EXHIBIT 10
Eli Lilly and Company EVA Bonus Plan
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(As amended and restated effective January 1, 2001)
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Table of Contents
ARTICLE I Bonus Plan Statement of Purpose and Summary................. 1
ARTICLE II Definitions of Certain Terms................................ 1
ARTICLE III Definition and Components of EVA............................ 2
ARTICLE IV Definition and Computation of the EVA Bonus................. 3
ARTICLE V Plan Administration......................................... 5
ARTICLE VI General Provisions.......................................... 7
ARTICLE VII Limitations................................................. 7
ARTICLE VIII Committee Authority......................................... 8
ARTICLE IX Notice...................................................... 9
ARTICLE X Effective Date.............................................. 9
ARTICLE XI Amendments and Termination.................................. 9
ARTICLE XII Applicable Law.............................................. 9
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ARTICLE I
Bonus Plan Statement of Purpose and Summary
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1.1 The purpose of the Plan is to provide a system of bonus compensation
for selected employees 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. The Plan is intended to satisfy the requirements for
providing "performance-based" compensation under Section 162(m) of the
Internal Revenue Code.
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
capital charge associated with the capital assets employed.
ARTICLE II
Definitions of Certain Terms
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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.
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2.2 "Committee" means the Compensation Committee, the members of which
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shall be selected by the Board of Directors of Eli Lilly and Company
from among its members. Each Committee member shall, at all times while
serving, satisfy the requirements of an "outside director" within the
meaning of Section 162(m).
2.3 "Participant" means any employee of the Company designated by the
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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.
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2.5 "Plan Year" means the applicable calendar year.
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2.6 "Retirement" means the cessation of employment upon the attainment of
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at least eighty age and benefit years of 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
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a payment under The Lilly Extended Disability Plan, assuming
eligibility to participate in that plan.
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2.8 "Section 162(m)" means Section 162(m) of the Internal Revenue Code of
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1986, as amended.
2.9 "Section 162(m) Participant" means a Participant who, in the
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determination of the Committee, is or may in the future become a
"covered employee" under Section 162(m).
ARTICLE III
Definition and Components of EVA
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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
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after subtracting the Capital Charge.
3.2 "Net Operating Profit After Tax" or "NOPAT" means the after tax
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operating earnings of the Company for the Plan Year. NOPAT is
determined by adding net sales plus other net income and subtracting
the following: cost of goods sold, marketing and administrative
expenses (excluding goodwill amortization and interest expense),
amortization of research and development, taxes (excluding the tax
benefit of interest expense) and amounts associated with discontinued
operations.
3.3 "Capital Charge" means the deemed opportunity cost of employing capital
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for the Company. The Capital Charge is calculated by multiplying
Operating Capital times Operating Cost of Capital (OC*) and Cash
Capital times Non-operating Cost of Capital (NOC*), then summing the
two products.
3.4 "Operating Capital" means the net investment employed in the operations
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of the Company produced by operations. Operating Capital is calculated
by adding together current assets (excluding cash and short-term
marketable securities), net property, plant and equipment, gross
goodwill, net intangibles, other assets, and 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 "Cash Capital" means the aggregate balances of any cash plus short-term
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marketable securities.
3.6 "Cost of Operating Capital" or "OC*" is the percentage calculated from
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the weighted average of Cost of Debt and Cost of Equity. Cost of
Operating Capital for each Plan Year is determined by the Chief
Financial Officer and approved by the Committee.
3.7 "Cost of Non-operating Capital" or "NOC*" is the after-tax opportunity
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cost of capital associated with Cash Capital, as deemed appropriate for
Cash Capital by the Chief Financial Officer and approved by the
Committee.
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3.8 "Cost of Debt" capital is the marginal long-term borrowing rate
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adjusted for the credit rating of the Company times (one minus the tax
rate).
