to elect four directors of the company to serve three-year terms

to ratify the appointment by the audit committee of Ernst & Young LLP as principal independent auditor for the year 2012

to approve, by non-binding vote, compensation paid to the company’s named executive officers

to approve amendments to the articles of incorporation to provide for annual election of all directors

to approve amendments to the articles of incorporation to eliminate all supermajority voting requirements

to consider shareholder proposals on establishing a majority vote committee and transparency in animal research.

Agenda

Item

Item 1

Name and principal occupation

Katherine Baicker, Ph.D.

Professor of Health Economics,

Harvard University

J. Erik Fyrwald

President, Ecolab Inc.

Ellen R. Marram

President, The Barnegat Group LLC

The New York Times
Company

Douglas R. Oberhelman

Chairman and Chief Executive Officer,

Caterpillar Inc.

Item 2

Item 3

Item 4

Item 5

standing shares

Item 6

Item 7

closely link compensation with company performance and individual performance

foster a long-term focus

reflect the market for pharmaceutical talent

be efficient and egalitarian

appropriately mitigate risk.

Alfred G.
Gilman,

M.D., Ph.D.

Professor

of Health

Economics,

Department of

Health Policy and

Management,

Harvard

University School

of Public Health;

and Research

Associate,

National Bureau

of Economic

Research

and Chief

Executive Officer,

United Parcel

Service, Inc.

President,
Private Client
Services, and
Managing
Director,
Marsh, Inc.

Guggenheim

Professor of

Biochemistry and
Molecular Biology
and Professor

of Molecular

Pharmacology
and Experimental

Therapeutics, Mayo
Medical School;

and Director, Mayo
Clinic Center for
Individualized
Medicine

Director

since 2011

since 2000

since 1987

since 1995

Board

committee:

public policy

and compliance

committees:
audit [chair];
compensation

committees:
directors and
corporate
governance;
finance

[chair]

committees:
public policy
and compliance;
science

and technology
[chair]

committees:
compensation
[chair];

directors and
corporate
governance

committees:

public policy

and compliance;
science and

technology

committees:
public

policy and
compliance;
science
and technology

R. David

Hoover

John C.

Lechleiter,

Ph.D.

Douglas R.

Oberhelman

Ellen R.

Marram

Martin S.

Feldstein,

Ph.D.

Kathi P.

Seifert

Ralph

Alvarez

Chairman,

Ball Corporation

President, and
Chief Executive

Officer

Chief Executive

Officer,

Caterpillar Inc.

The Barnegat

Group LLC

Professor of

Economics,

Harvard

University

Vice President,

Kimberly-Clark
Corporation

and Chief

Operating Officer,

McDonald’s

Corporation

Director

since 2009

since 2005

since 2008

since 2002

since 2002

since 1995

since 2009

Board

committees:

audit;

compensation

committees:

none

committees:

audit; finance

committees:

compensation;

directors

and corporate

governance

[chair]

committees:
audit; finance;

public policy
and compliance
[chair]

committees:

audit;

compensation

committees:

finance; public
policy and

compliance;

science and

technology

Professor of Health Economics at the Harvard University School of Public Health, Department of Health Policy and Management; and Research Associate at the National Bureau of Economic Research

Dr. Baicker has been a professor of health economics at the Department of Health Policy and Management, School of Public Health, since 2007. From 2005 to 2007, she served as a Senate-confirmed member of the Council of Economic Advisers. From 1998 to 2005, Dr. Baicker was assistant professor and associate professor of economics at Dartmouth College. In 2001 and 2002 she also served as an economist to the Council of Economic Advisers, Executive Office of the President, and in 2003 was a visiting assistant professor at the University of Chicago Harris School of Public Policy. Dr. Baicker is a commissioner of the Medicare Payment Advisory Board and serves on the Panel of Health Advisers to the Congressional Budget Office. She is a member of the editorial boards of Health Affairs and the Journal of Health Economics, chair of the board of directors of AcademyHealth, editor of the Forum for Health Economics and Policy, and associate editor of the Journal of Economic Perspectives. She is an elected member of the Institute of Medicine. Dr. Baicker has been serving under interim election since December 2011.

Qualifications: Dr. Baicker is a leading researcher in the fields of health economics, public economics, and labor economics. As a valued advisor to numerous health care-related commissions and committees, her expertise in health care policy and health care delivery is recognized by both academia and government.

Board committee: public policy and compliance

George F. Baker Professor of Economics, Harvard University

Dr. Feldstein is the George F. Baker Professor of Economics at Harvard University and president emeritus of the National Bureau of Economic Research. From 1982 through 1984, he served as chairman of the Council of Economic Advisers and President Ronald Reagan’s chief economic adviser. Dr. Feldstein served as president and chief executive officer of the National Bureau of Economic Research from 1977 to 1982 and 1984 to 2008. In 2009, President Obama appointed him to the President’s Economic Recovery Advisory Board. He is a member of the American Philosophical Society, a corresponding fellow of the British Academy, a fellow of the Econometric Society, and a fellow of the National Association for Business Economics. Dr. Feldstein is a trustee of the Council on Foreign Relations and a member of the Trilateral Commission, the Group of 30, the American Academy of Arts and Sciences, and the Council of Academic Advisors of the American Enterprise Institute, as well as past president of the American Economic Association. He previously served on the boards of American International Group, Inc., TRW, Phoenix Life Insurance, and HCA Inc.

Qualifications: Dr. Feldstein is a renowned economist, academic, and adviser to U.S. presidents of both political parties. He has deep economic and public policy expertise, financial acumen, and a global perspective. His background as an academic brings a diversity of experience and perspective to the board’s deliberations. He has also served on the boards of several major public companies.

Board committees: audit; finance; public policy and compliance (chair)

President of Ecolab Inc.

