Eli Lilly and Company EVA Bonus Plan
ARTICLE I
Bonus Plan Statement of Purpose and Summary
-------------------------------------------
1.1 The purpose of the Plan is to provide a system of bonus
compensation for certain executive, management and
technical personnel of Eli Lilly and Company and
subsidiaries which will promote the maximization of
shareholder value over the long term, by linking
performance incentives to increases in shareholder
value. The Plan ties bonus compensation to Economic
Value Added ("EVA"), and thereby rewards employees for
long-term, sustained improvement in shareholder value.
1.2 EVA will be used as the performance measure of value
creation. EVA reflects the benefits and costs of
capital employment. Employees create economic value
when the operating profits from a business exceed the
cost of the capital employed.
ARTICLE II
Definitions of Certain Terms
----------------------------
Unless the context requires a different meaning, the
following terms shall have the following meanings:
2.1 "Company" means Eli Lilly and Company and its
-------
subsidiaries.
2.2 "Committee" means the Compensation and Management
---------
Development Committee, the members of which shall be
selected by the Board of Directors from among its
members.
2.3 "Participant" means an executive, management or
-----------
technical employee of the Company designated by the
Committee as a participant in the Plan with respect to
any Plan Year. In its discretion, the Committee may
designate Participants either on an individual basis or
by determining that all employees in specified job
categories, classifications or levels shall be
Participants.
2.4 "Plan" means this Eli Lilly and Company EVA Bonus Plan.
----
2.5 "Plan Year" means the applicable calendar year.
---------
2.6 "Retirement" means the cessation of employment upon the
----------
attainment of at least eighty age and service points,
as determined by the provisions of The Lilly Retirement
Plan as amended from time to time, assuming eligibility
to participate in that plan.
2.7 "Disability" means the time at which a Participant
----------
becomes eligible for a payment under The Lilly Extended
Disability Plan, assuming eligibility to participate in
that plan.
ARTICLE III
-----------
Definition and Components of EVA
--------------------------------
The following terms set forth the calculation of EVA and the
components of calculating EVA. The calculation of EVA for a
Plan Year is used in determining the bonuses earned by
Participants under the Plan, as set forth in Article IV.
3.1 "Economic Value Added" or "EVA" means the excess NOPAT
-----------------------------
that remains after subtracting the Capital Charge.
3.2 "Net Operating Profit After Tax" or "NOPAT'' means the
-------------------------------------------
after tax operating earnings of the Company for the
Plan Year. NOPAT is determined by adding net sales plus
other income (excluding interest income from
operational cash) and subtracting the following: cost
of goods sold, selling, general and administrative
expenses (excluding goodwill amortization and interest
expense), amortization of research and development,
taxes (excluding the tax benefit of net interest
expense) and amounts associated with discontinued
operations.
3.3 Capital Charge" means the deemed opportunity cost of
--------------
employing Capital for the Company. The Capital Charge
is calculated by multiplying Capital times Cost of
Capital (C*).
3.4 "Capital" means the net investment employed in the
-------
operations of the Company produced by operations and
financing activities. Capital is calculated by adding
together current assets (excluding operating cash), net
property, plant and equipment, gross goodwill, net
intangibles, other assets, capitalized research and
development, and the present value of operating leases,
and subtracting the following: non-interest bearing
liabilities and capital associated with discontinued
operations.
3.5 "Cost of Capital" or "C*" is the percentage calculated
-----------------------
from the weighted average of Cost of Debt and Cost of
Equity. Cost of Capital for each Plan Year is
determined by reference to the percentage calculated at
the end of October of the prior Plan Year.
Cost of Debt capital is the marginal long-term
borrowing rate of the Company times (one minus the
tax rate). Cost of Equity capital is the risk-free
rate plus (beta times the market risk premium).
ARTICLE IV
Definition and Computation of the EVA Bonus
-------------------------------------------
Bonuses earned under the Plan for a Plan Year are determined
based on a comparison of actual EVA to the "Target EVA" for
the year, which is established as described below to ensure
improvement in EVA from year to year. The result of this
comparison is adjusted by a "Leverage Factor" measuring the
volatility of industry returns. The factor produced is
referred to as the "Bonus Multiple," which is multiplied by
the Participant's "Target Bonus" amount established for the
year to produce the actual bonus earned. This amount,
referred to as the "Declared Bonus," is credited to the
Participant's "Bonus Bank" balance and paid out in the
manner provided below.
4.1 Target Bonus. The Target Bonus Awards will be
determined by the Committee according to a schedule
that associates job responsibilities with a specified
dollar amount of Target Bonus. If a Participant moves
from one global job level to another during a Plan Year
by virtue of a change in job responsibilities (except
for changes as a result of moves to certain global job
levels designated by the Committee or changes between
part-time and full-time status) his or her Target Bonus
will not be changed for the Plan Year in which the move
occurs. The Target Bonus will be based on the currency
in which the highest portion of base pay is regularly
paid. The Committee shall determine the appropriate
foreign exchange conversion methodology in its
discretion.
