Director Compensation
Elanco Non-Employee Director Compensation Program
Directors who are employed by Elanco or any of its affiliates are not eligible to receive compensation for their service on the Board. Currently, all members of the Board, other than those
employed by Elanco, receive an annual retainer of $70,000 in cash and an annual equity award granted under the Elanco Directors’ Deferral Plan in the number of shares of our common stock having a grant date value equal to $180,000, both pro-rated based
upon the amount of time in the year the director served. The Board’s chairman also receives an annual retainer of $100,000 in cash, the chairman of the Audit Committee also receives an annual retainer of $18,000 in cash, and the chairman of the
Compensation Committee, Finance Committee and Nominating and Corporate Governance Committee each also receive an annual retainer of $16,000 in cash. The annual equity awards granted to directors are subject to mandatory deferral under the Elanco
Directors’ Deferral Plan and the cash compensation is subject to elective deferral under such plan, as described below.
Elanco’s directors may be reimbursed for reasonable out-of-pocket travel expenses incurred in connection with attendance at Board and committee meetings and other Board-related activities.
The Compensation Committee will review director compensation from time to time and make recommendations to the Board.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
15
|
GOVERNANCE
2019 Director Compensation
Directors who were not also employees Elanco received the following compensation for their service in 2019:
Name*
|
|
Fees Earned
or Paid
in Cash
($)
|
|
Stock
Awards
($)(1)
|
|
All Other
Compensation
Payments
($)
|
|
Total
($)
|
Kapila Anand
|
$88,000(2)
|
|
$270,000
|
|
$0
|
|
$358,000
|
John P. Bilbrey
|
$71,667(3)
|
|
$235,009
|
|
$0
|
|
$306,676
|
Art Garcia
|
$46,667
|
|
$207,390
|
|
$0
|
|
$254,057
|
Michael Harrington
|
$58,333
|
|
$270,006
|
|
$0
|
|
$328,339
|
R. David Hoover
|
$186,000(4)
|
|
$270,006
|
|
$0
|
|
$456,006
|
Deborah Kochevar
|
$58,333
|
|
$235,009
|
|
$0
|
|
$293,342
|
Lawrence Kurzius
|
$86,000(5)
|
|
$270,006
|
|
$0
|
|
$356,006
|
Kirk McDonald
|
$58,333
|
|
$235,009
|
|
$0
|
|
$293,342
|
Denise Scots-Knight
|
$58,333
|
|
$235,009
|
|
$0
|
|
$293,342
|
|
*
|
From January 1, 2019 through the completion of the exchange offer on March 11, 2019, our Board also included Carl L. McMillian, David A. Ricks, Aarti S. Shah and Joshua L. Smiley, each of whom was also an employee of Lilly and did not receive
any compensation from us for their service as directors.
|
|
(1)
|
This column shows the grant date fair value for each director’s stock awards in 2019 computed in accordance with FASB ASC Topic 718, based upon the closing price of our common stock on the grant date, and the assumptions in Note 14: Stock-Based
Compensation to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on February 28, 2020.
|
On April 11, 2019, each non-employee director (except Mr. Garcia, who joined the Board in May 2019) received a one-time award of stock valued at $90,002 (2,783
shares of our common stock) as a Founders’ Award, which vest on April 11, 2022. On June 3, 2019, Mr. Garcia received such a one-time Founders’ Award of stock valued at $90,010.67 (2,819 shares of our common stock), which vest on June 3, 2022. This
award was intended to recognize the Board members who were serving during Elanco’s first year as an independent company following its separation from Lilly. These shares vest after three years of service on the Board, and are then deferred until the
director leaves the Board.
On November 29, 2019, each non-employee director received an award of stock valued at $180,004 (6,496 shares), except Mr. Bilbrey, Ms. Kochevar, Mr. McDonald
and Dr. Scots-Knight (who each joined the Board in March 2019) and Mr. Garcia (who joined the Board in May 2019), who each received a pro-rated award for a partial year of service, which awards are mandatorily deferred and not issued until the second
January following the director’s departure from service under the Elanco Directors’ Deferral Plan.
|
(2)
|
Includes the retainer for service as the chairman of the Audit Committee.
|
|
(3)
|
Includes the pro-rated retainer for service as the chairman of the Finance Committee.
|
|
(4)
|
Includes the retainer for service as the chairman of the Nominating and Corporate Governance Committee and chairman of the Board.
|
|
(5)
|
Includes the retainer for service as the chairman of the Compensation Committee.
|
Elanco Directors’ Deferral Plan
Under the Elanco Directors’ Deferral Plan, non-employee directors’ equity compensation (but no more than the lesser of 30,000 shares or the number of shares equal in value to $800,000 (as
of the applicable valuation date) less the directors’ cash compensation for the applicable plan year) are credited annually in a deferred stock account (as described below). The Elanco Directors’ Deferral Plan also allows non-employee directors to
defer receipt of all or part of their cash compensation until after their service on our Board has ended. Each director can choose to invest their deferred cash compensation in one or both of the following two accounts:
Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash compensation in company stock. Funds in this account are credited as
hypothetical shares of company stock based on the closing stock price on pre-set dates. The number of shares credited in respect of deferred cash compensation is calculated by the amount deferred divided by the closing stock price on pre-set dates. In
addition, the annual stock compensation awards described above is also credited to this account. Deferred stock accounts are also credited for dividends as if the credited shares were actual shares, with such credited dividends credited in additional
shares.
Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term rate, compounded monthly, as established
the preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code of 1986 (the Internal Revenue Code).
Both accounts may generally only be paid in a lump sum in January of the second plan year following the plan year in which the director separates from service or in annual installments
over between two and ten years, beginning at the same time the lump sum payment would be made. Amounts credited to the director’s deferred stock account would generally be paid in shares of company stock and amounts credited to the director’s deferred
compensation account would be paid in cash.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
16
|
GOVERNANCE
Stock Ownership Guidelines
Pursuant to our corporate governance guidelines, directors should hold meaningful equity ownership positions in the company. Accordingly, a significant portion of director compensation is
made in the form of company equity. The Board will consider from time to time equity ownership requirements for non-employee directors.
Hedging/Pledging Policy
Elanco’s Board 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).
The Board’s Role in Enterprise Risk Management
The Board, together with its committees, oversees the processes by which the company conducts its business to ensure the company operates in a manner that complies with laws and
regulations and reflects the highest standards of integrity.
The company also has an enterprise risk management program overseen by our chief ethics and compliance officer, who is supported by our internal auditor. Enterprise risks are identified
and prioritized by management through both top-down and bottom-up processes. The top priorities are overseen by a Board committee or the full Board. Company management is charged with managing risk through robust internal processes and controls. The
enterprise risk management program as a whole is reviewed annually at a full Board meeting, and enterprise risks are also addressed in periodic business function reviews and at the annual Board and senior management strategy session.
Communicating with the Board
You may send written communications to one or more members of the Board, addressed to:
Board of Directors
Elanco Animal Health Incorporated
c/o Corporate Secretary
2500 Innovation Way
Greenfield, Indiana 46140
Transactions with Related Persons
Relationship between Elanco and Lilly
On September 24, 2018, immediately prior to the completion of the IPO, Elanco entered into a master separation agreement and a number of other agreements with Lilly to effect the
separation of Elanco’s business from Lilly and to provide a framework for Elanco’s ongoing relationship with Lilly after the IPO and the separation, each of which remain in effect following the completion of the exchange offer. The following is a
summary of the terms of the master separation agreement and other material agreements between us and Lilly.
Master Separation Agreement
Elanco entered into a master separation agreement with Lilly immediately prior to the completion of the IPO. The master separation agreement governs certain pre-IPO transactions, as well
as the ongoing relationship between Lilly and Elanco following the IPO and the separation.
The separation of Elanco’s business; contribution of entities. The master separation agreement generally allocates certain assets and liabilities between Elanco and Lilly according
to the business to which such assets or liabilities relate. Prior to the completion of the IPO, Lilly or its affiliates, as applicable, conveyed, contributed, assigned, distributed, delivered or otherwise transferred ownership of substantially all of
the assets that are used exclusively in, relate exclusively to, or arise exclusively out of, the operation or conduct of its animal health businesses, to certain direct and indirect subsidiaries of Lilly.
Effective as of the closing of the IPO on September 24, 2018, Lilly contributed to Elanco, pursuant to the master separation agreement, the equity interests of certain entities that held,
either directly or indirectly through the equity ownership of additional entities, substantially all of the assets of Lilly’s animal health businesses, which now forms the Elanco business. The master separation agreement also generally provides for the
assumption by Elanco or the entities that are now its subsidiaries pursuant to foregoing contribution, as applicable, of all historical and future liabilities to the extent relating to, arising out of or resulting from the ownership or operation of
such animal health business. In exchange for the transfer to Elanco of the entities holding substantially all of the assets and liabilities of Lilly’s animal health businesses, Lilly received (i) all of the net proceeds ($1,659.7 million) that Elanco
received from the sale of Elanco common stock in the IPO, including the net proceeds received as a result of the exercise of the underwriters’ option to purchase additional shares, (ii) all of the net proceeds (approximately $2,000 million) received in
the Senior Notes Offering and (iii) all of the net proceeds ($498.6 million) received from the entry by Elanco into a term loan facility. Following the IPO, Elanco made a payment to Lilly of $359.9 million pursuant to the terms of the master separation
agreement, which required that Elanco pay additional amounts to Lilly to the extent that Elanco’s total unrestricted cash for working capital and other general corporate purposes exceeded $300 million following the completion of the IPO. A portion of
the total consideration to be paid to Lilly was temporarily retained by Elanco as restricted cash in connection with the anticipated transfer to Elanco from Lilly of certain animal health assets in certain jurisdictions.
Except as expressly set forth in any of the transaction documents, or as required by law, the assets that have been or will be conveyed, contributed or assigned, transferred, distributed
or delivered to Elanco or its subsidiaries (including entities the equity interests of which have been or will be transferred to Elanco by Lilly) are being so transferred on an “as is,” “where is” basis, without any representations or warranties, and
Elanco has agreed to bear the economic and legal risks that any conveyance was insufficient to vest in it good title, free and clear of any security interest, that any necessary consents or approvals were not obtained or that any conveyance was not
done in compliance with any requirements of law or judgments.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
17
|
GOVERNANCE
Delayed transfers and further assurances. To the extent that the transfers of the assets and the assumptions of the liabilities allocated to Elanco under the master separation
agreement were not completed on or prior to the IPO, Elanco and Lilly agreed to cooperate with each other and use commercially reasonable efforts to effect such transfers and assumptions as promptly as practicable thereafter or at such other time as
Elanco and Lilly have agreed. Under the master separation agreement, until the transfer of such assets and the assumption of such liabilities have occurred, the benefits and burdens relating to any such assets and liabilities generally will inure,
after the IPO, to the entity who would have received such asset or liability, had it been transferred prior to completion of the IPO, including, in the case of the jurisdictions in which Lilly and Elanco have agreed to defer the applicable transfers
and assumptions, by calculating the net economic benefit and detriment attributable to such assets and liabilities and making payments in connection therewith in the manner agreed upon by Elanco and Lilly. If, despite Lilly and Elanco’s cooperating
with one another and using their respective commercially reasonable efforts, the transfers and assumptions of the applicable assets and liabilities in one or more of such jurisdictions has not occurred on or prior to the date previously agreed upon in
writing by Elanco and Lilly, then Lilly shall be paid any remaining consideration retained by Elanco as restricted cash, and shall be entitled to retain, sell, transfer or otherwise dispose of any such remaining asset or liability, in its sole
discretion.
Elanco and Lilly have agreed to cooperate with each other and use their respective commercially reasonable efforts to take or cause to be taken all actions, and to do, or cause to be done,
all things reasonably necessary, proper or advisable under applicable law, regulations and agreements to consummate and make effective the transactions contemplated by the master separation agreement and the other transaction documents.
Distribution. The master separation agreement provides that Elanco would cooperate with Lilly in all respects to make a distribution to its shareholders of all or a portion of its
equity interests in Elanco, including in connection with the exchange offer.