J. Erik Fyrwald is president of Ecolab Inc. Prior to the merger of Ecolab and Nalco Company in December 2011, Mr. Fyrwald was chairman and chief executive officer of Nalco from 2008 to 2011. He joined Nalco following a 27-year career at DuPont. From 2003 to 2008, Mr. Fyrwald served as group vice president of the agriculture and nutrition division at DuPont. From 2000 until 2003, he was vice president and general manager of DuPont’s nutrition and health business. At DuPont, he held a broad variety of assignments in a number of divisions covering many industries. He has worked in several locations throughout North America and Asia. Mr. Fyrwald serves as a director of the Society of Chemical Industry, the American Chemistry Council, and the Chicago Public Education Fund, and is a trustee of the Field Museum of Chicago.

Qualifications: Mr. Fyrwald has a strong record of operational and strategy leadership in two complex worldwide businesses with a focus on technology and innovation. An engineer by training, he has extensive senior executive experience at DuPont, a multinational chemical company, where he led the agriculture and nutrition division, which used chemical and biotechnology solutions to enhance plant health. He served for three years as chairman of the board and CEO of Nalco, a global technology-based water products and services company.

Board committees: public policy and compliance; science and technology

President, The Barnegat Group LLC

Ms. Marram will serve as the board’s lead director beginning April 2012. Ms. Marram is the president of The Barnegat Group LLC, a firm that provides business advisory services. She was a managing director at North Castle Partners, LLC from 2000 to 2005 and served as an advisor to the firm from 2006 to 2010. From 1993 to 1998, Ms. Marram was president and chief executive officer of Tropicana and the Tropicana Beverage Group. From 1988 to 1993, she was president and chief executive officer of the Nabisco Biscuit Company, the largest operating unit of Nabisco, Inc.; from 1987 to 1988, she was president of Nabisco’s grocery division; and from 1970 to 1986, she held a series of marketing positions at Nabisco/Standard Brands, Johnson & Johnson, and Lever Brothers. Ms. Marram is a member of the board of directors of Ford Motor Company and The New York Times Company, as well as several private companies. She previously served on the board of Cadbury plc. She also serves on the boards of Wellesley College, Institute for the Future, New York-Presbyterian Hospital, Lincoln Center Theater, and Families and Work Institute.

Qualifications: Ms. Marram is a former CEO with a strong marketing and consumer-brand background. Through her nonprofit and private company activities, she has a special focus and expertise in wellness and consumer health. Ms. Marram has extensive corporate governance experience through service on other public company boards in a variety of industries.

Board committees: compensation; directors and corporate governance (chair)

Chairman and Chief Executive Officer, Caterpillar Inc.

Mr. Oberhelman has been chairman of the board of Caterpillar Inc. since November 2010 and chief executive officer since July 2010. He previously served as vice chairman and chief executive officer-elect of Caterpillar. He joined Caterpillar in 1975 and has held a variety of positions, including senior finance representative based in South America for Caterpillar Americas Co., region finance manager and district manager for the company’s North American commercial division, and managing director and vice general manager for strategic planning at Caterpillar Japan Ltd. Mr. Oberhelman was elected a vice president in 1995, serving as Caterpillar’s chief financial officer from 1995 to November 1998. In 1998, he became vice president with responsibility for the engine products division and he was elected a group president and member of Caterpillar’s executive office in 2002. Mr. Oberhelman serves on the boards of Caterpillar, the National Association of Manufacturers, and the Wetlands America Trust. He previously served on the board of Ameren Corporation. He is a member of the Executive Committee of the Business Roundtable and a member of the Business Council.

Qualifications: Mr. Oberhelman has a strong strategic and operational background as a senior executive (and currently as chairman and CEO) of Caterpillar, a leading manufacturing company with worldwide operations and a special focus on emerging markets. He is an audit committee financial expert as a result of his prior experience as CFO of Caterpillar and as a member and chairman of the audit committee of another U.S. public company.

Board committees: audit; finance

Retired President and Chief Operating Officer, McDonald’s Corporation

Mr. Alvarez served as president and chief operating officer of McDonald’s Corporation from August 2006 until December 2009. Previously, he served as president of McDonald’s North America, with responsibility for all the McDonald’s restaurants in the U.S. and Canada. Prior to that, he was president of McDonald’s USA. Mr. Alvarez joined McDonald’s in 1994 and held a variety of leadership roles throughout his career, including chief operations officer and president of the central division, both with McDonald’s USA, and president of McDonald’s Mexico. Prior to joining McDonald’s, he held leadership positions at Burger King Corporation and Wendy’s International, Inc. Mr. Alvarez serves on the board of directors of Lowe’s Companies, Inc. He also serves on the President’s Council, the School of Business Administration Board of Overseers, and the International Advisory Board of the University of Miami. He was previously a member of the boards of McDonald’s Corporation and KeyCorp.

Qualifications: Through his senior executive positions at McDonald’s Corporation and other global restaurant businesses, Mr. Alvarez has extensive experience in consumer marketing, global operations, international business, and strategic planning. His international experience includes a special focus on emerging markets.

Board committees: finance; public policy and compliance; science and technology

Chairman, Lloyds Banking Group plc

Sir Winfried Bischoff has been chairman of the board of Lloyds Banking Group plc since September 2009. He served as chairman of Citigroup Inc. from December 2007 until February 2009 and as interim chief executive officer for a portion of 2007. He served as chairman of Citigroup Europe from 2000 to 2009. From 1995 to 2000, he was chairman of Schroders plc. He joined the Schroder Group in 1966 and held a number of positions there, including chairman of J. Henry Schroder & Co. and group chief executive of Schroders plc. He is also a director of The McGraw-Hill Companies, Inc. He previously served on the boards of Citigroup Inc., Prudential plc, Land Securities plc, and Akbank T.A.S.

