UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box: 

Elanco Animal Health Incorporated

(Name of registrant as specified in its charter)

(Name of person(s) filing proxy statement, if other than the registrant)

ELANCO ANIMAL HEALTH INCORPORATED

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

May 19, 2021

The 2021 Annual Meeting of Shareholders of ELANCO ANIMAL HEALTH INCORPORATED, an Indiana corporation (the “company” or “Elanco” or “we” or “our”), will be a virtual meeting of shareholders, conducted via live audio webcast at www.virtualshareholdermeeting.com/ELAN2021 on Wednesday, May 19, 2021, at 8:00 a.m., Eastern Time (the “meeting”), to consider and act upon the following matters:

  Items of Business

  Voting 

Only shareholders of record at the close of business on March 15, 2021 are entitled to notice of, and to vote at, the meeting. At least five days prior to the meeting, a complete list of shareholders will be available for inspection by any shareholder entitled to vote at the meeting, during ordinary business hours, at the office of the Secretary of the company at 2500 Innovation Way, Greenfield, Indiana 46140 or online at www.proxyvote.com. You are cordially invited to participate in the meeting via live audio webcast and vote on the business items described in this proxy statement. Regardless of whether you expect to participate in the meeting online, please vote electronically by telephone or the Internet as described in greater detail in the proxy statement. You may also complete, sign and date the proxy card, if mailed to you, and mail it promptly. Returning the proxy card or voting electronically or telephonically will not affect your right to vote online if you participate in the meeting.

By Order of the Board of Directors

Catherine Powell 

Interim General Counsel and Corporate Secretary

March 25, 2021

Even though you may plan to participate in the meeting online, please vote by telephone or the Internet, or execute the proxy card, if mailed to you, and mail it promptly. Telephone and Internet voting information is provided on the notice mailed to you or in this proxy statement. If you participate in the virtual meeting, you may revoke your proxy and vote your shares electronically during the meeting.

TABLE OF CONTENTS

PROXY STATEMENT

ELANCO ANIMAL HEALTH INCORPORATED

2500 Innovation Way

Greenfield, Indiana 46140

2021 ANNUAL MEETING OF SHAREHOLDERS

PROXY STATEMENT

This proxy statement is furnished in connection with the solicitation of proxies by the board of directors of Elanco Animal Health Incorporated (the “Board”), an Indiana corporation, to be voted at the 2021 Annual Meeting of Shareholders, which we refer to as the “annual meeting” or the “meeting,” and any adjournment or postponement of the meeting. The meeting will be a virtual meeting, conducted via live audio webcast on Wednesday, May 19, 2021, at 8:00 a.m. Eastern Time, for the purposes contained in the accompanying Notice of Annual Meeting of Shareholders and as set forth in this proxy statement. On April 7, 2021, we made this proxy statement and form of proxy available online and mailed a notice to our shareholders containing instructions on how to access this proxy statement and our 2020 Annual Report.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on May 19, 2021: The Annual Report and Notice & Proxy Statement are available at www.proxyvote.com. (All website addresses given in this document are for informational purposes only and are not intended to be an active link or to incorporate any website information into this document). 

2021 PROXY SUMMARY

This summary highlights information contained in this proxy statement. This summary does not contain all of the information that you should consider, and you should carefully read the entire proxy statement before voting.

ANNUAL MEETING OF SHAREHOLDERS

VOTING METHODS

Shareholders of record

If you are a shareholder of record, you may vote via the Internet or telephone following the instructions on the notice mailed to you or in this proxy statement. Your vote is important, and due to ongoing delays in the postal system, we are encouraging shareholders submit their proxies electronically, if possible. Alternatively, if you do not have access to a touch-tone telephone or the Internet, please sign, date and return the proxy card by mail.

Street name holders

Shares of our common stock that are held in a brokerage account in the name of the broker are held in “street name.” If your shares are held in street name, you should follow the voting instructions provided by your broker. You may complete and return a voting instruction form to your broker or vote by telephone or the Internet. Check your voting instruction form for more information.

QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS, ATTENDING THE ANNUAL MEETING AND VOTING

Please review the questions and answers about the annual meeting and voting beginning on page 53 to help you vote and be aware of what you need to do to attend the annual meeting virtually.

VOTING MATTERS AND BOARD RECOMMENDATIONS

ELECTION OF DIRECTORS: BOARD NOMINEES

2021 PROXY SUMMARY

DIRECTORS CONTINUING IN OFFICE

Terms expiring in 2022

Terms expiring in 2023

PROPOSAL TO RATIFY THE APPOINTMENT OF PRINCIPAL INDEPENDENT AUDITOR FOR 2021

Although not required, we are asking shareholders to ratify the selection of Ernst & Young LLP as our principal independent auditor for 2021.