4.2 Declared Bonus. A Declared Bonus is the Target Bonus
times the Bonus Multiple.
4.3 Bonus Multiple. The Bonus Multiple is Actual EVA minus
Target EVA over the Leverage Factor, plus one.
4.4 Bonus Bank. All bonus payments are made from the Bonus
Bank. Each Participant's beginning Bonus Bank balance
in his/her first year of participation is zero. The
Bonus Bank is increased or decreased for any plan year
by the amount of Declared Bonus. If the available
Bonus Bank balance is positive, the participant will be
paid from such balance up to the Target Bonus amount,
plus one third of any such balance that remains after
subtracting the Target Bonus from available Bonus Bank
balance. If the available Bonus Bank balance is
negative, no payment will occur.
4.5 Target EVA. The Target EVA for each year shall be
calculated as follows:
Target EVA = [Prior Year's Actual EVA + Prior Year's Target EVA]+Expected
------------------------------------------------- Improvement
2
4.6 Expected Improvement. The Expected Improvement is the
additional EVA amount determined by the Committee that
is used to assure that a minimum level of improvement
is achieved in order to earn target awards.
4.7 Leverage Factor. The Leverage Factor determines the
rate of change in bonuses as EVA surpasses or falls
short of Target EVA, determined by the Committee from
an evaluation of the long term volatility of industry
returns.
4.8 Working Plan Example. Examples of the mechanics of the
Plan are shown on Schedule A.
ARTICLE V
Plan Administration
-------------------
5.1 Time of Payment. Payment from the Bonus Bank will be
made before March 1 of the year following the Plan
Year.
5.2 Certification of Results. Before any amount is paid
under the Plan, the Committee shall certify in writing
the calculation of EVA for the Plan Year and the
satisfaction of all other material terms of the
calculation of the Declared Bonus.
5.3 New Hires, Promotions. New hires or individuals
promoted who are first selected for participation by
the Committee effective on a date other than January 1
will participate on a pro-rata basis in their first
year of participation, based on the Declared Bonus
determined for the Plan Year, pro-rated for that period
of the year during which the Participant was selected
for participation in the Plan.
5.4 Termination of Employment. If a Participant ceases
employment with the Company before the end of a Plan
Year for reasons other than Retirement, Disability or
death, the Participant shall receive a fraction of a
Bonus for that Plan Year equal to the number of days
worked during the plan year divided by the total number
of days in the Plan Year, and his/her Bank Balance
shall be forfeited. The Committee may make complete or
partial exceptions to this rule, with respect to the
Bank Balance only, in its sole discretion.
5.5 Retirement, Disability or Death. If a Participant
ceases employment with the Company because of
Retirement, Disability or death, the Participant or
personal representative, as the case may be, shall
receive full payment of his/her Bank Balance and a
bonus based on the Declared Bonus determined for the
Plan Year but pro-rated for that period of the year
during which the Participant was an active employee of
the Company.
5.6 Plan Participation. A Participant may not participate
in this Plan for any portion of a year for which he/she
is entitled to receive payment under the Eli Lilly and
Company Contingent Compensation Plan, and shall be
treated in accordance with 5.3.
ARTICLE VI
General Provisions
------------------
6.1 Withholding of Taxes. The Company shall have the right
to withhold the amount of taxes which in the sole
determination of the Company are required to be
withheld under law with respect to any amount due or
payable under the Plan.
6.2 Expenses. All expenses and costs in connection with
the adoption and administration of the plan shall be
borne by the Company.
6.3 No Prior Right or Offer, No Right to Employment.
Except and until expressly granted pursuant to the
Plan, nothing in the Plan shall be deemed to give any
employee any contractual or other right to participate
in the benefits of the Plan. No award to any such
Participant in any Plan Year shall be deemed to create
a right to receive any award or to participate in the
benefits of the Plan in any subsequent Plan Year.
6.4 Rights Personal to Employee. Any rights provided to an
employee under the Plan shall be personal to such
employee, shall not be transferable, except by will or
pursuant to the laws of descent or distribution, and
shall be exercisable during his/her lifetime, only by
such employee, or a court-appointed guardian for the
employee.
6.5 Non-Allocation of Award. In the event of a suspension
of the Plan in any Plan Year, as described in Section
11.1, no awards under the Plan for the Plan Year during
which such suspension occurs shall affect the
calculation of awards for any subsequent period in
which the Plan in continued.
ARTICLE VII
Limitations
-----------
7.1 No Continued Employment. Neither the establishment of
the Plan nor the grant of an award thereunder shall be
deemed to constitute an express or implied contract of
employment of any Participant for any period of time or
in any way abridge the rights of the Company to
determine the terms and conditions of employment or to
terminate the employment of any employee with or
without notice or cause at any time.