3.9 "Cost of Equity" capital is the risk-free rate plus (beta times the
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market risk premium). For this purpose, the risk-free rate, the beta
and the market risk premium are determined by the Chief Financial
Officer and approved by the Committee.
ARTICLE IV
Definition and Computation of the EVA Bonus
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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 motivate improvement in EVA from year to year. The result
of this comparison is adjusted by a "Leverage Factor" measuring the volatility
of industry EVA returns. The factor produced is referred to as the "Bonus
Multiple," which is multiplied by the Participant's applicable "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 Award will be determined by the
Committee on a basis that takes into consideration a Participant's
salary grade level, job responsibilities as well as past and expected
future job performance. Target Bonus Awards for a particular Plan Year
are expressed as a percentage of annual base salary as in effect on the
fixed annual merit date in that Plan Year or on the first day of the
Plan Year if there is no merit date in a given Plan Year. Early in the
Plan Year, each Participant (except Section 162(m) Participants) will
receive three Target Bonus Awards to correspond with each of the three
performance ratings. The actual Target Bonus used to calculate the
Declared Bonus will be determined by the individual's performance
rating for the given Plan Year as determined by the individual's
supervision. Section 162(m) Participants shall receive a single Target
Bonus Award. If a Participant moves from any salary grade level to a G-
6 or above salary grade level during a Plan Year, he/she will receive
an award that is pro-rated according to time based on the Target Bonus
percentage and base salary applicable to each such salary grade. For
purposes of pro-rating, the individual's performance rating at the end
of the Plan Year will apply to the entire Plan Year. 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 applicable Target Bonus times
the Bonus Multiple.
4.3 Bonus Multiple. The Bonus Multiple is Actual EVA less Target EVA
(positive or negative), divided by the Leverage Factor, plus one. In
years in which the Bonus Multiple is equal to or less than zero, the
Target Bonus used to calculate the Declared Bonus will be the Target
Bonus associated with the "Successful" or middle performance rating.
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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 after the inclusion of the Declared Bonus is positive, the
Participant will be paid from such balance up to the applicable Target
Bonus Award, plus one third of any such balance that remains after
subtracting the Target Bonus Award from the available Bonus Bank
balance. If the available Bonus Bank balance is negative, no payment
will occur. After any payment as calculated above, the beginning Bonus
Bank balance for the subsequent Plan Year shall be as follows:
(a) Any positive balance shall be carried forward as the new beginning
Bonus Bank balance.
(b) Any negative balance resulting from a negative Bonus Multiple shall be
carried forward as the new beginning (negative) Bonus Bank balance.
(c) If the Bonus Bank balance has been completely depleted because of a
Bonus Multiple between zero and 1.0, the new beginning Bonus Bank
balance shall be zero.
4.5 Target EVA. The Target EVA for each year will be calculated as follows:
Target EVA = Prior Year's Actual EVA + Expected Improvement
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 Section 162(m) Requirements, Bonus Maximum. In the case of Section
162(m) Participants, all determinations necessary for computing
Declared Bonuses for a Plan Year, including establishment of all
components of the EVA calculation and of the Target Bonus percentages,
shall be made by the Committee not later than 90 days after the
commencement of the Plan Year. As and to the extent required by Section
162(m), the terms of a Declared Bonus for a Section 162(m) Participant
must state, in terms of an objective formula or standard, the method of
computing the amount of compensation payable to the Section 162(m)
Participant, and must preclude discretion to increase the amount of
compensation payable that would otherwise be due under the terms of the
award. Notwithstanding anything elsewhere in the Plan to the contrary,
the maximum amount of the Declared Bonus that may be paid from the
Bonus Bank to a Section 162(m) Participant during any one calendar year
shall be $5 million.