Qualifications: Sir Winfried Bischoff has a distinguished career in banking and finance, including commercial banking, corporate finance, and investment banking. He has CEO experience both in Europe and the U.S. He is a globalist, with particular expertise in European matters but with extensive experience overseeing worldwide operations. He has broad corporate governance experience from his service on public company boards in the U.S., UK, and other European and Asian countries.

Board committees: directors and corporate governance; finance (chair)

Chairman, Ball Corporation

Mr. Hoover is chairman of Ball Corporation. Mr. Hoover joined Ball Corporation in 1970 and has held a variety of leadership roles throughout his career, including vice president and treasurer; executive vice president and chief financial officer; vice chairman, president, and chief operating officer; and chairman, president, and chief executive officer. He is a member of the boards of Ball Corporation and Energizer Holdings, Inc. Mr. Hoover previously served on the board of Irwin Financial Corporation. He is a member and past chair of the board of trustees of DePauw University and on the Indiana University Kelley School of Business Dean’s Council. He is also a director of Boulder Community Hospital and a member of the Colorado Forum.

Qualifications: Mr. Hoover has extensive CEO experience at Ball Corporation, with a strong record of leadership in operations and strategy. He is an audit committee financial expert as a result of his experience as CEO and CFO of Ball. He also has extensive corporate governance experience through his service on other public company boards.

Board committees: audit; compensation

Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and Professor of Molecular Pharmacology and Experimental Therapeutics, Mayo Medical School; and Director, Mayo Clinic Center for Individualized Medicine

Dr. Prendergast is the Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Biology and Professor of Molecular Pharmacology and Experimental Therapeutics at Mayo Medical School and the director of the Mayo Clinic Center for Individualized Medicine. He has held several other teaching positions at the Mayo Medical School since 1975.

Qualifications: Dr. Prendergast is a prominent medical clinician, researcher, and academician. He has extensive experience in senior-most administration at Mayo Clinic, a major medical institution, and as director of its renowned cancer center. He has special expertise in two critical areas for Lilly—oncology and personalized medicine. As a medical doctor, he brings an important practicing-physician perspective to the board’s deliberations.

Board committees: public policy and compliance; science and technology

Retired Executive Vice President, Kimberly-Clark Corporation

Ms. Seifert served as executive vice president for Kimberly-Clark Corporation until June 2004. She joined Kimberly-Clark in 1978 and served in several capacities in connection with both the domestic and international consumer-products businesses. Prior to joining Kimberly-Clark, Ms. Seifert held management positions at Procter & Gamble, Beatrice Foods, and Fort Howard Paper Company. She is chairman of Katapult, LLC. Ms. Seifert serves on the boards of Supervalu Inc.; Revlon Consumer Products Corporation; Lexmark International, Inc.; Appleton Papers Inc.; the U.S. Fund for UNICEF; and the Fox Cities Performing Arts Center.

Qualifications: Ms. Seifert is a retired senior executive of Kimberly-Clark, a global consumer products company. She has strong expertise in consumer marketing and brand management, having led sales and marketing for several worldwide brands, with a special focus on consumer health. She has extensive corporate governance experience through her other board positions.

Board committees: audit; compensation

Former Chairman and Chief Executive Officer, United Parcel Service, Inc.

Mr. Eskew served as chairman and chief executive officer of United Parcel Service, Inc., from January 2002 until December 2007. He continues to serve on the UPS board of directors. Mr. Eskew began his UPS career in 1972 as an industrial engineering manager and held various positions of increasing responsibility, including time with UPS’s operations in Germany and with UPS Airlines. In 1993, Mr. Eskew was named corporate vice president for industrial engineering. Two years later he became group vice president for engineering. In 1998, he was elected to the UPS board of directors. In 1999, Mr. Eskew was named executive vice president and a year later was given the additional title of vice chairman. He serves as chairman of the board of trustees of The Annie E. Casey Foundation. Mr. Eskew also serves on the boards of 3M Corporation and IBM Corporation.

Qualifications: Mr. Eskew has CEO experience with UPS, where he established a record of success in managing complex worldwide operations, strategic planning, and building a strong consumer-brand focus. He is an audit committee financial expert, based on his CEO experience and his service on other U.S. company audit committees. He has extensive corporate governance experience through his service on the boards of other companies.

Board committees: audit (chair); compensation

Chief Scientific Officer, Cancer Prevention and Research Institute of Texas

Dr. Gilman is the chief scientific officer of the Cancer Prevention and Research Institute of Texas and regental professor of pharmacology emeritus at the University of Texas Southwestern Medical Center at Dallas. Dr. Gilman was on the faculty of the University of Virginia School of Medicine from 1971 to 1981 and was named a professor of pharmacology there in 1977. He previously served as executive vice president for academic affairs and provost of the University of Texas Southwestern Medical Center at Dallas, dean of the University of Texas Southwestern Medical School, and professor of pharmacology at the University of Texas Southwestern Medical Center. He held the Raymond and Ellen Willie Distinguished Chair of Molecular Neuropharmacology; the Nadine and Tom Craddick Distinguished Chair in Medical Science; and the Atticus James Gill, M.D., Chair in Medical Science at the university and was named a regental professor in 1995. He is a director of Regeneron Pharmaceuticals, Inc. Dr. Gilman was a recipient of the Nobel Prize in Physiology or Medicine in 1994.

Qualifications: Dr. Gilman is a Nobel Prize-winning pharmacologist, researcher, and professor. He has deep expertise in basic science, including mechanisms of drug action, and experience with pharmaceutical discovery research. As the former dean of a major medical school, he brings to the board important perspectives of both the academic and practicing medical communities.

Board committees: public policy and compliance; science and technology (chair)

Retired President, Private Client Services, and Managing Director, Marsh, Inc.