2021 PROXY SUMMARY

ADVISORY VOTE TO APPROVE COMPENSATION OF NAMED EXECUTIVE OFFICERS

Named Executive Officers

Our Named Executive Officers for this proxy statement are:

·

Jeffrey N. Simmons, President and Chief Executive Officer;

·

Todd S. Young, Executive Vice President and Chief Financial Officer;

·

Aaron Schacht, Executive Vice President, Innovation, Regulatory and Business Development;

·

Sarena Lin (1), Former Executive Vice President, Transformation and Technology; and

·

Michael-Bryant Hicks (2), Former Executive Vice President, General Counsel and Corporate Secretary.

Named Executive Officer Compensation Overview

Elanco’s 2020 executive compensation program is primarily comprised of base salary, annual cash bonus and long-term equity awards.

Elanco’s compensation design supports the Company’s overall strategy through awarding performance based on financial and product innovation metrics that drive shareholder value.

2021 PROXY SUMMARY

2020 Highlights

We are asking our shareholders to approve the compensation of our Named Executive Officers on an advisory basis. Our Board recommends a FOR vote because we believe our compensation program aligns the interests of our Named Executive Officers with those of our shareholders. We also believe that our compensation program achieves our compensation objective of rewarding management based upon individual and company performance and the creation of shareholder value over the long term. Although shareholder votes on executive compensation are non-binding, the Board and the Compensation Committee consider the results when determining whether any changes should be made to our compensation program and policies.

APPROVAL OF THE AMENDED AND RESTATED 2018 ELANCO STOCK PLAN

We are asking our shareholders to approve the Amended and Restated 2018 Elanco Stock Plan (the “Amended 2018 Plan”), which includes an amendment to increase the number of shares authorized under the current 2018 Elanco Stock Plan by 9,000,000 shares. The Amended 2018 Plan is an important part of Elanco’s overall global compensation program. It allows Elanco to make annual and long-term incentive awards to the company’s current and prospective officers, employees, and directors. The purpose of the Amended 2018 Plan is to give Elanco a competitive advantage in attracting, retaining, and motivating officers, employees, and directors with a stock and incentive plan providing incentives that are directly linked to shareholder value in what is now a larger organization with the recently completed acquisition of Bayer Animal Health.

If approved, the Amended 2018 Plan would make the following material changes:

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains forward-looking statements within the meaning of the US federal securities laws. Forward-looking statements may be identified by words like “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “should,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “forecast,” “foresee” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Forward-looking statements in this proxy statement include, but are not limited to, statements regarding individual and company performance objectives and targets. These and other forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. Factors that may cause actual results to differ materially from those contemplated by the statements in this proxy statement can be found in our periodic reports on file with the SEC. The forward-looking statements speak only as of the date of this proxy statement and undue reliance should not be placed on these statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements, unless required by applicable securities laws. This cautionary statement is applicable to all forward-looking statements contained in this document.

GOVERNANCE

Overview of Our Corporate Governance

We are committed to the values of effective corporate governance and high ethical standards. These values are conducive to long-term performance and the Board reevaluates our policies on an ongoing basis to ensure they meet the company’s needs. We believe our key corporate governance and ethics policies enable us to manage our business in accordance with the highest standards of business practice and in the best interests of our shareholders.

The following sections provide information about our governance profile, directors, including their qualifications, director nomination process, and director compensation.

GOVERNANCE

Elanco Board Highlights

GOVERNANCE

Proxy Item No. 1: Election of Directors

GOVERNANCE

The Board’s Director Nominees

The ages, principal occupations, directorships held, and other information about our nominees and directors are shown below as of March 24, 2021.

GOVERNANCE

Directors Continuing in Office

Terms Expiring in 2022

GOVERNANCE

Terms Expiring in 2023

GOVERNANCE

Individual Board Skills Matrix

GOVERNANCE

Committees of the Board of Directors

Our Board is responsible for establishing broad corporate policies, evaluating, and guiding our strategic direction and overseeing the overall management of the company. In addition to considering various matters that require its approval, our Board provides advice and counsel to, and ultimately monitors the performance of, our senior executives. Our Board has five standing committees: Audit; Compensation; Finance and Oversight; Innovation, Science and Technology; and Nominating and Corporate Governance. Each committee has a written charter. The composition of each the committees is as follows:

	Audit Committee	Compensation Committee	Finance and Oversight Committee	Innovation, Science and Technology Committee	Nominating and Corporate Governance Committee
Kapila K. Anand
John P. Bilbrey
William F. Doyle
Scott D. Ferguson
Art A. Garcia
Michael J. Harrington
Paul Herendeen
R. David Hoover
Deborah T. Kochevar
Lawrence E. Kurzius
Kirk P. McDonald
Denise Scots-Knight
Jeffrey N. Simmons

Chairperson

Member

In 2020, our Board established the Innovation, Science and Technology Committee to focus on pipeline innovation and research and development optimization. Additionally, the Board enhanced the scope of its Finance Committee to emphasize operational initiatives, merger and acquisition integration, financial matters and margin expansion and related areas of oversight. Consistent with its revised mandate, the committee was retitled the Finance and Oversight Committee.