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ARTICLE V
Plan Administration
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5.1 Time of Payment. Payment from the Bonus Bank will be made before April
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. Any such
Participant's Target Bonus Award for that Plan Year will be determined,
as applicable, based on his or her annual base salary as in effect on
(i) the fixed annual merit date in that Plan Year, (ii) January 1 in
years when there is no merit date in that Plan Year, or (iii) on the
date of hire or promotion if hired or promoted after the fixed annual
merit date in that Plan Year. Notwithstanding the foregoing, in the
case of any Section 162(m) Participant who first becomes eligible to
participate in the Plan after January 1 of a Plan Year, such
Participant's Declared Bonus may be determined, at the discretion of
the Committee exercised at the time such participation begins, in a
manner that complies with the requirements for "performance-based
compensation" under Section 162(m).
5.4 Termination of Employment, Demotions. If a Participant ceases
employment with the Company on or before the last day of a Plan Year
for reasons other than Retirement, Disability or death, or is demoted
to a non-global job level with the Company effective on or before the
last day of a Plan Year, the Participant shall receive no Declared
Bonus for that Plan Year, and his/her Bonus Bank balance shall be
forfeited. The Committee may make complete or partial exceptions to
this rule, in its sole discretion, and, with respect to employees other
than executive officers, may delegate to the vice president responsible
for human resources the authority to make such exceptions.
Notwithstanding the foregoing, with respect to the Declared Bonus for a
Section 162(m) Participant, any such termination of employment or
demotion shall result in payment of a bonus based on the Declared Bonus
determined for the Plan Year but pro-rated for the period of the year
prior to such event, subject to the Committee's discretion to forfeit
all or any portion of such bonus, and the Bonus Bank balance shall be
forfeited as well.
5.5 Leave of Absence. If a Participant takes an approved leave of absence
from employment during a Plan Year, the Participant will not be
eligible for the Declared Bonus for the Plan Year. The Committee may
make complete or partial exceptions to this rule, in whatever manner it
deems appropriate, and, with respect to employees other than executive
officers, may delegate to the vice president responsible for human
resources the authority to make such exceptions. The Participant will
retain his Bonus Bank balance if he returns to employment following the
period of leave of absence. Notwithstanding the foregoing, with respect
to the Declared Bonus for a Section 162(m) Participant, any such leave
of absence
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shall result in payment of a bonus based on the Declared Bonus
determined for the Plan Year but pro-rated for the period of the year
that the Participant was actively employed by the Company, subject to
the Committee's discretion to forfeit all or any portion of such bonus.
5.6 Retirement, Disability or Death. If a Participant ceases employment
with the Company on or before the last day of the Plan Year because of
Retirement, Disability or death, the Participant or personal
representative, as the case may be, shall receive into his or her Bonus
Bank before April 1 of the next year a Declared Bonus based on the
Declared Bonus determined for the Plan Year but pro-rated for that
period of the Plan Year during which the Participant was an active
employee of the Company. Following payment of such bonus in accordance
with Section 4.4, any remaining positive Bonus Bank balance shall be
paid.
5.7 Plan Participation. A Participant may not participate in this Plan for
any portion of a Plan Year for which he/she is entitled to receive
payment under the Eli Lilly and Company Contingent Compensation Plan,
The Eli Lilly and Company Premier Rewards Plan, or such other bonus
program of the Company or a subsidiary or affiliate of the Company as
may be specifically designated by the Committee or its designee. Such
Participants will participate in this Plan on a pro-rata basis, based
on the Declared Bonus for the Plan Year, pro-rated for that period of
the year during which the Participant participated in this Plan.
Alternatively, the Committee or its designee may determine that the
Participant who is eligible to participate in such other plan may
continue to participate in this Plan but with reduced Target Bonus
Awards for any period during which the Participant is also
participating in such other plan.