Ms. Horn will serve as the board’s lead director until April 2012. She served as president of private client services and managing director of Marsh, Inc. from 1999 until her retirement in 2003. Prior to joining Marsh, she was senior managing director and head of international private banking at Bankers Trust Company; chairman and chief executive officer of Bank One, Cleveland, N.A.; president of the Federal Reserve Bank of Cleveland; treasurer of Bell Telephone Company of Pennsylvania; and vice president of First National Bank of Boston. Ms. Horn serves as director of T. Rowe Price Mutual Funds; Simon Property Group, Inc.; and Norfolk Southern Corporation and vice chairman of the U.S. Russia Foundation. She previously served on the board of Fannie Mae and Georgia-Pacific Corporation. Ms. Horn has been senior managing director of Brock Capital Group since 2004.

Qualifications: Ms. Horn is a former CEO with extensive experience in various segments of the financial industry, including banking and financial services. Through her for-profit and her public-private partnership work, she has significant experience in international economics and finance. Ms. Horn has extensive corporate governance experience through service on other public company boards in a variety of industries.

Board committees: compensation (chair); directors and corporate governance

Chairman, President, and Chief Executive Officer

Dr. Lechleiter is chairman, president, and chief executive officer of Eli Lilly and Company. He served as president and chief operating officer from 2005 to 2008. He joined Lilly in 1979 as a senior organic chemist and has held management positions in England and the U.S. He was named vice president of pharmaceutical product development in 1993 and vice president of regulatory affairs in 1994. In 1996, he was named vice president for development and regulatory affairs. Dr. Lechleiter became senior vice president of pharmaceutical products in 1998 and executive vice president for pharmaceutical products and corporate development in 2001. He was named executive vice president for pharmaceutical operations in 2004. He is a member of the American Chemical Society and the Business Roundtable. Dr. Lechleiter serves as chairman-elect of Pharmaceutical Research and Manufacturers of America (PhRMA), and on the boards of United Way Worldwide, Xavier University (Cincinnati, Ohio), Life Sciences Foundation, and the Central Indiana Corporate Partnership. He also serves on the board of Nike, Inc.

Qualifications: Dr. Lechleiter is our chairman, president, and chief executive officer. Under our corporate governance guidelines, the CEO is expected to serve on the board of directors. Dr. Lechleiter, a Ph.D. chemist, has over 30 years of experience with the company in a variety of roles of increasing responsibility in research and development, sales and marketing, and corporate administration. As a result, he has a deep understanding of pharmaceutical research and development, sales and marketing, strategy, and operations. He also has significant corporate governance experience through service on other public company boards.

Board committees: none

providing general oversight of the business

approving corporate strategy

approving major management initiatives

providing oversight of legal and ethical conduct

overseeing the company’s management of significant business risks

selecting, compensating, and evaluating directors

evaluating board processes and performance

selecting, compensating, evaluating, and, when necessary, replacing the chief executive officer, and compensating other senior executives

ensuring that a succession plan is in place for all senior executives.

a director who is an employee of the company, or whose immediate family member is an executive officer of the company. Temporary service by an independent director as interim chairman or chief executive officer will not disqualify the director from being independent following completion of that service.

a director who receives any direct compensation from the company other than the director’s normal director compensation, or whose immediate family member receives more than $120,000 per year in direct compensation from the company other than for service as a nonexecutive employee.

a director who is employed (or whose immediate family member is currently employed as an executive officer) by another company where any Lilly executive officer serves on the compensation committee of that company’s board.

a director who is currently employed by, who is a 10 percent shareholder of, or whose immediate family member is currently employed as an executive officer of a company that makes payments to or receives payments from Lilly for property or services that exceed the greater of $1 million or 2 percent of that company’s consolidated gross revenue in a single fiscal year.

a director who is a current executive officer of a nonprofit organization that receives grants or contributions from the company exceeding the greater of $1 million or 2 percent of that organization’s consolidated gross revenue in a single fiscal year.

Mr. Alvarez

Dr. Baicker

Sir Winfried Bischoff

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Mr. Hoover

Ms. Horn

Ms. Marram

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

A company officer-director, including the chief executive officer, will resign from the board at the time he or she retires or otherwise ceases to be an active employee of the company.

Nonemployee directors will retire from the board not later than the annual meeting of shareholders that follows their seventy-second birthday.

Directors may stand for reelection even though the board’s retirement policy would prevent them from completing a full three-year term.

A nonemployee director who retires or changes principal job responsibilities will offer to resign from the board. The directors and corporate governance committee will assess the situation and recommend to the board whether to accept the resignation.

The directors and corporate governance committee also considers the contributions of individual directors at least every three years when considering whether to recommend nominating the director to a new three-year term.

a strong, independent, clearly-defined lead director role (see below for a full description of the role)

executive sessions of the independent directors after every regular board meeting

annual performance evaluations of the chairman and CEO by the independent directors.

The Red Book, a comprehensive code of ethical and legal business conduct applicable to all employees worldwide and to our board of directors

Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and all members of financial management that recognizes the unique responsibilities of those individuals in assuring proper accounting, financial reporting, internal controls, and financial stewardship.

leads the board’s processes for selecting and evaluating the CEO;

presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors unless the directors decide that, due to the subject matter of the session, another independent director should preside;

serves as a liaison between the chairman and the independent directors;

approves meeting agendas and schedules and generally approves information sent to the board;

has the authority to call meetings of the independent directors; and

has the authority to retain advisors to the independent directors.

Policy. Related-person transactions must be approved by the board or by a committee of the board consisting solely of independent directors, who will approve the transaction only if they determine that it is in the best interests of the company. In considering the transaction, the board or committee will consider all relevant factors, including:

the company’s business rationale for entering into the transaction;

the alternatives to entering into a related-person transaction;

whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally;

the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and

the overall fairness of the transaction to the company.

Procedures.