Insurance. Following the time that Lilly holds 50% or less of Elanco’s common stock, subject to certain exceptions, Elanco will arrange for its own insurance policies and will no
longer seek benefit from any of Lilly’s or its affiliates’ insurance policies that may provide coverage for claims relating to the animal health business prior to the date on which Elanco obtains its own insurance coverage. The master separation
agreement contains procedures for the administration of insured claims and allocates the right to claim coverage and control over the prosecution and defense of claims between Elanco and Lilly.
Mutual releases and indemnification. Except for each party’s obligations under the master separation agreement, the other transaction documents and certain other specified
liabilities, under the master separation agreement, Elanco and Lilly have released and discharged the other from any and all liabilities existing or arising from acts or events that occurred (or failed to occur) prior to the completion of IPO.
Elanco will indemnify, defend and hold harmless Lilly, each of its affiliates and each of its and their respective directors, officers, managers, members, employees and agents from and
against any and all losses relating to, arising out of or resulting from, among others:
|
•
|
the liabilities of the animal health businesses that are allocated to Elanco;
|
|
•
|
any breach by Elanco or its subsidiaries of the master separation agreement or any other transaction document;
|
|
•
|
any untrue statement or omission of a material fact in Lilly’s governmental or public filings, to the extent caused by information furnished by Elanco or incorporated by reference from Elanco’s public filings; or
|
|
•
|
any untrue statement or omission of a material fact in Elanco’s governmental or public filings, to the extent not caused by information furnished by Lilly.
|
Lilly will indemnify, defend and hold harmless Elanco, each of its affiliates and each of its and their respective directors, officers, managers, members, employees and agents from and
against any and all losses relating to, arising out of or resulting from, among others:
|
•
|
the liabilities allocated to Lilly under the master separation agreement;
|
|
•
|
any breach by Lilly or its subsidiaries of the master separation agreement or any other transaction document;
|
|
•
|
any untrue statement or omission of a material fact in Elanco’s governmental or public filings, to the extent caused by information furnished by Lilly or incorporated by reference from Lilly’s public filings; or
|
|
•
|
any untrue statement or omission of a material fact in Lilly’s governmental or public filings, to the extent not caused by information furnished by Elanco.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
18
|
GOVERNANCE
Exchange of Information. The master separation agreement provides for the mutual sharing of information between Lilly and Elanco in order to comply with applicable law, reporting,
filing, audit or tax requirements or other applicable obligations, or for use in judicial or other proceedings.
Financial Reporting Covenants. Under the master separation agreement, Elanco agreed to comply with certain covenants relating to its financial reporting for so long as Lilly was
required to consolidate Elanco’s results of operations and financial position or to account for its investment in Elanco under the equity method of accounting.
Elanco has also agreed that, for so long as Lilly provides Elanco services under the transitional services agreement, Elanco will not change its auditor, nor will Elanco engage its auditor
for any non-audit services, in each case, without Lilly’s prior consent, and Elanco will generally implement and maintain Lilly’s business practices and standards in accordance with certain policies and procedures specified by Lilly, subject to
appropriate materiality thresholds.
Other covenants and approval rights. The master separation agreement also contained certain other covenants that placed restrictions on Elanco’s actions, or required Lilly’s prior
written approval to such actions, until Lilly disposed of its Elanco shares in the exchange offer.
Board representation. The master separation agreement provided that, for so long as Lilly and its affiliates beneficially owned at least 10% of Elanco voting shares, Lilly was
entitled to designate for nomination certain representatives on the Board. Following the completion of the exchange offer, Lilly no longer has such rights.
No solicitation of employees. The master separation agreement included an employee non-solicitation covenant for a period of 12 months following the date on which Lilly and its
affiliates no longer owned a majority of Elanco’s outstanding shares of common stock.
Dispute resolution. The master separation agreement provides that Elanco and Lilly will use their respective commercially reasonable efforts to resolve disputes expeditiously and on
a mutually acceptable negotiated basis by our respective senior level representatives. Any disputes unable to be resolved through such process will be referred to mediation, for non-binding resolution. Subject to compliance with the terms of the master
separation agreement, either Elanco or Lilly, following the escalation and mediation procedures in the master separation agreement, may submit a dispute to a court of competent jurisdiction in Indiana.
Term. The master separation agreement will continue unless terminated by the mutual consent of Elanco and Lilly, although certain rights and obligations terminated upon a reduction
in Lilly’s ownership of Elanco’s outstanding common stock.
Transitional Services Agreement
Historically, Lilly has provided Elanco significant shared services and resources related to corporate functions such as executive oversight, treasury, legal, finance, human resources,
tax, internal audit, financial reporting, information technology and investor relations, which are referred to collectively as the “Lilly Services.” The transitional services agreement became operative as of the completion of IPO and the agreement will
continue until the expiration or termination of the last Lilly Service to expire or be terminated, unless the agreement is earlier terminated according to its terms.
Under the transitional services agreement, Elanco is able to use Lilly Services for a fixed term established on a service-by-service basis. Partial reduction in the provision of any Lilly
Service or termination of a Lilly Service prior to the expiration of the applicable fixed term requires Lilly’s consent. In addition, either party can terminate the agreement due to a material breach of the other party, upon prior written notice,
subject to limited cure periods or if the other party undergoes a change of control.
Elanco will pay Lilly mutually agreed-upon fees for the Lilly Services provided under the transitional services agreement, which will be based on Lilly’s cost (including third-party costs)
of providing the Lilly Services through March 31, 2021 and subject to a mark-up of 7% thereafter, with additional inflation-based escalation beginning January 1, 2020.
Tax Matters Agreement
Allocation of taxes. Elanco entered into a tax matters agreement with Lilly immediately preceding the completion of the IPO that governs the parties’ respective rights,
responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. In general, under the
agreement:
|
•
|
Lilly is responsible for any U.S. federal, state, local or foreign taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to Elanco’s business) reportable on a consolidated, combined or unitary
return that includes Lilly or any of its subsidiaries (and Elanco and/or any of its subsidiaries) for any periods or portions thereof ending on or prior to the date of the closing of the IPO. Elanco is responsible for the portion of any such
taxes for periods or portions thereof beginning after such date, as would be applicable to Elanco if it filed the relevant tax returns on a standalone basis.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
19
|
GOVERNANCE
|
•
|
Elanco is responsible for any U.S. federal, state, local or foreign taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only Elanco and/or any of its subsidiaries, for all tax periods
whether before or after the completion of the IPO.
|
|
•
|
Lilly is responsible for certain taxes imposed on Lilly and/or any of its subsidiaries and Elanco and/or any of its subsidiaries arising from, or attributable to, certain transfers of assets or liabilities in the separation.
|
Elanco is not generally entitled to receive payment from Lilly in respect of any of Elanco’s tax attributes or tax benefits or any reduction of taxes of Lilly. Neither party’s obligations
under the agreement are limited in amount or subject to any cap. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or
similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.
Lilly is primarily responsible for preparing and filing any tax return with respect to the Lilly affiliated group for U.S. federal income tax purposes and with respect to any consolidated,
combined, unitary or similar group for U.S. state or local or foreign tax purposes that includes Lilly or any of its subsidiaries (including those that also include Elanco and/or any of its subsidiaries), as well as any tax return that includes only
Lilly and/or any of its subsidiaries (including such tax returns that reflect taxes attributable to Elanco’s business). Elanco is generally responsible for preparing and filing any tax returns that include only Elanco and/or any of its subsidiaries.
The party responsible for preparing and filing a given tax return generally has exclusive authority to control tax contests related to any such tax return. Elanco generally has exclusive
authority to control tax contests with respect to tax returns that include only Elanco and/or any of its subsidiaries.
Preservation of the tax-free status of certain aspects of the separation. Elanco and Lilly intend the separation, the transfer of net cash proceeds from the IPO and certain related
financing transactions (which we refer to as the Debt Transactions) to Lilly and the exchange offer to qualify as a tax-free transaction under Section 355, Section 368(a)(1)(D) and related provisions of the Code. In addition, Elanco and Lilly intend
for the separation, the transfer of net cash proceeds from the IPO and the Debt Transactions to Lilly, the exchange offer and certain related transactions to qualify for tax-free treatment under U.S. federal, state and local tax law and/or foreign tax
law.
In connection with certain opinions obtained by Lilly from its outside tax attorneys and advisors, Elanco has made representations regarding the past and future conduct of its business and
certain other matters. Elanco has also agreed to certain covenants that contain restrictions intended to preserve the tax-free status of the separation, the transfer of net cash proceeds from the IPO and the Debt Transactions to Lilly, the exchange
offer and certain related transactions. Elanco may take certain actions prohibited by these covenants only if Lilly receives a private letter ruling from the IRS or Elanco obtains and provides to Lilly an opinion from a U.S. tax counsel or accountant
of recognized national standing, in either case acceptable to Lilly in its sole and absolute discretion, to the effect that such action would not jeopardize the tax-free status of these transactions. Elanco is barred from taking any action, or failing
to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of these transactions, for all time periods. In addition, during the time period ending two years after
the date of the exchange offer these covenants include specific restrictions on Elanco’s:
|
•
|
issuance or sale of stock or other securities (including securities convertible into Elanco stock but excluding certain compensatory arrangements);
|
|
•
|
sales of assets outside the ordinary course of business; and
|
|
•
|
entering into any other corporate transaction which would cause Elanco to undergo a 40% or greater change in its stock ownership.
|
Elanco has generally agreed to indemnify Lilly and its affiliates against any and all tax-related liabilities incurred by them relating to the separation, the transfer of net cash proceeds
from the IPO and the Debt Transactions to Lilly, the exchange offer and/or certain related transactions to the extent caused by an acquisition of Elanco stock or assets or by any other action undertaken by Elanco. This indemnification provision applies
even if Lilly has permitted Elanco to take an action that would otherwise have been prohibited under the tax-related covenants described above.
Employee Matters Agreement
Elanco entered into an employee matters agreement with Lilly immediately prior to the completion of IPO. The employee matters agreement governs Lilly’s, Elanco’s and the parties’
respective subsidiaries’ and affiliates’ rights, responsibilities and obligations after the IPO with respect to employees, compensation, employment, employee benefit plans and related matters. Below is a summary of the terms of the employee matters
agreement.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
20
|
GOVERNANCE
Employment. Prior to the completion of the IPO, Elanco generally offered employment to certain employees who provided services to its business and who did not otherwise transfer to
Elanco entities by operation of law. The date on which any such transferring employee is considered to be employed by Elanco (either by operation of law or of an offer) for purposes of the employee matters agreement is referred to as the “Employee
Transfer Date.” To the extent that severance or termination obligations were triggered by or as a result of such transfers or Elanco’s failure to make offers or continue employment as required by the employee matters agreement or are required to be
paid under applicable law or a Lilly plan, Lilly will administer the severance pay or termination pay obligations in accordance with the terms and conditions of the applicable Lilly severance pay or termination pay plan or policy, or as otherwise
required by applicable law, and Elanco will indemnify Lilly for such liability. If any of Elanco’s U.S. employees began receiving long-term disability leave benefits under Lilly’s disability plan before the applicable Plan Transition Date, such
employees remain eligible for such benefits after the Plan Transition Date, subject to all applicable requirements of the disability plan. For the period starting as of the completion of the IPO and ending on December 31, 2019, Elanco employees were
entitled to receive: (A) (i) at least the same salary or wages, and cash bonus opportunities at target, (ii) equity incentive commitments equal to the equity budget value and (iii) other material terms and conditions of employment as such employees
were provided immediately before January 1, 2019; and (B) employee benefits and perquisites (other than cash bonus opportunities, equity incentive commitments, defined benefit pension, retiree medical and nonqualified benefits) that are substantially
comparable in the aggregate to the employee benefits and perquisites that such employees were provided under applicable plans of Lilly before January 1, 2019. Elanco was required to use reasonable efforts to assume, as of the Employee Transfer Date,
any applicable employment agreements or other individual benefit or compensation agreement entered into between Lilly and a transferring employee and will indemnify Lilly for all liabilities under such agreements.
Unions and collective bargaining agreements. The parties will cooperate to inform and consult with any applicable representative of a labor union, or similar organization, covering
any transferring employee, to the extent required by law or the applicable collective bargaining agreement or similar arrangement. As of the Employee Transfer Date, Elanco will assume any collective bargaining, or similar, agreements or arrangements
covering any such employees and indemnify Lilly for all related liabilities.