Our Board met eight times in 2020. Each director attended at least 75% of the total number of meetings of the Board and the Board committees of which he or she was a member in 2020. In addition, the non-executive members of the Board meet in executive session at least after every regularly scheduled quarterly Board meeting, and the Board’s Chairman presides over these executive sessions.

While we do not have a formal policy requiring members of the Board to attend the annual meeting of shareholders, we encourage all directors to attend. Each member of the Board was in attendance at our 2020 annual meeting of shareholders.

The following table lists the members, primary functions, and number of meetings held with respect to each committee:

GOVERNANCE

GOVERNANCE

Compensation Committee

Compensation Committee Report 

The Compensation Committee evaluates and establishes compensation for executive officers and oversees the company’s stock plans and other management incentive and benefit programs. Management has the primary responsibility for the company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, the Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (CD&A) below. The Compensation Committee recommended to the Board that the CD&A be included in this proxy statement for filing with the SEC. 

Compensation Committee Interlocks and Insider Participation

Elanco does not have any interlocking relationships between any members of its Compensation Committee or any of its executive officers that would require disclosure under the applicable rules promulgated under the federal securities laws.

Risk Assessment

As part of the company’s overall enterprise risk management program, the Compensation Committee is responsible for evaluating the company’s incentive compensation policies and practices. The Compensation Committee’s independent compensation consultant, Willis Towers Watson (“WTW”), performed an assessment of Elanco’s 2020 Corporate Bonus Plan and the Long-Term Incentive Awards that were granted under Elanco’s Stock Incentive Plan in 2020. WTW used certain evaluation criteria for these incentive awards to determine whether or not these incentive plans were reasonably likely to incentivize risk-taking among those who participate in them, including, among others, the following:

WTW reviewed its assessment of these incentive plans with the Compensation Committee. Based on its evaluation, the Compensation Committee has determined, in its reasonable judgment, that such programs and practices are not reasonably likely to incentivize risk-taking among those who participate in such plans.

Director Independence

The Board annually determines, taking into consideration the recommendations of the Nominating and Corporate Governance Committee, and discloses the independence of directors. No director is considered independent unless the Board has determined, based on all relevant facts and circumstances, that he or she has no material relationship with the company, either directly or indirectly as a partner, significant shareholder or officer of an organization that has a material relationship with the company. The Board has adopted the categorical independence standards for directors established in the NYSE listing standards.

GOVERNANCE

On the recommendation of the Nominating and Corporate Governance Committee, the Board determined that each of Ms. Anand, Mr. Bilbrey, Mr. Doyle, Mr. Ferguson, Mr. Garcia, Mr. Herendeen, Mr. Hoover, Dr. Kochevar, Mr. Kurzius, Mr. McDonald and Dr. Scots-Knight is independent. The Board determined that none of the non-employee directors, other than Mr. Harrington, has had during the last three years (i) any of the relationships identified in the company’s categorical independence standards or (ii) any other material relationship with the company that would compromise his or her independence.

The Board also determined that each of the members of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee also meet our independence standards.

Leadership Structure of the Board of Directors

The Board currently has a strong, independent, non-executive chairman to further strengthen the company’s governance structure. R. David Hoover has served as the Chairman of our Board since May 2018. The Chairman of our Board presides over all meetings of our Board, including its executive sessions, and performs such other duties as may be designated in our bylaws or by the Board. The Board believes this structure provides an effective leadership model for the company to assure effective independent oversight at this time.

However, no single leadership model is right for all companies or at all times. Depending on the circumstances, other leadership models, such as combining the roles of the CEO and chairman of the Board, might be appropriate. Accordingly, the Board periodically reviews its leadership structure.

Governance Documents

Corporate Governance Guidelines and Committee Charters

Elanco has adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE, that serve as a flexible framework within which the Board and its committees operate. These guidelines cover a number of areas, including the role of the Board, Board composition, director independence, director selection, qualification and election, director compensation, executive sessions, key Board responsibilities, CEO evaluation, succession planning, risk management, Board leadership and operations, conflicts of interest, annual Board assessments, Board committees, director orientation and continuing education, Board agendas, materials, information and presentations, director access to management and independent advisers, and Board communication with shareholders and others. A copy of Elanco’s corporate governance guidelines as well as the charter for each committee of the Board is available on Elanco’s website at elanco.com/about-us/ under “Governance.”

Code of Ethics

Elanco has adopted a code of conduct and code of ethical conduct for financial management that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is available on Elanco’s website at elanco.com/about-us/ under “Governance.” Any amendments to or waivers from Elanco’s code of ethical conduct for financial management will be disclosed on its website within the time period required by applicable law following the date of such amendment or waiver.