Management or the affected director or executive officer will bring the matter to the attention of the chairman, the lead director, the chair of the directors and corporate governance committee, or the secretary.

The chairman and the lead director shall jointly determine (or, if either is involved in the transaction, the other shall determine in consultation with the chair of the directors and corporate governance committee) whether the matter should be considered by the board or by one of its existing committees consisting only of independent directors.

If a director is involved in the transaction, he or she will be recused from all discussions and decisions about the transaction.

The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified as promptly as practicable.

The board or relevant committee will review the transaction annually to determine whether it continues to be in the company’s best interests.

oversees the processes by which the company conducts its business so that the company will do so in a manner that complies with laws and regulations and reflects the highest standards of integrity

reviews and makes recommendations regarding policies, practices, and procedures of the company that relate to public policy and social, political, and economic issues.

reviews and makes recommendations regarding the company’s strategic research goals and objectives

reviews new developments, technologies, and trends in pharmaceutical research and development

oversees matters of scientific and medical integrity and risk management.

Mr. Alvarez

Dr. Baicker

Sir Winfried Bischoff

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Mr. Hoover

Ms. Horn

Dr. Lechleiter

Ms. Marram ¹

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

Number of 2011 Meetings

Ms. Marram will take over as lead director in April 2012.

$3,000 for audit committee and science and technology committee members

$12,000 for committee chairs ($18,000 for audit committee chair and $15,000 for science and technology committee chair)

$30,000 for the lead director.

Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash compensation in company stock. In addition, the annual award of shares to each director noted above (3,990 shares in 2011) is credited to this account on a pre-set annual date. Funds in this account are credited as hypothetical shares of company stock based on the market price of the stock at the time the compensation would otherwise have been earned. Hypothetical dividends are “reinvested” in additional shares based on the market price of the stock on the date dividends are paid. Actual shares are issued or transferred after the director ends his or her service on the board.

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. The aggregate amount of interest that accrued in 2011 for the participating directors was $155,178, at a rate of 4.2 percent. The rate for 2012 is 3.3 percent.

Mr. Alvarez

Dr. Baicker

Sir Winfried Bischoff  

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Mr. Hoover

Ms. Horn

Ms. Marram

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

In 2011, Mr. Hoover deferred $107,500 in cash compensation into his deferred stock account (2,921 shares) under the “Lilly Directors’ Deferral Plan” (further described above).

Each nonemployee director received an award of stock valued at $145,000 (3,990 shares). This stock award and all prior stock awards are fully vested in that they are not subject to forfeiture; however, the shares are not issued until the director ends his or her service on the board, as further described above under “Lilly Directors’ Deferral Plan.” The column shows the grant date fair value for each director’s stock award. Aggregate outstanding stock awards are shown in the “Common Stock Ownership by Directors and Executive Officers” table in the “Directors’ Deferral Plan Shares” column. Aggregate outstanding stock options as of December 31, 2011 are shown in the table below. Nonemployee directors received no stock options in 2011. The company discontinued granting stock options to nonemployee directors in 2005. All outstanding stock options are currently under water, meaning they have no realizable value.

Mr. Alvarez

Dr. Baicker

Sir Winfried Bischoff

Mr. Eskew

Dr. Feldstein

Mr. Fyrwald

Dr. Gilman

Mr. Hoover

Ms. Horn

Ms. Marram

Mr. Oberhelman

Dr. Prendergast

Ms. Seifert

This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift program, which is generally available to U.S. employees as well as the outside directors. Under this program, the foundation matched 100 percent of charitable donations over $25 made to eligible charities, up to a maximum of $30,000 per year for each individual. The foundation matched these donations via payments made directly to the recipient charity.

Directors do not participate in a company pension plan or non-equity incentive plan.

active or retired chief executive officers and senior executives, particularly those with experience in operations, finance, accounting, banking, marketing, and sales

international business

medicine and science

government and public policy

health care system (public or private).

incumbent directors

management

shareholders

independent executive search firms that may be retained by the committee to assist in locating and screening candidates meeting the board’s selection criteria.

The committee approves the annual audit services engagement and, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope, company structure, or other matters. Audit services include internal controls attestation work under Section 404 of the Sarbanes-Oxley Act. The committee may also preapprove other audit services, which are those services that only the independent auditor reasonably can provide.

Audit-related services are assurance and related services that are reasonably related to the performance of the audit, and that are traditionally performed by the independent auditor. The committee believes that the provision of these services does not impair the independence of the auditor.

Tax services. The committee believes that, in appropriate cases, the independent auditor can provide tax compliance services, tax planning, and tax advice without impairing the auditor’s independence.

The committee may approve other services to be provided by the independent auditor if (i) the services are permissible under SEC and PCAOB rules, (ii) the committee believes the provision of the services would not impair the independence of the auditor, and (iii) management believes that the auditor is the best choice to provide the services.

Process. At the beginning of each audit year, management requests prior committee approval of the annual audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other engagements known at that time. Management will also present at that time an estimate of all fees for the upcoming audit year. As specific engagements are identified thereafter, they are brought forward to the committee for approval. To the extent approvals are required between regularly scheduled committee meetings, preapproval authority is delegated to the committee chair.

Audit Fees

•Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley 404 attestation

•Reviews of quarterly financial statements

•Other services normally provided by the auditor in connection with statutory and regulatory filings

Audit-Related Fees

•Assurance and related services reasonably related to the performance of the audit or reviews of the financial statements

— 2011 and 2010: primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential and completed acquisitions

Tax Fees

•2011 and 2010: primarily related to consulting and compliance services

All Other Fees

•2011: primarily related to integration services for an acquisition

•2010: primarily related to compliance services outside the U.S.

Total

Meetings. The committee meets several times each year (7 times in 2011). Committee agendas are approved by the committee chair in consultation with the committee’s independent compensation consultant. The committee meets in executive session after each meeting.