Credited service. Elanco was required to cause its employee benefit plans to credit its employees, without duplication of benefits, for service with Lilly on or prior to the
Employee Transfer Date, and for service with Elanco on or following the Employee Transfer Date, for purposes of eligibility and vesting under all of Elanco’s employee benefit plans and arrangements and computation of vacation, sick days or severance
benefits, or as may otherwise be required by applicable law.
U.S. defined benefit and retiree medical plans. Following the Plan Transition Date, U.S. employees are generally be eligible to receive credit for service with Elanco for vesting
and eligibility service (but not benefit service) under the Eli Lilly Retirement Plan and the Eli Lilly and Company Retiree Health Plan through a date not later than December 31, 2023, to the extent permitted by and subject to the terms of such plans.
U.S. defined contribution plans. Elanco established a 401(k) plan for its U.S. employees effective as of the Plan Transition Date with terms that are substantially similar to
Lilly’s 401(k) plan, except that it will provide for a 6% company match and 3% non-elective company contribution. Any transferring employee whose Employee Transfer Date was on or before January 1, 2019 is 100% vested in Elanco’s 401(k) plan. Elanco
accepted the transfer from the U.S. Lilly qualified defined contribution plan to its qualified defined contribution plan of any assets and liabilities allocable to the participants transferring to Elanco. Elanco’s employees are 100% vested in their
account balances under the Lilly qualified defined contribution benefit plan as of the Plan Transition Date, and ceased being eligible to receive any employer contributions from Lilly effective December 31, 2018.
U.S. Lilly nonqualified plans. As of the Plan Transition Date, any transferring employee ceased being eligible for contributions from Lilly under the Eli Lilly Excess Savings Plan
and Deferred Compensation Plan for services rendered after December 31, 2018. Following the Plan Transition Date, U.S. employees will generally be eligible to receive credit for service with Elanco for vesting and eligibility service (but not benefit
service) under the Eli Lilly Excess Benefit Retirement Plan through a date not later than December 31, 2023, to the extent permitted by and subject to the terms of the plan.
Non-U.S. retirement benefit arrangements. The employee matters agreement provides for the transfer from Lilly to Elanco of any retirement benefit arrangement covering Elanco
employees located outside of the U.S. and of any related obligations or liabilities, unless otherwise agreed by the parties.
Lilly equity compensation. The employee matters agreement provides that, prior to the completion of the IPO, the board of directors of Lilly would determine how any Lilly equity,
equity-related and long-term performance awards granted to Elanco’s transferring employees will be treated under the applicable Lilly plans.
Toll Manufacturing and Supply Agreement
Elanco entered into a toll manufacturing and supply agreement with Lilly immediately prior to the completion of the IPO. Lilly has historically manufactured Humatrope drug
substance for use in the human health field at its Speke manufacturing site, which site is being transferred to Elanco in connection with the separation. Under the toll manufacturing and supply agreement, Elanco will continue to exclusively manufacture
Humatrope for Lilly at the Speke site until December 31, 2020; provided, however, that such obligation may continue through December 31, 2023 (through the exercise of three one-year extensions) if Lilly’s replacement third party supplier of Humatrope
has not received all necessary governmental approvals or cannot meet Lilly’s volume requirements.
The tolling fee that Elanco charges Lilly for the provision of such manufacturing and supply services is based on local value added plus a reasonable arm’s length mark-up. By October 1 of
each calendar year during the term of the toll manufacturing and supply agreement, Elanco will mutually agree upon a new tolling fee to be effective for the following calendar year.
Under the toll manufacturing and supply agreement, Elanco agrees not to manufacture or sell any product that is competitive to Humatrope for a period of five years after the
expiration or termination of the agreement. In addition, during the term of the agreement, Elanco agrees not to manufacture any product other than Humatrope at certain buildings of the Speke manufacturing site without Lilly’s consent.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
21
|
GOVERNANCE
Intellectual Property and Technology License Agreement
Elanco entered into an intellectual property and technology license agreement with Lilly immediately prior to the completion of the IPO. Under the intellectual property and technology
license agreement, Lilly granted Elanco an exclusive, perpetual license to exploit products in the animal health field that utilize or use certain of Lilly’s intellectual property (excluding trademarks). In addition, Lilly granted Elanco a
non-exclusive, non-sublicensable license to screen certain compounds in Lilly’s compound libraries to exploit products in the animal health field that utilize or use certain of Lilly’s intellectual property. This screening license has an initial term
of two years, subject to three one-year extensions, each of which requires Lilly’s consent.
If Elanco makes any improvements to the licensed intellectual property, Elanco shall retain ownership of such improvements and provide Lilly with a non-exclusive, perpetual license to use
the intellectual property in fields outside animal health (including human health).
For a period of two years following the effective date of the intellectual property and technology license agreement, each party has a right of first offer with respect to third-party
offers that the other party receives to license such other party’s intellectual property in the first party’s field (animal health versus human health). In connection with such right, Elanco will negotiate exclusively as to such offer for the use of
the other party’s intellectual property in the first party’s field.
Under the intellectual property and technology license agreement, Elanco will provide quarterly reports to Lilly describing any know-how generated under the agreement, including
inventions, patentable subject matter, discoveries, and technical data. Elanco will retain ownership of such generated know-how and will provide Lilly with a non-exclusive, perpetual license to use the know-how in fields outside animal health
(including human health).
Transitional Trademark License Agreement
Elanco entered into a transitional trademark license agreement with Lilly immediately prior to the completion of the IPO. Under the transitional trademark license agreement, Lilly granted
Elanco a transitional license to use certain of Lilly’s trademarks for a period of time following the IPO. Such license is non-exclusive and royalty-free, and allows Elanco to use certain of Lilly’s trademarks on Elanco’s product packaging, any
advertising materials used in connection with the sale and distribution of Elanco products, and generally in connection with the sale and distribution of its products and in the day-to-day operation of its business (including in Elanco’s books and
records).
Such license will terminate on a product-by-product and country-by-country basis. The term of the license will not extend beyond four years; provided, however, that the license can extend
for one additional year (beyond such four years) if the parties mutually agree upon such extension. Lilly can terminate the transitional trademark license agreement due to our breach of such agreement, upon prior written notice, subject to a limited
cure period.
Registration Rights Agreement
Elanco entered into a registration rights agreement with Lilly immediately prior to the completion of the IPO, pursuant to which Elanco agreed that, upon the request of Lilly, Elanco would
use its reasonable best efforts to effect the registration under applicable federal and state securities laws of any shares of Elanco common stock retained by Lilly following the IPO. Prior to the commencement of the exchange offer, we filed a
registration statement on Form S-4 registering the shares of our common stock exchanged by Lilly in the exchange offer. Pursuant to the registration rights agreement, we were generally responsible for all registration expenses in connection with the
performance of our obligations under the registration rights provisions in the registration rights agreement. Lilly is responsible for its own internal fees and expenses, any applicable underwriting discounts or commissions and any stock transfer
taxes. The agreement contains indemnification and contribution provisions by us for the benefit of Lilly and, in limited situations, by Lilly for the benefit of us with respect to the information provided by or failed to be provided by Lilly included
or omitted, as applicable, in the registration statement, prospectus or related document.
Policy Concerning Related Person Transactions
Elanco’s Board has adopted a written policy, which is referred to as the “related person transaction policy,” for the review of any transaction, arrangement or relationship in which Elanco
is a participant, if the amount involved exceeds $120,000 and one of Elanco’s executive officers, directors, director nominees or beneficial holders of more than 5% of Elanco’s total equity (or their immediate family members), each of whom is referred
to as a “related person,” has a direct or indirect material interest. This policy was not in effect when Elanco entered into the transactions described above.
Each of the agreements between Elanco and Lilly and its subsidiaries that were entered into prior to the completion of the IPO, and any transactions contemplated thereby, were deemed to be
approved and not subject to the terms of such policy. If a related person, other than Lilly and its affiliates, proposes to enter into such a transaction, arrangement or relationship, which is referred to as a “related person transaction,” the related
person must report the proposed related person transaction to Elanco’s Audit Committee. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by the Audit Committee. In approving or rejecting
such proposed transactions, the Audit Committee will be required to consider relevant facts and circumstances. The Audit Committee will approve only those transactions that, in light of known circumstances, are deemed to be in Elanco’s best interests.
In the event that any member of the Audit Committee is not a disinterested person with respect to the related person transaction under review, that member will be excluded from the review and approval or rejection of such related person transaction;
provided, however, that such Audit Committee member may be counted in determining the presence of a quorum at the meeting of the Audit Committee at which such transaction is considered. If Elanco becomes aware of an existing related person transaction
which has not been approved under the policy, the matter will be referred to the Audit Committee. The Audit Committee will evaluate all options available, including ratification, revision or termination of such transaction. In the event that management
determines that it is impractical or undesirable to wait until a meeting of the Audit Committee to consummate a related person transaction, the chairman of the Audit Committee may approve such transaction in accordance with the related person
transaction policy. Any such approval must be reported to the Audit Committee at its next regularly scheduled meeting.
A copy of Elanco’s related person transaction policy is available on Elanco’s website at investor.elanco.com under “Governance.”
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
22
|
GOVERNANCE
Executive Officers
The following table sets forth the names, ages, as of April 8, 2020, titles and biographical information relating to Elanco’s executive officers.
Name and Position
|
Age
|
Biographical Information
|
|
|
|
Jeffrey N. Simmons
President and Chief Executive Officer
|
52
|
Jeffrey N. Simmons has served as our president and Chief Executive Officer since July 2018.
For additional biographical information, see page 10.
|
|
|
|
Todd S. Young
Executive Vice President and Chief Financial Officer
|
48
|
Todd S. Young has served as Elanco’s Executive Vice President and Chief Financial Officer
since November 2018. Prior to joining Elanco, Mr. Young was the Executive Vice President and Chief Financial Officer at ACADIA Pharmaceuticals, a biopharmaceutical company, since 2016. Prior to his time at ACADIA, Mr. Young served as Senior
Vice President and Treasurer leading the creation of a capital structure for Baxalta, a biopharmaceutical company, up until its acquisition by Shire in June 2016. Prior to Baxalta, Mr. Young worked for over 14 years at Baxter International
Inc., a health care company, in multiple leadership roles, including Corporate Vice President and Treasurer, Vice President, International Finance, and Vice President, Global Financial Planning and Analysis.
|
|
|
|
James M. Meer
Vice President, Chief Accounting Officer
|
50
|
James M. Meer has served as Elanco’s Chief Accounting Officer since September 2018. Prior to
joining Elanco, Mr. Meer served as the Chief Financial Officer of Healthx, Inc., a healthcare technology company beginning June 2017. Prior to joining Healthx, he served as Senior Vice President of Finance at Appirio, an information technology
consulting company, from 2014 to 2017, and as Vice President and Corporate Controller at Salesforce (previously ExactTarget), a cloud-based software company, from 2011 to 2014. Prior to 2011, Mr. Meer held various financial, accounting and
strategy positions at 3M (previously Aero Technologies Inc.), Hill-Rom, Hillenbrand Industries and Ernst & Young LLP.
|
|
|
|
Ramiro M. Cabral
Executive Vice President, Elanco International
|
48
|
Ramiro M. Cabral has served as Elanco’s Executive Vice President, Elanco International since
January 2019. Mr. Cabral served as Executive Vice President, Elanco International and Global Customer Value from July 2018 to December 2018, and as Vice President and Chief Marketing Officer of the Elanco Animal Health division of Lilly from
2017 until September 2018. Mr. Cabral joined Lilly in 2005 and held various leadership positions for Elanco, including Vice President and Head of Operations for Elanco EMEA from 2013 to 2017, during the acquisitions and integrations of Janssen,
Lohmann and Novartis Animal Health divisions. Mr. Cabral’s other roles include Senior Director, U.S. Beef Business Unit from 2011 to 2012, General Manager of Elanco Canada from 2008 to 2010, and Global Marketing Manager from 2005 to 2007.