Corporate Sustainability

Elanco’s approach to sustainability and environmental, social and governance (“ESG”) commitments is called Elanco Healthy Purpose™. This is a framework of commitments and actions focused on advancing the well-being of animals, people, and the planet, enabling us to realize our vision of ‘Food and companionship enriching life’. Elanco Healthy Purpose addresses societal challenges and underscores our role in improving the health and wellbeing of the world’s farm animals and pets.

In 2020, we announced our first sustainability commitments – Healthy Purpose Pledges. The decade-long commitments support the United Nations Sustainable Development Goals, address societal challenges and underscore Elanco’s role in improving the health of animals, which also improves the health of people and the planet. The three Healthy Purpose Pledges are expected to drive sustainable change by 2030:

GOVERNANCE

Our Board provides general oversight of ESG matters. The charter of the Nominating and Corporate Governance Committee requires the committee to annually review our activities and practices regarding ESG matters that are significant to Elanco, including our material initiatives and policies related to these matters and progress with respect to our Healthy Purpose-related sustainability and broader ESG commitments. Our activities and practices regarding ESG matters were reviewed during a committee meeting in 2020.

Diversity, Equity and Inclusion

Diversity, equity and inclusion ("DEI") is extremely important to us. Elanco has a broad view on diversity, including gender, race, ethnicity, sexual orientation, religion, nationality, skill set, educational background, disability/ability, among other aspects. Our employees’ unique experiences and backgrounds allow us to meet challenges effectively and perform efficiently at a global level.

Elanco’s DEI efforts began historically as an employee-driven effort, formally initiating with formation in 2015 of what was then known as the D&I Council and then leading to development of eight Employee Resource Groups over the last five years. The Council has now established a global DEI strategic action plan to include greater specificity on DEI governance, establishment of metrics including aspirational goals, and an annual multi-cultural summit. We are committed to a review of processes, programs and practices to drive alignment with our DEI vision and strategy.

In 2020, Elanco made a public declaration of action and investment further supporting DEI efforts, including a role dedicated to DEI beginning in the fourth quarter of 2020. We have developed a strategy to support and enhance our existing efforts, better understand employee insights, develop new capabilities and broaden our impact beyond the internal organization, while continuing to drive accountability for Elanco leaders. Our annual report on Form 10-K provides additional information relating to our human capital resources, including with respect to our DEI practices and initiatives.

Moving forward, Elanco will be committed to developing initiatives to understand better DEI opportunities across our workforce. We will strive to evolve our DEI vision with involvement of our leaders and employees at the core of our efforts.

Cybersecurity

Elanco prioritizes trust and confidence of our customers and workforce. We have a dedicated Chief Information Security Officer who is responsible for training and leading an information security team to prevent, identify, and appropriately address cyber security threats. The team focuses on developing and implementing strategies and processes to protect the confidentiality, integrity, availability of Elanco’s assets. To deliver appropriate protections, the team leverages and aligns with various frameworks and good practices that include NIST Cyber Security Framework, ISO 27000 family of Standards, ITIL Processes, and other good practice control methods. The Board and the Audit Committee receives reports from the Chief Information Security Officer on, among other things, assessments of risks and threats to Elanco’s security systems and processes to maintain and strengthen information security systems.

Selection of Nominees for the Board of Directors

The Board is responsible for selecting candidates for board membership and for establishing the general criteria to be used in identifying potential candidates. The Nominating and Corporate Governance Committee leads the director succession planning process. The Nominating and Corporate Governance Committee makes recommendations to the Board for nominations, identifies and screens potential new candidates, including by reviewing recommendations from other Board members, management and shareholders, and assesses the ongoing contributions of incumbent directors whose terms are expiring with input from all other Board members. The Nominating and Corporate Governance Committee may also retain search firms to assist in identifying and screening candidates.

The Nominating and Corporate Governance Committee employs the same process for evaluating all candidates, including those submitted by shareholders. The Nominating and Corporate Governance Committee initially evaluates a candidate based on publicly available information and any additional information supplied by the party recommending the candidate. If the candidate appears to satisfy the selection criteria and the Nominating and Corporate Governance Committee’s initial evaluation is favorable, the Nominating and Corporate Governance Committee, assisted by management and/or a search firm, gathers additional data on the candidate’s qualifications, availability, probable level of interest, and any potential conflicts of interest. If the Nominating and Corporate Governance Committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the Chairman of the Board and one or more of the independent directors for direct discussions to determine the mutual level of interest in pursuing the candidacy. If these discussions are favorable, the Nominating and Corporate Governance Committee makes a final recommendation to the Board to nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable).

