DEF 14A 1 lmrk2014_def14a.htm MERCK & CO. INC. - DEF 14A Merck & Co., Inc. - DEF 14A

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

 

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MERCK & CO., INC.

 

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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        Merck & Co., Inc.
         
   

 

Kenneth C. Frazier
Chairman,
President and Chief
Executive Officer

  One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889-0100

 

 



April 14, 2014


Dear Shareholders:

It is my pleasure to invite you to Merck’s 2014 Annual Meeting of Shareholders, which will be held on Tuesday, May 27, 2014, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807. The attached Notice of Annual Meeting of Shareholders and proxy statement will serve as your guide to the business to be conducted and provide details regarding admission to the meeting.

 

Merck is committed to creating value for shareholders and society through the kind of innovation that improves health and well-being. We apply cutting-edge science to develop medicines and vaccines that make a meaningful difference to patients, healthcare providers and payers. By focusing our efforts in areas where unmet need and scientific opportunity intersect, Merck will remain one of the world’s leading research-intensive biopharmaceutical companies.

 

In 2013, we took decisive action to revitalize our research and development and strengthen our pipeline of medically important products. We are allocating resources to our most promising clinical candidates and are focusing on the markets, customers and therapeutic areas that provide the best opportunities for our business while delivering the greatest value to our customers.

 

I am delighted that we are already seeing strong progress with candidates like MK-3475, our anti-PD-1 immunotherapy for oncology, which has received Breakthrough Therapy designation from the FDA. We also initiated Phase 3 trials for our BACE inhibitor for the treatment of Alzheimer’s disease and received Breakthrough Therapy designation for our combination regimen for the treatment of chronic hepatitis C. These are the kinds of meaningful innovations that can make a life or death difference to patients.

 

To maintain this momentum, we announced a strategic initiative last October designed to sharpen our focus, redesign our operating model and reduce our cost structure. This initiative will increase our efficiency, provide us with the flexibility to take action on our best opportunities and ensure we are able to remain responsive to the challenges of a dynamic healthcare environment. We have made solid progress on all of these fronts, and I am confident that these actions will make Merck a more competitive company, better positioned to innovate and grow.

 

We hope that you will participate in the Annual Meeting, either by attending and voting in person or by voting through other acceptable means as described in this proxy statement as promptly as possible. Merck began mailing its Notice of Internet Availability of Proxy Materials, proxy statement and the 2013 Annual Report on Form 10-K, and proxy card/voting instruction form to shareholders and to employee benefit and stock purchase plans participants on April 14, 2014. Your vote is important. We urge you to exercise your right to do so.

 

Sincerely,

 

     

 

2014 Proxy Statement    3

 

PARTICIPATE IN THE FUTURE OF MERCK & CO., INC. CAST YOUR VOTE RIGHT AWAY

 

We hope you will exercise your rights and fully participate as a shareholder. It is very important that you vote to play a part in the future of our Company. You do not need to attend the Annual Meeting to vote your shares.

 

If you hold your shares through a broker, bank or nominee, your broker is not permitted to vote on your behalf on the election of directors and other matters to be considered at the Annual Meeting of Shareholders (except on ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2014), unless you provide specific instructions by completing and returning the voting instruction form or following the instructions provided to you to vote your shares via telephone or the internet. For your vote to be counted, you will need to communicate your voting decisions to your broker, bank or nominee before the date of the shareholder meeting.

 

Please cast your vote right away on all of the following proposals to ensure that your shares are represented:

 

    More
information
Board’s
recommendation
Broker
discretionary
voting allowed?
Abstentions Votes required
for approval
PROPOSAL 1 Election of Directors Page 27 FOR
each Nominee
No Do not count
for all five
Majority
of shares cast
PROPOSAL 2 Non-binding Advisory Vote to
Approve the Compensation of
our Named Executive Officers
(Say on Pay)
Page 37 FOR No proposals required for all
five proposals
PROPOSAL 3 Ratification of Appointment of
Independent Registered Public
Accounting Firm for 2014
Page 67 FOR Yes    
PROPOSALS 4 - 5 Shareholder Proposals Pages 69 - 70 AGAINST
each proposal
No    

 

Vote right away

 

Even if you plan to attend our Annual Meeting in person, please read this proxy statement with care and vote right away using any of the following methods. In all cases, have your proxy card or voting instruction form in hand and follow the instructions.

 

BY INTERNET USING   BY TELEPHONE   BY INTERNET USING YOUR TABLET OR   BY MAILING YOUR PROXY CARD
YOUR COMPUTER       SMARTPHONE    
             
     
Visit 24/7   Registered Owners dial   Scan this QR code 24/7   Cast your ballot,
www.proxyvote.com   toll-free 24/7   to vote with your mobile device   sign your proxy card
    1-800-690-6903   (may require free software)   and send by free post

 

2014 Proxy Statement    4

 

All shareholders of record may vote in person at the 2014 Annual Meeting of Shareholders. Meeting details are provided below. Beneficial owners may vote in person at the meeting if they have a legal proxy, as described in the response to question “How do I vote?” on page 71 of “Questions and Answers About the Annual Meeting and Voting”.

 

Merck & Co., Inc. 2014 Annual Meeting of Shareholders Details

 

Date and Time: Tuesday, May 27, 2014, at 9:00 a.m., local time
   
Location: Bridgewater Marriott
  700 Commons Way
  Bridgewater, New Jersey 08807
   
Record Date: March 31, 2014

 

Admission:

 

All shareholders as of the record date may attend the Annual Meeting but must have an admission ticket and photo identification. You may request a ticket by writing to the Office of the Secretary, Merck & Co., Inc., WS3AB-05, P.O. Box 100, Whitehouse Station, New Jersey 08889-0100, by faxing your request to 908-735-1224, or by calling 908-423-3300. If you are a shareholder of record (your shares are held in your name), you must write your name on the request exactly as it appears on your stock ownership records from Wells Fargo Bank, N.A. If you are a beneficial owner (your shares are held through a broker, bank, or nominee), you must provide current evidence of your ownership of shares with your ticket request, which you can obtain from your broker, bank, or nominee.

 

If you are unable to attend the meeting, you will be able to view and listen to the meeting via the internet. We will broadcast the meeting as a live webcast through our website. The webcast will remain available for replay for one month following the meeting. Visit our Investor Relations website at http://www.merck.com/investors/webcasts-and-presentations.html and click on “Shareholder Meetings“.

 

2014 Proxy Statement    5

 

PROXY SUMMARY

 

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Page references (“XX”) are supplied to help you find further information in this proxy statement.

 

Governance Highlights (page 14)

 

The Company believes good governance is integral to achieving long-term shareholder value. We are committed to governance policies and practices that serve the interests of the Company and its shareholders. The Board of Directors monitors developments in governance best practices to assure that it continues to meet its commitment to thoughtful and independent representation of shareholder interests. The following table summarizes certain corporate governance practices and facts:

 

11 of our 12 Director Nominees are Independent   Diverse Board in Terms of Gender, Ethnicity, Experience and Skills
Annual Election of Directors   Transparent Public Policy Engagement
Independent Lead Director   The Threshold to Call a Special Meeting is 15% of Shareholders
Annual Board Self-Assessment Process   Longstanding Commitment to Corporate Responsibility
Active Shareholder Engagement   Policy Providing for Return of Incentive Compensation under Certain Circumstances
Majority Voting for All Directors   Share Ownership Guidelines for Executives and Directors and Share Retention Policy for Executives
Independent Directors Meet Without Management Present   Hedging, Short Sale and Pledging Policies

 

Voting Matters

 

The following table summarizes the proposals to be considered at the Annual Meeting and the Board’s voting recommendation with respect to each proposal.

 

        Board vote
recommendation
  See page number
for more detail
Management Proposals        
PROPOSAL 1   Election of Directors   FOR
each Nominee
  27
PROPOSAL 2   Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay)   FOR   37
PROPOSAL 3   Ratification of Appointment of Independent Registered Public Accounting Firm for 2014   FOR   67
Shareholder Proposals        
PROPOSAL 4   Shareholder Proposal Concerning Shareholders’ Right to Act by Written Consent   AGAINST   69
PROPOSAL 5   Shareholder Proposal Concerning Special Shareowner Meetings   AGAINST   70

 

 

2014 Proxy Statement    6

 

 

Nominees for Director (page 27)

 

The following table provides summary information about each Director nominee. Each Director stands for election annually. Detailed information about each Directors’ background, skillset and areas of experience can be found beginning on page 28.

 

Name   Age   Director
since
  Occupation and
Experience
  Independent   Committee Memberships   Other Public
Company Boards
Leslie A. Brun   61   2008   Chairman and Chief Executive Officer, Sarr Group, LLC    

Audit (Chair)

Governance, Public Policy and Corporate Responsibility

 

Automatic Data Processing, Inc.

Broadridge Financial Solutions, Inc.

Thomas R. Cech, Ph.D.   66   2009   Distinguished Professor, University of Colorado    

Audit

Research

   
Kenneth C. Frazier   59   2011   President,
Chairman and Chief Executive Officer,
Merck & Co., Inc.
         

Exxon Mobil Corporation

Thomas H. Glocer   54   2007   Retired Chief Executive Officer, Thomson Reuters Corporation    

Compensation and Benefits (Chair)

Governance, Public Policy and Corporate Responsibility

 

Morgan Stanley

William B. Harrison, Jr.   70   1999   Retired Chairman of the Board, JPMorgan Chase & Co.    

Governance, Public Policy and Corporate Responsibility (Chair)

Compensation and Benefits

   
C. Robert Kidder   69   2005   Former Chairman and Chief Executive Officer, 3Stone Advisors LLC    

Audit

Research

 

Morgan Stanley

Rochelle B. Lazarus   66   2004   Chairman Emeritus, Ogilvy & Mather    

Governance, Public Policy and Corporate Responsibility

 

The Blackstone Group L.P.

General Electric

Carlos E. Represas   68   2009   Retired Executive Vice President and Head of the Americas,
Nestlé, S.A.
   

Compensation and Benefits

Governance, Public Policy and Corporate Responsibility

 

Bombardier Inc.

Swiss Re Group

Patricia F. Russo   61   1995   Former Chief Executive Officer and Director, Alcatel-Lucent    

Compensation and Benefits

Governance, Public Policy and Corporate Responsibility

 

Alcoa Inc.

General Motors Company

Hewlett-Packard Company

KKR Management LLC (the managing partner of KKR & Co., L.P.)

Craig B.Thompson, M.D.   61   2008   President and Chief Executive Officer, Memorial Sloan- Kettering Cancer Center    

Research (Chair)

 

Charles River Laboratories International, Inc.

Wendell P. Weeks   54   2004   President, Chairman and Chief Executive Officer, Corning Incorporated    

Audit

Research

 

Corning Incorporated

Peter C. Wendell   63   2003   Managing Director,
Sierra Ventures
   

Compensation and Benefits

Research

   

 

2014 Proxy Statement    7

 

 

Select Performance and Compensation Highlights for 2013 (page 38)

 

(For more complete information about these topics, please review the Company’s Annual Report on Form 10-K and the complete proxy statement.)

 

Business Performance.

Revenue decreased by 7% compared to 2012, driven mainly by the negative impact of patent expiries and foreign exchange (minus 2% impact)
Despite revenue challenges, we delivered non-GAAP EPS of $3.49 (GAAP EPS of $1.47), which was near the mid-point of our revised target range but below the $3.61 target established at the beginning of the year under our Company Scorecard

 

Shareholder Value Creation.

Returned $11.7 billion to shareholders through dividend and share repurchases
Increased the dividend paid by 2.4% during 2013
Drove a 27% increase in total shareholder return

 

 

How Pay is Aligned to 2013 Company Performance (page 39)

 

While the Company’s operating performance fell below target in 2013, the operation of our variable incentives demonstrate strong linkage between pay and performance.

 

Annual Incentive – 2013 performance resulted in below target achievement (72 points vs. a target of 100 points) of the operational and strategic objectives of our 2013 Company Scorecard. As a result, annual incentive payouts for the Named Executive Officers were, on average, 40% lower than prior year. The 2013 Company Scorecard is described in more detail beginning on page 42.

 

Long-Term Incentive – Final payout of the 2011-2013 Performance Share Unit (“PSU“) award cycle was 86% of target. Additional details about our PSU program and the 2011-2013 PSU award cycle are provided on page 45.

 

2013 Executive Total Compensation Mix (page 41)

 

Under our executive compensation program, a significant portion (89% and 81%, respectively) of the CEO’s and other Named Executive Officers’ annual target total direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

 

 

2014 Proxy Statement    8

 

 

Key 2014 Compensation Actions (page 40)

 

Based on our dialogue with investors and to better align our incentive plans with our evolving long-term business strategy, the Committee approved the following actions for the Company’s 2014 compensation programs.

 

2014 Changes to Company Scorecard: The number of Scorecard measures used to fund the annual incentive pool will be reduced from eight to three. Revenue and earnings will be weighted 40% each and progress against important milestones related to our pipeline will be weighted 20%.

 

2014 Changes to PSU Program: Beginning with the three-year performance period commencing January 1, 2014, performance under the new PSU program will be measured over a single three-year period as opposed to three separate 12-month periods under the prior plan. In addition, a new relative TSR measure will consider the level of outperformance or underperformance relative to the peer group median alongside a three-year adjusted operating cash flow target with each metric comprising 50% of the payout calculation.

 

2014 Named Executive Officer Annual Target Compensation Opportunity: The Committee, and in the case of Mr. Frazier, the full Board of Directors, determined that no increases would be made to any of the Named Executive Officers’ 2014 annual target direct compensation opportunity (base salary + target cash incentive + target long-term incentive).

 

Response to Advisory Vote and Shareholder Feedback (pages 23 and 40)

 

In 2013, shareholders continued their strong support of our executive compensation programs with over 88% of the votes cast for approval of the “say on pay” proposal at the 2013 Annual Meeting of Shareholders. Consistent with the Company’s strong interest in shareholder engagement and our pay-for-performance approach, the Compensation and Benefits Committee has continued to examine our executive compensation program to ensure alignment between the interests of our executives and shareholders.

 

We ask that our shareholders approve, on an advisory basis, the compensation of our Named Executive Officers.

 

For additional information, see the CD&A in this proxy statement.

 

Beyond consideration of the annual “say on pay” vote, Merck regularly engages with its shareholders to better understand their perspectives on a wide range of issues. During 2013, we held multiple discussions with most of our largest shareholders on topics such as board composition, executive compensation, action by written consent, special meetings of shareholders, corporate political spending and other governance matters. These discussions provided valuable insights into shareholder views and were particularly helpful on the question of shareholders’ right to call a special meeting. As a result of the feedback we received, the Board of Directors recently approved an amendment to the Company’s By-Laws to provide that special meetings of shareholders may be called by shareholders owning at least 15% of the combined voting power of the outstanding shares of the Company’s stock.

 

We will continue to engage with shareholders on a regular basis to better understand and consider their views on our executive compensation programs and corporate governance practices.

 

Auditors (page 67)

 

We ask that our shareholders ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2014. Below is summary information about PricewaterhouseCoopers LLP’s fees for services provided in fiscal years 2013 and 2012.

 

Type of Fees (in Millions)     2013     2012
Audit Fees   $ 28.7   $ 27.5
Audit-Related Fees     5.5     5.9
Tax Fees     7.0     9.3
All Other Fees     2.8     5.6
TOTAL FEES   $ 44.0   $ 48.3

 

 

2014 Proxy Statement    9

 
TABLE OF CONTENTS  
   
Voting Information 4
   
Proxy Summary 6
   
Notice of Annual Meeting of Shareholders 13
   
Corporate Governance 14
Corporate Governance Practices 14
Board’s Role in Strategic Planning 15
Independence of Directors 16
Independence Determinations 17
Board Leadership Structure 17
Lead Director 18
Succession Planning 18
Annual Board Self-Assessment 18
Risk Oversight 19
Related Person Transactions 19
Board Meetings and Committees 20
Shareholder Engagement 23
Shareholder Communications with the Board 24
Political Contributions and Lobbying Expenditure Oversight and Disclosure 24
Commitment to Corporate Responsibility 24
   
Stock Ownership Information 25
   
Proposal 1: Election of Directors 27
Director Nomination Process 27
Nominees for Director 27
   
Director Compensation 35
   
Proposal 2. Non-Binding Advisory Vote to Approve the Compensation of our Named Executive Officers 37
   
Compensation Discussion and Analysis 38
Executive Summary 38
Pay for Performance Alignment 39
Results of 2013 Shareholder Advisory Vote 40
Key 2014 Compensation Actions 40
Detailed Discussion and Analysis 40
The Elements of 2013 Compensation 41
Executive Compensation Program Objectives and Strategy 47
Compensation Risk Assessment 50
Compensation and Benefits Committee Report 50

 

2014 Proxy Statement    10

 
Summary Compensation Table 51
Grants of Plan-Based Awards 53
Outstanding Equity Awards 55
Option Exercises and Stock Vested 57
Pension Benefits 58
Nonqualified Deferred Compensation 61
Potential Payments Upon Termination or a Change in Control 62
Proposal 3. Ratification of Appointment of Independent Registered Public Accounting Firm for 2014 67
Audit Committee’s Report 67
Pre-Approval Policy for Services of Independent Registered Public Accounting Firm 68
Fees for Services Provided by Independent Registered Public Accounting Firm 68
Shareholder Proposals 69
Proposal 4. Shareholder Proposal Concerning Shareholders’ Right to Act by Written Consent 69
Proposal 5. Shareholder Proposal Concerning Special Shareowner Meetings 70
Questions and Answers About the Annual Meeting and Voting 71
Requirements For Submitting Proxy Proposals, Transaction of Business at Annual Meeting and Nominating Directors 73
 
Date for Receipt of Shareholder Proposals for Inclusion in the Proxy Statement for the 2015 Annual Meeting of Shareholders 73
Procedure for Transaction of Business at Annual Meeting and Recommendation and Nomination of Directors 73
Forward Looking Statements 74
Other Matters 74

 

2014 Proxy Statement    11

 

 

 

 

 

   
    Merck & Co., Inc.
     