|
|
|
|
Michael-Bryant Hicks
Executive Vice President, General Counsel and Corporate Secretary
|
45
|
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 the 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
|
53
|
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 served 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.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
23
|
GOVERNANCE
Sarena S. Lin
Executive Vice President, Global Marketing, Corporate Strategy & Transformation
|
49
|
Sarena S. Lin has served as Elanco’s Executive Vice President, Global Marketing,
Corporate Strategy & Transformation since November 2019. Ms. Lin served as Executive Vice President, Elanco USA, Corporate Strategy and Global Marketing from January 2019 to October 2019, 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 served as
President of Cargill Feed & Nutrition, an animal nutrition company, from 2014 to 2017. Prior to 2014, Ms. Lin served as Global Head of Strategy and Business Development for Cargill from 2011 to 2014, leading major strategy and
acquisitions. Prior to 2011, Mr. Lin was a partner at McKinsey, specializing in cross-border strategy and large scale post-merger integrations. 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
|
52
|
Aaron L. Schacht has served as Elanco’s Executive Vice President, Innovation, Regulatory and
Business Development since July 2018. Mr. Schacht served as the Vice President 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, 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
Executive Vice President, Manufacturing and Quality
|
53
|
David A. Urbanek has served as Elanco’s Executive Vice President, Manufacturing and Quality
since July 2018. Mr. Urbanek served as Vice President of Manufacturing at the Elanco Animal Health division of Lilly from November 2017 to September 2018. Prior to that, Mr. Urbanek served in various leadership roles for Lilly’s Manufacturing
division, including Senior Director of Emerging Markets Manufacturing 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.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
24
|
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
This compensation discussion and analysis (“CD&A”) provides detailed information regarding the 2019 compensation for Elanco’s Chief Executive Officer, Chief Financial Officer and three
most highly-compensated executive officers who are named below (collectively, the “Named Executive Officers”):
Name
|
|
Title
|
Jeffrey N. Simmons
|
|
President, Chief Executive Officer and Director
|
Todd S. Young
|
|
Executive Vice President and Chief Financial Officer
|
David S. Kinard
|
|
Executive Vice President, Human Resources
|
David A. Urbanek
|
|
Executive Vice President, Manufacturing and Quality
|
Aaron L. Schacht
|
|
Executive Vice President, Innovation, Regulatory and Business Development
|
This CD&A discusses the compensation programs applicable to the Named Executive Officers and their compensation thereunder in 2019, including a description of Elanco’s compensation
philosophy, the elements of each compensation program, the factors that the Compensation Committee considered in setting compensation, and how the company’s financial results affected payouts under the 2019 short-term and long-term incentive plans for
each of the Named Executive Officers.
Our Philosophy on Compensation
Our compensation programs are designed to help achieve the goals of attracting, engaging and retaining highly talented individuals who are committed to our core values of integrity,
excellence and respect for people, while balancing the long-term interests of our shareholders and customers.
Our compensation and benefits programs are based on the following objectives:
|
·
|
Attract, retain, motivate, and reward top talent. Programs have clear line-of-sight to financial and operational goals that support the business strategy of innovation and profitable
growth.
|
|
·
|
Pay for Performance. Programs provide the opportunity to earn above median compensation if superior results are achieved and below median compensation if below target results are
achieved.
|
|
·
|
Create sustained long-term stakeholder value. Programs emphasize sustainable performance, such that our executives’ interests are aligned with those of our stakeholders.
|
We will achieve these objectives by:
|
§
|
Providing a compensation program that includes base salaries, and short-term and long-term incentive plans that are generally provided to other Elanco employees or similarly-situated
executives in our competitive talent market.
|
|
§
|
Generally targeting compensation levels, 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, we may exceed the targeted median positioning of the market. In comparison to our peer group, however, the
Total Direct Compensation (“TDC”) of our executive officers in 2019 ranged from 46% to 97% of the median TDC paid to the executives in our peer group.
|
|
§
|
Delivering senior executive pay with a greater emphasis on equity and lower weighting on cash to promote an ownership mentality and ensure stakeholder alignment.
|
|
§
|
Promoting a team mentality through the alignment of pay with company 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 our stakeholders.
|
|
§
|
Limiting the perquisites and other non-performance-based elements of the compensation program.
|
|
§
|
Ensuring the compensation program does not incentivize excessive risk-taking.
|
|
§
|
Considering stakeholder feedback through annual say-on-pay results and other sources when designing Elanco’s compensation and benefit programs.
|
|
§
|
Designing the program with consideration of the industry in which Elanco operates and the impact of market conditions.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
25
|
Compensation Processes and Analysis
Process for Setting Compensation
The independent, post-separation Compensation Committee considered individual performance assessments, compensation recommendations from senior leadership, Elanco’s company performance,
Elanco’s peer group data, input from its compensation consultant and its own judgment when determining compensation for Elanco’s executive officers. When determining the compensation for employees who were not executive officers of Elanco, Elanco’s
senior management considered similar factors consistent with Elanco’s philosophy, focusing on individual performance assessments, compensation recommendations from senior leadership, Elanco’s performance, 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
Elanco’s values and leadership behaviors.
|
|
•
|
Assessment of company performance. Elanco company performance was 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 the performance period, which if met, will determine payouts under cash and equity incentive programs.
|
|
•
|
Peer group analysis. Elanco used data from its peer group to benchmark 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. The Compensation Committee received the advice of its independent compensation consultant, Willis Towers Watson, when setting the compensation for
Elanco’s executive officers.
|
In addition, the Compensation Committee charter was amended in August 2019, to provide for the Board’s ratification of CEO Compensation based upon Compensation Committee recommendation.
Elanco Peer Group and Benchmarking
Elanco’s peer group for 2019 was comprised of companies that were direct competitors of Elanco, operated in a similar business model and employed people with the unique skills required to
operate an established biopharmaceutical company. The Compensation Committee selected a peer group whose median revenues were broadly similar to that of Elanco’s, with none being larger than three times Elanco’s size. Based on the advice of Willis
Towers Watson, the following group of 17 companies were identified as Elanco’s peers for 2019:
Agilent Technologies
|
Hologic
|
STERIS plc
|
Alexion Pharmaceuticals
|
IDEXX Laboratories
|
United Therapeutics
|
BioMarin Pharmaceutical
|
Incyte
|
Varian Medical Systems
|
Bio-Rad Laboratories
|
Jazz Pharmaceuticals plc
|
West Pharmaceutical Services
|
DENTSPLY SIRONA
|
Mettler-Toledo International
|
Zoetis
|
Edwards Lifesciences
|
PerkinElmer
|
|
The Compensation Committee periodically reviews Elanco’s peer group and makes adjustments to its size and composition, when appropriate.
To determine the elements of Elanco’s compensation programs for its Named Executive Officers, the Board approved compensation derived from following benchmarks, among others:
|
•
|
When comparable positions are disclosed, proxy statement data for the above peer group as disclosed in each company’s prior year Compensation Discussion and Analysis and executive compensation tables; and
|
|
•
|
Willis Towers Watson survey data for similarly-sized companies in the life sciences industry.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
26
|
Components of Executive Compensation
Elanco’s 2019 executive compensation program, in which certain key employees participate, including the Named Executive Officers was primarily comprised of base salary, annual cash bonus
and long-term equity awards.
|
•
|
2019 annual cash bonus program included:
|
|
•
|
Elanco’s Corporate Bonus Plan (the “Elanco Bonus Plan”), under which bonuses are calculated based on Elanco’s performance as compared to Elanco’s internal targets for revenue and earnings before interest and taxes (“EBIT”), and Elanco’s
innovation progress.
|
|
•
|
2019 equity incentive program included:
|
|
•
|
Performance awards (the “Elanco PAs”), which are Elanco equity awards with a performance component measuring Elanco’s two-year growth in EBIT.
|
|
•
|
Elanco Restricted Stock Units (the “Elanco RSUs”), which are Elanco time-vesting equity awards issued to certain executive officers and key employees of Elanco, including our Named Executive Officers.
|
|
•
|
Unique to 2019, Elanco granted equity awards (the “Replacement Awards”) to replace certain previously unvested Lilly awards, which Lilly awards included Shareholder Value Awards (“SVAs”), restricted stock units, and performance awards,
mirroring the original vesting date, with an exchange rate determined as of the date of the separation. For additional detail, see “Equity Incentives” and “Summary Compensation Table” below. For the issuance of these Replacement Awards, Sarena
Lin, the company’s Executive Vice President, Global Marketing, Corporate Strategy and Transformation, would have been a Named Executive Officer for 2019, replacing David Urbanek.
|
Elanco employees, which included the Named Executive Officers, also received a company benefits package, described below under “Other Elanco Compensation Practices and Information —
Employee Benefits.”
Base salaries for Elanco employees, including for the Named Executive Officers, are reviewed and established annually by Elanco 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 respect to Elanco peer group data.
Base salary increases for 2019 were established based upon our corporate budget for salary increases, which were set considering our performance over the prior year, expected performance
for the following year and general external trends. In setting salaries, Elanco seeks to retain, motivate and reward successful performers, while maintaining affordability within the company’s business plan.
During 2019, the base salaries of certain of the Named Executive Officers were adjusted as described in the table below. As such, the table below reflects the actual annual salary earned
by the Named Executive Officers in 2018 and 2019. See also the Summary Compensation Table in the section entitled “Executive Compensation Tables” below.
Name
|
|
2018 Annual
Base Salary
|
|
2019 Annual
Base Salary (2)
|
Mr. Simmons
|
|
$775,185(1)
|
|
$1,000,000
|
Mr. Young
|
|
$91,667(3)
|
|
$550,000
|
Mr. Kinard
|
|
$420,972(1)
|
|
$430,000
|
Mr. Urbanek
|
|
$381,885(1)
|
|
$385,000
|
Mr. Schacht
|
|
-
|
|
$434,167(4)
|
|
(1)
|
Represents a blend of salary prior to the IPO and a salary increase in connection with the 2018 IPO.
|
|
(2)
|
See “Elanco Peer Group and Benchmarking” above.
|
|
(3)
|
Mr. Young joined Elanco on November 1, 2018.
|
|
(4)
|
Effective March 1, 2019, Mr. Schacht’s salary was adjusted from $355,000 to $450,000.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
27
|
The Named Executive Officers participated in the Elanco Bonus Plan during 2019. The Elanco Bonus Plan for 2019 was designed to reward the achievement of Elanco’s financial goals and
innovation objectives for the year. The bonus was based on three areas that are measured relative to internal targets: revenue, EBIT, and certain innovation targets set by Elanco (“Elanco innovation progress”).
Elanco’s performance goals under the Elanco 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. The Elanco Bonus Plan for 2019 allowed for adjustments to Elanco’s 2019 fiscal performance based on unforeseen events, which adjustments needed to be recommended by management for consideration and approval by the Compensation Committee.
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 2019 weightings were as follows:
Elanco Bonus Plan
Elanco Goals
|
|
Weighting
|
Elanco revenue performance
|
|
30%
|
Elanco EBIT performance
|
|
40%
|
Elanco innovation progress
|
|
30%
|
Based on this weighting, the Elanco Bonus Plan multiple is calculated as follows:
(0.30 × revenue multiple) + (0.40 × EBIT multiple) + (0.30 × innovation progress 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 = payout
Bonus targets for 2018 and 2019 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 Board adjusted bonus targets for certain of the Named Executive Officers for that period.
Name
|
|
Pre-IPO
2018 Bonus
Target
|
|
Post-IPO
2018 Bonus
Target
|
|
Weighted
2018 Bonus
Target(1)
|
|
2019
Bonus
Target
|
Mr. Simmons
|
|
80%
|
|
120%
|
|
91%
|
|
120%
|
Mr. Young
|
|
N/A
|
|
70%
|
|
70%
|
|
70%
|
Mr. Kinard
|
|
45%
|
|
60%
|
|
49%
|
|
60%
|
Mr. Urbanek
|
|
45%
|
|
60%
|
|
49%
|
|
60%
|
Mr. Schacht
|
|
-
|
|
60%
|
|
-
|
|
60%
|
|
(1)
|
The 2018 bonus targets for and Messrs. Simmons, Urbanek, Schacht, and Kinard represent a weighted average of the amounts approved by Lilly management for the period prior to the IPO and amounts approved by Elanco’s Board in connection with the
IPO.
|
The 2019 results described below reflect Elanco’s 2019 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.
