Looking past “the little stuff” at Eli Lilly…

Proxies — like novels — often take dramatic turns. An example is the preliminary proxy that pharmaceutical giant Eli Lilly and Company (LLY) filed on Monday.

There were some small discoveries, such as the note on p. 41. It said starting this year, the company will no longer pay executives for the tax reimbursements for expenses incurred when their spouses attend company functions. Mind you, these aren—t the expenses themselves, but the taxes on those expenses. In 2009, those taxes ranged between $1,091 and $2,001 per executive. And last March, Lilly changed its policies to say that executive officers could no longer fly on its corporate planes to attend outside board meetings for other companies.

The next change affects Dr. John Lechleiter, who started with Lilly in 1979 as a senior organic chemist. In the past three decades, he has worked his way up, becoming president, then CEO in 2008, and chairman of the board in 2009. Page 27 of the proxy states that —In light of the business challenges the company currently faces, at Dr. Lechleiter’s request, the compensation committee approved that no increases be made to his 2010 salary or incentive targets.

These all sound like steps in the right direction; but as we read further, it became apparent how small they really were.

According to the Summary Compensation Table and the oddly named “Supplement to the Summary Compensation Table”, both on p. 40, Dr. Lechleiter’s total compensation package is worth either $20,927,649 or $15,905,108. (The numbers vary because the company is transitioning from a one-year performance award, “PA”, to a two-year award.) Lilly’s filing says it believes the second method is —more representative of [Lechleiter’s] annual compensation.

The company also says Dr. Lechleiter’s 2009 total compensation (which increased his base salary, bonus target, and equity grant target) was appropriate because it reflected strong performance measured by growth in revenue and EPS. It acknowledges, however, that the company’s performance —[lagged] in total shareholder return.—¯ To account for that (p. 27), the executives did not receive yet another award — the shareholder value award, or SVA.

What’s interesting here is that the company touts its progress on —the little stuff while glossing over the fact that the big dollars continue to flow to the top executives, even though it admits that shareholder return has suffered.

A final irony is that the board of directors opposes two shareholder resolutions. One would prohibit the CEO from serving on the compensation committee (the board —believes this proposal is not in the best long-term interests of the shareholders). The other resolution would give shareholders a —say on pay.—¯ On this one, the board says that besides company representatives and its independent consultant periodically meeting with shareholder groups, shareholders need only —[s]ee— page 5 for instructions on how [they] can communicate with the compensation committee or board.*

(*Hint to Lilly’s shareholders: It’s at the bottom of page 5 on your proxy.)

Image source: Dowling Law Office