7.2 No Vested Rights. Except as expressly provided herein,
no employee or other person shall have any claim of
right (legal, equitable, or otherwise) to any award,
allocation, or distribution or any right, title, or
vested interest in any amounts in his/her Bonus Bank
and no officer or employee of the Company or any other
person shall have any authority to make representations
or agreements to the contrary. No interest conferred
herein to a Participant shall be assignable or subject
to claim by a Participant's creditors.
7.3 Non-alienation. Except as provided in Subsection 5.1,
no Participant or other person shall have any right or
power, by draft, assignment, or otherwise, to mortgage,
pledge or otherwise encumber in advance any payment
under the plan, and every attempted draft, assignment,
or other disposition thereof shall be absolutely void.
ARTICLE VIII
Committee Authority
-------------------
8.1 Authority to Interpret and Administer. Except as
otherwise expressly provided herein, full power and
authority to interpret and administer this Plan shall
be vested in the Committee. The Committee may from
time to time make such decisions and adopt such rules
and regulations for implementing the Plan as it deems
appropriate for any Participant under the Plan. Except
as to Participants who are executive officers of the
Company, the Committee may delegate in writing to
officers or employees of the Company the power and
authority granted by this Section 8.1 to interpret and
administer this Plan. Any decision taken by the
Committee, or officer or employee to whom authority has
been delegated, arising out of or in connection with
the construction, administration, interpretation and
effect of the Plan shall be final, conclusive and
binding upon all Participants and any person claiming
under or through Participants.
8.2 Committee Discretion to Revise Rates and Amounts. The
Committee may, in its sole discretion, revise the
various rates, amounts and percentages provided in the
Plan from time to time (including, without limitation,
with respect to each of the foregoing defined terms),
provided that the methods and assumptions used in
making such determinations shall be established and
applied by the Committee on the basis of reasonable,
objective criteria that are applied in a uniform manner
from Plan Year to Plan Year.
8.3 Financial And Accounting Terms. Except as otherwise
provided, financial and accounting terms, including
terms defined herein, shall be determined by the
Committee in accordance with generally accepted
accounting principles and as derived from the audited
consolidated financial statements of the Company,
prepared in the ordinary course of business.
ARTICLE IX
Notice
------
9.1 Any notice to be given to the Company or Committee
pursuant to the provisions of the Plan shall be in
writing and directed to Secretary, Eli Lilly and
Company, Lilly Corporate Center, Indianapolis, IN
46285.
ARTICLE X
Effective Date
--------------
10.1 This Plan shall be effective as of January 1, 1995, as
amended and restated effective January 1, 1996.
ARTICLE XI
Amendments and Termination
--------------------------
11.1 This Plan may be amended, suspended or terminated at
any time at the discretion of the Board of Directors of
Eli Lilly and Company, and may, except for this Section
11.1, be amended at any time by the Committee.
ARTICLE XII
Applicable Law
--------------
12.1 This Plan shall be governed by and construed in
accordance with the provisions of the laws of the State
of Indiana.
SCHEDULE A
----------
YEAR ONE
Target EVA = $150MM
Actual EVA = $200MM
Leverage Factor = $100MM
Declared Bonus
- --------------
Actual EVA - Target EVA = $50MM
Bonus Multiple = 1 + (Actual EVA - Target EVA)/Leverage Factor
1.5 = 1 + 50/100
Target Bonus = $20,000
Declared Bonus = $30,000 (1.5 x $20,000)
Bonus Bank
- ----------
Declared Bonus $30,000
Beginning Bank Balance $ -0-
-------
Available Bank Balance $30,000
Target Bonus Paid $20,000*
-------
Remaining Balance $10,000
Pay 1/3 Remaining Balance $3,333*
Ending Bank Balance $6,667
*Total bonus paid = $20,000 + $150MM) / 2 + 0
= $175MM
YEAR TWO
Target EVA = $175MM
Actual EVA = $140MM
Leverage Factor = $100MM
Declared Bonus
- --------------
Actual EVA - Target EVA = ($35MM)
Bonus Multiple = 1 + (Actual EVA - Target EVA)/Leverage Factor
0.65 = 1 + (35)/100
Target Bonus = $20,000
Declared Bonus = $13,000 (0.65 x $20,000)
Bonus Bank
- ----------
Declared Bonus $13,000
Beginning Bank Balance $6,667
-------
Available Bank Balance $19,667
Target Bonus Paid $19,667*
(up to available balance)
Remaining Balance $0
Pay 1/3 Remaining Balance $0*
-------
Ending Bank Balance $0
*Total bonus paid = $19,667 + $0 = $19,667
EVA Target Reset (for year three) = ($140MM + $175MM)/2 + 0
= $157.5MM