    One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889-0100

 

NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS

 

May 27, 2014

 

To the Shareholders:

 

The shareholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, May 27, 2014, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807. The purposes of the meeting are to:

 

  elect 12 directors;
    
  consider and act upon a proposal to approve, by non-binding advisory vote, the compensation of our Named Executive Officers;
    
  consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2014;
    
  consider and act upon a shareholder proposal concerning shareholders’ right to act by written consent;
    
  consider and act upon a shareholder proposal concerning special shareowner meetings; and
    
  transact such other business as may properly come before the meeting.

 

Only shareholders listed on the Company’s records at the close of business on March 31, 2014, are entitled to vote.

 

Merck began mailing its Notice of Internet Availability of Proxy Materials, proxy statement and the 2013 Annual Report on Form 10-K, and proxy card/voting instruction form to shareholders and to employee benefit and stock purchase plans participants on April 14, 2014.

 

April 14, 2014

 

    By order of the Board of Directors,
     
    Geralyn S. Ritter
    Senior Vice President, Global Public Policy and Corporate
Responsibility, Secretary and Assistant General Counsel
     
   

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 27, 2014:

 

The Notice of Internet Availability of Proxy Materials, Notice of Annual Meeting of Shareholders, proxy statement and the 2013 Annual Report on Form 10-K and the means to vote by internet are available free of charge at: www.proxyvote.com.

 

2014 Proxy Statement    13

 

CORPORATE GOVERNANCE

 

Our business is managed under the direction of our Board of Directors. The primary mission of the Board is to represent and protect the interests of our shareholders. The Board has the legal responsibility for overseeing the affairs of the Company and for the overall performance of the Company. The Board selects and oversees senior management, who are charged by the Board with conducting the daily business of the Company.

 

The Board has adopted corporate governance principles (the “Policies of the Board”), which, in conjunction with our Restated Certificate of Incorporation, By-Laws and Board committee charters, form the governance framework for the Board and its Committees. Among the areas addressed by the Policies of the Board are philosophy and functions of the Board, composition of the Board including Lead Director responsibilities, qualifications of members, assessment of the Board, Board committee responsibilities, director transition and retirement, service on other boards, director compensation, stock ownership guidelines, chairmanship of meetings, director orientation and continuing education, incumbent Director resignation and related person transactions. From time to time, the Board revises the Policies of the Board in response to changing regulatory requirements, evolving best practices, and the perspectives of our shareholders and other constituents.

 

Governance Materials

 

 

The following materials relating to corporate governance at Merck are available on our website at
www.merck.com/about/leadership

 

Restated Certificate of Incorporation of Merck & Co., Inc.;
  
By-Laws of Merck & Co., Inc.;
  
Policies of the Board—a statement of Merck’s corporate governance principles;
Merck Board Committee Charters;
  
Shareholder Communications with the Board; and
  
Merck Code of Conduct—Our Values and Standards


 

 

Corporate Governance Practices

 

Merck has a history of strong corporate governance. The Company believes good governance is integral to achieving long-term shareholder value. We are committed to governance policies and practices that serve the interests of the Company and its shareholders. The Board of Directors monitors developments in governance best practices to assure that it continues to meet its commitment to thoughtful and independent representation of shareholder interests. Over the years, our Board of Directors has evolved our practices to best serve the interests of Merck shareholders, including:

 

2014 Proxy Statement    14

 
Annual election of all Directors.
  
Majority vote standard in uncontested elections. Each director must be elected by a majority of votes cast, not a plurality.
  
No shareholder rights plan (‘‘poison pill’’).
  
No supermajority voting provisions.
  
Confidential voting.
  
Shareholders holding 15% or more of our outstanding stock have the right to call a special meeting. In response to the feedback received from our shareholders, our Board recently amended our By-Laws to reduce the threshold that allows shareholders to call a special meeting from 25% to 15%.
  
Active shareholder engagement. Merck regularly engages with its shareholders to better understand their perspectives.
  
Longstanding commitment to corporate responsibility.
  
Annual corporate responsibility report. In our report we discuss our corporate responsibility performance and the actions we are taking to deliver on our corporate responsibility commitments in support of our business objectives. The report is available to read and download at http://www.merckresponsibility.com.
  
Independent Board. Our Board is comprised of all independent directors, except our CEO.
  
Annual Board self-assessment process. The Board evaluates its performance and the performance of each committee on an annual basis through a process that includes a written questionnaire and an interview of each Board member by the independent Lead Director.
  
Independent Lead Director. The position of Lead Director at Merck comes with a clear mandate and significant authority and responsibilities as set out in the Policies of the Board.
  
Independent Board committees. Each of our four Committees is made up of independent directors. Each standing committee operates under a written charter that has been approved by the Board.
  
Each Committee has the authority to retain independent advisors.
  
Robust code of ethics. Merck is committed to operating its business with the highest level of ethical conduct and has adopted a Code of Ethics that applies to all employees, as well as the Board of Directors. Merck’s Code of Ethics is available at http://www.merck.com/about/how-we-operate/code-of-conduct/home.html.
  
Policy providing for return of incentive compensation under certain circumstances.
  
Stock ownership guidelines for executives and directors and share retention policy for executives. Significant requirements strongly link the interests of the Board and management with those of shareholders.
  
Hedging, short sale and pledging policies.

 

Board’s Role in Strategic Planning

 

In connection with its responsibility for overseeing the affairs of the Company, the Board of Directors has an obligation to keep informed about the Company’s business and strategies. This involvement enables the Board to provide guidance to management in formulating and developing plans and to exercise independently its decision-making authority on matters of importance to the Company. Acting as a full Board and through the Board’s four standing committees (Audit Committee; Governance, Public Policy and Corporate Responsibility Committee; Compensation and Benefits Committee; and Research Committee), the Board is fully involved in the Company’s strategic planning process.

 

Each year, typically in the summer, senior management will set aside a specific period to review and refine the Company’s long-range operating plan and overall corporate strategy. Strategic areas of importance will include basic research and clinical development; global marketing and sales; manufacturing strategy, capability and capacity; and the public policy and political environments that affect the Company’s business and operations. Specific operating priorities will be developed to effectuate the Company’s long-range plan. Some of the priorities will be short-term in focus; others will be based on longer-term planning horizons. Senior management will review the conclusions reached at its summer meeting with the Board at one or more meetings that usually occur in the fall. These meetings are focused on corporate strategy and involve both management presentations and input from the Board regarding the assumptions, priorities and strategies that form the basis for management’s operating plans and strategies.

 

At subsequent Board meetings, the Board continues to review substantively the Company’s progress against its strategic plans and to exercise oversight and decision-making authority regarding strategic areas of importance and associated funding authorizations. For example, in the fall or winter, the Board typically reviews the Company’s overall annual performance and considers the operating budget and capital plan for the year. In this time period, the Board also usually finalizes specific criteria against which the Company’s performance will be evaluated for

 

2014 Proxy Statement    15

 

the following year. In addition, Board meetings held throughout the year target specific strategies (for example, basic research) and critical areas (for example, U.S. healthcare public policy issues) for extended, focused Board input and discussion. These time frames are flexible, however, and the Board adjusts its meeting agendas and plans to reflect business priorities and developments.

 

The role that the Board plays is inextricably linked to the development and review of the Company’s strategic plan. Through these procedures, the Board, consistent with good corporate governance, encourages the long-term success of the Company by exercising sound and independent business judgment on the strategic issues that are important to the Company’s business.

 

Independence of Directors

 

The Policies of the Board require that a substantial majority of the members of the Board of Directors be independent members. In making independence determinations, the Board observes all criteria for independence established by the SEC and the New York Stock Exchange (“NYSE”). The Board considers all relevant facts and circumstances in making an independence determination. To be considered independent, an outside director must meet the bright line independence tests established by the NYSE and the Board must affirmatively determine that the director has no direct or indirect material relationship with the Company. A material relationship is one which impairs or inhibits—or has the potential to impair or inhibit—a director’s exercise of critical and disinterested judgment on behalf of the Company and its shareholders.

 

Categorical Independence Standards

 

As contemplated by the NYSE rules, the Board has adopted categorical standards as part of the Policies of the Board to assist it in making independence determinations. The standards as set forth in the Policies of the Board are available on our website at www.merck.com/about/leadership. In accordance with the NYSE rules, independence determinations under the categorical standards will be based upon a director’s relationships with the Company during the three years preceding the determination. The categorical standards provide that the following will not be considered material relationships that would impact a director’s independence:

 

1.The director is an executive officer or employee or any member of his or her immediate family is an executive officer of another organization that does business with the Company, and the annual payments to or payments received from that organization during any single fiscal year during the evaluation period are less than the greater of $1 million or 2% of the other organization’s consolidated gross revenues.

 

2.The director or any member of his or her immediate family serves as an executive officer of a charitable, educational or other non-profit organization that receives contributions from the Company or the Merck Foundation in a single fiscal year of less than the greater of $1 million or 2% of that organization’s annual consolidated gross revenues during its last completed fiscal year. The Company’s automatic matching of employee charitable contributions will not be included in the amount of the Company’s contributions for this purpose.

 

3.Subject to standard 11 below, the director is a director or trustee, but not an executive officer nor employee, or any member of his or her immediate family is a director, trustee or employee, but not an executive officer, of any other organization (other than the Company’s external auditor) that does business with, or receives charitable contributions from, the Company.

 

4.More than three years have elapsed since:

 

a.the director was an employee of the Company, or

 

b.an immediate family member of the director was an executive officer of the Company, or

 

c.an executive officer of the Company served on the board of directors of a company that employs or employed the director, or an immediate family member of the director, as an executive officer.

 

5.An immediate family member is or has been an employee of the Company, provided that such family member is not, and has not been for a period of at least three years, an executive officer of the Company.

 

6.Subject to standard 8 below, the director does not receive more than $120,000 annually in direct compensation from the Company, other than through retainers, meeting fees, deferred compensation for prior services (provided that such compensation is not contingent in any way on continued service) and an annual stock option grant provided as the Company’s annual compensation to all Directors pursuant to the Non-Employee Directors Stock Option Plan, as amended and restated from time to time.

 

7.No immediate family member of the director receives more than $120,000 per year in direct compensation from the Company.

 

8.In the case of Audit Committee members, no immediate family member receives direct compensation or other fees from the Company and the Audit Committee members otherwise meet the independence requirements set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934.

 

9.Neither the director nor his or her immediate family members serves as a paid consultant or advisor to the Company or to an executive officer of the Company.

 

10.The director or any member of his or her immediate family holds less than a 10% interest in any other organization that has a relationship with the Company.

 

2014 Proxy Statement    16

 
11.With respect to the Company’s independent external auditors:

 

a.The director is not a current partner nor employee of the external auditor, and
b.No immediate family member is a current partner of the external auditor nor an employee of the external auditor who personally works on the Company’s audit, and
c.Within the past three years, neither the director nor an immediate family member of the director was a partner or an employee of the external auditor and personally worked on the Company’s audit during that time.

 

The Board, through its Governance, Public Policy and Corporate Responsibility Committee, reviews the Board’s approach to determining director independence periodically and recommends changes as appropriate for consideration and approval by the full Board.

 

Independence Determinations

 

In accordance with the NYSE Corporate Governance Listing Standards and the categorical standards set forth above, the Board reviewed all relationships between the Company and each Director and Director nominee and has determined that, with the exception of Kenneth C. Frazier, who is a Company employee, each non-management Director (Leslie A. Brun, Thomas R. Cech, Thomas H. Glocer, William B. Harrison, Jr., C. Robert Kidder, Rochelle B. Lazarus, Carlos E. Represas, Patricia F. Russo, Craig B. Thompson, Wendell P. Weeks, and Peter C. Wendell) has only immaterial relationships with the Company, and accordingly each is independent under these standards. The Board has also determined that each member of the Audit Committee; the Governance, Public Policy and Corporate Responsibility Committee; and the Compensation and Benefits Committee is independent within the meaning of the NYSE listing standards and rules of the SEC.

 

In making these determinations, the Board considered relationships that exist between the Company and other organizations where each of the Directors serves or served in the past, and that in the ordinary course of business, transactions may occur between the Company and such organizations. The Board also evaluated whether there were any other facts or circumstances that might impair a Director’s independence. In particular, the Board examined payments for information, data and content services made by the Company to Thomson Reuters Corporation for which Mr. Glocer was the Chief Executive Officer until December 31, 2011; and payments for advertising and marketing-related services made by the Company to Ogilvy & Mather (“Ogilvy”), for which Ms. Lazarus served as Chairman until July 2012, and previously also served as Chief Executive Officer, as well as to WPP Group, plc, of which Ogilvy is a subsidiary. The Company and Corning Incorporated (“Corning”), of which Mr. Weeks serves as Chairman, Chief Executive Officer and President, are parties to a Joint Research and Development Agreement (“R&D Agreement”) aimed at developing new glass materials.

 

The R&D Agreement was reviewed by the Board’s Committee on Corporate Governance (the “Committee”) and reviewed and approved by the Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to this agreement, and the Committee has conducted regular oversight of the R&D Agreement. In 2013, Merck reimbursed Corning approximately $3 million for development costs incurred based on the achievement of certain agreed milestones under the R&D Agreement and $2 million of reimbursable costs remain to be paid upon the achievement of a final milestone set forth in the original R&D Agreement. In 2014, Merck and Corning entered into two follow-on agreements: a multi-year component supply agreement (“Supply Agreement”) with minimum volume commitments and a royalty agreement (“Royalty Agreement”), which Royalty Agreement also amended the R&D Agreement. Both agreements were reviewed and approved by the Committee and the entire Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to these agreements. In March 2014, Merck reimbursed Corning for an additional $14 million of development costs it incurred under the R&D Agreement. Merck anticipates paying Corning a total of approximately $0.8 million under the Supply Agreement in 2014. Also, commencing in 2017, the Company expects to receive royalties under the Royalty Agreement. In addition, in 2013 the Company had purchases from Corning in the ordinary course of business. Dr. Cech and Dr. Thompson are employed at medical institutions with which the Company engages in ordinary course of business transactions in the form of purchases and sales. The Board reviewed all transactions with each of these entities and determined that the individual Director had no role with respect to the Company’s decision to make any of the purchases or sales and the aggregate amounts in each case were less than 1% of the consolidated gross revenues of the other organization and the Company.

 

Board Leadership Structure

 

The Board of Directors is currently led by Kenneth C. Frazier, who serves as the Chairman of the Board, and by William B. Harrison, Jr., an independent Director, who serves as the Board’s Lead Director in accordance with the Policies of the Board. The Board, comprised entirely of independent Directors other than Mr. Frazier, remains highly independent, empowered and engaged. Further, the independent Directors remain committed to evaluating our Board leadership structure at least annually.

 

2014 Proxy Statement    17

 

Lead Director

 

The position of Lead Director at Merck comes with a clear mandate and significant authority and responsibilities as set out in the Policies of the Board. These include:

 

Board Meetings and The authority to call meetings of the independent members of the Board.
Executive Sessions Presiding at all meetings of the Board at which the Chairman of the Board is not present, including executive sessions of the independent members of the Board.
Communicating with
Management
Serving as the principal liaison on board-wide issues between the independent members of the Board and the Chairman of the Board.
Agendas Approving meeting agendas for the Board and conferring with management on the supporting material to be sent to the Board for meetings.
Meeting Schedules Approving meeting schedules to ensure that there is sufficient time for discussion of all agenda items.
Communicating with
Shareholders and
Stakeholders

Being available for consultation and direct communication with major shareholders, as appropriate.

Serving as a liaison between the Board and shareholders on investor matters.

Board Performance
Evaluation
Leading the annual performance evaluation of the Board.
Chair and CEO Performance Evaluations Leading the annual performance evaluation of the Chair/CEO.
CEO Succession Leading the CEO succession planning process.
   

 

The Board of Directors has four standing committees, each of which is comprised solely of independent directors and is led by an independent chair. The role of these committees is described beginning on page 21.

 

The Board believes that the Company and its shareholders are well-served by the Board’s current leadership structure. Having an independent Lead Director vested with key duties and responsibilities and four independent Board committees chaired by independent Directors provides a formal structure for strong independent oversight of the Chairman and Chief Executive Officer and the rest of our management team.