GOVERNANCE

The Nominating and Corporate Governance Committee performs periodic assessments of the overall composition and skills of the board in order to ensure that the Board and management are actively engaged in succession planning for directors, and that our Board reflects the appropriate viewpoints, diversity, and expertise necessary to support our complex and evolving business. The Nominating and Corporate Governance Committee, with input from all Board members, also considers the contributions of the individual directors at least every three years when considering whether to nominate the director to a new three-year term. The results of these assessments inform the Board’s recommendations on nominations for directors at the annual meeting each year and help provide us with insight on the types of experiences, skills, and other characteristics we should be seeking for future director candidates. Pursuant to our corporate governance guidelines, the Board selects director candidates who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. We believe that the Board membership should reflect diversity in its broadest sense, including persons diverse in geography, gender, and ethnicity.

Since our last annual meeting in 2020, three directors have been appointed to our Board: William F. Doyle; Scott D. Ferguson; and Paul Herendeen. Messrs. Ferguson and Herendeen were suggested as potential board nominees by our shareholder Sachem Head Capital Management LP (“Sachem Head”) and were appointed to our Board in accordance with the Cooperation Agreement we have with Sachem Head, which is described herein. See “Transactions with Related Persons - Transactions with Sachem Head Capital Management LP” for additional information relating to this agreement. Mr. Doyle was identified as a potential director nominee in our internal discussions with respect to the Board membership.

Cooperation Agreement with Sachem Head Capital Management

On December 13, 2020, we entered into a Cooperation Agreement with Sachem Head with respect to various matters involving nominees to our Board, voting obligations, and related corporate governance matters. See “Transactions with Related Persons - Transactions with Sachem Head Capital Management LP” for additional information relating to this agreement.

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 and Oversight Committee, Innovation, Science and Technology 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 reviews director compensation from time to time and makes recommendations to the Board with regard to appropriate changes. 

GOVERNANCE

2020 Director Compensation

Directors who were not also employees of Elanco received the following compensation for their service in 2020:

On November 30, 2020, each non-employee director received an award of stock valued at $180,022 (5,885 shares), which awards are mandatorily deferred under the Elanco Directors’ Deferral Plan and will not be issued until the second January following the director’s departure from service.

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, as amended (the “Internal Revenue Code”).

Amounts under both accounts are 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.

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. While there is not currently a set threshold of ownership required, Directors are required to hold all shares under the terms of the Directors’ Deferral Plan until after their service on the Board has ended.

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. 

COVID-19 Risk Management

In early 2020, a new strain of coronavirus (COVID-19) has spread to many countries in the world and the outbreak has been declared a pandemic by the World Health Organization. The U.S. Secretary of Health and Human Services has also declared a public health emergency in the U.S. in response to the outbreak. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels.

The Board and management are continually evaluating risks to the business, our employees and stakeholders and have taken numerous steps, and will continue to take further actions, in our approach to addressing the COVID-19 pandemic. We have successfully implemented our business continuity plans, and our management team is in place to respond to changes in our environment quickly and effectively. We have not closed our manufacturing plants or R&D facilities. Additionally, the supply of raw materials and the distribution of finished products remain operational with no known or foreseeable constraints. As a result of the COVID-19 pandemic, we instructed employees at many of our facilities across the globe to work from home on a temporary basis and have implemented travel restrictions.

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

Shareholder Engagement

We are engaged in active discussions with our shareholders to facilitate investor understanding around a broad range of subjects. Discussion topics include strategy initiatives, business performance, corporate governance, risk and compensation practices, and other ESG metrics. In 2020, as in prior years, our management and investor relations team regularly addressed questions during earnings calls, one-on-one and group meetings, phone calls, roadshows, our annual investor day, and industry and investor conferences. We have incorporated investor and analyst feedback by enhancing our presentation of financial and operational information, including greater visibility into our product pipeline.

GOVERNANCE

Transactions with Related Persons 

Transactions with Sachem Head Capital Management LP

On December 13, 2020, Elanco entered into a Cooperation Agreement with Sachem Head, a shareholder holding more than 5% of Elanco’s common stock. Pursuant to the Cooperation Agreement, Elanco appointed Messrs. Doyle, Ferguson and Herendeen to the Board of Directors and to the committees on which they are currently serving as indicated in this proxy statement, and the parties further agreed to the following:

Concurrent with the execution of the Cooperation Agreement, Elanco and Sachem Head entered into a confidentiality agreement, pursuant to which, among other things, Sachem Head and Mr. Ferguson agreed to certain confidentiality obligations regarding information they may receive.