Role of independent consultant. The committee has retained Cimi B. Silverberg of Frederic W. Cook & Co., Inc., as its independent compensation consultant to assist the committee. Ms. Silverberg reports directly to the committee, and neither she nor her firm is permitted to perform any services for management. The consultant’s duties include the following:

review committee agendas and supporting materials in advance of each meeting and raise questions with the company’s global compensation group and the committee chair as appropriate

review the company’s total compensation philosophy, peer group, and target competitive positioning for reasonableness and appropriateness

review the company’s executive compensation program and advise the committee of plans or practices that might be changed in light of evolving best practices

provide independent analyses and recommendations to the committee on the CEO’s pay

review draft “Compensation Discussion and Analysis” and related tables for the proxy statement

proactively advise the committee on best practices for board governance of executive compensation

undertake special projects at the request of the committee chair.

Role of executive officers and management. With the oversight of the CEO and the senior vice president of human resources, the company’s global compensation group formulates recommendations on compensation philosophy, plan design, and the specific compensation recommendations for executive officers (other than the CEO, as noted below). The CEO gives the committee a performance assessment and compensation recommendation for each of the other executive officers. The committee considers those recommendations with the assistance of its compensation consultant. The CEO and the senior vice president of human resources attend committee meetings but are not present for executive sessions or for any discussion of their own compensation. (Only nonemployee directors and the committee’s consultant attend executive sessions.)

Risk assessment. With the help of its compensation consultant, in 2011 the committee reviewed the company’s compensation policies and practices for all employees, including executive officers. The committee concluded that the company’s compensation programs will not have a material adverse effect on the company, after reviewing the business risks identified in the annual enterprise risk management assessment process. The committee noted several design features of the company’s cash and equity incentive programs that reduce the likelihood of inappropriate risk-taking:

cash and equity and short-term and long-term incentive compensation are balanced

incentive plans include a range of payout opportunities below and above target

incentive payouts are capped at appropriate levels

multiple measures/goals and different measurement periods are used across our incentive plans

company performance targets and individual incentive payment targets are set using multiple inputs

a blend of internal and external measures is used across multiple incentive plans

the cost of incentive program payouts is included when determining payout results

performance objectives are appropriately difficult

the bonus program has a continuum of payout levels for individual performance

meaningful share ownership requirements exist for all members of senior management.

has ever been an officer or employee of the company

is or was a participant in a related-person transaction in 2011 (see “Review and Approval of Transactions with Related Persons” for a description of our policy on related-person transactions)

is an executive officer of another entity, at which one of our executive officers serves on the board of directors.

•  The company exceeded corporate goals for revenue and earnings per share (EPS) as well as pipeline progress. Strong revenues of $24.3 billion against a goal of $23.2 billion and adjusted non-GAAP earnings per share (EPS) of $4.36 against a goal of $4.31 demonstrated good operational performance, as the company entered a challenging era of significant patent expirations. The pipeline also progressed well, with approvals of Tradjenta^®, Bydureon^®, and Cialis^® for the treatment of benign prostatic hyperplasia, as well as several other milestones, five new molecular entities entered Phase III, and 61 percent of project milestones were met or accelerated. As a result, the annual cash incentive bonus paid out at 125 percent of target.

•  Two-year EPS growth fell in the middle range of our peer companies. Three-year stock price growth to $38.64 was under our target of $39.50. For the 2010-2011 Performance Award (PA), the annual cumulative compounded EPS growth rate was 9.0 percent, resulting in a payout of 109 percent of target to all participants. The company’s 2009-2011 Shareholder Value Award (SVA) fell short of its target payout price of $39.50; as a result, awards granted to executive officers and all other participants paid at 80 percent of target.

Highlights:

•  With the expiration of the Zyprexa^® patent, the company enters a period of patent expirations

•  Very strong performance in advancing the pipeline

•  New bonus metrics include a pipeline progress metric and sales and EPS growth measured against corporate goals

•  No increase to CEO salary or incentive targets for 2010, 2011, or 2012

  A balanced program fosters employee achievement, retention, and engagement. We delivered a total compensation package composed of salary, performance-based cash and equity incentives, and a competitive employee benefits program. We implemented new bonus-plan metrics to drive innovation and retain and motivate employees during the next few years of patent expirations and business challenges. The new bonus metrics measure our revenue, EPS, and pipeline performance against internal goals. At the same time, we retained the external metrics of EPS growth versus our peers and stock price performance versus expected large-cap returns for our equity program. Together these elements reinforced pay-for-performance, provided balance between short- and long-term performance and between internal and external metrics, and encouraged employee retention and engagement.

No increase in CEO target compensation since 2009. As he did for the past two years, and in light of the business challenges the company currently faces, Dr. Lechleiter requested, and the compensation committee approved, no increases to his 2012 salary or incentive targets.

The compensation committee reviewed the connection between compensation and risk. The committee reviewed our compensation programs and policies for features that may encourage excessive risk taking and found the overall program to be sound.

Executive Compensation Philosophy:

•  Individual and company performance

•  Long-term focus

•  Consideration of both internal relativity and competitive pay

•  Efficient and egalitarian

•  Reflect individual and company performance. We link employees’ pay to individual and company performance.

— As employees assume greater responsibilities, more of their pay is linked to company performance and shareholder returns through increased participation in equity programs.

— We seek to deliver above-market compensation given top-tier individual and company performance, but below-market compensation where individual performance falls short of expectations or company performance lags the industry.

Our 2011 incentive programs used a combination of corporate financial goals and a pipeline metric (annual bonus), relative EPS growth as measured against the performance of our peer companies (PA), and TSR growth as measured by stock price goals (SVA). We design our programs to be simple and clear, so that employees can understand how their efforts affect their pay.

