBio ($105 million), a nonrecurring charge for acquired IPR&D with no alternative future use that we recorded upon the initial consolidation of a variable interest entity that is not a business ($59 million), the finalization of a write-down charge associated with the sale of our manufacturing site in Speke, U.K. ($22 million), a measurement period adjustment to the consideration transferred and charge associated with the settlement of a liability for future royalty and milestone payments that was triggered in connection with the acquisition of KindredBio ($2 million), facility exit costs ($2 million), asset impairments ($2 million), and the write-off of a receivable associated with a previous R&D collaboration arrangement ($1 million), partially offset by adjustments resulting from the reversal of severance accruals ($9 million) and an adjustment related to asset write-downs ($1 million). |
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(3)
| 2021 excludes charges associated with integration efforts and external costs related to the acquisitions of Bayer Animal Health and KindredBio, and charges primarily related to independent stand-up costs and other related activities ($162 million), a charge associated with the settlement of a liability for future royalty and milestone payments triggered in connection with our acquisition of KindredBio ($26 million), costs associated with the sale of our manufacturing sites in Shawnee, Kansas and Speke, U.K. and other business development transactions ($5 million), severance accruals net of reversals ($110 million), asset impairments ($66 million), asset write-downs ($284 million), and the settlement of legal matters ($10 million), partially offset by curtailment gains recognized due to the remeasurement our pension benefit obligations resulting from workforce reductions associated with our recent restructuring programs ($29 million). |
(4)
| 2022 excludes the debt extinguishment losses recorded in connection with the early repayment of our 4.272% Senior Notes due August 28, 2023 and our Term Loan B ($20 million). |
(5)
| 2022 excludes a contribution to The Elanco Foundation ($3 million) and the impact of hyperinflationary accounting related to Turkey ($4 million), partially offset by the gain recognized on the disposal of the microbiome R&D platform ($3 million) and up-front payments received in relation to license and asset assignment agreements ($2 million). |
(6)
| 2021 excludes up-front payments received and equity issued to us in relation to license and asset assignment agreements ($9 million), the gain recorded on the sale of certain equine assets ($4 million), and the impact of a decrease in the fair value of the Prevtec contingent consideration ($1 million). |
(7)
| 2022 represents the income tax expense associated with the adjusted items, the reversal of tax expense that was previously stranded in accumulated other comprehensive income due to the interest rate swap settlement ($17 million), and a net tax benefit associated with the sale of the Speke manufacturing site ($12 million), partially offset by a net increase in the valuation allowance recorded against our deferred tax assets during the period ($62 million). |
(8)
| 2021 represents the income tax expense associated with the adjusted items, partially offset by a net increase in the valuation allowance recorded against our deferred tax assets during the period ($56 million). |
(9)
| During the years ended December 31, 2022 and 2021, we reported a GAAP net loss and thus potential dilutive common shares were not assumed to have been issued since their effect is anti-dilutive. During the same periods, we reported adjusted net income. As a result, potential dilutive common shares would not have an anti-dilutive effect, and diluted weighted average shares outstanding for purposes of calculating Adjusted EPS include 3.9 million and 1.7 million, respectively, of common stock equivalents. |
The following is a reconciliation of GAAP Revised for the year ended December 31, 2020 to Selected Non-GAAP Adjusted information:
| | Cost of sales(1) | | | $1,667 | | | $96 | | | $1,571 | |
| | Amortization of intangible assets | | | $360 | | | $360 | | | $— | |
| | Asset impairment, restructuring and other special charges(2) | | | $623 | | | $623 | | | $— | |
| | Interest expense, net of capitalized interest(3) | | | $150 | | | $3 | | | $147 | |
| | Other income, net(4) | | | $(178) | | | $(169) | | | $(9) | |
| | Income (loss) before taxes | | | $(677) | | | $914 | | | $237 | |
| | Provision for taxes(5) | | | $(103) | | | $(142) | | | $39 | |
| | Net income (loss) | | | $(574) | | | $773 | | | $199 | |
| | Earnings (loss) per share: | | | | | | | | | | |
| | basic | | | $(1.30) | | | $1.75 | | | $0.45 | |
| | diluted | | | $(1.30) | | | $1.75 | | | $0.45 | |
| | Adjusted weighted average shares outstanding: | | | | | | | | | | |
| | basic | | | 441.4 | | | 441.4 | | | 441.4 | |
| | diluted(6) | | | 441.4 | | | 442.6 | | | 442.6 | |
Numbers may not add due to rounding.
The table above reflects only line items with non-GAAP adjustments.
(a)
| GAAP Revised amounts for the year ended December 31, 2020 represent GAAP reported results that have been revised for certain immaterial items, as described in “Revisions of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company’s February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A from March 1, 2023. |
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(b)
| The company uses non-GAAP financial measures that differ from financial statements reported in conformity with U.S. generally accepted accounting principles (GAAP). The company believes that these non-GAAP measures provide useful information to investors. Among other things, they may help investors evaluate the company’s ongoing operations. They can assist in making meaningful period-over-period comparisons and in identifying operating trends that would otherwise be masked or distorted by the items subject to the adjustments. Management uses these non-GAAP measures internally to evaluate the performance of the business, including to allocate resources. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. |
(c)
| Adjustments to certain GAAP reported measures for the year ended December 31, 2020 include the following: |
(1)
| 2020 excludes amortization of inventory fair value adjustments recorded from the acquisition of Bayer Animal Health ($90 million), charges associated with the write-off of marketing inventory recorded from the acquisition of Bayer Animal Health ($2 million), and a one-time payment to settle outstanding obligations to a contract manufacturing organization in connection with a divestiture ($4 million). |
(2)
| 2020 excludes charges associated with integration efforts and external costs related to the acquisition of businesses, including the acquisition of the animal health business of Bayer, and charges primarily related to independent stand-up costs and other related activities ($424 million), severance ($155 million), asset impairments ($17 million), facility exit costs and asset write-downs ($17 million), a one-time payment associated with our agreement to build a new corporate headquarters ($9 million), the settlement of a legal matter ($3 million), registration fees for Elanco common shares sold by Bayer AG during the quarter ($1 million), and a payment for acquired IPR&D from a collaboration arrangement ($1 million), partially offset by adjustments to write-downs of assets held for sale ($1 million) and the gain on the sale of our R&D facility in Prince Edward Island, Canada ($4 million). |
(3)
| 2020 excludes the debt extinguishment losses recorded in connection with the repayments of our existing term loan facilities ($3 million). |
(4)
| 2020 excludes the gains recorded in relation to the divestiture of several products as required as a result of the acquisition of the animal health business of Bayer ($157 million), a hedging gain related to the closing of the acquisition of the animal health business of Bayer ($6 million), the gain on our sale of land and buildings in New South Wales, Australia ($45 million) and the impact of a decrease in the fair value of the Prevtec contingent consideration ($4 million), partially offset by financing commitment and advisory fees associated with the Bayer Animal Health acquisition ($36 million) and a loss recorded in relation to the divestiture of products ($7 million). |
(5)
| 2020 represents the income tax expense associated with the adjusted items, partially offset by the impact of the valuation allowance recorded against our deferred tax assets during the period ($81 million). |
(6)
| During the year ended December 31, 2020, we reported a GAAP net loss and thus potential dilutive common shares were not assumed to have been issued since their effect is anti-dilutive. During the same period, we reported non-GAAP net income. As a result, potential dilutive common shares would not have an anti-dilutive effect, and diluted weighted average shares outstanding for purposes of calculating Adjusted EPS include 1.2 million of common stock equivalents. |
Adjusted EBITDA / Adjusted EBITDA Margin
We define adjusted EBITDA as net income (loss) adjusted for interest expense (income), income tax expense (benefit), tax valuation allowances and depreciation and amortization, further adjusted to exclude purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs and other specified significant items, such as unusual or non-recurring items that are unrelated to our long-term operations adjusted for income tax expense associated with the excluded financial items. We define adjusted EBITDA margin as adjusted EBITDA divided by total revenue. The following is a reconciliation of U.S. GAAP Net Loss to EBITDA and adjusted EBITDA and a calculation of adjusted EBITDA margin for the year ended December 31, 2022 and 2021.
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| | Revised net loss(1) | | | $(78) | | | $(483) | |
| | Net interest expense | | | 241 | | | 236 | |
| | Income tax expense (benefit) | | | 6 | | | (88) | |
| | Depreciation and amortization | | | 682 | | | 716 | |
| | EBITDA | | | $851 | | | $381 | |
| | Non-GAAP Adjustments: | | | | | | | |
| | Cost of sales | | | $— | | | $64 | |
| | Asset impairment, restructuring and other special charges | | | 183 | | | 634 | |
| | Accelerated depreciation(2) | | | (19) | | | (6) | |
| | Other (income) expense, net | | | 2 | | | (14) | |
| | Adjusted EBITDA | | | $ 1,017 | | | $ 1,059 | |
| | Adjusted EBITDA Margin | | | 23.1% | | | 22.2% | |
Numbers may not add due to rounding.
(1)
| Net loss for the years ended December 31, 2022 and 2021 reflect revisions recorded to prior period financial statement amounts, as described in “Revision of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company's February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A. |
(2)
| Represents depreciation of certain assets that was accelerated during the periods presented. This amount must be added back to arrive at Adjusted EBITDA because it is included in Asset impairment, restructuring, and other special charges but it has already been excluded from EBITDA in the “Depreciation and amortization” row above. |
Net Debt
We define net debt as gross debt less cash and cash equivalents on our balance sheet. We define gross debt as the sum of the current portion of long-term debt and long-term debt excluding unamortized debt issuance costs. We define the net leverage ratio as gross debt less cash and cash equivalents divided by adjusted EBITDA. This calculation does not include Term Loan B covenant-related adjustments that reduce this leverage ratio. The following is a reconciliation of gross debt to net debt for the year ended December 31, 2022:
| | Long-term debt | | | 5,448 | |
| | Current portion of long-term debt | | | 388 | |
| | Less: Unamortized debt issuance costs | | | (64) | |
| | Total gross debt | | | 5,900 | |
| | Less: Cash and cash equivalents | | | 345 | |
| | Net Debt | | | 5,555 | |
| | Net Debt Leverage Ratio | | | 5.5x | |
Adjusted Gross Margin
We define adjusted gross margin as adjusted gross profit divided by total revenue and adjusted gross profit as total revenue less adjusted cost of sales.
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| |
| | | Appendix B
Amended and Restated
Elanco Animal Health Incorporated
Employee Stock Purchase Plan | |
ARTICLE I. PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN The purpose of the solicitation of proxies for the meeting. Brokerage houses, banks, custodians, nominees and fiduciaries are being requestedElanco Animal Health Incorporated Employee Stock Purchase Plan, as it may be amended from time to forward the proxy material to beneficial owners and their reasonable expenses will be reimbursed by us. Solicitation will be made by mail and may also be made personally or by telephone, facsimile or other means by our executive officers, directors and employees, without special compensation for such activities. We have not engaged an outside proxy solicitortime (the “Plan”), is to assist withemployees of Elanco Animal Health Incorporated, an Indiana corporation, and any successor corporation thereto (the “Company”), and its Designated Subsidiaries in acquiring a stock ownership interest in the solicitationCompany pursuant to a plan that is intended to qualify as an “employee stock purchase plan” under Code Section 423 (for employees in the United States), and to help such employees provide for their future security and encourage them to remain in the employment of proxies.the Company and its Subsidiaries.