5.8 Forfeiture Events. Notwithstanding any other provision of this Plan to
the contrary, the Committee may, in its sole discretion, upon the
occurrence of a Forfeiture Event (as defined below), forfeit all or any
portion of a Participant's Declared Bonus and Bonus Bank balance and
terminate such Participant's future participation in the Plan. For
purposes hereof, a "Forfeiture Event" shall mean the occurrence of one
or more of the following events with respect to a Participant: (i) the
termination or forced resignation from employment of the Participant
for "misconduct" (as defined in the Company's Employee Information
Handbook), (ii) any violation by the Participant of the Guidelines of
Company Policy (the "Redbook") that is detrimental to the Company,
(iii) any breach of a noncompetition, nonsolicitation, nondisclosure or
other restrictive covenant that may apply by written agreement between
the Company and the Participant or (iv) Participant's having engaged in
any other activity that, in the judgment of the Committee, is
detrimental to the business, affairs or reputation of the Company
(including, without limitation, engaging in any criminal activity).
Except with respect to executive officers, the Committee may delegate
the authority granted under this section to the vice president
responsible for human resources.
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ARTICLE VI
General Provisions
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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 Future Participation.
Participation in the Plan for Plan Years is determined from year-to-
year by the Committee in its sole discretion. 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 is
continued.
ARTICLE VII
Limitations
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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 Target Bonus or
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.
7.3 Non-alienation. No interest conferred herein to a Participant shall be
assignable or subject to claim by a Participant's creditors. Except as
provided in Subsection 6.1, no Participant or
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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 of any interest or payment under this Plan shall be
absolutely void.
ARTICLE VIII
Committee Authority
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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 treated by the Company as
executive officers of the Company for federal securities law reporting
purposes (including any Section 162(m) Participant), 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 Adjustments for Significant Events. Prior to the beginning of a Plan
Year, the Committee may specify with respect to Declared Bonuses for
the Plan Year that EVA will be determined before the effects of
acquisitions, divestitures, restructurings or changes in corporate
capitalization, accounting changes, and/or events that are treated as
extraordinary items for accounting purposes; provided that such
adjustments shall be made only to the extent permitted by Section
162(m) in the case of Section 162(m) Participants.
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.
8.4 Section 162(m) Deferrals. To the extent that, notwithstanding the terms
of the Plan, the Company's tax deduction for remuneration in respect of
the payment of bonuses under the Plan to a Section 162(m) Participant
would be disallowed under Section 162(m) by reason of the fact that
such Participant's applicable employee remuneration, as defined in
Section 162(m), either exceeds or, if such bonus were paid, would
exceed the $1,000,000 limitation in Section 162(m), any such excess (as
determined by the Committee in its sole discretion) shall be
automatically deferred under the terms of The Lilly Deferred
Compensation Plan. Payment of any deferred amounts shall be made to the
Participant in the first year thereafter that the Company's tax
deduction in respect of the payment would not be disallowed under
Section 162(m).
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ARTICLE IX
Notice
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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
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10.1 This Plan, as amended and restated herein, shall be effective for the
Plan Year commencing January 1, 2001. The terms of this restated plan
shall apply to Declared Bonuses earned in 2001 and future Plan Years.
All Declared Bonuses earned in Plan Years prior to 2001 shall be
payable in accordance with the terms of the Plan as in effect for the
year to which the Declared Bonus relates. The final Plan Year of this
Plan, unless amended by the Board (or the Committee) and approved by
the stockholders to the extent provided in Article XI, shall be the
2002 Plan Year.
ARTICLE XI
Amendments and Termination
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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.
Solely to the extent deemed necessary or advisable by the Board (or the
Committee) for purposes of complying with Section 162(m), the Board (or
the Committee) may seek the approval of any such amendment by the
Company's stockholders. Any such approval shall be by the affirmative
votes of a majority of the stockholders of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance
with applicable state law and the Articles of Incorporation and By-laws
of the Company. The material terms of EVA must be disclosed to and
reapproved by the stockholders of the Company no later than the
Company's annual meeting of stockholders that occurs in the year 2003.
ARTICLE XII
Applicable Law
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12.1 This Plan shall be governed by and construed in accordance with the
provisions of the laws of the State of Indiana without regard to the
conflicts-of-law principles of Indiana.
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