 

Succession Planning

 

The Board regularly reviews short and long-term succession plans for the Chief Executive Officer and for other senior management positions. In assessing possible CEO candidates, the independent Directors identify the skills, experience and attributes they believe are required to be an effective CEO in light of the Company’s global business strategies, opportunities and challenges.

 

The Board also considers its own succession and discussion of this topic is an important part of the annual Board evaluation process. In considering succession planning, the Governance, Public Policy and Corporate Responsibility Committee and Board take into account, among other things, the needs of the Board and the Company in light of the overall composition of the Board with a view to achieving a balance of the skills, experience and attributes that would be beneficial to the Board’s oversight role.

 

Annual Board Self-Assessment

 

The Board conducts a self-assessment of its performance and effectiveness as well as that of the four standing committees on an annual basis. The purpose of the self-assessment is to track progress in certain areas targeted for improvement from year to year and to identify ways to enhance the Board’s and Committees’ effectiveness. As part of the assessment, each Director completes a written questionnaire developed by the Governance, Public Policy and Corporate Responsibility Committee to provide feedback on the effectiveness of the Board, our Committees as well as each individual Director’s own contributions. The Lead Director and Chair of the Governance, Public Policy and Corporate Responsibility Committee also conducts an interview with each Board member designed to gather additional suggestions to improve Board effectiveness and solicit additional feedback on Board operations, Directors, and priority agenda topics. The collective ratings and comments of the Directors are compiled and presented by the Lead Director to the Committee and to the full Board for discussion and action.

 

2014 Proxy Statement    18

 

Risk Oversight

 

The Board of Directors has two primary methods of overseeing risk. The first method is through its Enterprise Risk Management (“ERM”) process which allows for full Board oversight of the most significant risks facing the Company. The second is through the functioning of the Board committees.

 

The Board of Directors established the ERM process to ensure a complete Company-wide approach to risk over five distinct but overlapping core areas:

 

1.Strategy (Macro risks that may impact our ability to achieve long-term business objectives);

 

2.Operations (Risks in operations that may impact our ability to achieve business objectives);

 

3.Compliance (Risks related to compliance with laws, regulations and Company policies);

 

4.Reporting (Risks to maintaining accurate financial statements and timely, complete financial disclosures); and

 

5.Reputation and Responsibility (Risks that may impact our reputation or the well-being of the Company or its employees).

 

The goal of the ERM process is to provide an ongoing process, implemented at all levels of the Company across each business unit and corporate function, to identify and assess risk, and to monitor risk and agreed-upon mitigating action. Where the ERM process identifies a material risk, it will be elevated through the CEO and the Executive Committee to the full Board of Directors for its consideration.

 

The Audit Committee periodically reviews the ERM process to ensure that it is robust and functioning effectively.

 

In addition to the ERM process, each committee of the Board oversees specific areas of risk relevant to the committee through direct interactions with the CEO, members of the Executive Committee and the heads of business units and corporate functions. For instance, the Audit Committee oversees risk relating to Finance, IT, Business Integrity and Sarbanes-Oxley reporting through its interactions with the CFO, CIO, Chief Compliance Officer, Controller, and Head of Internal Audit. A committee may address risks directly with management, or, where appropriate, may elevate a risk for consideration by the full Board.

 

The separate ERM process and Board committee approach to risk management leverages the Board’s leadership structure to ensure that risk is overseen by the Board on both a Company-wide approach and through specific areas of competency.

 

Related Person Transactions

 

Related Person Transaction Policy

 

The Board of Directors has adopted a written policy (the “Policy”) governing the review and approval of any transactions that Company management determines would be required to be publicly disclosed under Item 404(a) of Securities and Exchange Commission Regulation S-K (“Item 404(a)”).

 

The Policy requires that related person transactions, and any material amendments or modifications to such transactions shall be subject to review, approval or ratification by the Board, or a committee of the Board, and monitoring in accordance with the standards set forth in the Policy and available on our website at www.merck.com/about/leadership. The Policy is administered by the Governance, Public Policy and Corporate Responsibility Committee and is contained in the Policies of the Board.

 

The following process and guidelines are followed by the Governance, Public Policy and Corporate Responsibility Committee in determining whether to approve a related person transaction:

 

Company management is responsible for identifying transactions that are or would be related person transactions requiring review under this Policy through annual submission of and any interim update to Director and Officer questionnaires (“D&O Questionnaire”) or conflict of interest certifications, review of existing or proposed transactions with any shareholders owning five percent or greater of the Company’s outstanding common stock as of the date upon which we received notice of such party’s status as a related person, and through other disclosures to and reviews by management. Management is required to provide the Governance, Public Policy and Corporate Responsibility Committee all material information relevant to all related person transactions, with the exception of related person transactions that are excluded from the reporting requirements under Item 404(a), which shall not be subject to review, approval or ratification by the Governance, Public Policy and Corporate Responsibility Committee pursuant to this policy.

 

Charitable contributions, grants or endowments by the Company to a university or other academic institution at which a related

 

2014 Proxy Statement    19

 

person’s only interest is as a professor of such university or other academic institution and the aggregate amount involved does not exceed 0.5% of the recipient organization’s total annual revenues shall be deemed pre-approved pursuant to this policy. Notwithstanding the foregoing, a charitable contribution, grant or endowment shall not be deemed pre-approved where the related person has any role in the proposal or review of the contribution, grant or endowment or will specifically benefit from it personally or professionally.

 

The members of the Governance, Public Policy and Corporate Responsibility Committee review the material facts of related person transactions, and the disinterested members of the Committee shall either approve or disapprove of the transactions. The Committee only approves the transaction(s) if it determines that such transaction(s) is fair and reasonable. If advance approval by the Committee is not feasible, then the related person transaction is considered and, if the Committee determines it be appropriate, ratified by the disinterested members of the Committee. If after considering the relevant facts and circumstances in connection with such transaction, the Committee determines that it cannot ratify the related person transaction, then the Committee takes such course of action as it deems appropriate under the circumstances.

 

As necessary, the Committee reviews approved (including pre-approved) or ratified related person transactions throughout the duration of the term of the transaction, but no less than annually, to ensure that such transaction remains fair and reasonable.

 

In determining whether a related person transaction is fair and reasonable, the Committee considers all relevant factors, including as applicable: (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those generally available to an unaffiliated third party under the same or similar circumstances; (iv) the extent of the related person’s interest in the transaction; (v) the potential for the transaction to lead to an actual or apparent conflict of interest; and (vi) the impact on a director’s independence in the event the related person is a director or director nominee, an immediate family member of a director or director nominee, or an entity in which a director or director nominee is a partner, shareholder or executive officer.

 

Certain Related Person Transactions

 

Each Director, Director nominee and executive officer of Merck annually completes and submits to the Company a D&O Questionnaire. The D&O Questionnaire requests, among other things, information regarding whether any Director, Director nominee, executive officer or their immediate family members had an interest in any transaction, or proposed transaction, with Merck, or has a relationship with a company which had or proposes to enter into such a transaction.

 

After review of the D&O Questionnaires by the Office of the Secretary, the responses are collected, summarized and distributed to responsible areas within the Company to identify any potential transactions. All relevant relationships and any transactions, along with payables and receivables, are compiled for each person and affiliation. Management submits a report of the affiliations, relationships, transactions and appropriate supplemental information to the Board’s Governance, Public Policy and Corporate Responsibility Committee, which is comprised of independent directors, for its review.

 

Upon review by the Governance, Public Policy and Corporate Responsibility Committee of the report of related person transactions, no transactions concerning our Directors, executive officers or immediate family members of these individuals require disclosure under Item 404(a).

 

Board Meetings and Committees

 

In 2013, the Board of Directors met seven times. Under the Policies of the Board, Directors are expected to attend regular Board meetings, Board committee meetings and annual shareholder meetings. All Directors attended at least 75% of the meetings of the Board and of the committees on which they served.

 

Non-management Directors of the Company met in eight executive sessions in 2013. Mr. Harrison, Lead Director of the Board, presided over the executive sessions. Twelve Directors attended the 2013 Annual Meeting of Shareholders.

 

The Board of Directors has four standing committees, each of which is comprised solely of independent Directors: Audit Committee; Governance, Public Policy and Corporate Responsibility Committee; Compensation and Benefits Committee; and Research Committee. In addition, the Board from time to time establishes special purpose committees. Additional information about the committees is provided below.

 

2014 Proxy Statement    20

 

Members of the individual standing committees, as of April 1, 2014, are named below:

 

      Governance, Public  
    Compensation Policy and Corporate  
Board Member Audit and Benefits Responsibility Research
Leslie A. Brun(1) Chair      
Thomas R. Cech    
Thomas H. Glocer   Chair  
William B. Harrison, Jr.(2)   Chair  
C. Robert Kidder    
Rochelle B. Lazarus      
Carlos E. Represas    
Patricia F. Russo    
Craig B. Thompson       Chair
Wendell P. Weeks    
Peter C. Wendell    
         
Number of meetings in 2013 5 4 4 5

 

(1)Audit Committee Financial Expert as defined under SEC rules

 

(2)Lead Director of the Board

 

All of our standing committees are governed by Board-approved charters. The committees evaluate their performance and review their charters annually.

 

Audit Committee

 

The primary functions of this Committee are to:

 

oversee our accounting, financial reporting process, internal controls and audits, and consult with management, the internal auditors and the independent registered public accounting firm (the independent auditors) on, among other items, matters related to the annual audit, the published financial statements and the accounting principles applied;

 

appoint, evaluate and retain our independent auditors;

 

maintain direct responsibility for the compensation, termination and oversight of our independent auditors and evaluate the independent auditors’ qualifications, performance and independence;
   
 monitor compliance with the Foreign Corrupt Practices Act and the Company’s policies on ethical business practices and reports on these items to the Board; and

 

oversee the ERM process.

 

The Audit Committee has established policies and procedures for the pre-approval of all services provided by the independent auditors, which are described on page 68 of this proxy statement and the approval of the annual internal audit plan as executed by the Internal Audit organization. Further, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by the Company, which are described under Shareholder Communications with the Board on page  24 of this proxy statement.

 

The Audit Committee’s Report is included on page 67 of this proxy statement and the Audit Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors/home.html.

 

Financial Expert on Audit Committee

 

The Board has determined that Mr. Leslie A. Brun, who currently is the Chairman and Chief Executive Officer of Sarr Group, LLC (an investment holding company), is the Audit Committee financial expert. The Board made a qualitative assessment of Mr. Brun’s level of knowledge and experience based on a number of factors, including his formal education, extensive finance, management, investment banking, commercial banking and financial advisory experience, as well as his track record of achievement and sound judgment as demonstrated by his service as the Chairman and CEO of Sarr Group, LLC and former Chairman and founder of Hamilton Lane (a leading advisory and management firm). Mr. Brun’s depth of financial expertise is also demonstrated by his experience as a Managing Director and Head of Investor Relations, CCMP Capital Advisors, LLC (a global private equity firm), Managing Director and co-founder of the investment banking group of Fidelity Bank, Vice President in the Corporate Finance Division of E.F. Hutton & Co., Vice President of Lloyds International Corporation and Assistant Vice President and Chief Credit Officer of Chemical Bank in Seoul, South Korea.

 

2014 Proxy Statement    21

 

The Governance, Public Policy and Corporate Responsibility Committee

 

The primary functions of this Committee are to:

 

consider and make recommendations on matters related to the practices, policies and procedures of the Board and take a leadership role in shaping the corporate governance of the Company;

 

assess the size, structure and composition of the Board and Board committees, coordinate evaluation of Board performance, and review Board compensation, related person transactions, D&O indemnity and Fiduciary Liability insurance coverage for the Company’s Officers and non-employee Directors;

 

act as a screening and nominating committee for candidates considered for nomination by the Board for election as Directors as further described on page 27 and oversee the Board’s Incumbent Director Resignation Policy as further described beginning on page 27;

 

advise the Board of Directors and management on company policies and practices that pertain to our responsibilities as a global corporate citizen, our obligations as a pharmaceutical company whose products and services affect health and quality of life around the world, and our commitment to high standards of ethics and integrity; and

 

review social, political and economic trends that affect our business; review the positions and strategies that we pursue to influence public policy; monitor and evaluate our corporate citizenship programs and activities, including the support of charitable, political and educational organizations and political candidates and causes; and review legislative, regulatory, privacy and other matters that could impact our shareholders, customers, employees and communities in which we operate.

 

The Governance, Public Policy and Corporate Responsibility Committee Charter, the Company’s By-Laws and the Policies of the Board, which are the Company’s corporate governance guidelines, are available on our website www.merck.com/about/leadership.

 

Compensation and Benefits Committee

 

The primary functions of this Committee are to:

 

establish and maintain a competitive, fair and equitable compensation and benefits policy designed to retain and motivate executives on behalf of the Company and to attract necessary additions to the staff with the appropriate qualifications;

 

discharge the Board’s responsibilities for compensating our executives;

 

oversee and monitor

 

competence and qualifications of our senior management,

 

senior management succession,

 

soundness of the organizational structure, and

 

other related matters necessary to ensure the effective management of the business; and

 

review the Compensation Discussion and Analysis (“CD&A”) for inclusion in our proxy statement.

 

More specifically, the Compensation and Benefits Committee annually reviews and approves corporate goals and objectives relevant to the total direct compensation—that is, changes in base salary, and non-equity and equity incentive plan compensation—of the Chairman and Chief Executive Officer (“CEO”) and other executive officers; evaluates their performance against these goals and objectives; and, based on this evaluation, sets their target total direct compensation and determines payouts under our variable compensation plans. The details of the processes and procedures involved are described in the CD&A beginning on page 38. The independent members of the full Board ultimately make the final decisions regarding the Chairman and CEO’s total direct compensation.

 

The Compensation and Benefits Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors/home.html.

 

The Compensation and Benefits Committee Report is included on page 50 of this proxy statement.

 

Role of Compensation Consultants.

 

The Compensation and Benefits Committee retains the services of a compensation consultant to serve as an objective third-party advisor on the reasonableness of compensation levels and on the appropriateness of the compensation program structure in supporting our business strategy and human resource objectives. Since 2008, the Committee has retained Frederic W. Cook & Co., Inc. (“Cook”) as its compensation consultant.

 

Independence of Compensation Consultant.

 

The Committee regularly reviews the services provided by Cook and believes that Cook is independent in providing executive compensation consulting services. The Committee conducted a specific review of its relationship with Cook in 2013, and determined that Cook’s work for the Committee did not raise any conflicts of interest, consistent with the guidance provided under the Dodd-Frank Act, and by the SEC and the NYSE. In making this determination, the Committee reviewed information provided by Cook on the following factors:

 

The provision of other services to Merck by Cook;

 

The amount of fees received from Merck by Cook as a percentage of the total revenue of Cook;

 

The policies and procedures of Cook that are designed to prevent conflicts of interest;

 

Any business or personal relationship of the Committee’s advisor with a member of the Committee;

 

Any stock of Merck owned by the Committee’s advisor or the advisor’s immediate family members; and

 

Any business or personal relationship of the Committee’s advisor or any other employee at Cook with an executive officer of Merck.

 

2014 Proxy Statement    22

 

In particular, the Committee noted that (i) Cook provided no other services to Merck, other than occasional non-material assistance to the Human Resources staff related to Cook’s compensation committee-related duties; and (ii) Cook’s work is performed directly on behalf of the Committee, working in cooperation with management, to assist the Committee with executing its responsibilities.

 

In future years, if the Committee’s compensation consultant provides significant services to us that could reasonably be seen to affect the compensation consultant’s independence, we plan to disclose in our proxy materials the nature of those services, and fees paid for such services.

 

Services performed during 2013.

 

During 2013, Cook supported the Committee by:

 

Reviewing our competitive market data with respect to the CEO’s and senior executives’ compensation;

 

Providing information on executive compensation trends, as requested; and

 

Assisting in determining Chairman and CEO target total direct compensation and payouts under the Executive Incentive Plan.

 

Since 2010, the Company’s Human Resources department has retained Pay Governance LLC to provide various services pertaining to executive compensation. Pay Governance LLC had no direct role with the Compensation and Benefits Committee’s deliberations or decisions.

 

Compensation and Benefits Committee Interlocks and Insider Participation

 

Mr. Thomas H. Glocer, Mr. William B. Harrison, Jr., Mr. Carlos E. Represas, Ms. Patricia F. Russo, and Mr. Peter C. Wendell served on the Compensation and Benefits Committee during 2013. There were no Compensation and Benefits Committee interlocks or insider (employee) participation during 2013.

 

Research Committee

 

The primary functions of the Committee are to:

 

assist the Board in its oversight of matters pertaining to our strategies and operations for the research and development of pharmaceutical products and vaccines;

 

identify areas and activities that are critical to the success of our drug and vaccine discovery, development and licensing efforts, as well as evaluate the effectiveness of our drug and vaccine discovery, development and licensing strategies and operations;

 

keep the Board apprised of this evaluation process and findings and make appropriate recommendations to the President of Merck Research Laboratories and to the Board on modifications of strategies and operations.

 

The Research Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors/home.html.