We balance the objectives of pay-for-performance and employee retention. Even during downturns in company performance, the program should continue to motivate and engage successful, high-achieving employees.

Foster a long-term focus. In our industry, long-term focus is critical to success and is consistent with our goal of retaining highly-talented employees as they build their careers. A competitive benefits program aids retention. As employees progress to higher levels of the organization, a greater portion of compensation is tied to long-term performance through our equity programs.

Provide compensation consistent with the level of job responsibility and reflective of the market. We seek internal pay relativity, meaning that pay differences among jobs should be commensurate with differences in job responsibility and impact. In addition, the committee compares the company’s programs with a peer group of global pharmaceutical companies. Pharmaceutical companies’ needs for scientific and sales and marketing talent are unique to the industry and we compete with these companies for talent.

Provide efficient and egalitarian compensation. We seek to deliver superior long-term shareholder returns and to share value created with employees in a cost-effective manner. While the amount of compensation reflects differences in job responsibilities, geographies, and marketplace considerations, the overall structure of compensation and benefits programs should be broadly similar across the organization.

Appropriately mitigate risk. The compensation committee reviews the company’s compensation policies and practices annually and works with management to ensure that program design does not inadvertently create inappropriate incentives.

Shareholder input. In establishing 2012 compensation, the committee considered the shareholder vote in 2011 on the compensation paid to named executive officers—more than 88 percent in favor. The committee viewed this vote as supportive of the company’s overall approach to executive compensation.

Assessment of individual performance. Individual performance has a strong impact on compensation.

The independent directors, under the direction of the lead director, meet with the CEO at the beginning of the year to agree upon the CEO’s performance objectives for the year. At the end of the year, the independent directors meet with the CEO and in executive session to assess the CEO’s performance based on his achievement of the objectives, contribution to the company’s performance, ethics and integrity, and

For the other executive officers, the committee receives performance assessments and compensation recommendations from the CEO and also exercises its judgment based on the board’s interactions with the executive officers. As with the CEO, an executive officer’s performance assessment is based on his or her achievement of objectives established between the executive officer and the CEO, contribution to the company’s performance, ethics and integrity, and other leadership attributes and accomplishments.

Assessment of company performance. The committee considers company performance measures in two ways:

In establishing total compensation ranges, the committee uses as a reference the performance of the company and the public companies in its peer group with respect to revenue, EPS, return on assets, and 1- and 5-year TSR.

The committee establishes specific company performance goals that determine payouts under the company’s cash and equity incentive programs.

Peer-group analysis. The committee reviews peer-group data as a market check for compensation decisions, but does not base compensation targets on peer-group data only.

—  Overall competitiveness. The committee uses aggregated market data as a
  reference point to ensure that executive compensation is competitive, meaning
  within the broad middle range of comparative pay at peer companies when the
  company achieves the targeted performance levels. The committee does not target
  a specific position within the range.

—  Individual competitiveness. The committee compares the overall pay of individual
  executives if the jobs are sufficiently similar to make the comparison meaningful.
  The individual’s pay is driven primarily by individual and company performance and
  internal relativity; the peer-group data is used as a market check to ensure that
  individual pay remains within the broad middle range of peer-group pay. The
  committee does not target a specific position within the range.

Compensation
Considerations:

•    Individual metrics

•    Company metrics

•    Peer-group analysis

•    External advisor

•    Internal relativity

CEO compensation. To provide further assurance of independence, the compensation recommendation for the CEO is developed by the committee’s independent consultant with limited support from company staff. The consultant prepares analyses showing competitive CEO compensation among the peer group for the individual elements of compensation and total direct compensation. Normally, the consultant develops a range of recommendations for any change in the CEO’s base salary, annual cash incentive target, equity grant value, and equity mix. The CEO has no prior knowledge of the recommendations and normally takes no part in the recommendations, committee discussions, or decisions. For 2011, no such recommendation was prepared, since Dr. Lechleiter requested that no increases be made to his base salary or incentive targets. He made the same request for 2012, as he had for 2010 and 2011, and the committee granted this request for all three years.

Company performance. In 2010, the company performed in the upper tier of the peer group in revenue growth, in the middle tier in non-GAAP EPS growth and one-year TSR, and in the lower tier in five-year TSR. Company performance against corporate operating goals was at target for revenue growth, net cash flow, and pipeline progress. Growth in EPS, return on assets, and operating income per employee exceeded corporate goals.

Individual performance. As described above under “Setting Compensation,” base salary increases were driven largely by individual performance assessments. In assessing the 2010 performance of executive officers, the independent directors (for the CEO) and the compensation committee (with regard to all executive officers) considered the company’s and the executive officer’s accomplishment of objectives established at the beginning of the year and their own subjective assessment of the executive officer’s performance.

In assessing Dr. Lechleiter’s performance, the independent directors noted that under Dr. Lechleiter’s leadership in 2010, the company:

delivered strong revenue growth (6 percent actual vs. 2.5 percent expected industry growth) and earnings growth that exceeded analysts’ expectations for the company

effectively reorganized into four pharmaceutical business areas plus Elanco Animal Health, supported by a new global services organization

made measurable progress toward the goals of eliminating 5,500 positions and $1 billion in costs by the end of 2011

continued to demonstrate progress in the development of molecules in its late-stage pipeline, with 8 potential medicines in Phase III testing by the end of the year.

Dr. Lundberg had a strong first full year in his position. He demonstrated decisive leadership in moving the pipeline forward, simplifying LRL governance, prioritizing research projects, and closing or repurposing underutilized facilities, and he collaborated very effectively with the business units.

Mr. Rice’s responsibilities expanded in 2010 to include IT and Six Sigma^®. He led the transformation of the financial component and the creation and implementation of the global services organization. He provided important contributions to the company’s strategic decision making and served effectively as CFO.