Transactions with Bayer AG

In connection with the closing of our acquisition of the Bayer Animal Health business, we granted to Bayer registration rights with respect to our shares of common stock issued to Bayer as partial consideration in the acquisition. On November 30, 2020, we entered into an underwriting agreement with Bayer World Investments B.V., an indirect, wholly owned subsidiary of Bayer AG and BofA Securities, Inc., Goldman Sachs & Co. LLC, and Credit Suisse Securities (USA) LLC as representatives of the several underwriters named in the underwriting agreement, relating to the sale by Bayer of 54,500,000 shares of our common stock at a public offering price of $30.25 per share. In connection with the offering, Bayer granted the underwriters an option to purchase up to an additional 8,175,000 shares of our Common Stock. The offering closed on December 3, 2020. Elanco did not sell any shares in the offering and did not receive any proceeds from the sale of the shares of common stock by Bayer in the offering. The underwriting agreement contains customary representations, warranties and covenants of Elanco and Bayer and also provides for customary indemnification by each of Elanco, Bayer and the underwriters against certain liabilities.

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. 

If a related person 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 considers all 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 that 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 elanco.com/about-us/ under “Governance.”

GOVERNANCE

Executive Officers

The following table sets forth the names, ages, as of March 25, 2021, titles and biographical information relating to Elanco’s executive officers.

GOVERNANCE

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This compensation discussion and analysis (“CD&A”) provides detailed information regarding the 2020 compensation for Elanco’s Chief Executive Officer, Chief Financial Officer and three most highly compensated executive officers in 2020 who are named below (collectively, the “Named Executive Officers”):

This CD&A discusses the compensation programs applicable to the Named Executive Officers and their compensation thereunder in 2020, 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 2020 short-term and long-term incentive plans for each of the Named Executive Officers.

(1) Sarena Lin resigned from Elanco on January 22, 2021.

(2) Michael-Bryant Hicks resigned from Elanco on March 2, 2021.

CD&A Executive Summary

Our market-competitive executive compensation program attracts and retains executives who perform at a high level and contribute to the success of the company. It also provides strong financial incentives for the NEOs to increase shareholder value. To accomplish this, the company pays its NEOs a base salary in cash; a bonus in cash in the event the metrics of the Elanco Bonus Plan are met; equity in the form of service-based awards and performance-based awards; and other employment benefits. All of these are more fully described in this CD&A and in the narrative and tables included herein.

Company Performance in the Year Ended December 31, 2020

Elanco gathered momentum moving through 2020, ending the year on a strong note. Fourth quarter revenue surpassed our guidance, with U.S. Pet Health, U.S. Farm Animal, and China swine outperforming our expectations. Adjusted EPS in the fourth quarter came in at the high-end of the guidance range with our productivity agenda intact, partly offsetting what were largely one-time and targeted investments in our future growth and our people.

For the full year 2020, total revenue was $3,273.3 million, or an increase of 7% over the previous year, including the addition of $591.9 million of Bayer Animal Health product revenue. Gross margin decreased 300 basis points to 49.1% of revenue primarily due to amortization of inventory fair value adjustments recorded from the acquisition of Bayer Animal Health, unfavorable product mix, and deleverage of fixed manufacturing costs across the lower legacy Elanco revenue base, more than offsetting the benefit from inclusion of the acquired gross profit, price improvement for legacy Elanco, and continued improvements in manufacturing productivity. Adjusted gross margin² decreased 10 basis points to 52.0% of revenue, driven by unfavorable product mix and deleverage of fixed manufacturing costs across the lower legacy Elanco revenue base, more than offsetting the benefit from inclusion of the acquired gross profit from Bayer Animal Health, price improvement for legacy Elanco products, and continued improvements in manufacturing productivity. Legacy Elanco's manufacturing organization captured $115 million in cost savings and avoidance in 2020. Since 2018, the team has delivered $250 million in cost savings and avoidance, and most recently contributing to the fourth quarter gross margin performance.

EXECUTIVE COMPENSATION

Full year 2020 reported net loss and loss per share were $560.1 million and $1.27, respectively. Net income and earnings per share, on a non-GAAP basis,³ were $206.7 million and $0.47 per share, respectively. Adjusted EBITDA⁴ was $528.5 million for the full year 2020, which represents 16.1% of total revenue compared with 21.6% for the full year 2019. For more information, please review the company’s Annual Report on Form 10-K for fiscal year 2020 and this proxy statement.

Actions in 2020 to Contribute to Future Revenue and Earnings Growth

We believe Elanco is entering 2021 with good momentum. We are advancing our Innovation, Portfolio, and Productivity (IPP) strategy in driving shareholder value and continue to have confidence in our underlying fundamentals and market positioning.

Shareholder Engagement and Consideration of Prior Year’s Say on Pay Vote

We are committed to engagement with our shareholders on executive compensation and corporate governance matters and review all shareholder input and feedback.

At the 2020 annual meeting, the vote on "Say on Pay" regarding Named Executive Officer compensation garnered shareholder support of 95% of the votes cast. The Compensation Committee reviewed shareholder and other stakeholder feedback along with the results of each of these votes and incorporated it when making compensation decisions.