 

Shareholder Engagement

 

Merck regularly communicates with its shareholders to better understand their perspectives. During 2013, we held discussions with our largest shareholders in the spring before the 2013 Annual Meeting of Shareholders and once again in the late fall, and also engaged in other communications and dialogue throughout the year. We expanded our engagement program in the fall from past years because of our belief that it is most productive to discuss governance and compensation issues well in advance of the months leading up to the Annual Meeting, which allows management and the Board to gather information about investor perspectives and make educated and deliberate decisions that are balanced and appropriate for Merck’s diverse shareholder base and in the best interests of the Company. In 2013, our agenda included topics such as board composition, executive compensation, written consent, special shareholders meetings, corporate political spending and other governance matters. These discussions provided valuable insights into shareholder views of our current governance practices and executive compensation programs as well as the shareholders’ voting processes and priorities. In general, our shareholders expressed no concerns about our Board, corporate governance or executive compensation practices. The feedback received was summarized and presented to the Corporate Governance, Public Policy and Corporate Responsibility Committee, Compensation and Benefits Committee and full Board. We have also incorporated disclosure suggestions into this proxy statement. We will continue to engage with shareholders on a regular basis to better understand and consider their views on our executive compensation programs and corporate governance practices.

 

Special Meeting of Shareholders and Action by Written Consent

 

As discussed above, during our shareholder engagement in 2013, we sought shareholder input in terms of their views regarding special meetings of shareholders and action by written consent. At the time, the Company By-Laws allowed special shareholders meetings to be called at the request of holders of 25% of the shares. During our outreach, we requested input regarding whether the Board should consider lowering the threshold from 25%, and if so, the most appropriate threshold to adopt. Although our shareholders hold diverse views on this question, a number of our largest holders suggested the Company consider a lower threshold. The Governance, Public Policy and Corporate Responsibility Committee of the Board considered this input carefully in its recommendation to the Board on the matter. As a result of the feedback we received, on February 25, 2014, the Board of Directors approved an amendment to the Company’s By-Laws to provide that special meetings of shareholders may be called by shareholders owning at least 15% of the combined voting power of the then outstanding shares of all classes and series of capital stock of the Company entitled generally to vote in the election of directors of the Company.

 

2014 Proxy Statement    23

 

In our shareholder engagement, we also discussed shareholder views of the right to act by written consent. Through these dialogues, we learned that while some of our largest shareholders generally support the right of shareholders to act by written consent, most believe that shareholder interests are appropriately protected by a well-structured right to call a special meeting. As discussed further in the Board of Directors’ Statements in Opposition to shareholder proposals 4 and 5 on pages 69 and 70, we believe that the limitation on shareholders’ ability to act by written consent, coupled with the ability of shareholders to call a special meeting at a relatively low threshold, protects the overall interests of the Company and its shareholders in a fair and balanced manner.

 

Shareholder Communications with the Board

 

Merck will forward all communications from shareholders and interested parties to the full Board, to the Lead Director, to non-management Directors, to an individual Director or to the chairperson of the Board committee that is most closely related to the subject matter of the communication, except for the following types of communications:

 

communications that advocate that the Company engage in illegal activity;

 

communications that, under community standards, contain offensive or abusive content;

 

communications that have no relevance to the business or operations of the Company; and

 

mass mailings, solicitations and advertisements.

 

The Corporate Secretary, in consultation with the General Counsel, will determine when a communication is not to be forwarded.

 

Our acceptance and forwarding of communications to the Directors does not imply that the Directors owe or assume any fiduciary duties to persons submitting the communications.

 

Shareholders and interested parties who wish to do so may communicate directly with the Board, or specified individual Directors, by writing to the following address:

 

Board of Directors
Merck & Co., Inc.
P.O. Box 1150
Whitehouse Station, NJ 08889

 

Further information on communications to the Board can be found on our website at http://www.merck.com/contact.

 

In addition, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by us, including the Board and the Audit Committee, regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. These procedures are described in the Merck Code of Conduct—Our Values and Standards, which is also available on our website noted above.

 

Political Contributions and Lobbying Expenditure Oversight and Disclosure

 

The Company is committed to participating constructively and responsibly in the policymaking process, and to providing information and analysis on the issues that affect our business and patient care. As described on our website, our participation in the public policy debate is focused on two key objectives: encouraging innovation and improving patient access to quality healthcare. The Company’s public policy positions are determined by senior management with oversight by the Board’s Governance, Public Policy and Corporate Responsibility Committee. The Company’s political contributions are made in accordance with Company policies and procedures also overseen by senior management. The Board’s Governance, Public Policy and Corporate Responsibility Committee monitors all such contributions.

 

The Company publicly discloses and regularly updates information regarding its public policy positions and advocacy expenditures (http://www.merck.com/about/views-and-positions/home.html and http://www.merckresponsibility.com/focus-areas/ethics-transparency/public-policy-advocacy). The Company has been ranked No. 1 for three consecutive years on the CPA-Zicklin Index of Corporate Political Accountability and Disclosure.

 

In addition, the Company strictly complies with the disclosure obligations imposed by the numerous federal, state and local laws that regulate the Company’s political contributions and expenditures at all levels.

 

Commitment to Corporate Responsibility

 

The Company has robust corporate governance and oversight processes related to our corporate responsibility approach and our philanthropic giving. The Board’s Governance, Public Policy and Corporate Responsibility Committee regularly reviews the Company’s progress towards achieving our corporate responsibility objectives as well as the Company’s charitable giving priorities and programs. The Company publicly discloses and regularly updates information regarding its charitable contributions at http://www.merckresponsibility.com/giving-at-merck/home.html.

 

2014 Proxy Statement    24

 

STOCK OWNERSHIP INFORMATION

 

Stock Ownership Guidelines

 

The Company imposes stock ownership guidelines for Directors and executive officers. Guidelines for Directors are discussed in the Director Compensation section, beginning on page 35 and guidelines for executive officers are discussed in the Compensation Discussion and Analysis section, beginning on page 38.

 

Stock Ownership of Directors and Officers

 

The table below reflects the number of shares of Merck common stock beneficially owned by (a) each of our Directors; (b) each of our executive officers named in the Summary Compensation Table; and (c) all Directors and executive officers as a group. Unless otherwise noted, the information is stated as of February 28, 2014, and the beneficial owners exercise sole voting and/or investment power over their shares.

 

   Company Common Stock   
Name of Beneficial Owner   Shares
Owned
(a)    Right to Acquire Beneficial
Ownership Under
Options/Stock Units
Exercisable/Distributable
Within 60 Days(b)
   Percent
of Class
   Phantom
Stock
Units(c)
 
Kenneth C. Frazier   311,110    1,710,331   *    
Leslie A. Brun   100    10,000   *   20,841 
Thomas R. Cech   100    5,000   *   16,392 
Thomas H. Glocer   5,100    15,000   *   33,485 
William B. Harrison, Jr.   1,400    35,000   *   62,150 
C. Robert Kidder   10,339(d)    5,000   *   14,973 
Rochelle B. Lazarus   6,352(d)    30,000   *   48,347 
Carlos E. Represas   6,500(d)    5,000   *   20,375 
Patricia F. Russo   13,148    5,000   *   14,973 
Craig B. Thompson   3,352    5,000   *   14,973 
Wendell P. Weeks   200(d)    30,000   *   52,005 
Peter C. Wendell   1,000    30,000   *   53,323 
Peter N. Kellogg   149,553    778,289   *    
Bruce N. Kuhlik   121,844    251,288   *    
Roger M. Perlmutter   25,000       *    
Adam H. Schechter   92,794(d)    456,289   *   2,716 
All Directors and Executive Officers as a Group   1,057,734    4,775,697   *    
* Less than 1% of the Company’s outstanding shares of common stock.
(a) Includes equivalent shares of common stock held by the Trustee of the Merck U.S. Savings Plan, as applicable, as of January 8, 2014, for the accounts of individuals as follows: Mr. Frazier—3,445 shares and all Directors and executive officers as a group—16,053 shares.
(b) This column reflects the number of shares that could be acquired within 60 days of February 28, 2014, through the exercise of outstanding stock options.
(c) Represents phantom shares denominated in Merck common stock under the Plan for Deferred Payment of Directors’ Compensation or the Merck Deferral Program.
(d) Includes shares of common stock in which the beneficial owners share voting and/or investment power as follows: 1,022 shares held in a trust for the benefit of Mr. Kidder’s children; 1,757 shares held by Ms. Lazarus’ spouse; 6,000 shares held in a trust for the benefit of Mr. Represas’ family; 70,508 shares held in a trust for the benefit of Mr. Schechter’s family; and 100 shares held in a custodial account for Mr. Weeks’ minor child.

 

2014 Proxy Statement    25

 

Stock Ownership of Certain Beneficial Owners

 

The table below reflects the number of shares beneficially owned by persons or entities known to us to own more than 5% of the outstanding shares of Merck common stock as of December 31, 2013:

 

Name and Address of
Beneficial Owner
  Amount and Nature of
Beneficial Ownership
   Percent of Class
BlackRock, Inc.          
40 East 52nd Street          
New York, NY 10022   203,546,310(a)    7.00%
Capital World Investors          
333 South Hope Street          
Los Angeles, CA 90071   168,955,704(b)    5.80%
Wellington Management Company, LLP          
280 Congress Street          
Boston, MA 02210   154,016,283(c)    5.27%
(a) As reported on Amendment No. 4 to Schedule 13G/A (the “BlackRock filing”) filed with the SEC on February 10, 2014. According to the BlackRock filing, of the 203,546,310 shares of Merck common stock beneficially owned by BlackRock, Inc. (“BlackRock”), as of December 31, 2013, BlackRock has the sole power to vote or direct the vote with respect to 168,486,666 shares, sole power to dispose or to direct the disposition of 203,486,707 shares, and shared voting and shared dispositive power with respect to 59,603 shares.
(b) As reported on Amendment No. 4 to Schedule 13G/A (the “Capital World filing”) filed with the SEC on February 13, 2014. According to the Capital World filing, as of December 31, 2013, Capital World Investors (“Capital World”), a division of Capital Research and Management Company (“CRMC”), may be deemed to have the beneficial ownership of 168,955,704 shares of Merck common stock as a result of CRMC acting as an investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940. Capital World disclaims beneficial ownership of the shares pursuant to Rule 13d-4. Capital World has sole voting authority and sole dispositive power over the shares.
(c) As reported on Schedule 13G (the “Wellington filing”) filed with the SEC on February 14, 2014. According to the Wellington filing, as of December 31, 2013, Wellington Management Company, LLP (“Wellington”), in its capacity as investment adviser, may be deemed to have the beneficial ownership of 154,016,283 shares of Merck common stock which are held of record by clients of Wellington. Wellington has the shared power to vote or direct the vote with respect to 46,334,152 shares and the shared power to dispose or to direct the disposition of 154,016,283 shares. Wellington does not have sole voting or dispositive power with respect to any other shares.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and Directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission and the New York Stock Exchange. Officers, Directors and greater than 10% beneficial owners are required by applicable regulations to furnish us with copies of all Section 16(a) forms they file. We are not aware of any beneficial owner of more than 10% of Merck common stock.

 

Based solely upon a review of the copies of the forms furnished to us during fiscal year 2013, or written representations from certain reporting persons that no Forms 5 were required, we believe that all filing requirements applicable to our officers and Directors were complied with during the 2013 fiscal year.

 

2014 Proxy Statement    26

 
PROPOSAL 1.  ELECTION OF DIRECTORS

 

Director Nomination Process

 

The Governance, Public Policy and Corporate Responsibility Committee acts as a screening and nominating committee for candidates considered for nomination by the Board for election as Directors. In this capacity, it concerns itself with the composition of the Board with respect to depth of experience, balance of professional interests, required expertise and other factors. The Governance, Public Policy and Corporate Responsibility Committee evaluates prospective nominees identified on its own initiative as well as candidates referred or recommended to it by Board members, management, shareholders or search consultants utilizing qualifications which are set forth in the Policies of the Board, available on our web site at http://www.merck.com/about/leadership/home.html.

 

To be considered for membership on the Board, a proposed or recommended candidate must meet the following criteria:

 

(a) be of proven integrity with a record of substantial achievement in an area of relevance to the Company;
   
(b) have demonstrated ability and sound judgment that usually will be based on broad experience;
   
(c) be able and willing to devote the required amount of time to the Company’s affairs, including attendance at Board meetings, Board committee meetings and annual shareholder meetings;
   
(d) possess a judicious and critical temperament that will enable objective appraisal of management’s plans and programs; and
   
(e) be committed to building sound, long-term Company growth.

 

In addition, while the Governance, Public Policy and Corporate Responsibility Committee does not have a formal diversity policy, diversity is a factor considered when identifying prospective nominees. Nominees are selected so that the Board of Directors represents a diversity of expertise in areas needed to foster the Company’s business success, including science, finance, operations, manufacturing, commercial activities, marketing, international business, and governance. In addition, nominees are selected so that the Board of Directors represents a diversity of personal characteristics, including gender, race, ethnic origin and national background. In past years, when identifying potential candidates, the Committee retained independent search firms to assist in identifying candidates that reflected these diversity objectives and it is expected that the current Governance, Public Policy and Corporate Responsibility Committee will continue this practice as necessary. Evaluation of proposed or recommended candidates occurs on the basis of materials submitted by or on behalf of the proposed or recommended candidate. If a proposed or recommended candidate continues to be of interest to the Governance, Public Policy and Corporate Responsibility Committee, additional information about her/him is obtained through inquiries to various sources and, if warranted, interviews.

 

Nominees for Director

 

The Board has recommended twelve nominees for election as Directors at this Annual Meeting, Mr. Leslie A. Brun, Dr. Thomas R. Cech, Mr. Kenneth C. Frazier, Mr. Thomas H. Glocer, Mr. William B. Harrison, Jr., Mr. C. Robert Kidder, Ms. Rochelle B. Lazarus, Mr. Carlos E. Represas, Ms. Patricia F. Russo, Dr. Craig B. Thompson, Mr. Wendell P. Weeks and Mr. Peter C. Wendell. All nominees, other than Mr. Frazier, a Company employee, satisfy the NYSE independence requirements.

 

Each of the nominees currently serves on the Board and was elected by the shareholders at the 2013 Annual Meeting. If elected, each nominee will hold a term expiring at the 2015 Annual Meeting of shareholders or until his or her successor has been duly elected and qualified. The Governance, Public Policy and Corporate Responsibility Committee believes that each nominee possesses the qualifications and personal characteristics that would contribute to a diverse and well-functioning Board. All of the nominees hold, or have held, senior leadership positions in large, complex organizations, educational institutions and/or charitable and not-for-profit organizations. In these positions, they have demonstrated their leadership, intellectual and analytical skills and gained deep experience in core disciplines significant to their oversight responsibilities as Director. Their roles in these organizations also permit them to offer quality advice and counsel to the Company’s management.

 

A Director nominee who does not receive a majority of the votes cast with respect to his or her election will not be elected or re-elected, as applicable, as a Director of the Company. However, under the New Jersey Business Corporation Act, incumbent directors who are not re-elected in an uncontested election because of a failure to receive a majority of the votes cast in favor

 

2014 Proxy Statement    27

 

of their re-election, will be “held over” and continue as directors of the Company until they resign or their successors are elected at the next election of directors. Under the Incumbent Director Resignation Policy (the “Resignation Policy”) of the Policies of the Board, an incumbent director who is not re-elected will be required to submit his or her resignation and the Governance, Public Policy and Corporate Responsibility Committee will be responsible for evaluating whether to accept the resignation and making a recommendation to the full Board. Under the Resignation Policy, the Board will be required to act on the recommendation of the Governance, Public Policy and Corporate Responsibility Committee no later than 90 days following certification of the shareholder vote.

 

If any of the nominees becomes unavailable for election, which we do not expect, votes will be cast for such substitute nominee or nominees as may be designated by the Board of Directors, unless the Board of Directors reduces the number of directors.

 

Below are summaries that contain additional information regarding the nominees’ professional experience, qualifications and skills.

 

LESLIE A. BRUN

Independent Director

Age: 61

 

  Director since:   2008
Committees: Audit (Chair)
  Governance, Public Policy and Corporate Responsibility
Other Current Public Directorships: Automatic Data Processing, Inc. (2003), Non-executive Chairman (2007); Broadridge Financial Solutions, Inc. (2007), Non-executive Chairman (2011)

 

Career Highlights:

 

Sarr Group, LLC, an investment holding company

 

Chairman and Chief Executive Officer (2006-present)

 

CCMP Capital Advisors, LLC, global private equity firm

 

Managing Director and Head of Investor Relations (2011-2013)

 

Hamilton Lane, private equity firm

 

Chairman and Chief Executive Officer (1991-2005)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Brun, the Board considered his extensive finance, management, investment banking, commercial banking and financial advisory experience, as well as his demonstrated success throughout his tenure as the Chairman and CEO of Sarr Group, LLC and Chairman and founder of Hamilton Lane. Mr. Brun’s depth of financial expertise is also demonstrated by his experience as a Managing Director and co-founder of the investment banking group of Fidelity Bank and as Vice President in the Corporate Finance Division of E.F. Hutton & Co. In addition, his directorships at other public companies, including past service on the audit committee of Automatic Data Processing, Inc., provide him with extensive experience on corporate governance issues.

 

2014 Proxy Statement    28

 

THOMAS R. CECH, PH.D.