Performance targets for the Elanco Bonus Plan were based on Elanco’s 2019 operating plan. Elanco’s performance compared to the 2019 targets for revenue, EBIT, and innovation progress, as
well as the resulting bonus multiple, is set forth below. Adjustments to revenue, and therefore, EBIT targets, were made to account for unforeseen events throughout the year, including, amongst other things, the effect of Elanco’s 2019 revenue from
African Swine Fever, a one-time expense from a settlement, the acquisitions of Aratana Therapeutics, Inc. and Prevtec Microbia, Inc., and other unforeseen circumstances related to a supply disruption with one of our contract manufacturers.
|
|
2019
Elanco Target
|
|
2019
Elanco Results
|
|
Multiple
|
Revenue
|
|
$3.128B
|
|
$3.100B
|
|
0.8497
|
EBIT
|
|
$590.2M
|
|
$589.5M
|
|
0.9937
|
Innovation Progress
|
|
100%
|
|
130%
|
|
1.3000
|
Resulting Elanco Bonus Multiple
|
|
|
|
|
|
1.04
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
28
|
Elanco’s 2019 innovation progress target was 3.0 on a scale of 1.0 to 5.0. Elanco’s innovation progress multiple was comprised of the following factors: (i) achievement of certain product
approvals, (ii) the number of entrants into early and late stage development, (iii) adherence to approval timelines and (iv) a qualitative assessment of overall performance by Aaron Schacht, Elanco’s Executive Vice President, Innovation, Regulatory and
Business Development. Based on the weighted outcomes of these factors, Elanco achieved a 3.60 score, which correlates to a 1.30 innovation progress multiple for use in the calculation of the 2019 Elanco Bonus Plan.
When combined, Elanco’s revenue, EBIT, and innovation multiples yielded a 2019 Elanco Bonus Plan multiple of:
(0.30 × 0.8497) + (0.40 × 0.9937) + (0.30 × 1.30) = 1.04 bonus multiple
The 2019 bonuses paid to the Named Executive Officers under the 2019 Elanco Bonus Plan are as follows:
Name
|
|
2019 Bonus ($)
|
Mr. Simmons
|
|
$1,248,000
|
Mr. Young
|
|
$400,400
|
Mr. Kinard
|
|
$268,320
|
Mr. Urbanek
|
|
$240,240
|
Mr. Schacht
|
|
$270,920
|
|
3.
|
Equity Incentives Under Elanco’s 2019 Long-Term Incentive Plan
|
Elanco primarily grants two types of equity incentives to executives and certain other employees under its long-term incentive plans — Elanco PAs and Elanco RSUs. Elanco PAs are designed
to focus leaders on achieving certain determined company financial performance objectives. Equity issued under our long-term incentive plans are issued pursuant to the terms of The 2018 Elanco Stock Plan (the “Elanco Stock Plan”). The Compensation
Committee has the discretion to adjust downward (but not upward) any equity award payout, including executive officers’ payout from the amount yielded by the applicable formula.
Performance Awards (Elanco PAs)
All of our Named Executive Officers received Elanco PAs under Elanco’s 2019 Long-Term Incentive Plan that vest over a two-year performance period. In November 2018, the Compensation
Committee established two one-year EBIT targets for the 2019-2020 performance period, based on Elanco’s business plan at that time. The EBIT target is subject to adjustments which may include impacts of divestitures, acquisitions, non-GAAP adjustments,
or other adjustments approved by the Compensation Committee over the two-year performance period. These awards do not accumulate dividends. The Compensation Committee believes that EBIT growth is an effective measure of operational performance given
the transitional nature of Elanco’s IPO and unknown market response, while focusing on delivery on planned financials.
Payouts for the 2019-2020 Elanco PAs range from 0% to 200% of the target, based on the achievement of the EBIT targets, which we believe to be rigorous and challenging. The specific EBIT
metrics and the range of awards related to the achievement of such metrics are reflective of Elanco’s confidential business plan, the disclosure of which would cause Elanco competitive harm.
Performance-Based Replacement Awards
In 2019, the Compensation Committee approved one-time performance-based Replacement Awards to Messrs. Simmons, Kinard, Urbanek, and Schacht to replace unvested Lilly Performance Awards
from the performance period January 1, 2018 to December 31, 2019, that would have otherwise been forfeited at the time of separation. These awards were granted on February 12, 2019, to certain executive officers who were former Lilly employees, with
40% of the amount of the award being subject to a one-year performance period. The remaining 60% of the award shares were issued taking into account Lilly performance from January 1, 2018 until the grant date. These one-year Replacement Awards also
utilized an EBIT multiple. Possible payouts ranged from 0% to 200% of the target, depending on Elanco EBIT performance over the performance period.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
29
|
The Elanco EBIT target for this performance period set by the Compensation Committee was $590 million, of which $589.5 million was attained.
For the Named Executive Officers who participated in these awards, the number of Elanco shares earned under the performance-based Replacement Awards is set forth in the table below.
Details on the vesting schedule of these awards appears below, in the section Outstanding Equity Awards at December 31, 2019.
Name
|
|
Target Shares
|
|
Shares Paid Out
|
Mr. Simmons
|
|
34,425
|
|
34,339(1)
|
Mr. Kinard
|
|
14,344
|
|
14,308
|
Mr. Urbanek
|
|
17,932
|
|
17,887
|
Mr. Schacht
|
|
10,217
|
|
10,192
|
|
(1)
|
Mr. Simmons’ shares underlying this Replacement Award will not vest until February 1, 2021, as they remain subject to time-based vesting.
|
Restricted Stock Unit Awards (Elanco RSUs)
All of our Named Executive Officers received Elanco RSUs under Elanco’s 2019 Long-Term Incentive Plan. These awards 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. In addition, some of the Replacement Awards, which were part of Elanco’s
2019 Long-Term Incentive Plan, were issued as Elanco RSUs with the same vesting schedule as previously forfeited Lilly awards.
Elanco Equity Program — Target Grant Values
For the 2019 equity awards, excluding the Replacement Awards, Elanco set the total target value for Messrs. Simmons, Young, Urbanek, Kinard and Schacht based on internal pay equity, Elanco
performance, individual performance and Elanco peer group data. Total target values for the 2018 and 2019 equity grants to the applicable Named Executive Officers were as follows:
Name
|
|
2018 Annual
Equity
Grant(1)
|
|
2019 Annual
Equity
Grant
|
Mr. Simmons
|
|
$1,200,000
|
|
$4,150,000
|
Mr. Young
|
|
N/A
|
|
$1,200,000
|
Mr. Kinard
|
|
$400,000
|
|
$625,000
|
Mr. Urbanek
|
|
$500,000
|
|
$550,000
|
Mr. Schacht
|
|
-
|
|
$650,000
|
|
(1)
|
This column reflect equity granted by Lilly to certain of the Named Executive Officers. Mr. Young was not eligible for an annual Lilly equity grant since he was never a Lilly employee.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
30
|
Other Elanco Compensation Practices and Information
Elanco Employee Benefits
Elanco offers core employee benefits coverage to:
|
•
|
provide the Elanco 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 Elanco were generally the same as those available to all U.S. Elanco employees and included
medical and dental insurance, disability insurance and life insurance. In addition, The Elanco Employee 401(k) plan (the “Elanco 401(k) Plan” or the “Plan”) provides U.S. Elanco employees a competitive level of retirement income reflecting employees’
careers with Elanco.
The Elanco 401(k) Plan and Other Retirement Benefits
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 earnings, 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 nonqualified deferred compensation plan, or (2) a nonqualified savings plan. Elanco, through one of its subsidiaries, sponsors a defined
benefit retirement plan for certain of its employees at one of its manufacturing sites. Other than this one defined benefit retirement plan, neither Elanco nor any of its subsidiaries sponsor defined benefit retirement plans, although eligible
employees may receive transition service credit for vesting and eligibility purposes under certain retirement plans sponsored by Eli Lilly and Company.
The Elanco Deferred Compensation Plan
Elanco’s executive officers may defer receipt of all or part of their cash bonus under The Elanco Deferred Compensation Plan, which allows participants to save for retirement in a
tax-effective way at minimal cost to Elanco. 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 2019” table.
Stock Ownership and Holding Guidelines
Elanco’s Board has adopted stock ownership guidelines for Elanco’s executive officers. These stock ownership guidelines require the Chief Executive Officer to hold the number of shares of
Elanco common stock equal to six times (6x) his or her base salary, and other executive officers to hold the number of shares of Elanco common stock equal to three times (3x) their base salaries. The Named Executive Offers were compliant with the stock
ownership guidelines with respect to the annual equity awards granted to them, which requires the retention of 50% of all equity awards granted until their stock ownership requirements are satisfied, as they each build toward their respective ownership
requirements.
Hedging/Pledging Policy
Elanco’s Board adopted a hedging and pledging policy under which our 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.
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 Compensation Committee has adopted an executive compensation recovery policy that gives the 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.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
31
|
Executive Compensation Tables
All amounts included in the tables below represent compensation paid to or earned by the applicable Named Executive Officers in 2019 or the year indicated in the applicable table.
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
($)(7)
|
Jeffrey Simmons
President and Chief Executive Officer
|
|
2019
2018
2017
|
|
$1,000,000
$775,185
$688,118
|
|
$0
$0
$0
|
|
$13,534,347
$2,530,654
$2,400,000
|
|
$0
$1,119,445
$0
|
|
$1,248,000
$907,450
$379,841
|
|
N/A
$0
$1,261,845
|
|
$19,422
$46,511
$41,287
|
|
$15,801,769
$5,379,245
$4,771,091
|
Todd Young
Executive Vice President and Chief Financial Officer
|
|
2019
2018
|
|
$550,000
$91,667
|
|
$0
$200,000
|
|
$1,202,567
$300,032
|
|
$0
$0
|
|
$400,400
$79,567
|
|
N/A
$1,102
|
|
$121,165
$8,285
|
|
$2,274,132
$680,653
|
David Kinard
Executive Vice President, Human
Resources
|
|
2019
2018
2017
|
|
$430,000
$420,972
$405,632
|
|
$0
$0
$0
|
|
$2,128,266
$703,302
$518,750
|
|
$0
$215,288
$0
|
|
$268,320
$180,180
$244,596
|
|
N/A
$0
$379,379
|
|
$24,256
$25,258
$24,338
|
|
$2,860,842
$1,652,499
$1,572,696
|
David Urbanek
Executive Vice President, Manufacturing and Quality
|
|
2019
2018
2017
|
|
$385,000
$381,885
$297,174
|
|
$0
$0
$0
|
|
$2,196,557
$825,302
$300,040
|
|
$0
$215,288
$0
|
|
$240,240
$233,083
$76,887
|
|
N/A
$202,856
$333,402
|
|
$18,191
$22,913
$17,830
|
|
$2,839,988
$1,881,328
$1,025,333
|
Aaron Schacht
Executive Vice President, Innovation, Regulatory and Business Development
|
|
2019
|
|
$434,167
|
|
$0
|
|
$2,101,855
|
|
$0
|
|
$270,920
|
|
N/A
|
|
$19,367
|
|
$2,826,309
|
|
(1)
|
Mr. Young received a one-time cash bonus payment of $200,000 as part of his employment offer.
|
|
(2)
|
This column shows the grant date fair value of the Elanco RSUs, and Elanco PAs, and prior Lilly PAs, Executive Officer PAs, Lilly SVAs, Executive Officer SVAs, and Lilly RSUs, as applicable, awarded to the Named Executive Officers in 2017,
2018, and 2019, 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 14: 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, 2019, filed by Elanco with the Securities and Exchange Commission on February 28, 2020. The grant date fair value for Elanco PAs included in the
“Stock Awards” column are based on the probable payout outcome anticipated at the time of grant, which for the Elanco PAs was at target value.
|
The “Stock Awards” column also includes one-time Elanco PAs and Elanco RSUs awards as follows:
|
•
|
Messrs. Simmons, Kinard, Urbanek, and Schacht each received performance-based Replacement Awards on February 12, 2019, to replace previously unvested Lilly Performance Awards, that would have otherwise been forfeited at the time of separation.