ARTICLE II. DEFINITIONS
Whenever the following terms are used in the Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The singular pronoun shall include the plural where the context so indicates.
2.1
| “Agent” means the brokerage firm, bank or other financial institution, entity or person(s), if any, engaged, retained, appointed or authorized to act as the agent of the Company or an Employee with regard to the Plan. |
2.2
| By Order“Administrator” means the Committee, or such individual(s) to whom authority to administer the Plan has been delegated under Section 7.1. |
2.3
| “Board” means the Board of Directors of the Company. |
2.4
| “Code” means the Internal Revenue Code of 1986, as amended. |
2.5
| “Committee” means the committee of the Board of Directors |
| |
| |
| Michael-Bryant Hicks |
| Executive Vice President, General Counsel and
Corporate Secretary(or any successor committee) appointed or designated to administer the Plan. |
2.6
| “Common Stock” means the common stock of the Company, no par value. |
2.7
| “Company” has the meaning set forth in Article I. |
2.8
| “Designated Subsidiary” means each Subsidiary that has been designated by the Administrator from time to time in its sole discretion as eligible to participate in the Plan. As of the Restatement Effective Date, Designated Subsidiaries include the U.S. Subsidiaries of the Company that employ Employees and other Subsidiaries designated by the Administrator. |
2.9
| “Effective Date” means February 22, 2022, the date the Plan was initially approved by the Board. |
2.10
| “Eligible Employee” means an Employee who, after the grant of an Option, would not be deemed for purposes of Code Section 423(b)(3) to possess five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. The rules of Code Section 424(d) with regard to the attribution of stock ownership shall apply in determining the stock ownership of an individual, and stock that an Employee may purchase under outstanding options shall be treated as stock owned by the Employee. An Eligible Employee shall not include an Employee whose |
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customary employment is fewer than twenty (20) hours per week, an Employee whose customary employment is as a student or intern or for not more than five months in a calendar year, or an Employee whose wages and benefits are determined by collective bargaining that does not provide for Plan participation.
Notwithstanding the foregoing, the Administrator may exclude from participation in the Plan as an Eligible Employee (x) any Employee who is a “highly compensated employee” of the Company or any Designated Subsidiary (within the meaning of Code Section 414(q)), or a “highly compensated employee” (A) with compensation above a specified level, (B) who is an officer and/or (C) who is subject to the disclosure requirements of Section 16(a) of the Exchange Act; and/or (y) any Employee who is a citizen or resident of a foreign jurisdiction (without regard to whether such Employee also is a citizen of the United States or a resident alien (within the meaning of Code Section 7701(b)(1)(A))) if either (A) the grant of the Option is prohibited under the laws of the jurisdiction governing such Employee, or (B) compliance with the laws of the foreign jurisdiction would cause the Plan or the Option to violate the requirements of Code Section 423 (with respect to an Employee who is a U.S. taxpayer); and/or (z) any Employee who has been employed by the Company or a Designated Subsidiary for less than a period specified by the Administrator (such period not to exceed two years); provided that any exclusion in clause (x), (y) and/or (z) shall be applied in an identical manner for each Offering Period commencing after the date of the Administrator’s action to all Employees of the Company and all Designated Subsidiaries, in accordance with Treasury Regulation Section 1.423-2(e) to the extent applicable.
2.11
| “Employee” means any person who renders services to the Company or a Designated Subsidiary in the status of an employee within the meaning of Code Section 3401(c) or applicable local law and is treated as an employee in the personnel records of the Company or a Designated Subsidiary. The term “Employee” shall not include any director of the Company or a Designated Subsidiary who does not render services to the Company or a Designated Subsidiary in the status of an employee within the meaning of Code Section 3401(c) or applicable local law. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on military leave, sick leave or other leave of absence approved by the Company or Designated Subsidiary and meeting the requirements of Treasury Regulation Section 1.421-1(h)(2) or applicable local law. Where the period of leave exceeds three (3) months, or such other period specified in Treasury Regulation Section 1.421-1(h)(2) or applicable local law, and the individual’s right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the first day immediately following such three (3)-month period, or such other period specified in Treasury Regulation Section 1.421-1(h)(2) or applicable local law. |
2.12
| “Enrollment Date” means the first date of each Offering Period. |
2.13
| “Enrollment Period” means the time period established by the Administrator leading up to an Enrollment Date during which Eligible Employees may elect to participate in an Offering Period. |
2.14
| “Exercise Date” means the last Trading Day of each Offering Period, except as provided in Section 5.2. |
2.15
| “Exchange Act” means the Securities Exchange Act of 1934, as amended. |
2.16
| “Fair Market Value” means, as of any date, the value of Common Stock determined as follows: |
(a)
| If the Common Stock is (i) listed on any established securities exchange (such as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system, or (iii) listed, quoted or traded on any automated quotation system, its Fair Market Value shall be: |
(A)
| if the Common Stock is purchased on the open market, the price paid for such Common Stock; or |
(B)
| if the Common Stock is not purchased on the open market, the closing sale price for a share of Common Stock as quoted on such exchange or system for such date or, if there is no closing sale price for a share of Common Stock on the date in question, the closing sale price for a share of Stock on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable for such purposes; |
(b)
| If the Common Stock is not listed on an established securities exchange, national market system or automated quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices |
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for a share of Common Stock on such date, the high bid and low asked prices for a share of Common Stock on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable for such purposes; or
(c)
| If the Common Stock is neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be determined by the Company in accordance with uniform and nondiscriminatory standards adopted by it from time to time. |
2.17
| “Grant Date” means the first Trading Day of an Offering Period. |
2.18
| “New Exercise Date” has such meaning as set forth in Section 5.2(b). |
2.19
| “Offering Period” means the three (3)-month period as determined by the Administrator; provided, however, that the duration and timing of Offering Periods may be changed by the Administrator, in its sole discretion. In no event may an Offering Period exceed twenty-seven (27) months. |
2.20
| “Option” means the right to purchase shares of Common Stock pursuant to the Plan during each Offering Period. |
2.21
| “Option Price” means the purchase price of a share of Common Stock hereunder as provided in Section 4.2. |
2.22
| “Parent” means any entity that is a parent corporation of the Company within the meaning of Code Section 424 and the Treasury Regulations thereunder. |
2.23
| “Participant” means any Eligible Employee who elects to participate in the Plan. |
2.24
| “Payday” means the regular and recurring established day for payment of compensation to an Employee of the Company or any Designated Subsidiary. |
2.25
| “Plan” has the meaning set forth in Article I. |
2.26
| “Plan Account” means a bookkeeping account established and maintained by the Company in the name of each Participant. |
2.27
| “Restatement Effective Date” means March 31, 2023, the date this restatement of the Plan was approved by the Board. |
2.28
| “Section 423 Option” has the meaning set forth in Section 3.1(b). |
2.29
| “Subsidiary” means any corporation, partnership, joint venture, business trust, or other entity of which fifty percent (50%) or more of the voting equity or control is owned, directly or indirectly, by the Company. |
2.30
| “Trading Day” means a day on which the principal securities exchange on which the Common Stock is listed is open for trading or, if the Common Stock is not listed on a securities exchange, a business day, as determined by the Administrator in good faith. |
2.31
| “Withdrawal Election” has the meaning set forth in Section 6.1(a). |
ARTICLE III. PARTICIPATION
(a)
| Any Eligible Employee who is employed before the first day of the month containing an Enrollment Period, elects during such Enrollment Period to participate in the Plan for an Offering Period, and is employed by the Company or a Designated Subsidiary on the Enrollment Date for the Offering Period shall be eligible to participate in the Plan during such Offering Period, subject to the requirements of Articles IV and V (and the limitations imposed by Code Section 423(b) and the Treasury Regulations thereunder, to the extent applicable). |
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(b)
| No Eligible Employee shall be granted an Option under the Plan that permits the Participant’s rights to purchase shares of Common Stock under the Plan, and to purchase stock under all other employee stock purchase plans of the Company, any Parent or any Subsidiary subject to Code Section 423 (any such Option or other option, a “Section 423 Option”), to accrue at a rate that exceeds $25,000 of fair market value of such stock (determined at the time the Section 423 Option is granted) for each calendar year in which any Section 423 Option granted to the Participant is outstanding at any time. The limitation under this Section 3.1(b) shall be applied in accordance with Code Section 423(b)(8) and the Treasury Regulations thereunder to the extent applicable. No Eligible Employee may purchase in any calendar year shares of Common Stock having an aggregate Fair Market Value in excess of $25,000 (determined at the time the Section 423 Option is granted). The Administrator may implement other limitations on the number or value of shares of Common Stock that may be purchased under the Plan as the Administrator determines are necessary or desirable to carry out the purposes of the Plan. |
3.2
| Election to Participate; Payroll Deductions. |
(a)
| Except as provided in Section 3.3, an Eligible Employee may become a Participant in the Plan only by means of payroll deduction. Each individual who is an Eligible Employee and satisfies the requirements set forth in Section 3.1(a) may elect to participate in such Offering Period and the Plan by delivering to the Company or its designee a payroll deduction authorization no later than the Enrollment Period deadline determined by the Administrator in its sole discretion. |
(b)
| Subject to Section 3.1(b), and unless alternative contribution limits are set by the Administrator prior to any Offering Period, payroll deductions for each Offering Period shall not exceed ten percent (10%) of the Participant’s base compensation during the Offering Period. In addition, the Administrator may establish for any calendar year a contribution limit per Participant that is less than the annual dollar limit set forth in Section 3.1(b) hereof. Amounts deducted from a Participant’s base compensation with respect to an Offering Period pursuant to this Section 3.2 shall be deducted each Payday through payroll deduction and credited to the Participant’s Plan Account. |
(c)
| Following at least one (1) payroll deduction during an Offering Period, a Participant may cancel the Participant’s payroll deduction for such Offering Period upon at least ten (10) calendar days’ prior written notice to the Administrator or its designee. The change will be reflected in payroll deductions as soon as administratively practicable after the notice is received. |
(d)
| A Participant may affirmatively elect, in accordance with applicable Plan administrative procedures, to automatically participate in subsequent Offering Periods at the same payroll deduction percentage as in effect at the termination of the prior Offering Period, unless such Participant delivers to the Company a different election with respect to the successive Offering Period in accordance with Section 3.1(a), unless such Participant becomes ineligible to participate in the Plan, or unless applicable local law imposes other requirements. |
3.3