Independent Director

Age: 66

 

  Director since:   2009
Committees: Audit
  Research
Other Current Public Directorships: None

 

 

 

 

Career Highlights:

 

Howard Hughes Medical Institute, non-profit medical research organization

 

President (2000-2009)

 

Investigator (1988-present)

 

University of Colorado

 

Director, BioFrontiers Institute (2009-present)

 

Distinguished Professor, Chemistry and Biochemistry (1990-present)

 

Awards:

 

National Medal of Science (1995)

 

Nobel Prize in Chemistry (1989)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Cech, the Board considered his extensive scientific expertise relevant to the pharmaceutical industry, including being a Nobel Prize winning chemist and a Professor at the University of Colorado. In addition, his role as the former President of the Howard Hughes Medical Institute provides Dr. Cech with extensive managerial experience with direct relevance to scientific research.

 

KENNETH C. FRAZIER

Management

Age: 59

 

  Director since: 2011
Other Current Public Directorships: Exxon Mobil Corporation (2009)

 

 

 

 

 

Career Highlights:

 

Merck & Co., Inc.

 

Chairman and Chief Executive Officer (2011-present)

 

President (2010-present)

 

Executive Vice President and President, Global Human Health (2007-2010)

 

Executive Vice President and General Counsel (2006-2007)

 

Senior Vice President and General Counsel (1999-2006)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Frazier, the Board considered Mr. Frazier’s broad managerial and operational expertise and deep institutional knowledge, as well as his track record of achievement, integrity and sound judgment demonstrated throughout his career with Merck & Co., Inc. and prior to joining Merck.

 

2014 Proxy Statement    29

 

THOMAS H. GLOCER

Independent Director

Age: 54

 

  Director since:   2007
Committees: Compensation and Benefits (Chair)
  Governance, Public Policy and Corporate Responsibility

Other Current Public Directorships: Morgan Stanley (2013)

 

Former Directorships Held During the Past 5 Years: Thomson Reuters Corporation (2008-2011)

 

Career Highlights:

 

Thomson Reuters Corporation, multinational media and information firm

 

Chief Executive Officer (2008-2011)

 

Chief Executive Officer, Reuters Group PLC (2001-2008)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Glocer, the Board considered his extensive management, operational, technology and international business expertise, and his history of accomplishment and comprehensive executive ability as CEO and a director at Thomson Reuters Corporation. In addition, his directorships at other public companies provide him with valuable experience on governance issues facing public companies.

 

WILLIAM B. HARRISON, JR.

Independent Lead Director

Age: 70

 

  Director since:   1999
Committees: Governance, Public Policy and Corporate Responsibility (Chair)
  Compensation and Benefits

Other Current Public Directorships: None

 

Former Directorships Held During the Past 5 Years: Cousins Properties Incorporated (2006-2012)

 

Career Highlights:

 

JPMorgan Chase & Co., multinational banking and financial services holding company

 

Chairman and Chief Executive Officer (2001-2007)

 

President and Chief Executive Officer (1999-2001)

 

Chief Executive Officer, Chase Manhattan Corporation (1991-1999)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Harrison, the Board considered his extensive management, operational, financial and investment banking experience as well as his leadership and record of achievement and sound judgment during his tenure as Chairman and CEO of JPMorgan Chase & Co. He also has significant Board experience as a former director of Cousins Properties Incorporated and a current director of charitable and civic organizations.

 

2014 Proxy Statement    30

 

C. ROBERT KIDDER

Independent Director

Age: 69

 

  Director since:   2005
Committees: Audit
  Research

Other Current Public Directorships: Morgan Stanley (1993)

 

Former Directorships Held During the Past 5 Years: Chrysler Group LLC (2009-2011)

 

Career Highlights:

 

Chrysler Group LLC, automobile manufacturer

 

Non-Executive Chairman (2009-2011)

 

3Stone Advisors LLC, private investment firm

 

Chairman and Chief Executive Officer (2006-2011)

 

Stonehenge Partners, Inc., private investment firm

 

Principal (2004-2006)

 

Borden Chemical, Inc., forest products and industrial chemical company

 

Chairman of the Board (1995-2004)

 

Chief Executive Officer (1995-2002)

 

Duracell International Inc., batteries and smart power systems manufacturer

 

President (1988-1991) and Chief Executive Officer (1988-1994)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Kidder, the Board considered his extensive management, operational and financial expertise as well as his experience and demonstrated success holding corporate leadership roles in multiple industries. In addition, his experience as a member of another public company board provides him with an enhanced perspective on issues applicable to public companies.

 

ROCHELLE B. LAZARUS

Independent Director

Age: 66

 

  Director since: 2004
Committees: Governance, Public Policy and Corporate Responsibility
Other Current Public Directorships: The Blackstone Group L.P. (2013), General Electric (2000)

 

 

 

Career Highlights:

 

Ogilvy & Mather, global advertising and marketing communication company

 

Chairman Emeritus (2012-present)

 

Chairman, Ogilvy & Mather Worldwide (2008-2012)

 

Chairman and Chief Executive Officer (1996-2008)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Ms. Lazarus, the Board considered her extensive management, marketing and communications expertise as well as her track record of achievement and sound judgment as demonstrated by her history as Chairman and CEO of Ogilvy & Mather Worldwide. Her role as Trustee of New York Presbyterian Hospital has enabled her to obtain experience in overseeing the management of medical providers, a key stakeholder group of the Company. In addition, her role as the Chair of the Nominating and Corporate Governance Committee of General Electric provides her with deep experience on governance issues facing public companies. She also has extensive experience as a director of charitable and civic organizations.

 

2014 Proxy Statement    31

 

CARLOS E. REPRESAS

Independent Director

Age: 68

 

  Director since:   2009
Committees: Compensation and Benefits
  Governance, Public Policy and Corporate Responsibility
Other Current Public Directorships: Bombardier Inc. (2004), Swiss Re Group (2010)

 

 

Career Highlights:

 

Bombardier Inc., aerospace and transportation company

 

Non-Executive Chairman, Bombardier Latin America (2011-present)

 

Chairman, Advisory Board, Bombardier Mexico (2007-present)

 

Swiss Re Group, a reinsurance and financial services group

 

Director (2010-present)

 

Swiss Re America Holding Corporation, a reinsurance and financial services group

 

Director (2010-present)

 

Nestlé, S.A, multinational food and beverage company

 

Chairman, Nestlé Group Mexico (1983-2011)

 

Executive Vice President and Head of the Americas (1994-2004)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Represas, the Board considered his extensive management, operational and international business experience as well as his past performance and sound leadership demonstrated throughout his tenures as the Chairman, CEO and President of Nestlé Group Mexico and Executive Vice President—Head of the Americas, Nestlé S.A. Mr. Represas worked for Nestlé for 36 years in the United States, Brazil, Spain, Ecuador, Venezuela, Mexico and Switzerland. In addition, his role as the Chair of the Corporate Governance and Nominating Committee of Bombardier Inc. provides him with important experience on governance issues facing public companies.

 

PATRICIA F. RUSSO

Independent Director

Age: 61

 

  Director since:   1995
Committees: Compensation and Benefits
  Governance, Public Policy and Corporate Responsibility
Other Current Public Directorships: Alcoa Inc. (2008), General Motors Company (2009), Hewlett-Packard Company (2011), KKR Management LLC (the managing partner of KKR & Co., L.P.) (2011)

 

Career Highlights:

 

Alcatel-Lucent, global telecommunications equipment company

 

Chief Executive Officer and Director (2006-2008)

 

Chairman, Lucent Technologies Inc. (2003-2006)

 

President and Chief Executive Officer, Lucent Technologies Inc. (2002-2006)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Ms. Russo, the Board considered her extensive management, operational, international business and financial expertise as well as her career achievements and demonstrated ability during her history as the former CEO and a director of Alcatel-Lucent and Lucent Technologies Inc. In addition, her directorships at other public companies, including her role as the Chair of the Directors and Corporate Governance Committee of General Motors, provide her with deep experience on governance issues facing public companies.

 

2014 Proxy Statement    32

 

CRAIG B.THOMPSON, M.D.

Independent Director

Age: 61

 

  Director since: 2008
Committees: Research (Chair)
Other Current Public Directorships: Charles River Laboratories International, Inc. (2013)

 

 

 

 

Career Highlights:

 

Memorial Sloan-Kettering Cancer Center, cancer treatment and research institution

 

President and Chief Executive Officer (2010-present)

 

The University of Pennsylvania

 

Director, Abramson Cancer Center (2006-2010)

 

Associate Vice President, Cancer Services, University of Pennsylvania Health System (2006-2010)

 

Professor of Medicine, University of Pennsylvania Medical School (1999-2011)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Thompson, the Board considered his extensive scientific and medical expertise relevant to the pharmaceutical industry and the Company’s research focus, including his positions as President and CEO of Memorial Sloan-Kettering Cancer Center and past experience as a Professor of Medicine at the University of Pennsylvania School of Medicine, Director of the Abramson Cancer Center and Associate Vice President for Cancer Services of the University of Pennsylvania Health System.

 

WENDELL P. WEEKS

Independent Director

Age: 54

 

  Director since:   2004
Committees: Audit
  Research
Other Current Public Directorships: Corning Incorporated (2000)

 

 

 

Career Highlights:

 

Corning Incorporated, specialty glass company for the consumer electronics, telecommunications, emissions-control, and life sciences industries

 

President (2010-present)

 

Chairman and Chief Executive Officer (2007-present)

 

President and Chief Executive Officer (2005-2007)

 

President and Chief Operating Officer (2002-2005)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Weeks, the Board considered his extensive management, commercial, operational, and financial expertise, as well as his track record of success evidenced by his history at Corning Incorporated. Mr. Weeks’ diverse industry experience is demonstrated by the strategic leadership positions he held in Corning’s television, display glass, and telecommunications divisions prior to joining the company’s senior management team. In addition, he brings unique insight into managing innovation, based on his experience with new product development.

 

2014 Proxy Statement    33

 

PETER C. WENDELL

Independent Director

Age: 63

 

  Director since:   2003
Committees: Compensation and Benefits
  Research
Other Current Public Directorships: None

 

 

 

 

Career Highlights:

 

Sierra Ventures, technology-oriented venture capital firm

 

Managing Director (1982-present)

 

Stanford University

 

Faculty, Stanford University Graduate School of Business (1991-present)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Wendell, the Board considered his extensive management, financial and venture capital expertise as demonstrated by his positions as a Managing Director of Sierra Ventures, his status as a Lecturer in strategic management at the Stanford University Graduate School of Business for over 20 years, and his former Chairmanship of the $18 billion Princeton University endowment.

 

2014 Proxy Statement    34

 

DIRECTOR COMPENSATION

 

As described more fully below, this chart summarizes the annual compensation for our non-employee directors during 2013.

 

Director Compensation for Fiscal Year Ended December 31, 2013
Name   Fees Earned or
Paid in Cash
($)
  Option
Awards
($)(1)
    All Other
Compensation
($)(2)
    Total
($)
Leslie A. Brun $ 125,000     $ 165,000   $ 290,000
Thomas R. Cech   110,000       170,774     280,774
Thomas H. Glocer   115,000       175,000     290,000
William B. Harrison, Jr.   145,000       180,000     325,000
C. Robert Kidder   110,000       150,000     260,000
Rochelle B. Lazarus   100,000       180,000     280,000
Carlos E. Represas   104,167       150,000     254,167
Patricia F. Russo   104,167       175,000     279,167
Craig B. Thompson   115,000       150,000     265,000
Wendell P. Weeks   105,833       180,000     285,833
Peter C. Wendell   100,000       180,000     280,000

 

(1) Beginning in 2011, no further grants will be made under the 2010 Non-Employee Directors Stock Option Plan, subject to the Board’s right to further amend the Plan. Stock options previously issued to directors under the 2010 Non-Employee Directors Stock Option Plan and any predecessor plans become exercisable in substantially equal installments on the first, second and third anniversaries of the grant date. All options expire on the day before the tenth anniversary of their grant. The exercise price of the options is the closing price of our common stock on the grant date as quoted on the New York Stock Exchange.
   
  On December 31, 2013, the aggregate number of option awards outstanding for Directors who served during 2013 was:

 

Director Name  Outstanding Option
Awards at 12/31/13
L.A. Brun   10,000
T.R. Cech   5,000
T.H. Glocer   15,000
W.B. Harrison, Jr.   35,000
C.R. Kidder   5,000
R.B. Lazarus   30,000
C.E. Represas   5,000
P.F. Russo   5,000
C.B. Thompson   5,000
W.P. Weeks   35,000
P.C. Wendell   35,000

 

(2) Represents Company credits to the Plan for Deferred Payment of Directors’ Compensation.
   
  Also includes charitable contributions made by the Merck Foundation under its matching gift program on behalf of the following Directors as follows:

 

Director Name  Matched Charitable
Contribution
L.A. Brun  $15,000
T.R. Cech  $20,774
T.H. Glocer  $25,000
W.B. Harrison, Jr.  $30,000
R.B. Lazarus  $30,000
P.F. Russo  $25,000
W.P. Weeks  $30,000
P.C. Wendell  $30,000

 

  For Mr. Brun, Dr. Cech, Mr. Harrison, Ms. Lazarus and Mr. Weeks, matching contributions include 2012 contributions that were paid in calendar year 2013.

 

2014 Proxy Statement    35

 

Directors who are not Merck employees are compensated for their service as a director as shown in the chart below:

 

Schedule of Director Fees
Compensation Element*   Director Compensation Program
Annual Retainer $ 100,000, which may be deferred, at the Director’s option
Annual Mandatory Deferral $ 150,000 in credit to Director’s Merck common stock account under the Plan for Deferred Payment of Directors’ Compensation
Committee Chair Retainer $ 25,000 for the Audit Committee
  $ 15,000 for the Governance, Public Policy and Corporate Responsibility Committee
  $ 15,000 for the Compensation and Benefits Committee
  $ 15,000 for the Research Committee
Audit Committee Member Retainer $ 10,000
Lead Director Retainer $ 30,000
Stock Ownership Guideline   Ownership of common stock or shares held in the Merck common stock account under the Plan for Deferred Payment of Directors’ Compensation equal to five times the annual cash retainer to be achieved by each director within five years of joining the Board or as soon thereafter as practicable**

 

* All annual retainers are paid in quarterly installments.
   
** Each of our non-employee Directors met this guideline as of December 31, 2013.

 

Directors’ Deferral Plan. Under the Merck & Co., Inc. Plan for Deferred Payment of Directors’ Compensation (“Directors’ Deferral Plan”) each Director may elect to defer all or a portion of cash compensation from retainers. Any amount so deferred is, at the Director’s election, valued as if invested in any of the investment measures offered under the Merck U.S. Savings Plan, including our common stock, and is payable in cash in installments or as a lump sum beginning with the year after termination of service as a Director.

 

In addition to the annual retainer, on the first Friday following the Annual Meeting of Shareholders, each Director receives a deferred stock unit—that is, a credit to his/her Merck common stock account under the Directors’ Deferral Plan—of $150,000. Directors who join the Board after that date are credited with a pro-rata portion.

 

Other. We reimburse all directors for travel and other necessary business expenses incurred in the performance of their services for us and extend coverage to them under our travel accident and directors’ and officers’ indemnity insurance policies. Directors are also eligible to participate in the Merck Foundation Matching Gift Program. The maximum gift total for a director participant in the Program is $30,000 in any calendar year.

 

Director Stock Ownership Guidelines. On joining the Board, each Director must own at least one share of stock, with a target Merck common stock ownership level equal to five times the annual cash retainer to be achieved by each Director within five years of joining the Board or as soon thereafter as practicable. Shares held in the Merck common stock account under the Plan for Deferred Payment of Directors’ Compensation will be included in the target goal. Upon the request of a Director, the Governance, Public Policy and Corporate Responsibility Committee will consider if modification of the target ownership level is appropriate in view of a Director’s personal circumstances.

 

2014 Proxy Statement    36

 
PROPOSAL 2.  NON-BINDING ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

 

Pursuant to Rule 14A of the Securities and Exchange Act of 1934, we are providing our shareholders the opportunity to vote on a non-binding, advisory resolution to approve the compensation of our Named Executive Officers as disclosed in this proxy statement, including the Compensation Discussion and Analysis, compensation tables and the narrative discussion accompanying the tables beginning on the following page.

 

As described in the Compensation Discussion and Analysis, our executive compensation programs are designed to reward executives based on the achievement of company and individual performance objectives which, as a whole, are intended to drive sustainable long-term value creation for shareholders and reflect and maintain our position as an industry leader in the development of innovative medicines. The compensation of our Named Executive Officers is also designed to enable us to attract, engage, and retain talented, high-performing and experienced executives in a competitive market.

 

In order to align executive pay with operational performance and the creation of long-term shareholder value, a significant portion of compensation paid to our Named Executive Officers is allocated to annual cash and long-term equity incentives which are directly linked to Company and/or stock price performance. For 2013, 89% and 81%, respectively, of the CEO’s and other Named Executive Officers’ annual target total direct compensation was variable based on our operating performance and/or our stock price.

 

The Named Executive Officers received below target payouts under our 2013 annual incentive plan and our long-term incentive plan for the three-year performance period ended December 31, 2013. While the Company’s operating performance fell below target in 2013, the operation of our variable incentives demonstrates strong linkage between pay and performance and fosters alignment between executive compensation and the degree to which we achieve our operating objectives and successfully create value for shareholders over time.