Of these awards, 40% of the amount of granted shares is subject to a one-year performance period. The remaining 60% of shares had been adjusted for the Lilly Performance from January 1, 2018 until the grant date. The grant date fair value for Mr.
Simmons was $1,008,653. For Mr. Kinard, the grant date fair value was $420,279. For Mr. Urbanek the grant date fair value was $525,408. For Mr. Schacht the grant date fair value was $299,358. These Replacement Awards vested on February 14, 2020,
for Messrs. Kinard, Urbanek, and Schacht, and will vest on February 1, 2021 for Mr. Simmons.
|
|
•
|
Messrs. Simmons, Kinard, Urbanek, and Schacht each received multiple Elanco RSUs as Replacement Awards on February 12, 2019, which replaced previously unvested Lilly SVAs and Lilly RSUs,
that would have otherwise been forfeited at the time of separation. For Mr. Simmons, the grant date fair value was $8,375,677. For Mr. Kinard, the grant date fair value was $1,082,974. For Mr. Urbanek, the grant date fair value was $1,121,100.
For Mr. Schacht, the grant date fair value was $1,152,455. For Mr. Simmons, some awards vested on December 31, 2019 and February 1, 2020, and additional awards will vest on December 31, 2020. For Mr. Kinard, some awards vested on December 31,
2019, and additional awards will vest on December 31, 2020. For Mr. Urbanek, some awards vested on December 31, 2019, and additional awards will vest on September 1, 2020, and December 31, 2020. For Mr. Schacht, some awards vested on December
31, 2019, and additional awards will vest on September 1, 2020, and December 31, 2020.
|
|
•
|
Mr. Young received an Elanco RSU 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 vested on December 3, 2019 and the remaining one-half will vest on December 3, 2020.
|
The “Stock Awards” column also includes Founders’ Award Elanco RSUs for Messrs. Simmons, Urbanek, Kinard and Schacht. These awards were granted on October 20, 2018, after the
IPO, and will vest on October 20, 2021. The grant date fair values were $1,119,454 for Mr. Simmons and $215,302 for Messrs. Kinard, Urbanek, and Schacht.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
32
|
The supplemental table below shows the total target grant date fair values of the annual equity awards approved by the Compensation Committee in 2019 for all Named Executive
Officers, and the Lilly compensation committee in 2018 for Mr. Simmons and approved by Lilly management for the remaining Named Executive Officers, as applicable:
Name
|
|
2018
Total Equity
|
|
2019
Total Equity
|
Mr. Simmons
|
|
$1,200,000
|
|
$1,200,000
|
Mr. Young*
|
|
N/A
|
|
$1,000,000
|
Mr. Kinard
|
|
$400,000
|
|
$625,000
|
Mr. Urbanek
|
|
$500,000
|
|
$550,000
|
Mr. Schacht**
|
|
-
|
|
$650,000
|
|
*
|
Mr. Young was not eligible for an annual Lilly equity grant since he was never a Lilly employee.
|
|
**
|
Mr. Schacht is a new Named Executive Officer as of 2019.
|
The table below shows the minimum, target and maximum payouts for the 2019 Replacement Performance Awards included in this column of the “Summary Compensation Table.”
Name
|
|
Payout
Date
|
|
Target
Payout
|
|
Maximum
Payout
|
Mr. Simmons
|
|
February 2021
|
|
$1,008,643
|
|
$1,412,114
|
Mr. Kinard
|
|
February 2020
|
|
$420,279
|
|
$588,403
|
Mr. Urbanek
|
|
February 2020
|
|
$525,408
|
|
$735,577
|
Mr. Schacht
|
|
February 2020
|
|
$299,358
|
|
$419,107
|
The table below shows the minimum, target and maximum payouts for the 2019 Performance Awards included in this column of the “Summary Compensation Table.”
Name
|
|
Payout
Date
|
|
Target
Payout
|
|
Maximum
Payout
|
Mr. Simmons
|
|
February 2021
|
|
$3,112,505
|
|
$6,225,010
|
Mr. Young
|
|
February 2021
|
|
$900,023
|
|
$1,800,046
|
Mr. Kinard
|
|
February 2021
|
|
$468,760
|
|
$937,520
|
Mr. Urbanek
|
|
February 2021
|
|
$412,529
|
|
$825,058
|
Mr. Schacht
|
|
February 2021
|
|
$487,524
|
|
$975,048
|
|
(3)
|
The “Option Awards” column includes Founders’ Awards of Elanco options for Messrs. Simmons, Kinard, Urbanek, and Schacht. These nonqualified stock option awards were granted after the IPO on October 20, 2018. These
options vest on the third anniversary of the grant date, followed by a seven-year exercise period. The grant date fair values were $1,119,445 for Mr. Simmons, and $215,288 for Messrs. Kinard, Urbanek and Schacht. The grant date fair value of
such awards is based upon the assumptions described in Note 13: Stock Based Compensation to Elanco’s consolidated and combined financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 filed by Elanco
with the Securities and Exchange Commission on February 20, 2019.
|
|
(4)
|
This column shows payments under the Elanco Bonus Plan for performance in 2019, and/or the Lilly Bonus Plan for performance in 2018 and 2017. See “Components of Executive Compensation – Annual Cash Bonus” above for details on 2019 payouts for
the Named Executive Officers under the 2019 Elanco Bonus Plan.
|
|
(5)
|
The amounts in this column represent information previously reported in Elanco’s 2018 proxy statement and represent changes in Lilly pension value, calculated by Lilly’s actuary, and are affected by additional service accruals and pay earned,
as well as actuarial assumption changes.
|
|
(6)
|
The amounts in this column consist solely of Elanco’s matching contributions under the Elanco 401(k) for each Named Executive Officer, any recognition program awards, Imputed Life income, or Health Saving Account contributions. There
were no reportable perquisites, personal benefits or tax reimbursements or gross-ups paid to any of the Named Executive Officers for 2019, with the exception of grossed-up relocation expenses for Mr. Young.
|
|
(7)
|
Excluding the one-time impact of the Replacement Awards, the 2019 compensation for each Named Executive Officer would have been as detailed in the table below. If not for the Replacement Awards, Sarena Lin would have been a Named Executive
Officer in 2019, rather than David Urbanek.
|
Name and Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
All Other
Compensation
($)
|
|
Total
Compensation
($)
|
Jeffrey Simmons
President and Chief Executive Officer
|
|
2019
|
|
$1,000,000
|
|
$0
|
|
$4,150,017
|
|
$0
|
|
$1,248,000
|
|
$19,422
|
|
$6,417,439
|
Todd Young
Executive Vice President and Chief Financial Officer
|
|
2019
|
|
$550,000
|
|
$0
|
|
$1,202,567
|
|
$0
|
|
$400,400
|
|
$121,165
|
|
$2,274,132
|
David Kinard
Executive Vice President, Human
Resources
|
|
2019
|
|
$430,000
|
|
$0
|
|
$625,013
|
|
$0
|
|
$268,320
|
|
$24,256
|
|
$1,347,589
|
David Urbanek
Executive Vice President, Manufacturing and Quality
|
|
2019
|
|
$385,000
|
|
$0
|
|
$550,049
|
|
$0
|
|
$240,240
|
|
$18,191
|
|
$1,193,480
|
Aaron Schacht
Executive Vice President, Innovation, Regulatory and Business Development
|
|
2019
|
|
$434,167
|
|
$0
|
|
$650,042
|
|
$0
|
|
$270,920
|
|
$19,367
|
|
$1,374,496
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
33
|
Grants of Plan-Based Awards During 2019
The following table reflects grants of plan-based awards described in the CD&A under each of the following plans: the Elanco Bonus Plan (a non-equity incentive plan), and the Elanco
Stock Plan, which provides for the grant of Elanco PA, Elanco RSUs, and Elanco stock options. To receive a payout under the Elanco PAs and Elanco RSUs, a participant must remain employed with Elanco through the end of the relevant performance period or
vesting date (except in the case of death, disability, retirement or redundancy). No dividends accrue on either the Elanco PAs or the Elanco RSUs prior to payout or vesting, as applicable.
|
|
|
|
|
|
Elanco
compensation
committee
|
|
Estimated Future Payouts Under
Non-Equity Incentive
Plan Awards(1)
|
|
Estimated Future Payouts
Under Equity Incentive
Plan Awards
|
|
All
Other
Stock
Awards:
Number
of Shares
of Stock
|
|
Grant
Date
Fair Value
|
Name
|
|
Award
|
|
Grant
Date(2)
|
|
Action
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
|
or Units
(#)
|
|
of Stock
Awards(8)
|
Mr. Simmons
|
|
2019 Elanco Bonus Plan
|
|
|
|
|
|
$72,000
|
|
$1,200,000
|
|
$2,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Replacement PAs(3)
|
|
2/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
20,655
|
|
34,425
|
|
48,195
|
|
|
|
$1,008,652
|
|
|
2019 Elanco PAs(4)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
50,925
|
|
101,849
|
|
203,698
|
|
|
|
$3,112,505
|
|
|
2019 Replacement RSUs(5)
|
|
3/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,718
|
|
$8,375,678
|
|
|
2019 Elanco RSUs(6)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,950
|
|
$1,037,512
|
Mr. Young
|
|
2019 Elanco Bonus Plan
|
|
|
|
|
|
$23,100
|
|
$385,000
|
|
$770,000
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Elanco PAs(4)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
14,726
|
|
29,451
|
|
58,902
|
|
|
|
$900,023
|
|
|
2019 Elanco RSUs(6)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,817
|
|
$300,008
|
|
|
2019 Elanco Own Our Future Award(7)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
$2,536
|
Mr. Kinard
|
|
2019 Elanco Bonus Plan
|
|
|
|
|
|
$15,480
|
|
$258,000
|
|
$516,000
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Replacement PAs(3)
|
|
2/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
8,606
|
|
14,344
|
|
20,082
|
|
|
|
$420,279
|
|
|
2019 Elanco PAs(4)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
7,670
|
|
15,339
|
|
30,678
|
|
|
|
$468,760
|
|
|
2019 Replacement RSUs(5)
|
|
3/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,228
|
|
$1,082,974
|
|
|
2019 Elanco RSUs(6)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,113
|
|
$156,253
|
Mr. Urbanek
|
|
2019 Elanco Bonus Plan
|
|
|
|
|
|
$13,860
|
|
$231,000
|
|
$462,000
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Replacement PAs(3)
|
|
2/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
7,173
|
|
17,932
|
|
21,357
|
|
|
|
$525,408
|
|
|
2019 Elanco PAs(4)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
6,750
|
|
13,499
|
|
26,998
|
|
|
|
$412,529
|
|
|
2019 Replacement RSUs(5)
|
|
3/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,413
|
|
$1,121,100
|
|
|
2019 Elanco RSUs(6)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
$137,520
|
Mr. Schacht
|
|
2019 Elanco Bonus Plan
|
|
|
|
|
|
$15,630
|
|
$260,500
|
|
$521,000
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Replacement PAs(3)
|
|
2/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
6,130
|
|
10,217
|
|
14,304
|
|
|
|
$299,358
|
|
|
2019 Elanco PAs(4)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
7,977
|
|
15,953
|
|
31,906
|
|
|
|
$487,524
|
|
|
2019 Replacement RSUs(5)
|
|
3/12/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,424
|
|
$1,152,455
|
|
|
2019 Elanco RSUs(6)
|
|
3/1/2019
|
|
2/12/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,318
|
|
$162,518
|
|
(1)
|
These columns show the threshold, target and maximum payouts for performance under the 2019 Elanco 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 the Compensation Committee. Mr. Schacht’s full year 2019 bonus target is reflective of his adjusted base pay, effective March 1, 2019.
|
|
(2)
|
To assure grant timing is not manipulated for employee gain, the annual grant date for Elanco awards is established in advance of the grant date by the Compensation Committee. Elanco equity awards to new hires and other off-cycle grants are
generally effective on the first trading day of the following quarter.
|
|
(3)
|
This row shows the range of payouts for 2019 performance-based Replacement Awards, of which 40% of the granted shares are subject to a performance multiple ranging from 0% to 200% of target. The performance-based Replacement Awards paid out in
February 2020, with the exception of those of Mr. Simmons’, which will pay out in January 2021. The grant date fair value of the performance-based Replacement Awards was based on the probable payout outcome at the time of grant. The target and
maximum values for these awards are set forth in Note 2 to the Summary Compensation Table above.