| Leave of Absence. Payroll deductions for shares that a Participant has an option to purchase may be suspended during any leave of absence approved by the Company meeting the requirements of Treasury Regulation Section 1.421-1(h)(2) or applicable local law, or, if the Participant so elects, periodic payments for such shares may continue to be made in cash if permitted by applicable law. If such Participant returns to active service prior to the last day of the Offering Period, the Participant’s payroll deductions will be resumed and, if the Participant did not make periodic cash payments during the Participant’s period of absence, the Participant shall, by written notice to the Administrator within ten (10) days after the Participant’s return to active service, but not later than the last day of the Offering Period, elect: (a) to make up any deficiency in the Participant’s Plan Account resulting from a suspension of payroll deductions by making an immediate cash payment or through increased payroll deductions; (b) not to make up such deficiency, in which event the number of shares to be purchased by the Participant shall be reduced to the number of whole shares which may be purchased with the amount, if any, then credited to the Participant’s Plan Account plus the aggregate amount, if any, of all payroll deductions to be made thereafter; or (c) withdraw the amount in the Participant’s Plan Account and terminate the Participant’s option to purchase. If any Participant fails to deliver the written notice described above within ten (10) days after the Participant’s return to active service or by the last day of the Offering Period, whichever is earlier, the Participant shall be deemed to have elected the approach described in clause (b) of this Section 3.3. |
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ARTICLE IV. PURCHASE OF SHARES
4.1
| Grant of Option. Each Participant shall be granted an Option with respect to an Offering Period on the applicable Grant Date. Subject to the limitations described in Section 3.1(b), the number of shares of Common Stock subject to a Participant’s Option shall be determined by dividing (a) such Participant’s payroll deductions accumulated prior to such Exercise Date and retained in the Participant’s Plan Account on such Exercise Date by (b) the applicable Option Price; provided, however, that the maximum number of shares of Common Stock that may be purchased by a Participant in an Offering Period shall be determined by dividing such Participant’s Plan Account balance on such Exercise Date by eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Grant Date. The Administrator may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common Stock that a Participant may purchase during such future Offering Periods. Each Option shall expire on the Exercise Date for the applicable Offering Period immediately after the automatic exercise of the Option in accordance with Section 4.3, unless such Option terminates earlier in accordance with Article 6. |
4.2
| Option Price. The “Option Price” per share of Common Stock to be paid by a Participant upon exercise of the Participant’s Option on the Exercise Date for an Offering Period shall equal eight-five percent (85%) (or such greater percentage as may be determined by the Administrator prior to the commencement of any Offering Period) of the Fair Market Value of a share of Common Stock on the applicable Exercise Date. |
(a)
| Subject to the limitation contained in Section 4.1, on the Exercise Date for an Offering Period, each Participant shall automatically and without any action on such Participant’s part be deemed to have exercised the Participant’s Option to purchase at the applicable per share Option Price the largest number of whole shares of Common Stock that can be purchased with the amount in the Participant’s Plan Account. No fractional shares shall be issued upon the exercise of rights granted under this Plan. Any balance that is remaining in the Participant’s Plan Account (after exercise of such Participant’s Option) as of the Exercise Date shall be returned to the Participant in one cash lump sum payment within thirty (30) days after such Exercise Date, without any interest thereon. |
(b)
| As soon as practicable following the applicable Exercise Date, the number of shares of Common Stock purchased by a Participant pursuant to Section 4.3(a) shall be delivered (in either share certificate or book entry form), in the Company’s sole discretion, to either (i) the Participant or (ii) an account established in the Participant’s name at a stock brokerage or other financial services firm designated by the Company. If the Company is required to obtain from any commission or agency authority to issue any such shares of Common Stock, the Company shall seek to obtain such authority. Inability of the Company to obtain from any such commission or agency authority which counsel for the Company deems necessary for the lawful issuance of any such shares shall relieve the Company from liability to any Participant except to refund to the Participant such Participant’s Plan Account balance, without interest thereon. |
4.4
| Transferability of Rights. An Option granted under the Plan shall not be transferable, other than by will or the applicable laws of descent and distribution, and is exercisable during the Participant’s lifetime only by the Participant. No Option or interest or right to the Option shall be available to pay off any debts, contracts or engagements of the Participant or the Participant’s successors in interest or shall be subject to disposition by pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempt at disposition of the Option shall have no effect. |
ARTICLE V. PROVISIONS RELATING TO COMMON STOCK
5.1
| Common Stock Reserved. Subject to adjustment as provided in Section 5.2, the number of shares of Common Stock that shall be permitted to be purchased under the Plan, including any sub-plan to the Plan, shall be six million (6,000,000) shares of Common Stock (which includes the 625,000 shares initially authorized under the Plan as of the Effective Date). The shares of Common Stock may be treasury shares, shares acquired on the open market, reacquired shares reserved for issuance under the Plan, or authorized but unissued shares. If any purchase right granted under the Plan, or under any other sub-plan to the Plan, expires or terminates for any reason without having been exercised in full, the unpurchased shares subject to that purchase right shall again become available for purposes of the Plan. |
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5.2
| Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. |
(a)
| Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock that have been authorized for issuance under the Plan but not yet placed under Option, as well as the price per share and the number of shares of Common Stock covered by each Option under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company. Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. |
(b)
| Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Administrator. The New Exercise Date shall be before the date of the Company’s proposed dissolution or liquidation. The Administrator shall notify each Participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the Participant’s Option has been changed to the New Exercise Date and that the Participant’s Option shall be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 6.1. |
(c)
| Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option shall be assumed or an equivalent Option substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, any Offering Periods then in progress shall be shortened by setting a New Exercise Date and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company’s proposed sale or merger. The Administrator shall notify each Participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the Participant’s Option has been changed to the New Exercise Date and that the Participant’s Option shall be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 6.1 hereof. |
5.3
| Insufficient Shares. If the Administrator determines that, on a given Exercise Date, the number of shares of Common Stock with respect to which Options are to be exercised may exceed the number of shares of Common Stock remaining available under the Plan on such Exercise Date, the Administrator shall make a pro rata allocation of the shares of Common Stock available for issuance on such Exercise Date in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all Participants exercising Options to purchase Common Stock on such Exercise Date, and unless additional shares are authorized for issuance under the Plan, no further Offering Periods shall take place and the Plan shall terminate pursuant to Section 7.5. If an Offering Period is so terminated, then the balance of the amount credited to the Participant’s Plan Account that has not been applied to the purchase of shares of Common Stock shall be paid to such Participant in one cash lump sum payment within thirty (30) days after such Exercise Date, without any interest thereon. |
5.4
| Rights as Shareholders. With respect to shares of Common Stock subject to an Option, a Participant shall not be deemed to be a shareholder of the Company and shall not have any of the rights or privileges of a shareholder. A Participant shall have the rights and privileges of a shareholder of the Company when, but not until, shares of Common Stock have been deposited in the designated brokerage account following exercise of the Participant’s Option. |
ARTICLE VI. TERMINATION OF PARTICIPATION
6.1
| Cessation of Contributions; Voluntary Withdrawal. |
(a)
| A Participant may cease payroll deductions during an Offering Period and elect to withdraw from the Plan by delivering written notice of such election to the Administrator or its designee in such form and at such time prior to the Exercise Date for such Offering Period as may be established by the Administrator (a “Withdrawal Election”). A Participant electing to withdraw from the Plan may elect to withdraw all of the funds then credited to the Participant’s Plan Account as of the date on which the Withdrawal Election is received by the Administrator or its designee, in which case amounts |
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credited to such Plan Account shall be returned to the Participant in one cash lump sum payment within thirty (30) days after such election is received by the Administrator or its designee, without any interest thereon, and the Participant shall cease to participate in the Plan and the Participant’s Option for such Offering Period shall terminate. Following receipt by the Administrator or its designee of a Withdrawal Election, the Participant’s payroll deduction authorization and the Participant’s Option to purchase under the Plan shall terminate as soon as administratively feasible.
(b)
| A Participant’s withdrawal from the Plan shall not affect the Participant’s eligibility to participate in any similar plan that may be adopted hereafter by the Company or in succeeding Offering Periods that commence after the termination of the Offering Period from which the Participant withdraws. |
(c)
| A Participant who ceases contributions to the Plan during any Offering Period shall not be permitted to resume contributions to the Plan during that Offering Period. |
6.2
| Termination of Eligibility. Upon a Participant’s ceasing to be an Eligible Employee for any reason, such Participant’s Option for the applicable Offering Period shall automatically terminate, the Participant shall be deemed to have elected to withdraw from the Plan, and amounts credited to the Participant’s Plan Account shall be paid in cash to such Participant or, in the case of the Participant’s death, to the person or persons entitled thereto pursuant to applicable law, within thirty (30) days after such cessation of being an Eligible Employee, without any interest thereon. |
ARTICLE VII. GENERAL PROVISIONS
(a)
| The Administrator shall have the power, authority and responsibility for the day-to-day administration of the Plan, the power, authority and responsibility specifically provided in this Plan, and any additional duties and responsibilities approved by the Board or necessary to operate the Plan. To the extent permitted under applicable law, the Administrator may delegate its power, authority and responsibilities under the Plan to one or more officers of the Company at any time in its sole discretion. In this regard and to the extent permitted under applicable law, the Administrator hereby delegates its power, authority and responsibilities under the Plan to the Company’s Executive Vice President, Human Resources (or the individual holding equivalent duties and responsibilities). Accordingly, any reference herein to the Administrator shall, to the extent permitted under applicable law, be read to include such delegate. In its absolute discretion, the Board or the Committee may at any time and from time to time exercise any and all rights and duties of the Administrator under the Plan. |
(b)
| It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with the provisions of the Plan. To the extent permitted under applicable law, the Administrator may delegate its authority and responsibilities to one or more officers of the Company in addition to the delegation made under Section 7.1(a). The Administrator or its delegate shall have the power, subject to, and within the limitations of, the express provisions of the Plan: |
(i)
| To establish Offering Periods; |
(ii)
| To determine when and how Options shall be granted and the provisions and terms of each Offering Period (which need not be identical); |
(iii)
| To identify Designated Subsidiaries in accordance with Section 7.2; and |
(iv)
| To construe and interpret the Plan, the terms of any Offering Period and the terms of the Options and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. The Administrator, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, any Offering Period or any Option, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective, subject to Code Section 423 and the Treasury Regulations thereunder to the extent applicable. |
(c)
| The Administrator may adopt rules or procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures. Without limiting the generality of the foregoing, |
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the Administrator is specifically authorized to adopt rules and procedures regarding handling of participation elections, payroll deductions, payment of interest, conversion of local currency (if applicable), payroll tax, withholding procedures and handling of stock certificates that vary with local requirements.