Mr. Carmine reorganized the sales and marketing functions and collaborated effectively with other business unit leaders. Lilly Biomedicines operating results exceeded target. Mr. Carmine retired from the company on December 31, 2011.

Mr. Armitage provided outstanding support to his internal clients and continued industry leadership in external influence regarding intellectual property matters. The legal organization helped achieve positive outcomes in key patent litigation (wins for Alimta, Strattera, and Evista; a loss for Gemzar).

Pay relative to peer group. The company’s total compensation to executive officers, in the aggregate, for 2010 was in the broad middle range of the peer group.

Program elements. The 2011 program consisted of base salary, a cash incentive bonus, and two forms of performance-based equity grants: PAs and SVAs. Executives also received the company employee benefits package. This total compensation program balances the mix of cash and equity compensation, the mix of current and longer-term compensation, the mix of financial and market goals, and the security of foundational benefits in a way that furthers the compensation objectives discussed above.

Targets. The company generally maintained pay ranges and a balance of pay elements similar to 2010. The committee believes this overall program continues to provide cost-effective delivery of total compensation that:

encourages employee retention and engagement by delivering competitive cash and equity components

maintains a strong link to company performance and shareholder returns through a balanced equity incentive program without encouraging excessive risk-taking

 maintains appropriate internal pay relativity

provides opportunity for total pay within the broad middle range of expected peer-group pay given company performance comparable to that of our peers.

   Dr. Lechleiter

   Mr. Rice

   Mr. Carmine

   Dr. Lundberg

   Mr. Armitage

within this budget. Mr. Rice’s base salary reflects his increased responsibilities. In setting 2011 compensation, peer-group data confirmed that the proposed salaries were within the broad middle range of competitive pay.

The company’s annual cash bonus program aligns employees’ goals with the company’s financial plans and pipeline delivery objectives for the current year. For executive officers, cash incentive bonuses are made under the Executive Officer Incentive Plan (EOIP), which operates by establishing a maximum annual incentive bonus and granting the committee discretion to reduce the bonus from the maximum. Under the EOIP, the maximum bonuses are based on non-GAAP net income (as defined under “Non-GAAP Results” below) for the year. For the chief executive officer, chief operating officer (if any), and executive chairman (if any), the maximum

Bonus Weighting:

• 25% revenue goals

• 50% non-GAAP EPS goals

• 25% pipeline progress

2011 Targets:

• $23.2 billion revenue

• $4.31 adjusted non-GAAP EPS

• achievement of pipeline milestones

•Bonus targets. Consistent with our compensation objectives, as employees assume greater responsibilities, more of their pay is linked to company performance. Bonus targets (expressed as a percentage of base salary) were based on job responsibilities, internal relativity, individual performance, and peer-group data. For each named executive officer, the committee maintained the same bonus targets as 2010.

Bonus Targets (as a percentage of base salary)

  Dr. Lechleiter

  Mr. Rice

  Mr. Carmine

  Dr. Lundberg

  Mr. Armitage

Company performance measures. A bonus program’s goals should be challenging, yet achievable, in order to motivate and retain employees. Beginning in 2011, performance goals under our bonus plan are tied directly to our internal annual operating goals. The committee established 2011 corporate goals with a 25 percent weighting on revenue growth, 50 percent weighting on non-GAAP EPS growth, and 25 percent weighting on our pipeline progress. These goals replace the prior years’ goals of 25 percent revenue growth versus peer expectations and 75 percent non-GAAP EPS growth versus peer expectations. Revenue and non-GAAP EPS goals that reflect anticipated median peer group year-on-year growth would likely not be achievable in years with patent losses, such as 2011, and would likely result in artificially-inflated payouts in subsequent near-term growth years. The new performance measures were designed to be achievable yet challenging, focusing employees appropriately on achieving or exceeding the company’s top-line sales and bottom-line earnings objectives in a difficult period for the company while delivering a robust pipeline of medicines at all stages of development, which is critical to our long-term success.

Target grant values. For 2011, the committee set the aggregate target grant values for the named executive officers based on internal relativity, individual performance, and aggregated peer-group data. Mr. Rice and Dr. Lundberg’s target grant values were increased, reflecting Mr. Rice’s increased responsibilities and implementation of the global services organization and Dr. Lundberg’s successful first year. The target grant values for the remaining named executive officers were maintained. Consistent with the company’s compensation objectives, individuals at higher levels received a greater proportion of total compensation in the form of equity. The committee determined that for members of senior management, a 50/50 split between PAs and SVAs appropriately balances the company financial performance and shareholder equity return metrics of the two programs. Target values for 2010 and 2011 equity grants for the named executive officers were as follows:

Equity Compensation:

•   Performance metrics of growth in non-GAAP EPS and share price are objective and align with shareholder interests

•   Target grant values set based on internal relativity, performance, and peer data

Dr. Lechleiter

Mr. Rice

Mr. Carmine

Dr. Lundberg

Mr. Armitage

Performance Awards:

• Target 2-year EPS growth was 4.6%, slightly above expected peer-group performance

• Payout in restricted stock for executive officers

Shareholder Value Awards:

•Three-year performance period

•Target is determined by applying an expected three-year rate of return for large-cap companies

•Shares earned by executive officers must be held one year

Company performance measure. For the 2011 grants, the SVA will pay above target if company stock outperforms an expected compounded annual rate of return for large-cap companies and below target if company stock underperforms that rate of return. The expected rate of return was determined considering total return that a reasonable investor would consider appropriate for investing in a large-cap U.S. company (based on input from external money managers). The resulting share price payout schedule was developed using this expected rate of return, less the company’s dividend yield applied to the starting share price. Executive officers receive no payout if the stock price, less three years of dividends at the current rate, does not grow over the three-year performance period—in other words, if total shareholder return for the three-year period is zero or negative.

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