Suffering Eli Lilly freezes salaries, cuts bonuses across the board

Eli Lilly CEO John Lechleiter

Eli Lilly ($LLY) has once again put its payroll in the deep freeze. The U.S.-based drugmaker says most employees won't see salary increases this year because of patent-cliff losses. And Lilly is cutting cash bonuses, too.

Lilly staffers might have seen this coming. Early this year, CEO John Lechleiter said 2014 would be the most financially challenging yet. Still suffering from the loss of Zyprexa's patent in late 2011, Lilly now faces generic competition for its top-selling drug, Cymbalta. Its attempts to fill those sales gaps have been less than successful, with several potential drugs now in the discard pile.

Most recently, Lilly and partner Boehringer lost out at the FDA with their new diabetes drug empagliflozin; the agency refused to approve the drug because of manufacturing shortfalls. European regulators have recommended it for approval.

If it's any consolation, the pay freeze affects top executives as well as the rank-and-file. "[M]ost employees, including executive officers, will not be receiving an increase to base salary to allow the company to fully invest in late-stage pipeline assets," the company's newly filed proxy statement says.

The hit to bonuses will vary person-to-person. The bonus multiple--the amount by which base salary is multiplied to determine the amount of cash incentive pay--will be cut by 0.25. So, if an employee's target bonus was 1.4 times base salary, and that employee hits all performance targets, the actual incentive pay would actually be 1.15 times base pay.

It's Lilly's second pay freeze in three years. After putting the kibosh on salary increases in 2012, most Lilly employees saw a pay increase last year. CEO John Lechleiter has waved off salary increases 5 years straight. Employees could take great comfort in the fact that Lechleiter's total compensation for 2013 took a swan dive, down 23% to $11.2 million.

Lilly CFO Derica Rice--Courtesy of Indiana University

Except for the fact that the decrease comes entirely from a new approach to calculating changes in the value of executive pensions. His stock awards actually went up by more than $1 million to $6.75 million, and his incentive pay dropped only slightly, to $2.88 million.

It's more or less the same story for Lilly's execs across the board, with any decline in pay deriving from pension-value changes rather than declines in stock awards, incentive pay or salary. CFO Derica Rice, for instance, saw his total compensation decline to $5.18 million from $6.94 million, but his salary went up slightly, his stock awards stayed the same, and incentive pay dropped by only $14,000 or so. For 2012, his pension value grew by $1.77 million; for 2013, that growth was zero.

Meanwhile, Lilly has been cutting jobs and otherwise retrenching to weather its latest patent-cliff blow. The company said last spring that it would shed about 1,000 salespeople, including contract reps, to shrink the group that reps not only Cymbalta and its sister drugs, but also its men's health products.

- see the Lilly proxy statement

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Editor's note: This article has been edited to note that most Eli Lilly employees did receive a salary increase in 2013. The pay freeze announced in 2013 took effect in 2014.