 

In addition, management and the Compensation and Benefits Committee of the Board of Directors continually review the compensation programs for the Named Executive Officers to ensure they achieve the desired goals of reinforcing senior management’s alignment with the interests of shareholders and linking compensation to performance as measured by operational results. As a result, we have adopted the policies and practices described on page 39 to further align pay with operational performance and increases in long-term shareholder value while minimizing excessive risk taking.

 

We are asking shareholders to indicate their support for the Named Executive Officer compensation as described in this proxy statement. Accordingly, the following resolution will be submitted for approval by shareholders at the 2014 Annual Meeting:

 

“Resolved, that the compensation paid to the Company’s Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and the narrative discussion described in pages 38 to 66 of this proxy statement, is hereby APPROVED.”

 

The shareholder vote on this resolution will not be binding on management or the Board of Directors and will not be construed as overruling any decision by management or the Board. However, the Board of Directors and the Compensation and Benefits Committee of the Board value the opinions of our shareholders as expressed through their votes and other communications. For example, in 2013, shareholders continued their strong support of our executive compensation programs with an overwhelming majority (88%) of the votes cast for approval of a similar proposal. We will continue to give careful consideration to the outcome of the advisory vote on executive compensation and to the opinions of our shareholders when making compensation decisions.

 

The Board of Directors has adopted a policy providing for annual “say-on-pay” advisory votes. Accordingly, the next “say-on-pay” vote will occur in 2015.

 

The Board of Directors recommends that Shareholders vote FOR the resolution to approve, on an advisory basis, the compensation of our Named Executive Officers.

 

2014 Proxy Statement    37

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

2013 proved to be a challenging year for Merck as the impact of patent expiries, late-stage pipeline setbacks, foreign exchange and other macroeconomic factors negatively impacted our top-and bottom-line results.

 

In response to these challenges, we launched a multi-year global initiative to redesign our operating model and reduce our cost base, sharpen our commercial focus and reprioritize R&D. We believe that these actions will improve our performance in the short term while allowing us to invest for the long term, thereby making us a more competitive company, and one that is better positioned to drive innovation and create value for patients, customers and shareholders.

 

To date, we have made solid progress in each of these key areas and are excited about the potential of our near- and long-term pipeline, which includes the accelerated development program for MK-3475, our investigational anti-PD-1 immunotherapy for patients with advanced melanoma, as well as other investigational therapies to treat chronic hepatitis C virus, HPV and Alzheimer’s disease.

 

Redesigned operating model and reduced cost base
Sharpened commercial focus
Reprioritized R&D

 

Select Business Highlights for 2013

 TOP LINE / BOTTOM LINE RESULTS:

 

Revenue decreased by 7% compared to 2012, driven mainly by the negative impact of patent expiries and foreign exchange (minus 2% impact)
Despite revenue challenges, we delivered non-GAAP EPS of $3.49 (GAAP EPS of $1.47), which was near the mid-point of our revised target range but below the $3.61 target established at the beginning of the year under our Company Scorecard

 SHAREHOLDER VALUE CREATION:

Returned $11.7 billion to shareholders through dividend and share repurchases
Increased the dividend paid by 2.4% during 2013
Drove a 27% increase in total shareholder return

 COMMERCIAL PERFORMANCE:

Continued strong growth of key brands including GARDASIL, REMICADE, SIMPONI, ISENTRESS and ZOSTAVAX
Emerging markets sales increased 3% compared to 2012
Animal Health revenue declined 1% (including a 2% negative impact from foreign exchange) compared to 2012
Consumer Care revenue declined 3% (including a 1% negative impact from foreign exchange) compared to 2012

 CLINICAL & REGULATORY:

Experienced delays in completing the U.S. Food and Drug Administration (“FDA”) filings for certain pipeline candidates (e.g., MK-0822 for osteoporosis and MK-4305 for insomnia) and cancelled certain projects as part of our pipeline reprioritization efforts
Initiated an accelerated development program for MK-3475, our investigational anti-PD-1 immunotherapy for patients with advanced melanoma
Received Breakthrough Therapy designation from the U.S. FDA for MK-5172/MK-8742, our investigational oral combination regimen for the treatment of chronic hepatitis C virus
Initiated Phase III trials for MK-8931, our investigational BACE inhibitor for Alzheimer’s disease

 MANAGING COSTS AND OPERATING EFFICIENCIES:

 

Reduced non-GAAP operating expenses (Marketing and Administrative expenses and R&D expenses) by approximately $1.5 billion while continuing to invest for future growth

 

2014 Proxy Statement    38

 

Pay for Performance Alignment

 

Annual Incentive – Our performance during 2013 resulted in below target achievement (72 points vs. a target of 100 points) of the operational and strategic objectives of our 2013 Company Scorecard. These results determine annual incentive payouts to the majority of our employees, including the Named Executive Officers (as defined page 40). As a result, annual incentive payouts for the Named Executive Officers were, on average, 40% lower than prior year. The 2013 Company Scorecard is described in more detail beginning on page 42.

 

Long-Term Incentive – Our 2011-2013 Performance Share Unit (“PSU”) plan gives senior executives the opportunity to earn share awards based on EPS performance measured over each of the preceding three years as modified by a three-year total shareholder return (“TSR”) ranking versus our peer group. While EPS fell below target for 2013, growth for the three-year performance period ended December 31, 2013, was above target as a result of strong performance in the two prior years. This generated a preliminary payout of 107% of target for our 2011-2013 PSU award cycle. However, notwithstanding that our three-year annualized TSR was 15.6%, we ranked 10 of 12 among our industry peers which reduced the payout by 20% based on the schedule that was established by the Compensation and Benefits Committee of the Board of Directors (the “Committee”) at the time of grant. As a result, the final payout of the 2011-2013 PSU award cycle was 86% of target. Additional details about our PSU program and the 2011-2013 PSU award cycle are provided on page 45.

 

While the Company’s operating performance fell below target in 2013, the operation of our variable incentives demonstrates strong linkage between pay and performance and fosters alignment between executive compensation and the degree to which we achieve our operating objectives and successfully create value for shareholders over time.

 

Strong pay-for-performance alignment of incentive plans

 

 

Compensation and Corporate Governance Policies and Practices—Linking Pay with Performance and Mitigating Risk
Our executive compensation programs are designed to closely link pay with operational performance and increases in long-term shareholder value while minimizing excessive risk taking. To help us accomplish these important objectives, we have adopted the following policies and practices:
No excise tax gross ups—we do not provide for “golden parachute” excise tax gross-ups upon a change in control of the Company.
Double trigger vesting—our long-term incentive grants contain a “double trigger” acceleration feature in the event of a change in control.
No time-vested restricted stock units—the annual, long-term incentive mix for our Named Executive Officers consists solely of PSUs and stock options (weighted 60% / 40%).
Total shareholder return metric—our PSU program uses a total shareholder return metric to further align the overall payout with our long-term stock price performance.
No re-pricing of underwater options—under the terms of our Incentive Stock Plan (“ISP”), the re-pricing of underwater options is strictly prohibited absent prior shareholder approval.
Regular monitoring of share utilization—we manage shareholder dilution, share usage and overhang rates by limiting participation in our long-term incentive program and by eliminating stock option grants below the executive level.
Modest perquisites—we offer only modest perquisites that are supported by a business interest.
Independent compensation consultant—the Committee retains an independent compensation consulting firm which provides no other services to the Company.
Risk Mitigation Policies and Practices:
Robust stock ownership guidelines—senior executives are subject to stock ownership requirements that encourage a long-term perspective and ensure that their interests are closely aligned with those of shareholders.
Recoupment policy—incentive compensation may be subject to recoupment in the event of (1) a significant restatement of financial results caused by executive fraud or willful misconduct; or (2) a material violation of company policy that causes significant harm to the Company (including a failure to manage or monitor conduct or risks appropriately).
No hedging or pledging of stock—executive officers are prohibited from entering into hedging or pledging transactions or short sales of our common stock.
Balanced compensation approach—our executive compensation program has a reasonable balance between annual and long-term performance, with a significant portion of compensation being delivered in the form of long-term incentives to recognize our long drug discovery and development cycle.
Multiple performance goals—annual cash incentives under the Executive Incentive Plan are funded based on a mix of financial and strategic measures.
Caps on incentive awards—the annual cash incentive awards under the Executive Incentive Plan and payouts under our PSU program are capped.

 

2014 Proxy Statement    39

 

Results of 2013 Shareholder Advisory Vote on Executive Compensation and Recent Key Actions taken by the Compensation and Benefits Committee of the Board of Directors

 

Each year, the Committee considers the outcome of shareholder advisory votes on executive compensation when making future decisions relating to the compensation of the Named Executive Officers and our executive compensation program and policies.

 

In 2013, shareholders continued their strong support of our executive compensation programs with over 88% of the votes cast for approval of the “say on pay” proposal at the 2013 Annual Meeting of Shareholders. The Committee believes that the voting results conveyed our shareholders’ strong support of the philosophy, strategy and objectives of our executive compensation programs.

 

Furthermore, we continue to engage in direct dialogue with our shareholders regarding our executive compensation programs and policies to ensure that investors understand the manner in which our policies support our long-term strategic objectives. Through our proactive shareholder engagement process, we held discussions with a majority of our largest institutional investors during both the spring and fall of 2013 on various corporate governance and executive compensation-related issues.

 

Key 2014 Compensation Actions

 

Based on our dialogue with investors and to better align our incentive plans with our evolving long-term business strategy, the Committee approved changes to both the annual incentive plan and our PSU program.

 

2014 Changes to Company Scorecard. Following a thorough review of the current Company Scorecard design, the number of Scorecard measures used to fund the annual incentive pool will be reduced from eight to three: revenue and earnings will be weighted 40% each and progress against important milestones related to our pipeline will be weighted 20%. Given the near-term business challenges and transformational efforts underway at the Company, we believe that a more streamlined approach to the Scorecard will create a sharper focus on our most critical business drivers and further align pay for performance. We will continue to use additional key performance indicators to hold leaders accountable for achieving business results and driving our longer term strategic priorities.
   
2014 Changes to PSU Program. Beginning with the three-year performance period commencing January 1, 2014, performance under the new PSU program will be measured over a single three-year period as opposed to three separate 12-month periods under the prior plan. In addition, a new relative TSR measure will consider the level of outperformance or underperformance relative to the peer group median alongside a three-year adjusted operating cash flow target with each metric comprising 50% of the payout calculation. These metrics were selected to create a strong linkage between payouts to executives and changes in TSR over time and to ensure focus on a key driver of operational excellence over the longer-term. The Committee believes that the new plan will complement the metrics chosen in the revised annual incentive plan to create “line of sight” between the most critical operating objectives, changes in shareholder value, and compensation payouts over both the short and longer terms.
   
2014 Named Executive Officer Annual Target Compensation Opportunity. Additionally, the Committee, and in the case of Mr. Frazier, the full Board of Directors, determined that no increases would be made to any of the Named Executive Officers’ 2014 annual target direct compensation opportunity (base salary + target cash incentive + target long-term incentive).

 

Detailed Discussion and Analysis

 

This Compensation Discussion and Analysis or “CD&A” describes the material elements of compensation for the executive officers identified in the Summary Compensation Table (the “Named Executive Officers”).

 

Kenneth C. Frazier  Chairman, President and Chief Executive Officer
Peter N. Kellogg  Executive Vice President and Chief Financial Officer
Bruce N. Kuhlik  Executive Vice President and General Counsel
Roger M. Perlmutter, M.D., Ph.D  Executive Vice President and President, Merck Research Laboratories
Adam H. Schechter  Executive Vice President and President, Global Human Health

 

The Committee makes all decisions on the total direct compensation (base salary, annual cash incentives, and long-term incentive awards) of our executive officers other than for the CEO. The Committee’s recommendations for the total direct compensation of the CEO are subject to approval by the Board of Directors. Additional details regarding the roles and responsibilities of the Committee are provided on page 22.

 

2014 Proxy Statement    40

 

In April 2013, Dr. Roger Perlmutter was appointed Executive Vice President and President, Merck Research Laboratories. In connection with his offer letter, Dr. Perlmutter will be provided the following compensation and benefits, aligned with the external market for executives in comparable roles and requisite experience. Dr. Perlmutter also received a cash and stock sign-on incentive to attract him to join Merck for this critical leadership position, as described in the table below:

 

Annual Base Salary $1,000,000
Annual Target Incentive 105% of annual base salary
Annual Long-Term Incentive Grant $3,500,000 granted in May 2013 comprised of 60% performance share units and 40% stock options, consistent with the other Named Executive Officers’ award mix
Sign-on Bonus $1,000,000
 

•  $500,000 is payable following his start date

 

• $500,000 is payable following his one-year anniversary subject to being a Company employee at the time of payment, resignation for good reason or termination by the Company without good reason

 

• The right to retain both payments is conditioned upon Dr. Perlmutter’s continued employment for twenty-four months after his start date

 

Sign-on Restricted Stock Units $2,000,000 granted in May 2013 subject to the normal terms and conditions that govern Merck’s restricted stock units
Other Benefits Participation in other benefit plans in accordance with the Company’s practices for other executives of a similar level, including participation in the Company’s Change in Control Plan

 

The Elements of 2013 Compensation

 

This section describes the elements of our Named Executive Officers’ 2013 compensation, which consisted of the following:

 

Direct Compensation Indirect Compensation
   

Base Salary

Employee and Other Benefits

Annual Cash Incentive

 

Long-Term Equity Incentives

 

 

Under our executive compensation program, a significant portion (89% and 81%, respectively) of the CEO’s and other Named Executive Officers’ annual target total direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

 

 

 

2014 Proxy Statement    41

 

Base Salary

 

The Committee, and in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier), determines base salaries for the Named Executive Officers each year based on the following factors:

 

Evaluation of individual performance;
   
Breadth, scope and complexity of the role;
   
Review of survey data to ensure competitive compensation against our pharmaceutical peer group (as described in more detail on page 48); and
   
Comparison of non-CEO executive officer base salaries to ensure reasonable internal equity.

 

Since Mr. Frazier became CEO in 2011, the Board of Directors has maintained his base salary at $1.5 million. In addition, a substantial majority of his compensation is variable (89%) and tied to longer-term operating and stock price performance measured on both an absolute and relative basis.

 

In addition, as part of the annual compensation management process applicable to all Merck salaried employees throughout the world, in early 2013, Mr. Frazier recommended, and the Committee reviewed and approved a 2% base salary increase for Mr. Schechter and a 1.5% increase for both Mr. Kellogg and Mr. Kuhlik. These increases were consistent with the merit budget established for all other U.S. salaried employees.

 

Annual Cash Incentive

 

The Named Executive Officers participate in the shareholder-approved Executive Incentive Plan (“EIP”). Award amounts under the EIP are determined based upon achievement of company performance measures as reflected by the Company Scorecard and individual performance against pre-established objectives. The EIP provides for an award fund of up to 2.5% of the Company’s adjusted net income (which is the Company’s non-GAAP earnings after certain adjustments). The CEO may receive a maximum award equal to 10% of the award fund, and the maximum award for the other EIP participants is equal to 90% of the award fund for that year divided by the number of participants other than the CEO.

 

For 2013, the maximum awards for the CEO and other Named Executive Officers were $26.1 and $16.8 million, respectively. Using a process commonly referred to as negative discretion, the maximum awards are adjusted down to the actual amounts paid to each Named Executive Officer.

 

2013 Merck Company Scorecard

 

Our Company Scorecard helps translate our strategic priorities into operational terms that outline how we will track and measure the achievement of our key objectives during the year. These measures focus on our ability to deliver results, both in the short- and long-term. We have used a balanced scorecard as a framework to provide a holistic view of performance impacting shareholder value with appropriate emphasis on the following: (1) financial performance, (2) key internal business drivers, (3) customer interactions and outcomes, and (4) Company culture. As described in more detail below, these four elements, taken together, are intended to measure our progress and performance against both annual operating goals and critically important longer-term strategic drivers of sustainable value creation that are tied to our research and development processes and outcomes.

 

The Company Scorecard is calibrated so that results will range between 50% and 200% of the target award opportunity, commensurate with performance. The stretch (200%) and threshold (50%) goals are set to ensure our financial performance achieved in each scenario will cover the cost of the cash incentives. The Committee has discretion to adjust the results of individual measures to exclude charges or items from the measurement of performance relating to restructurings, discontinued operations, purchase accounting items, merger-related costs, extraordinary items and other unusual or nonrecurring charges and/or events. Similarly, the Committee has the discretion to determine that no annual cash incentives be paid if it determines, on a qualitative basis, that overall performance on the Company Scorecard is too low. Moreover, the Company Scorecard achievements are also evaluated in the context of compliance, health and safety outcomes.