(d)
| Notwithstanding anything in the Plan to the contrary, with the exception of Section 5.1, the Administrator may, in its sole discretion: (i) amend or vary the terms of the Plan to conform such terms with the requirements of each jurisdiction where a Designated Subsidiary is located; (ii) amend or vary the terms of the Plan in each jurisdiction where a Designated Subsidiary is located as it considers necessary or desirable to take into account or to mitigate or reduce the burden of taxation and social security contributions for Participants and/or the Designated Subsidiary; or (iii) amend or vary the terms of the Plan in a jurisdiction where a Designated Subsidiary is located as it considers necessary or desirable to meet the goals and objectives of the Plan. The Administrator may, where it deems appropriate in its sole discretion, establish one or more sub-plans for these purposes. The Administrator may, in its sole discretion, establish administrative rules and procedures to facilitate the operation of the Plan in such jurisdictions. The terms and conditions contained herein which are subject to variation in a jurisdiction shall be reflected in a written attachment to the Plan, or shall be otherwise documented in such manner as may be prescribed by the Administrator. |
(e)
| All expenses and liabilities incurred by the Administrator in connection with the administration of the Plan shall be borne by the Company. The Administrator may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Administrator, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Administrator in good faith shall be final and binding upon all Participants, the Company and all other interested persons. None of the Board, the Administrator, or any delegate of the Administrator shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options or any purchase right granted under the Plan, and all members of the Board, the Administrator, or any delegate of the Administrator shall be fully protected by the Company in respect to any such action, determination, or interpretation. |
7.2
| Designation of Subsidiary Corporations. The Administrator shall designate from among the Subsidiaries, as determined from time to time, the Subsidiary or Subsidiaries that shall constitute Designated Subsidiaries. The Administrator may designate a Subsidiary, or terminate the designation of a Subsidiary, without the approval of the shareholders of the Company. |
7.3
| Reports. Individual accounts shall be maintained for each Participant. Statements of Plan Accounts shall be given or made available to Participants at least annually, which statements shall set forth the amounts of payroll deductions, the Option Price, the number of shares purchased and the remaining cash balance, if any. |
7.4
| No Right to Employment. Nothing in the Plan shall be construed to give any person (including any Participant) the right to remain in the employ of the Company, a Parent or a Subsidiary or to affect the right of the Company, any Parent or any Subsidiary to terminate the employment of any person (including any Participant) at any time, with or without cause, which right is expressly reserved. |
7.5
| Amendment and Termination of the Plan. |
(a)
| The Board may, in its sole discretion, amend, suspend or terminate the Plan at any time and from time to time; provided, however, that without approval of the Company’s shareholders within twelve (12) months before or after action by the Board, the Plan may not be amended to increase the maximum number of shares of Common Stock subject to the Plan or change the designation or class of Eligible Employees. |
(b)
| In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Administrator may, to the extent permitted under Code Section 423, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: |
(i)
| altering the Option Price for any Offering Period, including an Offering Period underway at the time of the change in Option Price; |
(ii)
| shortening any Offering Period so the Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Administrator action; and |
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(iii)
| allocating shares of Common Stock. |
Such modifications or amendments shall not require shareholder approval or the consent of any Participant.
(c)
| Upon termination of the Plan, the balance in each Participant’s Plan Account shall be refunded as soon as practicable after such termination, without any interest thereon. |
7.6
| Use of Funds; No Interest Paid. All funds received by the Company by reason of purchase of Common Stock under the Plan shall be included in the general funds of the Company free of any trust or other restriction and may be used for any corporate purpose. No interest shall be paid to any Participant or credited under the Plan. |
7.7
| Term; Approval by Shareholders. No Option may be granted during any period of suspension of the Plan or after termination of the Plan. The Plan shall be submitted for the approval of the Company’s shareholders within twelve (12) months after the date of the Board’s initial adoption of the Plan. Options may be granted prior to such shareholder approval; provided, however, that such Options shall not be exercisable prior to the time when the Plan is approved by the shareholders; provided, further, that if such approval has not been obtained by the end of said twelve (12)-month period, all Options previously granted under the Plan shall terminate and be canceled and become null and void without being exercised. |
7.8
| Effect on Other Plans. The adoption of the Plan shall not affect any other compensation or incentive plan in effect for the Company, any Parent or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company, any Parent or any Subsidiary (a) to establish any other form of incentives or compensation for Employees of the Company or any Parent or any Subsidiary, or (b) to grant or assume options otherwise than under the Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. |
7.9
| Conformity to Securities Laws. Notwithstanding any other provision of the Plan, the Plan and the participation in the Plan by any individual who is then subject to Section 16 of the Exchange Act (or similar applicable local law) shall be subject to any additional limitations set forth in any applicable exemption rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) (or similar applicable local law) that are requirements for the application of such exemption rule. To the extent permitted by applicable law, the Plan shall be deemed amended to the extent necessary to conform to such applicable exemption rule. |
7.10
| Notice of Disposition of Shares. Each Participant shall give the Administrator or its designee prompt written notice of any disposition or other transfer of any shares of Common Stock acquired pursuant to the exercise of an Option if such disposition or transfer is made (a) within two (2) years after the applicable Grant Date or (b) within one (1) year after the transfer of such shares of Common Stock to such Participant upon exercise of such Option. The Company may direct that any certificates evidencing shares acquired pursuant to the Plan refer to such requirement. |
7.11
| Tax Withholding. The Company or any Parent or any Subsidiary shall be entitled to require payment in cash or deduction from other compensation payable to each Participant of any sums required by federal, state or local tax law to be withheld with respect to any purchase of shares of Common Stock under the Plan or any sale of such shares. |
7.12
| Governing Law. The Plan and all rights and obligations hereunder shall be construed and enforced in accordance with the laws of the State of Indiana. |
7.13
| Notices. All notices or other communications by a Participant to the Company or the Administrator (or its designee) under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company or the Administrator (or its designee) at the location, or by the person, designated for the delivery thereof. |
7.14
| Conditions to Issuance of Shares. |
(a)
| Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates or make any book entries evidencing shares of Common Stock pursuant to the exercise of an Option by a Participant unless and until the Administrator has determined, with advice of counsel, that the issuance of such shares of Common Stock is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any securities exchange or automated quotation system on which the shares of Common Stock are listed or traded, and the shares of Common Stock are covered by an effective registration statement or applicable |
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exemption from registration. In addition to the terms and conditions provided herein, the Administrator may require that a Participant make such reasonable covenants, agreements, and representations as the Administrator, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements.
(b)
| All certificates for shares of Common Stock delivered pursuant to the Plan and all shares of Common Stock issued pursuant to book entry procedures are subject to any stop-transfer orders and other restrictions as the Company deems necessary or advisable to comply with federal, state, or foreign securities or other laws, rules and regulations and the rules of any securities exchange or automated quotation system on which the shares of Common Stock are listed, quoted, or traded. The Company may place legends on any certificate or book entry evidencing shares of Common Stock to reference restrictions applicable to the shares of Common Stock. |
(c)
| The Administrator shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement, distribution or exercise of any Option, including a window-period limitation, as may be imposed in the sole discretion of the Administrator. |
(d)
| Notwithstanding any other provision of the Plan, unless otherwise determined by the Company or required by any applicable law, rule or regulation, the Company may, in lieu of delivering to any Participant certificates evidencing shares of Common Stock issued in connection with any Option, record the issuance of shares of Common Stock in the books of the Company (or, as applicable, its transfer agent or stock plan administrator). |
7.15
| Equal Rights and Privileges. Except with respect to sub-plans designed to be outside the scope of Code Section 423, if any, and Eligible Employees who are not subject to U.S. tax laws, if any, Eligible Employees of the Company (or any U.S. Subsidiary) shall have equal rights and privileges under the Plan to the extent required under Code Section 423 or the regulations promulgated thereunder so this Plan qualifies as an “employee stock purchase plan” within the meaning of Code Section 423 and the Treasury Regulations thereunder. Any provision of this Plan that is inconsistent with Code Section 423 and the Treasury Regulations thereunder shall, without further act or amendment by the Company or the Board, be reformed to comply with the equal rights and privileges requirement of Code Section 423 or the Treasury Regulations thereunder to the extent applicable. |
7.16
| Account Transfer Restriction. Unless otherwise determined by the Administrator, shares of Common Stock purchased under the Plan shall not be transferable by a Participant from the account established in the Participant’s name under the Plan until the first anniversary of the Exercise Date upon which such shares were purchased by the Participant. |
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| |
| | | Appendix C
Amended and Restated 2018 Elanco Animal Health Incorporated Stock Plan | |
Amended and Restated 2018 Elanco Animal Health Incorporated
Stock Plan
ARTICLE 1. PURPOSES OF THE PLAN
The Company previously adopted the 2018 Elanco Stock Plan, which was adopted by the Board of Directors on September 5, 2018 and approved by the shareholders of the Company on September 18, 2018 (the “Effective Date”). The Company then amended and restated the 2018 Elanco Stock Plan effective May 19, 2021. The Company hereby again amends and restates the 2018 Elanco Stock Plan. The Company believes that this Amended and Restated 2018 Elanco Stock Plan, as may be amended from time to time (the “Plan”), will benefit the Company’s shareholders by allowing the Company to attract, motivate and retain the best available Employees and Directors and by providing those Employees and Directors stock-based incentives to strengthen the alignment of interests between those persons and the Company’s shareholders. The terms of this Amended and Restated 2018 Elanco Stock Plan shall apply to Awards granted on and after the Restatement Date.
ARTICLE 2. DEFINITIONS
Wherever the following terms are used in the Plan, they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1
| “Affiliate” shall have the meaning given to such term in Rule 12b-2 promulgated under the Exchange Act. The Board shall have the authority to determine the time or times at which “Affiliate” status is determined within the foregoing definition. |
2.2
| “Applicable Laws” means the requirements relating to the administration of equity-based and cash-based awards, as applicable, and the related issuance of Shares under U.S. state corporate laws, U.S. federal and state and non-U.S. securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any non-U.S. country or jurisdiction where Awards are, or will be, granted under the Plan. |
2.3
| “Award” means an Option, Restricted Stock Units, Restricted Stock, a Stock Appreciation Right, an Other Share-Based Award or a Performance-Based Award granted to a Participant pursuant to the Plan. |
2.4
| “Award Agreement” means any written agreement, contract, or other instrument or document evidencing the terms and conditions (either expressly or by reference to any subplan created hereunder) of an Award, including through electronic medium. |
2.5
| “Board” means the board of directors of the Company. |
2.6
| “Change in Control” means and includes each of the following: |
(a)
| the acquisition by any “person,” as that term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (i) the Company, (ii) any Subsidiary, or (iii) any employee benefit plan or employee stock plan of the Company or a Subsidiary or any trustee or fiduciary with respect to any such plan when acting in that capacity) of “beneficial ownership,” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of twenty percent (20%) or more of the shares of |
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the Company’s capital stock the holders of which have general voting power under ordinary circumstances to elect at least a majority of the Board (or which would have such voting power but for the application of the Indiana Control Shares Statute) (“Voting Stock”); provided, however, that an acquisition of Voting Stock directly from the Company shall not constitute a Change in Control under this Section 2.6(a);
(b)
| the first day on which less than one-half of the total membership of the Board shall be Continuing Directors; |
(c)
| consummation of a merger, share exchange, or consolidation of the Company (a “Transaction”), other than a Transaction which would result in the Voting Stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than sixty percent (60%) of the Voting Stock of the Company or such surviving entity immediately after such Transaction; or |
(d)
| a sale or disposition of all or substantially all the assets of the Company, other than a sale or disposition of assets to a Subsidiary. |
Notwithstanding the foregoing, no Change in Control shall be deemed to have occurred upon an event described in this Section 2.6 unless the event would also constitute a change in ownership or effective control of, or a change in the ownership of a substantial portion of the assets of, the Company under Section 409A.