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:

We will achieve these objectives by:

EXECUTIVE COMPENSATION

Participants in Executive Compensation Design and Decision-Making Process

Role of the Compensation Committee

The Compensation Committee determines our compensation philosophy, program design and is the decision-making body on all matters relating to the compensation paid to our Named Executive Officers. The Compensation Committee has the sole authority to retain and terminate a compensation consultant to assist with its responsibilities as well as the sole authority to approve the compensation consultant’s fees, which the company pays. For more information about the Compensation Committee, its members and its duties as set forth in its charter, please refer to the section entitled “Election of Directors - Committees of the Board of Directors” beginning on page 13 of this proxy statement.

Role of the Compensation Consultant

The Compensation Committee directly engages a compensation consultant, WTW, to advise it on competitive pay practices, determine our peers for compensation purposes, provide market data and assist us in the analysis of that data. WTW is independent of the company and does not perform any services for the company or any of its executive officers or other employees.

Role of the CEO

Our Compensation Committee works with our executive management, including our CEO, to oversee our executive compensation program. Our CEO plays a key role in the process as it relates to executive officers other than himself. For the Named Executive Officers other than himself, our CEO:

With respect to our CEO, the Compensation Committee determines and approves (subject to ratification by the independent members of the Board) each element of the CEO’s compensation.

Compensation Processes and Analysis

Process for Setting Compensation

The 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.

EXECUTIVE COMPENSATION

Elanco Peer Group and Benchmarking

Elanco’s peer group for 2020 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 3.2 times Elanco’s revenue. Based on the advice of Willis Towers Watson, the following group of 19 companies were identified as Elanco’s peers for 2020:

Elanco’s peer group for setting 2021 compensation was revised in August 2020 due to the Bayer Animal Health acquisition to better reflect 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 in size than 2.4 times Elanco’s. Executive compensation was not adjusted upon the finalization of the Bayer Animal Health acquisition. Based on the advice of Willis Towers Watson, the following group of 18 companies were identified as Elanco’s peers for 2021:

The Compensation Committee periodically reviews Elanco’s peer group and adds or removes companies in the peer group when appropriate to ensure the companies in the peer group are similar in size to the company and appropriately reflect the company and how it conducts its business.

To determine the elements of Elanco’s compensation programs for its Named Executive Officers, the Board approved compensation derived from the following benchmarks, among others:

EXECUTIVE COMPENSATION

Components of Executive Compensation

Elanco’s 2020 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.

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 2020 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 2020, 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 2019 and 2020. See also the Summary Compensation Table in the section entitled “Executive Compensation Tables” below.

The Named Executive Officers participated in the Elanco Bonus Plan during 2020. The Elanco Bonus Plan for 2020 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, adjusted EBITDA, 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 2020 allowed for adjustments to Elanco’s 2020 fiscal performance based on unforeseen events, which adjustments needed to be recommended by management for consideration and approval by the Compensation Committee.

EXECUTIVE COMPENSATION

In late 2019, the Compensation Committee of the Board of Directors approved a recommendation from management to reset bonus plan targets in August 2020 due to the acquisition of the Bayer Animal Health business. This strategic decision was approved to be implemented upon the completion of the acquisition, since the resulting combined company would increase revenue, leading to likely overperformance on Elanco-only targets. Management neither sought nor received any relief specific to the impact of COVID-19 on our business during 2020 for either half of the bonus plan.

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 2020 weightings were as follows:

Elanco Bonus Plan

Based on this weighting, the Elanco Bonus Plan multiple is calculated as follows:

(0.30 × revenue multiple) + (0.40 × adjusted EBITDA 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 2019 and 2020 are shown in the table below as a percentage of the Named Executive Officer’s actual base salary earnings.

The 2020 results described below reflect Elanco’s 2020 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 2020 operating plan. Elanco’s performance compared to the 2020 targets for revenue, adjusted EBITDA, and Elanco innovation progress, as well as the resulting bonus multiple, is set forth below.

As mentioned above, in August 2020 the Compensation Committee reset the Bonus Targets for 2020, in order to compensate for the likely over-performance that would have resulted had the original, full year 2020 targets been maintained. The prior, full year target was halved to create a revised first half target, and new targets were set for the second half. While the performance periods were split into first half (January – June) and second half (July – August), the weighting on the periods was set at 7/12 for first half, to align with the 7 months of the year pre-acquisition, and 5/12 for second half, to align with the 5 months of the year post-acquisition. Adjustments were made to the second half 2020 results to rationalize what ended up being stronger than mid-year projections anticipated. COVID-19 pandemic was expected to have a severe impact on our second half 2020 revenue and earnings, but instead the business showed resiliency. The resiliency of our business was particularly present with a stronger and faster COVID recovery in our U.S. Farm Animal business as well as a sustained U.S. Pet Health Retail business that was strengthened due to COVID-related purchasing behavior and overall increased attention to pets. Another adjustment was to reduce investment income related to Tarsus Bio-Pharma (an investment where in exchange, in part, for equity in Tarsus Bio-Pharma we granted licenses for the development and marketing of lotilaner for applications in humans) where the returns on this investment exceeded expectations that were not part of our core business.