 

2014 Proxy Statement    42

 

 

For 2013, the final Company score of 72.0 is reflected in the following table:

 

2013 Merck Company Scorecard Results
Measure Results Target Points Final Score
Financial 60 27.1
Revenue vs. Plan Revenue of $44.6 billion, which was below our planned revenue goal of $47.6 billion (which includes 50% of revenue from joint venture sales). 20 6.6
EPS vs. Plan Non-GAAP EPS of $3.49 which was below our planned non-GAAP EPS goal of $3.61 (the reconciliation of non-GAAP EPS to GAAP EPS is publicly disclosed in the Form 8-K filed by the Company with the SEC on February 5, 2014). 20   16.5
Value of Pipeline Growth (NPV + ROI) Below target pipeline growth (driven primarily by several late-stage pipeline failures, FDA filing delays as well as the cancellation of certain programs as part of the pipeline reprioritization efforts). 20   4.0
Key Business Drivers 16 23.6
Cost Structure The Company had significantly above target points for our cost structure goal ($1.8 billion better than plan). 10 17.3
Revenue Growth in High Priority Markets The Company had above target revenue growth in our high priority markets. 6 6.3
Customer 14 17.1
Merck Customer Service Level The Company earned above target points based on an above target score on the customer service level metric. 7 10.2
Merck Trust & Value Customer Survey The Company earned slightly below target score on the Merck Trust & Value Survey (the goal was missed by less than 1% of the target). 7   6.9
Culture   10 4.2
Culture Improvement We maintained strong results in two of our three focus areas (Reputation & Trust and Innovation) but failed to show improvement in our third area of focus (Customer Focus). 10   4.2
    100   72.0

For more information on the EIP, see “Narrative Information Relating to the Grants of Plan-Based Awards Table” starting on page 54.

 

2014 Proxy Statement    43

 

2013 Named Executive Officer Performance

 

Each of the Named Executive Officer’s 2013 annual incentive awards reflects the achievement of the Company Scorecard result at 72% of target.

 

In determining Mr. Frazier’s award, which is equal to the funded percent under the Company Scorecard, the Board also considered his leadership, which was critical in accelerating change while continuing the positive momentum that will position us for success both in the near- and longer-term.

 

Mr. Kellogg’s award largely reflects the financial challenges Merck faced in a below target financial year.

 

Mr. Kuhlik’s award reflects his leadership and counsel on a broad range of complex litigation, commercial and transactional matters in the United States and globally.

 

Dr. Perlmutter’s award reflects the significant progress he has achieved since his arrival earlier in 2013 in refocusing and reprioritizing Merck’s R&D organization and early- and late-stage pipelines.

 

Mr. Schechter’s award reflects the challenges Merck faced in the global human health business during 2013. Despite the below target business performance, Mr. Schechter’s award also recognizes his leadership in responding to the challenging healthcare environment.

 

2013 Annual Incentive Payouts

 

The table below shows the 2013 annual cash incentives paid to the Named Executive Officers. The total annual incentive paid to each Named Executive Officer is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Named Executive Officer 2013 Annual Incentive Payments
      Target  Actual
Named Executive
Officer
  Annual Base
Salary
(as of 12/31/13)
  Target Annual
Incentive %
  Target
Annual Cash
Incentive
  Company
Performance %
  Individual
Performance %
  Final Award  Final Award as
% of Target
K.C. Frazier  $1,500,000    150%  $2,250,000    72%   100%  $1,620,000    72%
P.N. Kellogg   992,832    95    943,190    72    90    611,187    65 
B.N. Kuhlik   807,492    95    767,117    72    100    552,325    72 
R.M. Perlmutter(1)   1,000,000    105    787,500    72    110    623,700    79 
A.H. Schechter   962,388    105    1,010,507    72    95    691,187    68 
(1) Dr. Perlmutter’s award is pro-rated based on his April 2013 employment start date.

 

Long-Term Equity Incentives

 

2013 Award Mix

 

We utilize the following long-term incentive (“LTI”) vehicles in order to ensure that our LTI program remains balanced, sustainable and supportive of its objectives over a multi-year period:

 

Performance Share Units (“PSUs”) support the objectives of linking realized value to the achievement of critical financial objectives and shareholder alignment because the earned award varies based on results versus pre-determined performance goals, as well as long-term returns to shareholders as measured by absolute and relative stock price performance and dividend yield.
   
Stock options support the shareholder alignment objective because options only have financial value to the recipient if the price of our stock at the time of exercise exceeds the stock price on the date of grant. As a result, we believe stock option grants encourage executives to focus on behaviors and initiatives that support sustained long-term stock price appreciation, which benefits all shareholders.

 

The 2013 LTI award mix for the Named Executive Officers is shown on the following chart:

 

 

 

2014 Proxy Statement    44

 

2013 LTI Grants

 

The Committee and, in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier) determines the value of 2013 annual LTI grants for the Named Executive Officers based on competitive market data, the executives’ future potential contributions, sustained performance, degree of importance of their contributions to Merck, tenure and experience in the role, and skill set relative to industry peers and other executives of a comparable level. The Board of Directors increased Mr. Frazier’s target LTI value from $9.5 million to $10 million. The Board believed that this increase was appropriate given Mr. Frazier’s sustained performance and expected future contributions as well as the competitive positioning of Mr. Frazier’s target total direct compensation versus that of other CEOs in our pharmaceutical peer group.

 

While we do not grant time-based restricted stock awards to our NEOs as part of the normal annual program, we do occasionally use such awards as part of new hire offer packages and to enhance the retentive power of the overall compensation system for select executives (see footnote 3 in the following table).

 

The 2013 annual target LTI grant values for the Named Executive Officers are shown in the following table. The number of shares associated with each award is set forth in the Grants of Plan-Based Awards table on page 53.

 

Named Executive Officer Annual Target LTI Grant Values
Named Executive Officer  PSUs(1)  Stock Options(2)  Total LTI Value
K.C. Frazier  $6,000,000   $4,000,000   $10,000,000
P.N. Kellogg   1,920,000    1,280,000    3,200,000
B.N. Kuhlik   1,380,000    920,000    2,300,000
R.M. Perlmutter(3)   2,100,000    1,400,000    3,500,000
A.H. Schechter   2,280,000    1,520,000    3,800,000
(1) PSU dollar values were converted to a number of target units using the fair value as calculated in accordance with FASB ASC Topic 718 on the grant date, March 29, 2013, which was $38.33. The 2013 PSU values shown in the Summary Compensation Table, beginning on page 51, and Grants of Plan-Based Awards table, beginning on page 53, will be different from what is shown above as the amounts in those tables are calculated pursuant to SEC disclosure rules.
   
(2) Stock option dollar values were converted to a number of shares using the Black-Scholes value on the date of grant of $6.21 per share.
   
(3) Dr. Perlmutter also received a grant of RSUs with a grant date fair market value of $2,000,000 as part of his new-hire offer package. That grant is reflected in the Grants of Plan-Based Awards table on page 53.

 

PSU Program

 

Under the PSU program, executives are granted a target award opportunity at the beginning of a multi-year performance cycle that is denominated in units of our common stock and paid in actual shares. The number of shares that are ultimately earned varies based on performance against earnings per share (“EPS”) goals and is modified based on relative total shareholder return over the three-year performance period. The Committee selected EPS as the performance measure because it incorporates aspects of growth, profitability and capital efficiency, all of which are critical to our long-term financial success. Failure to attain the minimum performance goal results in forfeiture of the shares applicable to the respective award opportunity. For more information on the PSU program, see “Narrative Information Relating to the Grants of Plan-Based Awards Table” starting on page 54.

 

Payouts under the 2011-2013 PSU Award Cycle

 

For the 2011-2013 award cycle, preliminary payouts were determined based on the average annual achievement of a pre-established EPS goal for each year during the performance period (2011, 2012 and 2013). For purposes of the award, EPS is defined as the Company’s diluted earnings per share adjusted to exclude charges or items from the measurement of performance relating to (1) restructurings, discontinued operations, purchase accounting items, merger-related costs, extraordinary items and other unusual or non-recurring charges and/or events; (2) an event either not directly related to Company operations or not reasonably within the control of Company management; and (3) the effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles, or other significant legislative changes.

 

The preliminary award is then adjusted (positive/negative/neutral) based on our three-year (2011 – 2013) annualized total shareholder return (“TSR”) ranking against our eleven pharmaceutical peers (see page 48 for additional details on our peer group). The Committee believes that having this TSR modifier helps ensure that final awards are aligned with the relative return delivered to our shareholders for the three-year performance period.

 

2014 Proxy Statement    45

 

The tables below show our TSR ranking and resultant modifier for 2011-2013 PSU award cycle:

 

Company Annualized TSR1,2 TSR Percentile Rank        
Bristol-Myers Squibb 31.0% 100 th 1        
Amgen 29.1% 91 st 2        
Roche 28.8% 82 nd 3        
Pfizer 26.1% 73 rd 4        
Abbott 21.5% 64 th 5   TSR Percentile Rank Payout Modifier
Sanofi 21.5% 55 th 6   81% to 100% 1,2,3 120%
Eli Lilly 18.2% 45 th 7   61% to 80% 4,5 110%
Johnson & Johnson 18.1% 36 th 8   41% to 60% 6,7 neutral
Novartis 15.8% 27 th 9   21% to 40% 8,9 90%
Merck 15.6% 18 th 10 0% to 20% 10,11,12 80%
GlaxoSmithKline 15.6% 9 th 11        
AstraZeneca 13.4% 0   12        
(1) TSR as reported by Bloomberg. Assumes reinvestment of dividends.
   
(2) TSR calculated using the average closing price of Merck common stock for
December 2010 and December 2013.

 

Payout Schedule for 2011-2013 PSU Award Cycle
   Threshold    Target    Stretch    Actual    Payout  
2011 EPS:  $3.33   $3.70   $4.26   $3.85(1)    134.1%
2012 EPS:   3.42    3.80    4.37    3.82    104.2%
2013 EPS:   3.25    3.61    3.90    3.49    82.7%
Preliminary Payout:                       107%
TSR Modifier:                       80%
FINAL PAYOUT:                       86%
(1) Includes an upward adjustment of $0.08 to account for the unplanned impact of the REMICADE/SIMPONI settlement as previously described in our 2012 Proxy Statement on Form DEF-14A, filed on April 12, 2012.

 

Based on the final payout percentage of 86%, the Named Executive Officers received the following number of shares of Merck common stock:

 

Named Executive Officer PSU Distribution(1)
Named Executive Officer  Target Award (# of shares)  Final Award (# of shares)
K.C. Frazier  90,882  78,159
P.N. Kellogg  38,776  33,347
B.N. Kuhlik  21,812  18,758
A.H. Schechter  42,411  36,473
(1) Dr. Perlmutter was not a participant in this PSU award cycle.

 

Additional information regarding the payouts under the 2011-2013 PSU award cycle is provided in the Option Exercises and Stock Vested table on page 57.

 

2014 Proxy Statement    46

 

Employee and Other Benefits

 

Similar to other salaried, U.S.-based employees of Merck, the Named Executive Officers participate in a variety of retirement, health and welfare, and paid time-off benefits designed to enable us to attract and retain our workforce in a competitive marketplace. Pension and savings plans help employees, especially long-service employees, save and prepare financially for retirement. Health and welfare and paid time-off benefits help ensure that we have a productive and focused workforce.

 

Additionally, the Named Executive Officers, along with other senior management employees, are provided a limited number of other benefits, which the Committee believes are reasonable, appropriate and consistent with our executive compensation philosophy. The primary purposes of these other benefits are to minimize distractions from the executives’ attention to important company initiatives and to ensure their safety and security.

 

The following benefits described are reflected in the “All Other Compensation” column of the Summary Compensation Table.

 

Reimbursement for financial counseling and tax preparation. The value is taxable to executives, and is limited to $10,000 per year. This benefit is intended to encourage executives to engage knowledgeable experts to assist with financial and tax planning. It supports our objectives by helping to ensure that executives understand the compensation and benefit plans in which they participate and are not unnecessarily distracted from Company responsibilities to attend to personal financial matters.
   
Limited personal use of company aircraft and company cars. We believe that these benefits provide better security for executives and allow them to devote additional time to Company business.
   
Reimbursement for the installation and maintenance of residential security systems. We believe that providing this benefit allows us to ensure that our executives have appropriate security. We do not reimburse executives for monthly security monitoring fees.

 

Executive Compensation Program Objectives and Strategy

 

Objectives

 

Our executive compensation program is designed to:

 

Align the interests of our senior executives with those of our shareholders to ensure prudent, short-term actions that will benefit Merck’s long-term value;
   
Reward our executives based on the achievement of sustained financial and operating performance as well as demonstrated leadership;
   
Attract, engage, and retain high-performing executives that help us achieve immediate and future success and maintain our position as an industry leader in the development of innovative medicines; and
   
Support a shared, one-company mindset of performance and accountability to deliver on business objectives.

 

How our business environment impacts our executive compensation objectives and strategy:
The pharmaceutical industry is science-focused and driven by innovation. Other characteristics of the pharmaceutical industry include:
Enormous impact—drugs discovered through scientific innovation save and improve the quality of lives;
The inherently risky nature of the complex and dynamic science of human and animal health—even if every step of the discovery and development process is executed flawlessly, there is an ever-present risk of failure;
The need to achieve a balance between benefits and risks for every drug. Society’s increasing demand for innovation to treat and cure illness is offset by society’s increasing awareness of and aversion to risk;
A highly regulated industry environment, including uncertainties in the political environment that impact the regulatory framework;
A lengthy 5-year to 15-year new drug cycle for research-based drug discovery and development;
The high and often unpredictable cost of drug discovery and development; and
The dynamics of the industry environment, which include intellectual property laws that evolve as governments change, competitive and reimbursement pressures, and regulatory/science developments, often limit the effective commercial life of a drug to a few years and put pressure on replenishing the product portfolio through successful research and development.
As a result of these challenges and complexities, we believe executives with certain specific, relevant skills and experience, including but not limited to pharmaceutical industry experience, are more likely to excel. At the same time, there is a small pool of superior executives with the desired relevant experience. These factors can complicate the process of attracting and retaining a top-performing management team with the right extensive industry and other experience. As such, our executive compensation program is designed to balance its attraction and retention objectives carefully with pay-for-performance objectives. Each element of the compensation program is structured to support these critical objectives and, as a whole, designed to ensure that we are able to retain the talent critical to our long-term success. Our executives are rewarded commensurate with the degree to which they are able to achieve our short- and long-term strategic and operational objectives and enhance shareholder value.

 

2014 Proxy Statement    47

 

Strategy

 

Our mission is to discover and provide innovative products and services that save and improve lives around the world. It is therefore critical that we attract, engage and retain the best talent and thought leaders globally in academia and industry to leverage diverse experiences and cutting-edge thinking. Each compensation element has a specific purpose in furthering the executive compensation program objectives described above.

 

Compensation Element Purpose
Base Salary Attract and retain high-quality executives over time and mitigate pressures that might otherwise exist to support high-risk business strategies.
Annual Incentive Motivate executives to achieve financial and non-financial performance objectives that are key to our annual operating and strategic plans.
Long-Term Incentives

Align the interests of executives with shareholders by tying the value of awards to the performance of our common stock over the long term;

 

Encourage executives to achieve multi-year strategic and financial objectives; and

 

Enhance the retention of key talent.

 

Employee Benefits (Retirement, Health and Welfare)

Assist employees, especially long-service employees, to save and prepare financially for retirement; and

 

Help ensure that we have a productive and focused workforce.

 

Perquisites Minimize distractions from the executives’ attention to important company initiatives and to ensure their safety and security.
Post-Employment Benefits Provide temporary income to employees following an involuntary termination of employment. These benefits fit into our overall compensation structure by enhancing our ability to attract, retain, and motivate highly talented individuals in a highly competitive marketplace where such protections are commonly offered.

 

Other Compensation Practices

 

Merck’s Peer Group.

 

Individual executive officer compensation levels and opportunities are compared to a peer group of large multinational pharmaceutical companies that participate in a pharmaceutical industry compensation survey. The survey is conducted by Towers Watson, an independent consulting firm. In setting compensation levels for 2013, the Committee utilized the survey, which consisted of the following peer companies with which Merck competes to attract talented, high-performing executives:

 

Merck’s Pharmaceutical Peer Group
Abbvie Johnson & Johnson
Amgen Novartis
AstraZeneca Pfizer
Bristol-Myers Squibb Roche
Eli Lilly Sanofi
GlaxoSmithKline  

 

 

Our overarching strategy is to position our executives’ target direct compensation (base salary, target cash incentive and target long-term incentive) at the 50th percentile, on average, with variability by individual executive based on scope of responsibility, market availability of proven talent, the critical need to retain the executive, sustained performance over time, potential for advancement as part of key succession planning processes, and other unique factors that may exist from time to time. This median target compensation philosophy ensures that actual realized compensation varies above or below market levels based on attainment of longer-term goals and changes in shareholder value, and overall costs and share dilution are reasonable and sustainable relative to market practices.

 

In addition to the pharmaceutical peer group described above, we also utilize a supplemental peer group consisting of the companies that comprise the Dow Jones Industrial Average (excluding the financial services companies) as a reference for other compensation-related practices (for example, share usage and dilution, change in control policy design and share ownership and retention guidelines).

 

2014 Proxy Statement    48

 

Current LTI Grant Practices.