2.7
| “Code” means the U.S. Internal Revenue Code of 1986, as amended. All references herein to specific sections of the Code shall include any successor provisions of the Code or corresponding sections of any future U.S. federal tax code. |
2.8
| “Committee” means the committee of the Board appointed or described in Article 3 to administer the Plan. |
2.9
| “Common Stock” means the common stock of the Company, no par value, and such other securities of the Company that may be substituted for the Common Stock pursuant to ARTICLE 13. |
2.10
| “Company” means Elanco Animal Health Incorporated, an Indiana corporation, and any successor corporation thereto. |
2.11
| “Continuing Director” means any Director who is not an Affiliate or Associate (as the term is defined in the General Rules and Regulations under the Exchange Act) or representative of any Related Person and (i) who was a Director immediately prior to the time that any Related Person involved in the proposed action or transaction became a Related Person or (ii) who was nominated by a majority of the remaining Continuing Directors. |
2.12
| “Director” means a member of the Board. |
2.13
| “Director Plan” means the Elanco Animal Health Incorporated Directors’ Deferral Plan Effective September 18, 2018, as amended from time to time. |
2.14
| “Disability” means, unless otherwise provided in an Award Agreement, that the Participant would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate to which the Participant provides Service regardless of whether the Participant is covered by such policy. If the Company or the Affiliate to which the Participant provides Service does not have a long-term disability policy, “Disability” means that a Participant is unable to carry out the responsibilities and functions of the position held by the Participant by reason of any medically determined physical or mental impairment for a period of not less than ninety (90) consecutive days. A Participant shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Committee in its discretion. Notwithstanding the foregoing, (a) for purposes of Incentive Stock Options granted under the Plan, “Disability” means that the Participant is disabled within the meaning of Section 22(e)(3) of the Code, and (b) with respect to an Award that is subject to Section 409A where the payment or settlement of the Award will accelerate as a result of the Participant’s Disability, solely for purposes of determining the timing of payment, no such event will constitute a Disability for purposes of the Plan or any Award Agreement unless such event also constitutes a “disability” as defined under Section 409A. |
2.15
| “Dividend Equivalent Right” means a right to receive the equivalent value of dividends paid on the Shares with respect to Shares underlying Restricted Stock Units or an Other Share-Based Award that is a Full Value Award prior to vesting of the Award in accordance with the provision of Section 12.3. |
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2.16
| “Effective Date” means September 18, 2018. |
2.17
| “Eligible Individual” means any natural person who is an Employee or a Director determined by the Committee as eligible to participate in the Plan. |
2.18
| “Employee” means an individual, including an officer or Director, who is treated as an employee in the personnel records of the Company or an Affiliate and providing Service to the Company or the Affiliate. Neither services as a Director nor payment of a director’s fee by the Company or an Affiliate shall be sufficient to constitute “employment” by the Company or an Affiliate. |
2.19
| “Equity Restructuring” shall mean a nonreciprocal transaction between the Company and its shareholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the Shares (or other securities of the Company) or the price of Shares (or other securities) and causes a change in the per-share value of the Shares underlying outstanding Awards. |
2.20
| “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended. |
2.21
| “Fair Market Value” means, as of any given date, (a) if Shares are traded on any established stock exchange, the closing price of a Share as quoted on the principal exchange on which the Shares are listed, as reported in The Wall Street Journal (or such other source as the Company may deem reliable for such purposes) for such date, or if no sale occurred on such date, the first trading date immediately prior to such date during which a sale occurred; or (b) if Shares are not traded on an exchange but are regularly quoted on a national market or other quotation system, the closing sales price on such date as quoted on such market or system, or if no sales occurred on such date, then on the date immediately prior to such date on which sales prices are reported; or (c) in the absence of an established market for the Shares of the type described in (a) or (b) of this Section 2.21, the fair market value established by the Committee acting in good faith, under a reasonable methodology and reasonable application in compliance with Section 409A to the extent such determination is necessary for Awards under the Plan to comply with, or be exempt from, Section 409A. |
Notwithstanding the foregoing, for income tax reporting purposes under U.S. federal, state, local or non-US law and for such other purposes as the Committee deems appropriate, including, without limitation, where Fair Market Value is used in reference to exercise, vesting, settlement or payout of an Award, the Fair Market Value shall be determined by the Company in accordance with uniform and nondiscriminatory standards adopted by it from time to time.
2.22
| “Full Value Award” means any Award other than an (i) Option, (ii) Stock Appreciation Right or (iii) other Award for which the Participant pays (or the value or amount payable under the Award is reduced by) an amount equal to or exceeding the Fair Market Value of the Shares, determined as of the date of grant. |
2.23
| “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code. |
2.24
| “Non-Employee Director” means a Director of the Company who is not an Employee. |
2.25
| “Non-Qualified Stock Option” means an Option that is not intended to be an Incentive Stock Option. |
2.26
| “Option” means a right granted to a Participant pursuant to Article 6 to purchase a specified number of Shares at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. |
2.27
| “Other Share-Based Award” shall mean an Award granted pursuant to Article 10. |
2.28
| “Participant” means any Eligible Individual who, as an Employee or Director, has been granted an Award pursuant to the Plan. |
2.29
| “Performance-Based Award” means an Award that are subject, in whole or in part, to Performance Goals and are granted pursuant to Article 10. |
2.30
| “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish |
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Performance Goals include, but are not limited to, the following: earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), cash flow (including, without limitation, operating cash flow and free cash flow), earnings per share, gross or net profit margin, net income (either before or after interest, taxes, amortization, and/or depreciation), operating income (either before or after restructuring and amortization charges), return on capital or return on invested capital, return on equity, return on operating assets or net assets, return on sales, sales or revenue, stock price goals, total shareholder return. The Committee shall define objectively the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.
2.31
| “Performance Goals” means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria that the Committee, in its sole discretion, selects. The Committee, in its sole discretion, may provide that one or more objectively determinable adjustments shall be made to one or more of the Performance Goals. |
2.32
| “Performance Period” means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance-Based Award, provided that the duration of any Performance Period shall not be less than twelve (12) months. |
2.33
| “Plan” means this Amended and Restated 2018 Elanco Stock Plan, as it may be amended from time to time. |
2.34
| “Related Person” any corporation, person, or entity which beneficially owns or controls, directly or indirectly, 5% or more of the outstanding shares of Voting Stock, and any Affiliate or Associate of a Related Person; provided, however, that the term Related Person shall not include (a) the Company or any of its Subsidiaries, or (b) any profit-sharing, employee stock ownership or other employee benefit plan of the Company, or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity. |
2.35
| “Restatement Date” means the date the Amended and Restated 2018 Elanco Stock Plan is approved by the Company’s shareholders. |
2.36
| “Restricted Stock” means Shares awarded to a Participant pursuant to Article 8 that are subject to certain restrictions and may be subject to risk of forfeiture. |
2.37
| “Restricted Stock Unit” means an Award granted pursuant to Article 7 that shall be evidenced by a bookkeeping entry representing the equivalent of one Share. |
2.38
| “Section 409A” means Section 409A of the Code, and the regulations and guidance promulgated thereunder. |
2.39
| “Securities Act” means the U.S. Securities Act of 1933, as amended. |
2.40
| “Service” means service as an Employee or Non-Employee Director. Except as otherwise determined by the Committee in its sole discretion, a Participant’s Service terminates when the Participant ceases to actively provide services to the Company or an Affiliate and shall not be extended by any notice period mandated under applicable employment laws or the terms of the Participant’s employment or service contract, if any. The Committee shall determine which leaves shall count toward Service and when Service terminates for all purposes under the Plan. Further, unless otherwise determined by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant provides Service to the Company or an Affiliate, or a transfer between entities (i.e., the Company or any Affiliates), provided that there is no interruption or other termination of Service in connection with the Participant’s change in capacity or transfer between entities (except as may be required to effect the change in capacity or transfer between entities). For purposes of determining whether an Option is entitled to Incentive Stock Option status, an Employee’s Service shall be treated as terminated ninety (90) days after such Employee goes on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. |
2.41
| “Share” means a share of Common Stock. |
2.42
| “Subsidiary” means a “subsidiary corporation,” as defined in Code Section 424(f), of the Company. |
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2.43
| “Stock Appreciation Right” or “SAR” means a right granted pursuant to Article 9 to receive a payment equal to the excess of the Fair Market Value of a specified number of Shares on the date the SAR is exercised over the exercise price of the SAR, as set forth in the applicable Award Agreement. |
2.44
| “Tax-Related Items” means any U.S. federal, state, and/or local taxes and any taxes imposed by a jurisdiction outside of the U.S. (including, without limitation, income tax, social insurance and similar contributions, payroll tax, fringe benefits tax, payment on account, employment tax, stamp tax and any other taxes related to participation in the Plan and legally applicable to a Participant, including any employer liability for which the Participant is liable pursuant to Applicable Laws or the applicable Award Agreement). |
ARTICLE 3. ADMINISTRATION
3.1.
| Committee. The Board, at its discretion or as otherwise necessary to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act or to the extent required by any other Applicable Law or regulation, may delegate administration of the Plan to a Committee consisting of two or more members of the Board. Unless otherwise determined by the Board, the Committee shall consist solely of two or more “non-employee directors” within the meaning of Rule 16b-3(b)(3) under the Exchange Act, or any successor rule, and “independent directors” under the applicable New York Stock Exchange rules (or other principal securities market on which Shares are traded). Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to all Awards granted to Non-Employee Directors and for purposes of such Awards the term “Committee” as used in this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by Section 3.5 hereof. Unless and until the Board delegates administration of the Plan to a Committee as set forth below, the Plan shall be administered by the full Board, and for such purposes the term “Committee” as used in this Plan shall be deemed to refer to the Board. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan, except with respect to matters which under Applicable Laws are required to be determined in the sole discretion of the Committee. |
3.2.
| Action by the Committee. Unless otherwise established by the Board or in any charter of the Committee, a majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Affiliate, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. |
3.3.
| Authority of Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to: |
(a)
| designate Participants to receive Awards; |
(b)
| determine the type or types of Awards to be granted to each Participant; |
(c)
| determine the number of Awards to be granted and the number of Shares to which an Award will relate; |
(d)
| determine the terms and conditions of any Award granted pursuant to the Plan, including, without limitation, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, any provisions related to recoupment of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines; |
(e)
| determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Shares, other Awards, or other property, or an Award may be cancelled, forfeited, or surrendered; |
(f)
| prescribe the form of each Award Agreement, which need not be identical for each Participant and may vary for Participants within and outside of the U.S.; |
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(g)
| decide all other matters that must be determined in connection with an Award; |
(h)
| establish, adopt or revise any rules and regulations, including adopting sub-plans to the Plan, for the purposes of granting certain types of Awards, granting Awards to certain groups of Eligible Individuals, facilitating compliance with foreign laws, easing the administration of the Plan and/or taking advantage of tax-favorable treatment for Awards granted to Participants outside the U.S., in each case as it may deem necessary or advisable; |
(i)
| suspend or terminate the Plan at any time, subject to Article 15; |
(j)
| amend or modify the terms of an Award, including, without limitation, accelerate the vesting and/or exercisability of any Award for any reason, including, without limitation, the Participant’s retirement or other termination; provided, however, that no amendment or modification of an outstanding Award other than the following types of amendments or modifications shall affect adversely, in any material way, any Award previously granted pursuant to the Plan without the prior written consent of the Participant: (i) an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option; (ii) an amendment made or other action taken pursuant to Section 16.14 of the Plan; (iii) any amendment or other action that may be required or desirable to facilitate compliance with Applicable Laws, as determined in the sole discretion of the Committee. |
(k)
| interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and |
(l)
| make all other decisions and determinations that may be required pursuant to the Plan or that the Committee deems necessary or advisable to administer the Plan. |
3.4.