|
|
(4)
|
This row shows the range of payouts for 2019 Elanco Performance Awards. These performance awards will pay out in February 2021, with payouts ranging from 0% to 200%. The grant date fair value of the Elanco Replacement PAs is based on the
probable payout outcome at the time of grant. The target and maximum values are listed for these awards in Note 2 to the Summary Compensation Table, above.
|
|
(5)
|
This row shows the shares underlying the Elanco RSUs granted as Replacement Awards. For Messrs. Simmons, Kinard, Urbanek, and Schacht, a certain number of these shares vested on December 31, 2019. See also the information in “Elanco Stock
Vested in 2019” below. Other portions of these awards vested or will vest February 1, 2020 and December 31, 2020 for Mr. Simmons; December 31, 2020 for Mr. Kinard; September 1, 2020 and December 31, 2020 for Messrs. Urbanek and Schacht.
|
|
(6)
|
This row shows the shares underlying the Elanco RSUs granted under the 2019 Elanco Long-Term Incentive Plan. One third of these shares vested on March 1, 2020, one third of these shares will vest on March 1, 2021, and the remainder of these
shares will vest on March 1, 2022.
|
|
(7)
|
This row shows the shares granted to Mr. Young as part of a global grant made to all employees in connection with the company’s IPO (the ‘‘all employee award’’). The other Named Executive Officers did not receive this award as they had received
Founders’ Awards in 2018. The shares underlying the Founders’ Award will all vest on March 1, 2022. Since Mr. Young was not employed at Elanco at the time of these Founders’ Awards, he was provided with this “all employee” RSU Award grant.
|
|
(8)
|
This column shows the grant date fair value of the Elanco PAs 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 Elanco
RSUs. See also notes 3 through 7 of this table.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
34
|
Outstanding Equity Awards at December 31, 2019
The closing price of Elanco’s common stock on December 31, 2019, which was $29.45, was used to calculate the values in the table below.
|
|
|
|
Option Awards
|
|
Stock Awards
|
Name
|
|
Award
|
|
Number of
Securities
Underlying
Options
Exercisable
(#)
|
|
Number of
Securities
Underlying
Options
Unexercisable
(#)
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
Number of
Shares
or Units of
Stock
That Have
Not Vested
(#)
|
|
Market Value
of Shares or
Units of
Stock That
Have Not
Vested
($)
|
|
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
|
|
2019 - 2020 Executive PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,849(1)
|
|
$2,999,453
|
|
|
2019 Elanco RSUs
|
|
|
|
|
|
|
|
|
|
33,950(2)
|
|
$999,828
|
|
|
|
|
|
|
2019 Elanco Replacement PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,339(3)
|
|
$1,013,816
|
|
|
2019 Elanco Replacement RSUs
|
|
|
|
|
|
|
|
|
|
153,219(4)
|
|
$4,512,300
|
|
|
|
|
|
|
Elanco Founders RSUs
|
|
|
|
|
|
|
|
|
|
36,287(5)
|
|
$1,068,652
|
|
|
|
|
|
|
Elanco Options
|
|
|
|
109,642(6)
|
|
$31.61
|
|
10/20/2028
|
|
|
|
|
|
|
|
|
Mr. Young
|
|
2019 - 2020 Elanco PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,451(1)
|
|
$867,332
|
|
|
2019 Elanco RSUs
|
|
|
|
|
|
|
|
|
|
9,817(2)
|
|
$289,111
|
|
|
|
|
|
|
2019 Sign-On RSUs
|
|
|
|
|
|
|
|
|
|
4,492(7)
|
|
$132,289
|
|
|
|
|
|
|
2019 Own Our Future Award
|
|
|
|
|
|
|
|
|
|
83(8)
|
|
$2,444
|
|
|
|
|
Mr. Kinard
|
|
2019 – 2020 Elanco PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,339(1)
|
|
$451,734
|
|
|
2019 Elanco RSUs
|
|
|
|
|
|
|
|
|
|
5,113(2)
|
|
$150,578
|
|
|
|
|
|
|
2019 Elanco Replacement PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,308(9)
|
|
$422,431
|
|
|
2019 Elanco Replacement RSUs
|
|
|
|
|
|
|
|
|
|
17,928(10)
|
|
$527,980
|
|
|
|
|
|
|
Elanco Founders RSUs
|
|
|
|
|
|
|
|
|
|
6,979(5)
|
|
$205,532
|
|
|
|
|
|
|
Elanco Options
|
|
|
|
21,086(6)
|
|
$31.61
|
|
10/20/2028
|
|
|
|
|
|
|
|
|
Mr. Urbanek
|
|
2019 – 2020 Elanco PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,499(1)
|
|
$397,546
|
|
|
2019 Elanco RSUs
|
|
|
|
|
|
|
|
|
|
4,500(2)
|
|
$132,525
|
|
|
|
|
|
|
2019 Elanco Replacement PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887(9)
|
|
$528,097
|
|
|
2019 Elanco Replacement RSUs
|
|
|
|
|
|
|
|
|
|
32,289(11)
|
|
$950,911
|
|
|
|
|
|
|
Elanco Founders RSUs
|
|
|
|
|
|
|
|
|
|
6,979(5)
|
|
$205,532
|
|
|
|
|
|
|
Elanco Options
|
|
|
|
21,086(6)
|
|
$31.61
|
|
10/20/2028
|
|
|
|
|
|
|
|
|
Mr. Schacht
|
|
2019 – 2020 Elanco PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,953(1)
|
|
$469,816
|
|
|
2019 Elanco RSUs
|
|
|
|
|
|
|
|
|
|
5,318(2)
|
|
$156,615
|
|
|
|
|
|
|
2019 Elanco Replacement PAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,192(9)
|
|
$300,891
|
|
|
2019 Elanco Replacement RSUs
|
|
|
|
|
|
|
|
|
|
27,588(12)
|
|
$812,467
|
|
|
|
|
|
|
Elanco Founders RSUs
|
|
|
|
|
|
|
|
|
|
6,979(5)
|
|
$205,532
|
|
|
|
|
|
|
Elanco Options
|
|
|
|
21,086(6)
|
|
$31.61
|
|
10/20/2028
|
|
|
|
|
|
|
|
|
|
(1)
|
Elanco PAs granted for the 2019-2020 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 the Securities and Exchange
Commission’s regulations, the number of shares and payout value for the performance awards and restricted stock units reflect the target payout for this grant since the company’s performance over the two-year performance period cannot be
determined at this time.
|
|
(2)
|
Elanco RSUs granted on March 1, 2019. One third of the shares underlying this grant vested on March 1, 2020, one third of the shares will vest March 1, 2021, and the remainder of the shares will vest March 1, 2022.
|
|
(3)
|
For Mr. Simmons, this award represents a performance-based Replacement Award that was issued on February 12, 2019, with a one-year performance period from January 1, 2019 until December 31, 2019, to replace unvested Lilly Performance Award
shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly. This award will vest on February 1, 2021. The number of shares reflected in the table with respect to this Replacement Award is the actual amount of
shares that will vest on February 21, 2021, as the final performance metric was approved by the Compensation Committee on February 14, 2020.
|
|
(4)
|
Elanco RSUs granted on March 12, 2019, to replace the award of unvested Lilly RSUs. Of this total, 65,060 shares underlying this award vested on February 1, 2020, and 88,159 shares underlying this award will vest on December 31, 2020.
|
|
(5)
|
Elanco RSUs award granted after Elanco’s IPO, which award shall vest annually in three equal installments beginning on October 20, 2021.
|
|
(6)
|
An award of nonqualified stock options granted after Elanco’s IPO, which award shall vest annually in three equal installments beginning on October 20, 2021 followed by a seven-year exercise period ending October 20, 2028.
|
|
(7)
|
Elanco RSU granted to Mr. Young on December 3, 2018. One-half of this grant (4,491 shares) vested on December 3, 2019, and the remaining 4,492 shares will vest on December 3, 2020.
|
|
(8)
|
Reflects the “all employee” award granted to Mr. Young on March 1, 2019. The award will cliff vest on March 1, 2022.
|
|
(9)
|
For Messrs. Kinard, Urbanek, and Schacht this award represents a performance-based Replacement Award that was issued February 12, 2019, with a one-year performance period from January 1, 2019 until December 31, 2019, to replace unvested Lilly
Performance Award shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly. This award vested on February 14, 2020. The number of shares reflected in the table with respect to these Replacement Award is the
actual amount of shares that vested based on the company’s performance under the metrics for such award as approved by the Compensation Committee on February 14, 2020.
|
|
(10)
|
Elanco RSUs granted to Mr. Kinard on March 12, 2019, to replace unvested Lilly RSU shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly, which will vest on December 31, 2020.
|
|
(11)
|
Elanco RSUs granted to Mr. Urbanek on March 12, 2019, to replace unvested Lilly RSU shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly. Of this total, 9,876 shares underlying these Elanco RSUs will
vest on September 1, 2020, and the remaining 22,413 shares underlying these Elanco RSUs will vest on December 31, 2020.
|
|
(12)
|
Elanco RSUs granted to Mr. Schacht on March 12, 2019, to replace unvested Lilly RSU shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly. Of this total, 14,815 shares underlying these Elanco RSUs will
vest on September 1, 2020, and the remaining 12,773 shares underlying these Elanco RSUs will vest on December 31, 2020.
|
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
35
|
Elanco Stock Vested in 2019
|
|
Elanco Stock Awards
|
|
Name
|
|
Number of
Shares
Acquired on
Vesting (#)
|
|
Value
Realized on
Vesting ($)(1)
|
|
Mr. Simmons
|
|
67,772(2)
|
|
$1,995,885
|
|
Mr. Young
|
|
3,207(3)
|
|
$87,551
|
|
Mr. Kinard
|
|
11,412(2)
|
|
$336,083
|
|
Mr. Urbanek
|
|
2,078(2)
|
|
$61,197
|
|
Mr. Schacht
|
|
6,081(2)
|
|
$179,085
|
|
|
(1)
|
Amounts reflect the market value of the Elanco’s common stock on the day the stock award vested.
|
|
(2)
|
Replacement Awards issued in March of 2019 to replace unvested Lilly shares that would have otherwise been forfeited at the time of Elanco’s separation from Lilly.
|
|
(3)
|
The first vesting event of Mr. Young’s sign-on award of restricted stock units granted in December 2018.
|
Nonqualified Deferred Compensation
Name
|
|
Plan
|
|
Executive
Contributions
in Last Fiscal
Year
($)(1)
|
|
Registrant
(Elanco)
Contributions
in Last Fiscal
Year
($)
|
|
Aggregate
Earnings
in Last
Fiscal Year
($)
|
|
Aggregate
Withdrawals/
Distributions
in Last
Fiscal Year
($)
|
|
Aggregate
Balance at
Last Fiscal
Year End
($)
|
Mr. Simmons
|
|
Elanco deferred compensation
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Total
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Mr. Young
|
|
Elanco deferred compensation
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Total
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Mr. Kinard
|
|
Elanco deferred compensation
|
|
$67,080
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Total
|
|
$67,080
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Mr. Urbanek
|
|
Elanco deferred compensation
|
|
$240,240
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Total
|
|
$240,240
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Mr. Schacht
|
|
Elanco deferred compensation
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
Total
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
(1)
|
The amounts in this column are also included in the Summary Compensation Table, in the “Elanco Non-Equity Incentive Plan Compensation” column (deferred compensation).
|
The Nonqualified Deferred Compensation table above shows information about the Elanco Deferred Compensation Plan. Elanco executives may defer receipt of all or part of their cash bonus
under the Elanco Deferred Compensation Plan. Amounts deferred by executives under the Elanco 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. There were no active balances during 2019, so there is no compounding to report. Initial contributions for bonuses earned in 2019, payable in 2020, will be made in the first quarter of 2020.