EXECUTIVE COMPENSATION

Elanco’s 2020 first half 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 and submissions; (ii) increase of pipeline value; (iii) launch equivalents; 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 3.70 score, which correlates to a 1.18 innovation progress multiple for use in the calculation of the first half of the 2020 Elanco Bonus Plan.

Elanco’s 2020 second half 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 and submissions, (ii) increase of pipeline value, (iii) launch equivalents, 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 3.90 score, which correlates to a 1.45 innovation progress multiple for use in the calculation of the second half of the 2020 Elanco Bonus Plan.

When combined, Elanco’s revenue, adjusted EBITDA, and innovation multiples yielded a 2020 Elanco Bonus Plan multiple of:

First Half (0.30 × 0) + (0.40 × 0) + (0.30 × 1.18) = 0.35 bonus multiple

Second Half (0.30 × 1.11) + (0.40 × 1.9308) + (0.30 × 1.45) = 1.54 bonus multiple

(7/12 * 0.35) + (5/12 *1.54) = 0.85 full year bonus multiple

The 2020 bonuses paid to the Named Executive Officers under the 2020 Elanco Bonus Plan are as follows:

Elanco primarily grants two types of equity incentives to executives and certain other employees under its long-term incentive plans — Elanco Performance Awards (Elanco PAs) and Elanco Restricted Stock Units (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.

EXECUTIVE COMPENSATION

Performance Awards (Elanco PAs)

All of our Named Executive Officers received Elanco PAs under Elanco’s 2020 Long-Term Incentive Plan that vest over a two-year performance period. In February 2020 the Compensation Committee established two one-year Net Income targets for the 2020-2021 performance period, based on Elanco’s business plan at that time. As mentioned above, in August 2020 the Compensation Committee reset the Long-Term Incentive for 2020, in order to compensate for the likely over-performance that would have resulted had the original full year 2020 targets been maintained. While the 2020 performance periods were split into first half (January – June) and second half (July – August), the weighting on the periods was set at 7/12 for first half, to align with the 7 months of the year pre-acquisition, and 5/12 for second half, to align with the 5 months of the year post-acquisition. The 2021 performance period, of a full year, was approved in December 2020, upon finalization of the 2021 business plan.

The Net Income 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 Net Income is an effective measure of long-term earnings, including management of expenses, interest incurred on outstanding debt and gross margin expansion.

Payouts for the 2020-2021 Elanco PAs range from 0% to 200% of the target, based on the achievement of the Net Income targets, which we believe to be rigorous and challenging. The specific Net Income 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 Equity Incentives Under Elanco’s 2019 Long-Term Incentive Plan

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.

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.

2019 Performance Period

The Elanco EBIT target for this performance period set by the Compensation Committee was $590 million, of which $589.5 million was attained. The Compensation Committee approved a period multiple of 0.9937 for the 2019 Performance Period on February 14, 2020.

2020 Performance Period

For the same reasons as set forth above regarding the adjustments to the Bonus Targets for 2020, the EBIT Targets for the 2020 Performance Period were also adjusted.

EXECUTIVE COMPENSATION

For the Named Executive Officers who participated in these awards, the number of Elanco shares earned under the performance-based awards is set forth in the table below. Details on the vesting schedule of these awards appear below, in the section “Outstanding Equity Awards at December 31, 2020.”

Restricted Stock Unit Awards (Elanco RSUs)

All of our Named Executive Officers received Elanco RSUs under Elanco’s 2020 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.

Elanco Equity Program — Target Grant Values

For the 2020 equity awards Elanco set the total target value for Messrs. Simmons, Young, Schacht, and Hicks, and Ms. Lin based on internal pay equity, Elanco performance, individual performance and Elanco peer group data. Total target values for the 2020 equity grants to the applicable Named Executive Officers were as follows:

EXECUTIVE COMPENSATION

Other Elanco Compensation Practices and Information

Elanco Employee Benefits

Elanco offers core employee benefits coverage to:

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.

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 2020” 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.

EXECUTIVE COMPENSATION

Executive Compensation Tables

All amounts included in the tables below represent compensation paid to or earned by the applicable Named Executive Officers in 2020 or the year indicated in the applicable table. 

Summary Compensation Table

The “Stock Awards” column also includes one-time Elanco PAs and Elanco RSUs awards as follows:

The “Stock Awards” column also includes Founders’ Award Elanco RSUs for Messrs. Simmons, Schacht, and Ms. Lin. 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 Mr. Schacht and Ms. Lin.

EXECUTIVE COMPENSATION

The table below shows the target and maximum payouts for the 2020 Performance Awards included in this column of the “Summary Compensation Table.”

Grants of Plan-Based Awards During 2020

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.