| Decisions Binding. The Committee’s interpretation of the Plan, any Awards granted pursuant to the Plan, and any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. |
3.5.
| Delegation of Authority. To the extent permitted by Applicable Laws, the Board, from time to time, may delegate to a Committee of one or more members of the Board (pursuant to delegation that does not meet the requirement of Section 3.1 hereof) or to one or more officers of the Company the authority to grant Awards to Participants other than (a) Employees who are subject to Section 16 of the Exchange Act, or (b) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder. Furthermore, if the authority to grant or amend Awards has been delegated to the Committee pursuant and subject to the preceding sentence, such authority may be further delegated by the Committee to one or more officers of the Company. For the avoidance of doubt, provided it meets the limitations of this Section 3.5, any delegation hereunder shall include the right to modify Awards as necessary to accommodate changes in Applicable Laws or regulations, including in jurisdictions outside the U.S. Furthermore, any delegation hereunder shall be subject to the restrictions and limitations that the Board (or, as applicable, the Committee) specifies at the time of such delegation, and the Board (or, as applicable, the Committee) may rescind at any time the authority so delegated and/or appoint a new delegatee. At all times, the delegatee appointed under this Section 3.5 shall serve in such capacity at the pleasure of the Board (or, as applicable, the Committee). |
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1
| Number of Shares. Subject to Article 13 hereof, the aggregate number of Shares that may be issued or transferred pursuant to Awards under the Plan shall be 26,325,395 Shares. Subject to Article 13, the maximum number of Shares that may be issued or transferred pursuant to the exercise of Incentive Stock Options shall be the total number of Shares in the Plan’s share reserve as specified in the first sentence of this Section 4.1, subject to adjustment as provided in Article 13. |
(a)
| Shares Reissuable under Plan. The following Shares shall again be available for the grant of an Award pursuant to the Plan: (i) Shares that are not issued as a result of the termination, expiration or lapsing of any Award for any reason; and (ii) Shares subject to a Full Value Award that are not issued because the Award is settled in cash. Notwithstanding the provisions of this Section 4.1, no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an Incentive Stock Option. |
(b)
| Shares Not Reissuable under Plan. The following Shares shall be counted against the maximum number of Shares available for issuance pursuant to Section 4.1 hereof and shall not be returned to the Plan, again become available for |
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Awards, or replenish the share reserve under Section 4.1: (i) Shares tendered (either actually or by attestation) by the Participant or withheld by the Company in payment of the exercise price of a stock option issued under this Plan, (ii) Shares tendered (either actually or by attestation) by the Participant or withheld by the Company to satisfy any tax withholding obligation with respect to an award under this Plan, (iii) Shares repurchased by the Company with proceeds received from the exercise of a stock option issued under this Plan, and (iv) Shares subject to a stock appreciation right award issued under this Plan that are not issued in connection with the stock settlement of that award upon its exercise.
(c)
| Shares Not Counted Against Share Pool Reserve. To the extent permitted by Applicable Laws, Shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or an Affiliate shall not be counted against Shares available for grant pursuant to this Plan. Additionally, to the extent permitted by Applicable Laws, in the event that a company acquired by (or combined with) the Company or an Affiliate has shares available under a pre-existing plan approved by its shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the shareholders of the entities party to such acquisition or combination) may, at the discretion of the Committee, be used for Awards under the Plan in lieu of awards under the applicable pre-existing plan of the other company and shall not reduce the Shares authorized for grant under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of the Company or any Affiliate in existence prior to such acquisition or combination. The payment of Dividend Equivalent Rights in cash in conjunction with any outstanding Awards shall not be counted against the Shares available for issuance under the Plan. |
4.2
| Shares Distributed. Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares purchased on the open market, subject to Section 4.1(b) hereof. |
4.3
| Non-Employee Director Award Limit. Notwithstanding any provision to the contrary in the Plan or in any policy of the Company regarding compensation payable to a Non-Employee Director, the sum of the grant date fair value (determined as of the grant date in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, or any successor thereto) of all Awards payable in Common Stock to an individual as compensation for services as a Non-Employee Director, together with cash compensation earned by the Non-Employee Director during any calendar year, shall not exceed $800,000 in any calendar year. |
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1
| Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan. An Eligible Individual who is subject to taxation in the U.S. and who is providing Services to an Affiliate may be granted Options or SARs under this Plan only if the Company qualifies as an “eligible issuer of service recipient stock” within the meaning of the U.S. Department of Treasury regulations promulgated under Section 409A. |
5.2
| Participation. Subject to the provisions of the Plan, the Committee, from time to time, may select from among all Eligible Individuals those to whom Awards shall be granted, and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted an Award pursuant to this Plan and the grant of an Award to an Eligible Individual shall not imply any entitlement to receive future Awards. |
ARTICLE 6. STOCK OPTIONS
6.1
| General. The Committee is authorized to grant Options to Eligible Individuals on the following terms and conditions, and the Committee may specify such additional terms and conditions as: |
(a)
| Exercise Price. The exercise price per Share subject to an Option shall be determined by the Committee and set forth in the Award Agreement; provided that, subject to Section 6.2(c) hereof, the per-Share exercise price for any Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant. |
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(b)
| Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part; provided that the term of any Option granted under the Plan shall not exceed ten (10) years. The Committee also shall specify the vesting conditions, if any, as it deems appropriate that must be satisfied before all or part of an Option may be exercised. The vesting conditions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. |
(c)
| Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, including the following methods: (i) cash or check; (ii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Committee may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date or surrender of attestation equal to the aggregate exercise price of the Shares as to which the Option is to be exercised; (iii) promissory note from a Participant to the Company or a third-party loan guaranteed by the Company (in either case, with such loan bearing interest at no less than such rate as shall then preclude the imputation of interest under the Code); (iv) through the delivery of a notice that the Participant has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that payment of such proceeds is then made to the Company upon settlement of such sale; (v) by a “net exercise” arrangement pursuant to which the number of Shares issuable upon exercise of the Option shall be reduced by the largest whole number of Shares having an aggregate fair market value that does not exceed the aggregate exercise price (plus withholding taxes, if applicable) and any remaining balance of the aggregate exercise price (and/or applicable withholding taxes) not satisfied by such reduction in the number of whole Shares to be issued shall be paid by Participant in cash or other form of payment approved by the Committee; (vi) other property acceptable to the Committee; or (vii) any combination of the foregoing methods of payment. The Award Agreement will specify the methods of paying the exercise price available to each Participant. The Committee also shall determine the methods by which Shares shall be delivered or deemed to be delivered to Participants. Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an Option, or continue any extension of credit with respect to the exercise price of an Option, with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act. |
(i)
| Procedure for Exercise; Rights as a Shareholder. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (A) a notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (B) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no dividends or Dividend Equivalent Right shall be paid, and no right to vote or receive dividends or Dividend Equivalent Rights or any other rights as a shareholder shall exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13.1 of the Plan. |
(ii)
| Termination of Participant’s Service. If a Participant ceases to provide Service, including as a result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). Unless otherwise provided by the Committee, if on the date of termination of Service the Participant is not vested as to his or her entire Option, the unvested portion of the Option shall be forfeited and the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination of Service, the Participant does not exercise his or her Option within the time specified by the Committee, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. To the extent the Option is exercisable following a Participant’s death, the Option may be exercised by such persons as may be specified in the Award Agreement, which may include any of the following: (i) the Participant’s designated beneficiary, provided that such designation is permitted under Applicable Laws and that such beneficiary has been designated before the Participant’s death in a form acceptable to the Company; (ii) the Participant’s legal representative or representatives; (iii) the person or persons entitled to do so |
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pursuant to the Participant’s last will and testament; or (iv) if the Participant fails to make testamentary disposition of the Option or dies intestate, by the person or persons entitled to receive the Option pursuant to the applicable laws of descent and distribution.
6.2
| Incentive Stock Options. Incentive Stock Options shall be granted only to Employees of the Company or any Subsidiary of the Company, and the terms of any Incentive Stock Options granted pursuant to the Plan, in addition to the requirements of Section 6.1 hereof, must comply with the provisions of this Section 6.2. |
(a)
| Expiration. Subject to Section 6.2(c) hereof, an Incentive Stock Option shall expire and may not be exercised to any extent by anyone after the first to occur of the following events: |
(i)
| Ten (10) years from the date of grant, unless an earlier time is set in the Award Agreement; |
(ii)
| Three (3) months after the date of the Participant’s termination of Service on account of any reason other than death or Disability (within the meaning of Section 22(e)(3) of the Code); and |
(iii)
| One (1) year after the date of the Participant’s termination of Service on account of death or Disability (within the meaning of Section 22(e)(3) of the Code). |
(b)
| Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed US $100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options. |
(c)
| Ten Percent Owners. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of Shares of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five (5) years from the date of grant. |
(d)
| Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of Shares acquired by exercise of an Incentive Stock Option within (i) two (2) years from the date of grant of such Incentive Stock Option or (ii) one (1) year after the transfer of such Shares to the Participant. |
(e)
| Right to Exercise. During a Participant’s lifetime, only the Participant may exercise an Incentive Stock Option. |
(f)
| Failure to Meet Requirements. Any Option (or portion thereof) purported to be an Incentive Stock Option, which, for any reason, fails to meet the requirements of Section 422 of the Code shall be considered a Non-Qualified Stock Option. The Company shall have no liability to any Participant or any other person if an Option designated as an Incentive Stock Option fails to qualify as such at any time or if an Option is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A and the terms of such Option do not satisfy the requirements of Section 409A. |
ARTICLE 7. RESTRICTED STOCK UNITS
7.1
| Restricted Stock Units. The Committee is authorized to grant Restricted Stock Units to Eligible Individuals in such amounts and subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose. |
7.2
| Vesting Conditions. Subject to Section 12.3, the Committee shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting, if any, as it deems appropriate. The vesting conditions, if any, may be based on among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. |
7.3
| Form and Timing of Payment. The Committee shall specify the settlement date applicable to each grant of Restricted Stock Units, which date shall not be earlier than the date or dates on which the Restricted Stock Units shall become fully vested |
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and nonforfeitable, or such settlement date may be deferred to any later date, subject to compliance with Section 409A, as applicable. On the settlement date, the Company shall, subject to Section 12.6(a) hereof and satisfaction of applicable Tax-Related Items (as further set forth in Section 16.3 hereof), transfer to the Participant one Share for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited. Alternatively, settlement of a Restricted Stock Unit may be made in cash (in an amount reflecting the Fair Market Value of the Shares that otherwise would have been issued) or any combination of cash and Shares, as determined by the Committee, in its sole discretion, in either case, less applicable Tax-Related Items (as further set forth in Section 16.3 hereof). Until a Restricted Stock Unit is settled, the number of Restricted Stock Units shall be subject to adjustment pursuant to Article 13 hereof.