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 Elanco, except in the event of hardship as approved by the Compensation
Committee. All deferral elections and associated distribution schedules are irrevocable. The Nonqualified Deferred Compensation is unfunded and subject to forfeiture in the event of bankruptcy.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
36
|
Payments Upon Termination or Change in Control (as of December 31, 2019)
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, 2019, in the circumstances described in the table. The closing price of Elanco’s common stock on December 31, 2019, was $29.45, and was the price used to calculate the
values in the table below. 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
|
|
|
|
|
|
|
|
|
• Termination due to death
|
|
$0
|
|
$0
|
|
$8,744,564 (3)
|
|
$8,744,564
|
• Termination due to disability, reduction in force, or retirement
|
|
$0
|
|
$0
|
|
$5,749,300(3)
|
|
$5,749,300
|
• Involuntary or good reason termination after change in control
|
|
$4,400,000
|
|
$26,624(2)
|
|
$10,594,049 (5)
|
|
$15,020,673
|
Mr. Young
|
|
|
|
|
|
|
|
|
• Termination due to death
|
|
$0
|
|
$0
|
|
$818,675(4)
|
|
$818,675
|
• Termination due to disability, reduction in force, or retirement
|
|
$0
|
|
$0
|
|
$485,136 (4)
|
|
$485,136
|
• Involuntary or good reason termination after change in control
|
|
$1,870,000
|
|
$26,420(2)
|
|
$1,291,176 (4)
|
|
$3,187,596
|
Mr. Kinard
|
|
|
|
|
|
|
|
|
• Termination due to death
|
|
$0
|
|
$0
|
|
$1,512,160 (3)
|
|
$1,512,160
|
• Termination due to disability, reduction in force, or retirement
|
|
$0
|
|
$0
|
|
$986,621 (3)
|
|
$986,621
|
• Involuntary or good reason termination after change in control
|
|
$1,376,000
|
|
$17,919(2)
|
|
$1,758,253 (5)
|
|
$3,152,172
|
Mr. Urbanek
|
|
|
|
|
|
|
|
|
• Termination due to death
|
|
$0
|
|
$0
|
|
$1,998,037 (3)
|
|
$1,998,037
|
• Termination due to disability, reduction in force, or retirement
|
|
$0
|
|
$0
|
|
$1,280,137 (3)
|
|
$1,280,137
|
• Involuntary or good reason termination after change in control
|
|
$1,232,000
|
|
$20,934(2)
|
|
$2,214,611 (5)
|
|
$3,467,545
|
Mr. Schacht
|
|
|
|
|
|
|
|
|
• Termination due to death
|
|
$0
|
|
$0
|
|
$1,689,375(3)
|
|
$1,689,375
|
• Termination due to disability, reduction in force, or retirement
|
|
$0
|
|
$0
|
|
$1,045,328 (3)
|
|
$1,045,328
|
• Involuntary or good reason termination after change in control
|
|
$1,440,000
|
|
$27,487(2)
|
|
$1,945,320 (5)
|
|
$3,412,807
|
|
(1)
|
As of December 31, 2019, the Named Executive Officers 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 Founders’ Award, 2019 - 2020 Elanco PAs, 2019 - 2021 Elanco RSUs, 2019 Eli Lilly Replacement PAs, and 2019 Eli Lilly Replacement RSUs. For Mr. Young, the amount includes 2019 - 2020
Elanco PAs, 2019 - 2021 Elanco RSUs, 2019 sign on RSU award and the 2019 “all employee” award. For Mr. Kinard, the amount includes the Founders’ Award, 2019 - 2020 Elanco PAs, 2019 - 2021 Elanco RSUs, 2019 Eli Lilly Replacement PAs, and 2019 Eli
Lilly Replacement RSUs. For Mr. Urbanek, the amount includes the Founders’ Award Elanco RSUs, 2019 – 2020 Elanco PAs, 2019 -2021 Elanco RSUs, 2019 Eli Lilly Replacement PAs, and 2019 Eli Lilly Replacement RSUs. For Mr. Schacht, the amount
includes the Founders’ Award Elanco RSUs, 2019 – 2020 Elanco PAs, 2019 -2021 Elanco RSUs, 2019 Eli Lilly Replacement PAs, and 2019 Eli Lilly Replacement RSUs.
|
|
(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 PAs, Eli Lilly Replacement RSUs and PAs, and 2019 Founders’ Awards, as applicable, upon the event of certain qualifying terminations following a change-in-control.
|
Equity Acceleration in Connection with a Change-in-Control
Upon a change-in-control of Elanco, 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 PAs will be paid out at target upon a change in control.
Elanco Change-in-Control Severance Pay Plan for Certain of Elanco’s Employees
In connection with the IPO, the Board adopted Elanco change-in-control severance pay plans for nearly all Elanco employees, including a plan that applies to the Named Executive Officers.
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
participating Elanco employees’ and Elanco’s shareholder interests by enabling executives to evaluate corporate transactions that may be in the best interests of Elanco’s shareholders and other stakeholders without undue concern over whether the
transactions would jeopardize the participating employee’s own employment. Outside of a change-in-control, Elanco is not obligated to pay severance to its Named Executive Officers upon termination of employment, but severance may be paid at the
discretion of the Compensation Committee.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
37
|
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 resulting from a loss of employment.
|
|
•
|
Covered terminations. Our participating Named Executive Officers 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 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 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. Elanco 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.
|
CEO Pay Ratio
Elanco’s compensation and benefits philosophy, and the overall structure of our compensation and benefit programs, are broadly similar across the organization to encourage and reward all
employees who contribute to our success. We strive to ensure the pay of every Elanco employee reflects the level of their job impact and responsibilities, and is competitive within our peer group. Compensation rates are benchmarked and set to be
market-competitive in the country in which the jobs are performed. Elanco’s ongoing commitment to pay equity is critical to our success in supporting a diverse workforce with opportunities for all employees to grow, develop, and contribute. Elanco is a
global company that employs approximately 6,080 people, with more than half of our workforce located outside of the U.S.
Under rules adopted pursuant to the Dodd-Frank Act of 2010, Elanco is required to calculate and disclose the total compensation paid to its median paid employee, as well as the ratio of
the total compensation paid to the median employee as compared to the total compensation paid to Elanco’s CEO. The paragraphs that follow describe our methodology and the resulting CEO Pay ratio.
Measurement Date
We identified the median employee using our employee population on December 31, 2019.
Consistently Applied Compensation Measure (CACM)
Under the relevant rules, we identified the median employee 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 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. We chose not to include one-time equity awards when choosing the median employee, such as any Replacement Awards that were granted to certain
of the executive officers in March 2019, as the grant of such awards is not a recurring event.
De Minimis Exception
Elanco chose not to exclude any employees when determining our median employee.
Methodology and Pay Ratio
After applying our CACM, we identified the median paid employee. Once the median paid employee was identified, we calculated the median paid employee’s total annual compensation in
accordance with the requirements of the Summary Compensation Table.
Our median employee compensation as calculated using Summary Compensation Table requirements was $81,265. Our CEO’s compensation as reported in the Summary Compensation Table was
$15,801,769, resulting in a CEO to median employee pay ratio of 194:1. However, if we exclude the Replacement Awards as noted above in our CACM approach, Mr. Simmons’ revised compensation becomes $6,417,439. The CEO to median employee pay ratio under
this approach is 79:1.
This information is being provided for compliance purposes. Neither the Compensation Committee nor management of the company used the pay ratio measure in making compensation decisions for
2019.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
38
|
oWNERSHIP OF COMPANY STOCK
The following table sets forth, as of March 16, 2020, beneficial ownership of shares of Elanco’s common stock by (i) 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, and (ii) by each person or group known to Elanco to be the beneficial owner of more than 5% of outstanding shares of Elanco’s 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 398,799,023 shares of Elanco’s common stock outstanding as of March 16, 2020.
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 the outstanding shares of Elanco’s 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
|
|
Directors’ and
officers’ total
stock-based
holdings(2)
|
T. Rowe Price Associates, Inc.(3)
|
|
41,405,577
|
|
10.38%
|
|
N/A
|
The Vanguard Group (4)
|
|
34,077,726
|
|
8.55%
|
|
N/A
|
Wellington Management Group LLP (5)
|
|
30,932,315
|
|
7.76%
|
|
N/A
|
PRIMECAP Management Company(6)
|
|
30,598,365
|
|
7.67%
|
|
N/A
|
|
|
|
|
|
|
|
Jeffrey N. Simmons
|
|
245,849
|
|
*
|
|
598,759
|
David S. Kinard
|
|
33,058
|
|
*
|
|
88,552
|
Aaron L. Schacht
|
|
16,239
|
|
*
|
|
87,813
|
David A. Urbanek
|
|
18,679(7)
|
|
*
|
|
88,726
|
Todd S. Young
|
|
15,520
|
|
*
|
|
41,513
|
R. David Hoover
|
|
65,920(8)
|
|
*
|
|
76,995
|
Kapila K. Anand
|
|
2,200
|
|
*
|
|
13,275
|
John P. Bilbrey
|
|
14,642(9)
|
|
*
|
|
22,658
|
Art A. Garcia
|
|
—
|
|
—
|
|
7,055
|
Michael J. Harrington
|
|
7,500
|
|
*
|
|
16,779
|
Deborah T. Kochevar
|
|
1,000
|
|
*
|
|
9,016
|
Lawrence E. Kurzius
|
|
10,000
|
|
*
|
|
21,075
|
Kirk McDonald
|
|
—
|
|
—
|
|
8,016
|
Deborah Scots-Knight
|
|
—
|
|
—
|
|
8,016
|
All directors and executive officers as a group (18 persons)
|
|
497,328
|
|
*
|
|
1,320,770
|
(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 16, 2020, 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, or (ii) the annual award of deferred stock units to be credited to non-employee directors in November 2020 under the
Directors’ Deferral Plan based on service during 2020.
(3) The address for T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, MD 21202. It has sole voting power with respect to 17,386,485 shares and sole dispositive
power with respect to 41,341,877 shares. The share information is based solely on Amendment No. 2 to Schedule 13G filed by T. Rowe Price Associates, Inc. with the SEC on April 10, 2019.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
39
|
(4) The address for The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355. It has sole voting power with respect to 276,724 shares, shared voting power with respect to
118,687 shares, sole dispositive power with respect to 33,719,198 shares and shared dispositive power with respect to 358,528 shares. The share information is based solely on a Schedule 13G filed by BlackRock, Inc. with the SEC on February 11, 2020.
(5) The address for Wellington Management Group LLP is 280 Congress Street, Boston, MA 02210. It has, together with certain of its affiliates, shared voting power with respect
to 28,088,239 shares and shared dispositive power with respect to 30,932,315 shares. The share information is based solely on a Schedule 13G filed by Wellington Management Group LLP with the SEC on January 28, 2020.
(6) The address for PRIMECAP Management Company is 177 E. Colorado Blvd., 11th Floor, Pasadena
CA 91105. It has sole voting power with respect to 29,698,027 shares and sole dispositive power with respect to 30,598,365 shares. The share information is based solely on Amendment No. 1 to Schedule 13G filed by PRIMECAP Management Company with the
SEC on February 12, 2020.
(7) Includes 228 shares held by Mr. Urbanek’s children.
(8) Includes 15,920 shares held in trust over which Mr. Hoover shares voting and investment power.
(9) Includes 14,642 shares held in trust over which Mr. Bilbrey shares voting and investment power.
ELANCO ANIMAL HEALTH INCORPORATED - Proxy Statement
|
40
|
PROXY ITEM NO. 2: Proposal to Ratify the Appointment of Principal Independent Auditor
The Audit Committee is responsible 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 in the Audit Committee charter, available on our website at investor.elanco.com under “Governance.”
In connection with 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’s qualifications and experience; (2) the communication and interactions with the auditor over the course of the year; and (3) the auditor’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 committee also periodically considers
whether a rotation of the company’s independent auditor 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 principal independent auditor is in the best interests of the company and its shareholders, and has therefore reappointed the firm
of EY as principal independent auditor for the company for 2020. 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. EY has gained
institutional knowledge and expertise regarding the company’s global operations, accounting policies and practices, and internal control over financial reporting. Audit and other fees are also competitive with peer companies because of EY’s familiarity
with the company and its operations. This appointment is being submitted to the shareholders for ratification.
Representatives of EY are expected to attend the annual 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 the ratification of the appointment of Ernst & Young LLP as our principal
independent auditor for 2020.
|