7.4
| Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, any Restricted Stock Units that are not vested as of the date of the Participant’s termination of Service shall be forfeited. |
7.5
| General Creditors. A Participant who has been granted Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement evidencing the grant of the Restricted Stock Units. |
ARTICLE 8. RESTRICTED STOCK AWARDS
8.1
| Grant of Restricted Stock. The Committee is authorized to grant Restricted Stock to Eligible Individuals selected by the Committee in such amounts and subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose. |
8.2
| Purchase Price. At the time of the grant of Restricted Stock, the Committee shall determine the price, if any, to be paid by the Participant for each Share subject to the Award. The purchase price of Shares acquired pursuant to the Award shall be paid either: (i) in cash at the time of purchase; (ii) at the sole discretion of the Committee, by Service rendered or to be rendered to the Company or an Affiliate; or (iii) in any other form of legal consideration that may be acceptable to the Committee in its sole discretion and in compliance with Applicable Laws. |
8.3
| Issuance and Restrictions. Subject to Section 12.3, Restricted Stock shall be subject to such restrictions, if any, on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). The restrictions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. These restrictions, if any, may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. |
8.4
| Dividends. Any dividends that are distributed with respect to Shares of Restricted Stock shall be paid in accordance with the applicable Award Agreement, subject to the provisions of Section 12.3(b). |
8.5
| Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of Service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited. |
8.6
| Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse. |
ARTICLE 9. STOCK APPRECIATION RIGHTS
9.1
| Grant of Stock Appreciation Rights. The Committee is authorized to grant SARs to Eligible Individuals on the following terms and conditions, and the Committee may specify such additional terms and conditions as: |
(a)
| Exercise Price. The exercise price per Share subject to a SAR shall be determined by the Committee and set forth in the Award Agreement; provided that the exercise price per Share for any SAR shall not be less than 100% of the Fair Market Value of a Share on the date of grant. |
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(b)
| Time and Conditions of Exercise. The Committee shall determine the time or times at which a SAR may be exercised in whole or in part; provided that the term of any SAR granted under the Plan shall not exceed ten (10) years. Subject to Section 12.3, the Committee also shall specify the vesting conditions, if any, as it deems appropriate that must be satisfied before all or part of a SAR may be exercised. The vesting conditions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. |
(c)
| A SAR may not be exercised for a fraction of a Share. A SAR shall be deemed exercised when the Company receives a notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the SAR. |
9.2
| Tandem Stock Appreciation Rights. A SAR may be granted in connection with an Option, either at the time of grant or at any time thereafter during the term of the Option. A SAR granted in connection with an Option will entitle the holder, upon exercise, to surrender the Option or any portion thereof to the extent unexercised, with respect to the number of Shares as to which such SAR is exercised, and to receive payment of an amount computed as described in Section 9.3. The Option shall, to the extent and when surrendered, cease to be exercisable. A SAR granted in connection with an Option hereunder will have an exercise price per share equal to the per share exercise price of the Option, will be exercisable at such time or times, and only to the extent, that the related Option is exercisable, and will expire no later than the related Option expires. If a related Option is exercised in whole or in part, then the SAR related to the Shares purchased terminates as of the date of such exercise. |
9.3
| Payment and Limitations on Exercise. |
(a)
| A SAR shall entitle the Participant (or other person entitled to exercise the SAR pursuant to the Plan) to exercise all or a specified portion of the SAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount equal to the excess of the aggregate Fair Market Value of the Shares on the date the SAR is exercised over the aggregate exercise price of the SAR, less applicable Tax-Related Items (as further set forth in Section 16.3 hereof), subject to any limitations the Committee may impose. |
(b)
| Payment of the amounts determined under Section 9.3(a) hereof shall be in cash, in Shares (based on the Fair Market Value of the Shares as of the date the SAR is exercised) or a combination of both, as determined by the Committee in the Award Agreement. To the extent Shares are issued upon exercise of a SAR, the Shares shall be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no dividends or Dividend Equivalent Right shall be paid, and no right to vote or receive dividends or Dividend Equivalent Rights or any other rights as a shareholder shall exist with respect to the Shares subject to a SAR, notwithstanding the exercise of the SAR. The Company shall issue (or cause to be issued) such Shares promptly after the SAR is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13.1 of the Plan. The provisions of Section 6.1(d)(ii) regarding the treatment of a termination of the Participant’s Service shall also apply to SARs. |
ARTICLE 10. OTHER SHARE-BASED AWARDS
10.1
| Grants of Other Share-Based Awards. Subject to limitation under Applicable Laws, the Committee is authorized under the Plan to grant Awards (other than Options, Restricted Stock Units, Restricted Stock and SARs) to Eligible Individuals subject to the terms and conditions set forth in this Article 10 and such other terms and conditions as may be specified by the Committee that are not inconsistent with the provisions of the Plan and that, by their terms, involve or might involve the issuance of, consist of, or are denominated in, payable in, valued in whole or in part by reference to, or otherwise relate to, Shares. The Committee may also grant Shares as a bonus, or may grant other Awards in lieu of obligations of the Company or an Affiliate to pay cash or other property under the Plan or other plans or compensatory arrangements. The terms and conditions applicable to such other Awards shall be determined from time to time by the Committee and set forth in an applicable Award Agreement. The Committee may establish one or more separate programs or subplans under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Participants on such terms and conditions as determined by the Committee from time to time, including but not limited to the Director Plan, which shall be a subplan. |
10.2
| Exercise Price. The Committee may establish the exercise price, if any, of any Other Share-Based Award granted pursuant to this Article 10; provided that such exercise price shall not be less than the Fair Market Value of a Share on the date of grant for an Award that is intended to be exempt from Section 409A. |
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10.3
| Form of Payment. Payments with respect to any Awards granted under Section 10.1 shall be made in cash or cash equivalent, in Shares or any combination of the foregoing, as determined by the Committee. |
10.4
| Vesting Conditions. Subject to Section 12.3, the Committee shall specify the date or dates on which the Awards granted pursuant to this Article 10 shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. The vesting conditions may be based on, among other vesting conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. |
10.5
| Term. Except as otherwise provided herein, the Committee shall set, in its discretion, the term of any Award granted pursuant to this Article 10; provided that the term of any Award granted pursuant to this Article 10 shall not exceed ten (10) years. |
ARTICLE 11. PERFORMANCE-BASED AWARDS
11.1
| Procedures with Respect to Performance-Based Awards. With respect to any Performance-Based Awards, which may be granted to one or more Eligible Individuals, unless determined otherwise by the Committee, the Committee, in writing (a) shall designate one or more Eligible Individuals as eligible for an Award, (b) shall designate the Performance Period over which the Performance Goals shall be measured; (c) shall select the Performance Criteria applicable to the Performance Period, (d) shall establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (e) shall specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Eligible Individuals for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by an Eligible Individual, the Committee shall have the right to adjust or eliminate the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period. |
ARTICLE 12. PROVISIONS APPLICABLE TO AWARDS
12.1
| Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. |
12.2
| Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and limitations for each Award, not inconsistent with the Plan, which may include, without limitation, the term of an Award, the provisions applicable in the event the Participant’s Service terminates, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award. |
12.3
| Minimum Vesting Requirements. Notwithstanding any other provision of the Plan, except in connection with Awards granted in connection with assumption or substitution of awards as part of a transaction as contemplated under Section 4.1(c) or Awards that may be settled only in cash, no portion of an Award may vest before the first anniversary of the date of grant, subject to accelerated vesting as contemplated under Section 3.3(j) and ARTICLE 13; provided, however, that the Company may grant (i) Awards with respect to up to five percent (5%) of the number of Shares reserved under Section 4.1 as of the Effective Date, and (ii) Awards granted to Non-Employee Directors under a subplan, without regard to the minimum vesting period set forth in this Section 12.3. |
12.4
| Dividends and Dividend Equivalent Rights. |
(a)
| Any Participant selected by the Committee may be granted Dividend Equivalent Rights based on the dividends declared on the Shares that are subject to any Restricted Stock Unit or an Other Share-Based Award that is a Full Value Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is vests or is settled, as determined by the Committee and set forth in the applicable Award Agreement. Such Dividend Equivalent Rights shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee. |
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(b)
| To the extent Shares subject to an Award (other than Restricted Stock) are subject to vesting conditions, any Dividend Equivalent Rights relating to such Shares shall either (i) not be paid or credited or (ii) be accumulated and subject to restrictions and risk of forfeiture to the same extent as the underlying Award with respect to which such cash, stock or other property has been distributed. For Shares of Restricted Stock that are subject to vesting, dividends shall be accumulated and subject to any restrictions and risk of forfeiture to which the underlying Restricted Stock is subject. |
12.5
| Limits on Transfer. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or an Affiliate. Except as otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participant other than by will or the laws of descent and distribution. The Committee may, however, provide in an Award Agreement or otherwise that an Award (other than an Incentive Stock Option) may be transferred pursuant to a domestic relations order or may be transferable by gift to any “family member” (as defined in General Instruction A.1(a)(5) to Form S-8 under the Securities Act of 1933) of the Participant. Any Award held by a transferee shall continue to be subject to the same terms and conditions that were applicable to that Award immediately before the transfer thereof. For purposes of any provision of the Plan relating to notice to a Participant or to acceleration or termination of an Award upon the death or termination of Service of a Participant, the references to “Participant” shall mean the original grantee of an Award and not any transferee. |
12.6
| Deferrals of Full Value Awards. The Committee may, in its discretion, permit or require the deferral by a Participant of the issuance of Shares or payment of cash in settlement of any Full Value Award, subject to such terms, conditions, rules and procedures as it may establish or prescribe for such purpose and with the intention of complying with the applicable requirements of Section 409A. The terms, conditions, rules and procedures for any such deferral shall be set forth in writing in the relevant Award Agreement or in such other agreement, plan or document as the Committee may determine, including but not limited to the Director Plan. The terms, conditions, rules and procedures for any such deferral shall address, to the extent relevant, matters such as: (i) the amount of compensation that may or must be deferred (or the method for calculating the amount); (ii) the permissible time(s) and form(s) of payment of deferred amounts; (iii) the terms and conditions of any deferral elections by a Participant or of any deferral required by the Company; and (iv) the crediting of interest or dividend equivalents on deferred amounts. |
12.7
| Stock Certificates; Book Entry Procedures. |
(a)
| Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing Shares pursuant to the exercise or vesting, as applicable, of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all Applicable Laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the Shares are listed or traded. All certificates evidencing Shares delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state, or local securities or other laws, including laws of jurisdictions outside of the U.S., rules and regulations and the rules of any national securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Committee may place legends on any certificate evidencing Shares to reference restrictions applicable to the Shares. In addition to the terms and conditions provided herein, the Board may require that a Participant make such reasonable covenants, agreements, and representations as the Board, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including, without limitation, a window-period limitation, as may be imposed in the discretion of the Committee. |
(b)
| Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any Applicable Laws, rule or regulation, the Company shall not deliver to any Participant certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator). |
12.8
| Paperless Administration. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website, intranet or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Participant may be permitted through the use of such an automated system. |
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ARTICLE 13. CHANGES IN CAPITAL STRUCTURE
(a)
| In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other similar event or other change related to a corporate event affecting the Shares or the price of the Shares other than an Equity Restructuring, the Committee shall make such adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change with respect to (a) the aggregate number and kind of shares that may be issued under the Plan (including, without limitation, adjustments of the limitations in Sections 4.1 and 4.3 hereof); (b) the terms and conditions of any outstanding Awards (including, without limitation, the number and kind of shares that may be issued, or any applicable performance goals or criteria with respect thereto); and (c) the grant or exercise price per Share for any outstanding Awards under the Plan. |
(b)
| In the event of any transaction or event described in Section 13.1(a) hereof or any unusual or infrequently occurring items or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in Applicable Laws, regulations or accounting principles, the Committee, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions whenever the Committee determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: |
(i)
| to provide for either (A) termination of any such Award in exchange for an amount of cash, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 13.1 the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Committee in its sole discretion; |
(ii)
| to provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; |
(iii)
| to make adjustments in the number and type of Shares (or other securities or property) subject to outstanding Awards, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards; |
(iv)
| to provide that such Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and |
(v)
| to provide that the Award cannot vest, be exercised or become payable after such event. |
(c)
| In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in Sections 13.1(a) and 13.1(b) hereof: |
(i)
| the number and type of securities subject to each outstanding Award and the exercise price or grant price thereof, if applicable, shall be equitably adjusted. The adjustments provided under this Section 13.1(c)(i) shall be final and binding on the affected Participant and the Company. |
(ii)
| the Committee shall make such equitable adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of shares that may be issued under the Plan (including, without limitation, adjustments of the limitations in Sections 4.1 and 4.3 hereof). |
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(a)
| Notwithstanding Section 13.1 hereof, and provided that any applicable Award Agreement does not expressly preclude the following from applying, if a Change in Control occurs and Awards that vest solely on the Participant’s continued Service are not converted, assumed, substituted or replaced by a successor or survivor corporation, or a parent or subsidiary thereof, then immediately prior to the Change in Control such Awards shall become fully exercisable and all forfeiture restrictions on such Awards shall lapse and, immediately following the consummation of such Change in Control, all such Awards shall terminate and cease to be outstanding. |
(b)
| Notwithstanding Section 13.1 hereof, Awards that vest based on the attainment of performance-based conditions shall be subject to the provisions of the Award Agreement governing the impact of a Change in Control, provided that any such provisions in the Award Agreement shall (i) not permit the vesting of Awards at a rate that is greater than the actual level of attainment and/or (ii) provide for pro-rated vesting of the Award based on any reduction to the performance period resulting from the Change in Control. |
(c)
| Where Awards are assumed or continued after a Change in Control, the Committee may provide that the vesting of one or more Awards will automatically accelerate upon an involuntary termination of the Participant’s employment or service without cause within a designated period following the effective date of such Change in Control. Any such Award shall accordingly, upon an involuntary termination of the Participant’s employment or service without cause in connection with a Change in Control, become fully exercisable and all forfeiture restrictions on such Award shall lapse. |
(d)
| The portion of any Incentive Stock Option accelerated in connection with a Change in Control shall remain exercisable as an Incentive Stock Option only to the extent the applicable $100,000 limitation is not exceeded. To the extent such U.S. dollar limitation is exceeded, the accelerated portion of such Option shall be exercisable as a Non-Statutory Option under the U.S. federal tax laws. |
13.3
| No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of Shares of any class, the payment of any dividend, any increase or decrease in the number of Shares of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of Shares of any class, or securities convertible into Shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to an Award or the grant or the exercise price of any Award. |
ARTICLE 14. EFFECTIVE AND EXPIRATION DATE
14.1
| Plan Effective Date. The Plan was originally effective on the Effective Date. This amendment and restatement was approved by the Board on [DATE], 2023 and shall become effective on the Restatement Date. |
14.2
| Expiration Date. The Plan will continue in effect until the tenth (10th) anniversary of the Restatement Date or, if earlier, the date that the Plan is terminated by the Board pursuant to Section 15.1. Any Awards that are outstanding on the date the Plan terminates shall remain in force according to the terms of the Plan and the applicable Award Agreement. |
ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION
15.1
| Amendment, Modification, and Termination. Subject to Section 16.14 hereof, with the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however, that to the extent necessary and desirable to comply with any Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. Notwithstanding any provision in this Plan to the contrary, absent approval of the shareholders of the Company, and except as permitted by Article 13, no Option or SAR may be amended to reduce the per-Share exercise price of the Shares subject to such Option or SAR below the per-Share exercise price as of the date the Option or SAR is granted and (a) no Option or SAR may be granted in exchange for, or in connection with, the cancellation, surrender or substitution of an Option or SAR having a higher per-Share exercise price and (b) no Option or SAR may be cancelled in exchange for, or in connection with, the payment of a cash amount or another Award at a time when the Option or SAR has a per-Share exercise price that is higher than the Fair Market Value of a Share. |
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15.2
| Awards Previously Granted. Except with respect to amendments made or other actions taken pursuant to Section 16.14 hereof or any amendment or other action with respect to an outstanding Award that may be required or desirable to facilitate compliance with Applicable Laws, as determined by the Committee in its sole discretion, no termination, amendment, or modification of the Plan shall affect adversely, in any material way, any Award previously granted pursuant to the Plan without the prior written consent of the Participant; provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Participant. |
ARTICLE 16. GENERAL PROVISIONS
16.1
| No Rights to Awards. No Eligible Individual or other person shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is obligated to treat Eligible Individuals, Participants or any other persons uniformly. |
16.2
| No Shareholders Rights. Except as otherwise provided herein, a Participant shall have none of the rights of a shareholder with respect to Shares covered by any Award, including the right to vote or receive dividends, until the Participant becomes the record owner of such Shares, notwithstanding the exercise of an Option or SAR or vesting of another Award. |
16.3
| Tax-Related Items. The Company or any Affiliate, as applicable, shall have the authority to require a Participant to remit to the Company or an Affiliate, an amount sufficient to satisfy the withholding obligations for Tax-Related Items or to take such other action as may be necessary or appropriate in the opinion of the Company or an Affiliate, as applicable, to satisfy withholding obligations for Tax-Related Items, including one or a combination of the following: (a) withholding from the Participant’s wages or other cash compensation payable to the Participant by the Company or an Affiliate; (b) withholding from the proceeds of the sale of Shares acquired pursuant to an Award, either through a voluntary sale or a mandatory sale arranged by the Company on the Participant’s behalf, without need of further authorization; or (c) in the Committee’s sole discretion, by withholding Shares otherwise issuable under an Award (or allowing the return of Shares) sufficient, as determined by the Committee in its sole discretion, to satisfy such Tax-Related Items. No Shares shall be delivered pursuant to an Award to any Participant or other person until the Participant or such other person has made arrangements acceptable to the Committee to satisfy the withholding obligations for Tax-Related Items. |
16.4
| No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant’s Service at any time, nor confer upon any Participant any right to continue in the Service of the Company or any Affiliate. |
16.5
| Unfunded Status of Awards. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate. |
16.6
| Indemnification. To the extent allowable pursuant to Applicable Laws, each member of the Committee and the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. |
16.7
| Relationship to other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, termination programs and/or indemnities or severance payments, welfare or other benefit plan of the Company or any Affiliate, except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder. |
16.8
| Expenses. The expenses of administering the Plan shall be borne by the Company and/or its Affiliates. |
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16.9
| Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. |
16.10
| Fractional Shares. No fractional Shares shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate. |
16.11
| Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 under the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by Applicable Laws, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. |
16.12
| Government and Other Regulations. The obligation of the Company to make payment of awards in Shares or otherwise shall be subject to all Applicable Laws, and to such approvals by government agencies, including government agencies in jurisdictions outside of the U.S., in each case as may be required or as the Company deems necessary or advisable. Without limiting the foregoing, the Company shall have no obligation to issue or deliver evidence of title for Shares subject to Awards granted hereunder prior to: (i) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and (ii) completion of any registration or other qualification with respect to the Shares under any Applicable Laws in the U.S. or in a jurisdiction outside of the U.S. or ruling of any governmental body that the Company determines to be necessary or advisable or at a time when any such registration or qualification is not current, has been suspended or otherwise has ceased to be effective. The inability or impracticability of the Company to obtain or maintain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained and shall constitute circumstances in which the Committee may determine to amend or cancel Awards pertaining to such Shares, with or without consideration to the affected Participant. The Company shall be under no obligation to register, pursuant to the Securities Act or otherwise, any offering of Shares issuable under the Plan. If, in certain circumstances, the Shares paid pursuant to the Plan may be exempt from registration pursuant to the Securities Act, the Company may restrict the transfer of such Shares in such manner as it deems advisable to ensure the availability of any such exemption. |
16.13
| Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Indiana. |
16.14
| Section 409A. It is intended that all Awards under the Plan will be exempt from, or will comply with, Section 409A, and to the maximum extent permitted the Awards the Plan will be limited, construed and interpreted in accordance with this intent. Notwithstanding anything to the contrary in the Plan or any Award Agreement, with respect to any Award that constitutes a deferral of compensation subject to Section 409A: |
(a)
| If any amount is payable under such Award upon a termination of Service, a termination of Service will be deemed to have occurred only at such time as the Participant has experienced a “separation from service” as such term is defined for purposes of Section 409A; |
(b)
| Each amount to be paid under an Award or this Plan shall be construed as a separate and distinct payment for purposes of Section 409A; and |
(c)
| If any amount shall be payable with respect to any such Award as a result of a Participant’s “separation from service” at such time as the Participant is a “specified employee” within the meaning of Section 409A, then no payment shall be made, except as permitted under Section 409A, prior to the first business day after the earlier of (i) the date that is six months after the Participant’s separation from Service or (ii) the Participant’s death. Unless the Committee has adopted a specified employee identification policy as contemplated by Section 409A, specified employees will be identified in accordance with the default provisions specified under Section 409A. |
16.15
| No Representations or Covenants with Respect to Tax Qualification. Although the Company may endeavor to (a) qualify an Award for favorable or specific tax treatment under the laws of the U.S. (e.g., Incentive Stock Options under Section 422 of the Code) or jurisdictions outside of the U.S. or (b) avoid adverse tax treatment (e.g., under Section 409A or Section 280G of the Code), the Company makes no representation to that effect and expressly disavows any covenant to maintain favorable |
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or avoid unfavorable tax treatment, notwithstanding anything to the contrary in this Plan, including Section 16.14 hereof. The Company shall be unconstrained in its corporate activities without regard to the potential negative tax impact on Participants under the Plan. Nothing in this Plan or in an Award Agreement shall provide a basis for any person to take any action against the Board, Committee, Company or any Affiliate based on matters covered by Section 409A, including the tax treatment of any Awards, and none of Board, Committee, the Company nor any Affiliate will have any liability under any circumstances to the Participant or any other party if the Award that is intended to be exempt from, or compliant with, Section 409A, is not so exempt or compliant or for any action taken by the Committee with respect thereto.
16.16
| Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy adopted by the Company and in effect from time to time providing for the recovery of Awards, shares, proceeds, or payments to Participants in the event of fraud or as required by Applicable Laws or governance considerations or in other similar circumstances. |
16.17
| Severability. If any provision of the Plan or the application of any provision hereof to any person or circumstance is held to be invalid or unenforceable, the remainder of the Plan and the application of such provision to any other person or circumstance shall not be affected, and the provisions so held to be unenforceable shall be reformed to the extent (and only to the extent) necessary to make it enforceable and valid. |
C-18 2023 Proxy Statement | | | |