 

Annual stock option and RSU grants are made on the third business day following announcement of our first quarter earnings. We may also selectively grant stock options and RSUs to employees on the third business day following the announcement of second, third, and fourth quarter earnings. These dates were chosen to ensure that grants are made shortly after we have released information about our financial performance to the public. However, the Committee reserves the right to change the date when grants are made, in view of its responsibility to take into account all facts and circumstances to ensure that grants are consistent with our compensation philosophy and objectives. All grants to executive officers are approved by the Committee, and in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier).

 

Stock options are granted at fair market value on a fixed date or event, with all required approvals obtained in advance of or on the actual grant date. Fair market value is the closing price of a share of Company stock on the grant date. In certain countries, a higher grant price may be used to satisfy provisions of local applicable law. The re-pricing of stock options is not permitted under the Incentive Stock Plan (“ISP”) without prior shareholder approval.

 

Stock Ownership Requirements.

 

The Committee recognizes the critical role that executive stock ownership has in aligning the interests of management with those of shareholders. As such, we maintain a formal stock ownership policy, under which the CEO and other senior executives are required to acquire and hold Merck common stock in an amount representing a multiple of base salary. Until the designated multiple of base salary is reached, executives are required to retain in stock a percentage of the after-tax net proceeds associated with stock option exercises and/or PSU and RSU distributions (100% for the CEO and 75% for the other Named Executive Officers).

 

The following table sets forth the stock ownership requirements and current holdings for the CEO and other Named Executive Officers as of February 28, 2014.

 

 

 

Return of Incentive Compensation.

 

Under our incentive compensation recoupment policy, in the case of a significant restatement of financial results caused by executive fraud or willful misconduct, the Board of Directors will seek reimbursement for the portion of the annual cash incentive and/or PSUs paid to the executive in excess of the amount that would have been paid if the financial results were reported accurately. Additionally, effective for incentive compensation awarded in and after 2014, a new incentive recoupment policy applies to senior executives in instances of material violations of company policy that cause significant harm to Merck and instances of a failure to manage or monitor conduct or risks appropriately.

 

Tax Deductibility of Compensation.

 

In administering our executive compensation program, the Company takes into account the tax deductibility of the compensation, including the application of Section 162(m) of the Internal Revenue Code. We believe annual cash incentives paid to executive officers under the shareholder approved EIP and PSUs, stock options and RSUs granted under the shareholder approved ISP may be granted in a manner that qualifies as performance-based compensation under Section 162(m) and, if so, would generally be deductible by the Company for federal income tax purposes.

 

2014 Proxy Statement    49

 

Compensation Risk Assessment

 

Our executive compensation program and policies are driven by our business environment and designed to enable us to achieve our mission and adhere to our values. The Committee and senior management continually evaluate the relationship between risk and reward as it relates to our executive compensation program and has adopted policies and practices that mitigate undue risk while preserving the incentive/variable nature of the compensation. These policies and practices are described in more detail in the chart on page 39.

 

We performed a formal assessment of our global compensation programs including our executive compensation program and policies in late 2013. The results of the assessment were reviewed and discussed with the Committee in February 2014. The assessment reaffirmed our belief that our compensation programs and policies are structured and operated in a manner that does not create risks that are reasonably likely to have a material adverse effect on our business.

 

Compensation and Benefits Committee Report

 

The Compensation and Benefits Committee, comprised of independent directors, reviewed and discussed the above CD&A with management. Based on the review and discussions, the Committee recommended to our Board of Directors that the CD&A be included in these proxy materials.

 

  Compensation and Benefits Committee
Thomas H. Glocer
(Chairperson)
  William B. Harrison, Jr. Patricia F. Russo
  Carlos E. Represas Peter C. Wendell

 

2014 Proxy Statement    50

 

SUMMARY COMPENSATION TABLE

 

The following table summarizes the total compensation that was paid or accrued for the Named Executive Officers for the fiscal years ended December 31, 2013, 2012 and 2011. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers as of December 31, 2013.

 

                        Change in       
                        Pension       
                        Value and       
                     Non-Equity  Nonquali-       
                     Incentive  fied Deferred       
                     Plan  Compen-  All Other    
               Stock  Option  Compensa-  sation  Compen-    
        Salary   Bonus   Awards  Awards  tion  Earnings  sation  Total 
Name and Principal Position  Year   ($)(1)    ($)   ($)(2)   ($)(3)   ($)(4)   ($)(5)   ($)(6)   ($) 
Kenneth C. Frazier,   2013   $1,500,000   $0   $5,105,338  $3,999,998  $1,620,000  $917,774  $232,825  $13,375,935 
Chairman, President   2012    1,500,000    0    3,284,997   3,799,998   2,500,000   4,316,762   57,850   15,459,607 
and Chief Executive Officer   2011    1,500,000    0    3,107,878   2,999,997   3,096,563   2,586,840   56,374   13,347,652 
Peter N. Kellogg,   2013    988,881    0    1,565,331   1,279,999   611,187   352,575   100,401   4,898,374 
Executive Vice   2012    973,362    0    1,818,176   1,280,002   1,056,416   598,085   19,282   5,745,323 
President and                                        
Chief Financial Officer   2011    954,279    0    1,486,330   1,280,000   1,211,177   418,484   18,985   5,369,255 
Bruce N. Kuhlik,   2013    804,281    0    1,049,879   919,999   552,325   206,277   86,477   3,619,238 
Executive Vice President   2012    791,664    0    1,236,796   919,999   898,270   732,748   21,250   4,600,727 
and General Counsel   2011    776,142    0    919,912   719,998   1,031,991   506,114   21,025   3,975,182 
Roger M. Perlmutter, M.D., Ph.D.,   2013    711,538    500,000(7)    2,699,987   1,400,001   623,700   34,439   16,459   5,986,124 
Executive Vice President and   2012(8)                             
President, Merck Research                                        
Laboratories   2011(8)                            
Adam H. Schechter,   2013    957,306    0    1,813,702   1,520,003   691,187   0   160,359   5,142,557 
Executive Vice President   2012    938,886    0    1,858,845   1,519,998   1,254,248   2,115,949   42,977   7,730,903 
and President, Global                                        
Human Health   2011    906,258    0    1,356,800   1,400,000   1,352,735   1,484,367   39,735   6,539,895 
(1) Amounts shown reflect actual base salary earnings and are not reduced to reflect the Named Executive Officers’ elections, if any, to defer receipt of salary into the Merck Deferral Program, an unfunded savings plan.
  During 2013, Mr. Frazier deferred $672,404 into the Merck Deferral Program. For more information about deferred amounts, see the Nonqualified Deferred Compensation table and related footnotes beginning on page  61.
(2) The amounts shown in this column represent the full grant date fair value of RSUs and PSUs granted to each of the Named Executive Officers during 2013, 2012 and 2011, respectively, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during the respective year. For discussion of the assumptions used in these valuations, see Note 13 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2013.
  The maximum value of the PSU awards granted to the Named Executive Officers during 2013, assuming achievement of the highest level of performance (240% of target), was:

 

  Maximum Value
NEO of the PSU Awards
K.C. Frazier $ 12,252,812
P.N. Kellogg 3,756,794
B.N. Kuhlik 2,519,708
R.M. Perlmutter 1,679,989
A.H. Schechter 4,352,885

 

For more information on the awards granted during 2013, see the Grants of Plan-Based Awards table and related narrative and footnotes.

 

2014 Proxy Statement    51

 
(3) The amounts shown in this column represent the full grant date fair value of stock options granted to each of the Named Executive Officers during 2013, 2012 and 2011, respectively, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during the respective year. The stock option values were calculated using the Black-Scholes option pricing model. For discussion of the assumptions used in these valuations, see Note 13 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2013.
  For more information on stock options granted during 2013, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(4) Represents amounts paid under the EIP. For more information, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(5) Amounts shown are solely an estimate of the change in actuarial present value of the Named Executive Officer’s accrued benefit under the Company’s pension plans from December 31, 2012 to December 31, 2013. These plans are the Retirement Plan for the Salaried Employees of MSD (the “Qualified Plan”) and the MSD Supplemental Retirement Plan (the “SRP”). For more information about those plans, see the Pension Benefits table and accompanying narrative beginning on page 58.
 

The discount rate used to determine the present value of pension benefits at December 31, 2013, increased from the rate used December 31, 2012. See page 58 for more information of the assumptions used to determine the present value of pension benefits. An increase in discount rates reduces the present value of the pension benefits. As a result, there were certain individuals whose present value of pension benefits decreased during 2013 as follows:

 

Mr. Frazier’s change in pension value for 2013 is $917,774 (-$16,052 for the Qualified Plan and $933,826 for the SRP). The decreased value in the Qualified Plan is due to the higher discount rate used to determine the lump sum value of his benefit.

  Mr. Schechter’s change in pension value for 2013 is -$233,550 (-$84,927 for the Qualified Plan and -$148,623 for the SRP). The decreased values are due to the higher discount rate used to determine the lump sum values of his benefit. Under SEC rules, the negative amount is not reflected in the Table.
  The Merck Deferral Program, an unfunded savings plan, does not provide for above market or preferential earnings. For more information, see the Nonqualified Deferred Compensation table and related notes and narrative.
  For more information, see the Pension Benefits table on page 58 and the Nonqualified Deferred Compensation table and related footnotes and narrative on page 61.
(6) See the All Other Compensation table below for additional details on amounts. In accordance with SEC disclosure rules, we calculated the cost of personal benefits provided to the Named Executive Officers as the incremental cost of providing those benefits. We believe that there is a business purpose for the few personal benefits provided only to executives.
(7) Sign-on bonus. Remaining portion ($500,000) payable April 15, 2014, if Dr. Perlmutter is still a Company employee or resigned with good reason or was terminated by the Company without good reason.
(8) Was not a Named Executive Officer during 2012 or 2011.

 

All Other Compensation

 

        Financial/Tax         Installation and  Savings Plan    
       Counseling &      Company  Maintenance  Company    
       Tax Preparation   Company  Car and  of Home Security  Match and    
Named Executive Officer  Year   Services(2)   Aircraft(3)  Driver(4)  Monitoring System(2)   Credits(5)  TOTAL 
K.C. Frazier   2013   $10,000   $  0  $37,955  $  5,130  $179,740  $232,825 
    2012    10,000    0   30,253   6,347   11,250   57,850 
    2011    10,000    0   35,349   0   11,025   56,374 
P.N. Kellogg   2013    8,532    0   0   0   91,869   100,401 
    2012    8,032    0   0   0   11,250   19,282 
    2011    7,960    0   0   0   11,025   18,985 
B.N. Kuhlik   2013    10,000    0   0   0   76,477   86,477 
    2012    10,000    0   0   0   11,250   21,250 
    2011    10,000    0   0   0   11,025   21,025 
R.M. Perlmutter   2013    0    0   14,728   0   1,731   16,459 
    2012(1)                     
    2011(1)                     
A.H. Schechter   2013    10,000    0   27,857   23,145   99,357   160,359 
    2012    10,000    0   21,067   660   11,250   42,977 
    2011    10,000    0   18,710   0   11,025   39,735 
(1) Was not a Named Executive Officer during 2012 or 2011.
(2) Financial planning, tax preparation, and installation and maintenance of home security are valued at actual costs billed by outside vendors.
(3) The value of any personal use of Company aircraft by the Named Executive Officers is based on the aggregate incremental per-hour cost based on the flight time flown from origination to destination and a return to point of origination without passengers, when applicable. This benefit generally is taxable to the Named Executive Officers.
(4) The value of any personal use of Company car and driver by the Named Executive Officers is based on the recipient’s cost if equivalent assets were used independent of the Company. This benefit generally is taxable to the Named Executive Officers.
  The incremental cost calculation for personal use of the car and driver by the Named Executive Officers included driver overtime, meals and travel pay, maintenance and fuel costs. Company cars also provided business transportation to other executives and non-executive Company personnel. Since the cars were used primarily for business travel, the calculation excludes the fixed costs that do not change based on personal usage, such as drivers’ salaries and the purchase costs of the cars.
(5) The Named Executive Officers received Company matching contributions equal to 75% of the first 6% of eligible compensation contributed (up to the IRS limit for qualified savings plans) to the Merck U.S. Savings Plan (formerly known as the MSD Employee Savings and Security Plan) and 4.5% credit of eligible pay in excess of the IRS limit to the NEO’s accounts under the Merck Deferral Plan.

 

2014 Proxy Statement    52

 

GRANTS OF PLAN-BASED AWARDS

 

The following table provides information concerning each grant of an award made in 2013 to the Named Executive Officers under any plan.

 

Grants of Plan-Based Awards for Fiscal Year Ended December 31, 2013  
                              All Other  All Other        
                              Stock  Option        
            Estimated Future Payouts  Estimated Future Payouts  Awards:  Awards:  Exercise  Grant Date  
            Under Non-Equity Incentive  Under Equity Incentive  Number  Number of  or Base  Fair Value  
            Plan Awards  Plan Awards  of Shares  Securities  Price of  of Stock  
      Board     Thres-        Thres-        of Stock  Underlying  Option  and Option  
   Grant  Approval  Award  hold  Target  Maximum  hold  Target  Maximum  or Units  Options  Awards  Awards  
Name  Date  Date  Type  ($)(1)  ($)(1)  ($)(1)  (#)(2)  (#)(2)  (#)(2)  (#)(3)  (#)(4)  ($ / Sh)(4)  ($)(5)  
K.C. Frazier  03/29/2013  02/25/2013  PSUs           0  156,535  375,684           $ 5,105,338 (2) 
   05/06/2013  02/25/2013  Options                       644,122  $44.98  3,999,998 (4) 
         EIP  $0  $2,250,000  $5,625,000                       
P.N. Kellogg  03/29/2013  02/25/2013  PSUs           0  50,091  120,218           1,565,331 (2) 
   05/06/2013  02/25/2013  Options                       206,119  44.98  1,279,999 (4) 
         EIP  0  943,190  2,357,976                       
B.N. Kuhlik  03/29/2013  02/25/2013  PSUs           0  36,003  86,407           1,049,879 (2) 
   05/06/2013  02/25/2013  Options                       148,148  44.98  919,999 (4) 
         EIP  0  767,117  1,917,794                       
R.M. Perlmutter  05/06/2013  02/25/2013  PSUs           0  54,012  129,629           699,996 (2) 
   05/06/2013  02/25/2013  RSUs                    44,464        1,999,991 (3) 
   05/06/2013  02/25/2013  Options                       225,443  44.98  1,400,001 (4) 
         EIP  0  787,500  1,968,750                       
A.H. Schechter  03/29/2013  02/25/2013  PSUs           0  59,483  142,759           1,813,702 (2) 
   05/06/2013  02/25/2013  Options                       244,767  44.98  1,520,003 (4) 
         EIP  0  1,010,507  2,526,269                       
(1) Amounts represent awards under the EIP, which equal a specified percentage of base salary as in effect on December 31, 2013. The actual amounts earned by each Named Executive Officer are set forth in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(2) The payout of PSUs can range from zero at threshold to a maximum of 240% of target, depending on the level of achievement of the applicable performance goals. For more information on PSUs, see “The Elements of 2013 Compensation” on page 41 and the Narrative to the Grants of Plan Based Awards table below.
(3) RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of grant provided the individual remains continuously employed through that date. Beginning with grants made in 2010, dividend equivalents are accrued and paid at the end of the restricted period.
(4) Stock options generally vest and become exercisable in equal installments on the first, second and third anniversaries of the grant date.
  The exercise price of all stock options granted in 2013 is the closing price of Merck common stock, as traded on New York Stock Exchange on the grant date.
(5) This column represents the full grant date fair value of PSUs, RSUs and stock options granted to each of the Named Executive Officers, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during 2013.

 

2014 Proxy Statement    53

 

Narrative Information Relating to the Grants of Plan-Based Awards Table

 

General Information Regarding the Executive Incentive Plan (“EIP”)

 

The EIP is a shareholder-approved plan that is administered by the Compensation and Benefits Committee of the Board (the “Committee”). It is designed to provide cash awards to employees who are subject to Section 16 of the Securities Exchange Act of 1934. Compensation paid under this plan is intended to be treated as “performance-based compensation” under Section 162(m) of the Internal Revenue Code. Awards are based on an objective formula defined in the plan that provides for a maximum award fund equal to 2.5% of adjusted net income. The CEO may receive an award not to exceed 10% of the maximum award fund. The maximum individual award for all other plan participants is 90% of the award fund for that year divided by the number of participants other than the CEO. The Committee can use its discretion to reduce (commonly called “negative discretion”), but not increase, the maximum awards payable under this formula for executive officers. In prior years, it has been the Committee’s practice to reduce the maximum awards to the amount actually paid using the following process.

 

The following methodology is used by the Committee for adjusting the maximum awards payable under the EIP to the actual amounts paid to executive officers:

 

Each executive officer is assigned a target award opportunity that is expressed as a multiple of salary.
   
The target award opportunity is determined based on Company performance as reflected by the Company Scorecard. The Company performance component can range between 50% and 200% of target.
   
The award can be adjusted higher or lower based on the assessment of the individual’s performance against pre-established objectives.

 

No annual cash incentive will be paid to an individual if the Company or individual performance is below the minimum performance expectations as determined by the Committee.

 

General Information Regarding Long-Term Incentives

 

Stock Options. Stock options enable executives to share in the financial gain derived from the potential appreciation in stock price from the date that the option is granted until the date that the option is exercised. The exercise price of a stock option is set as the closing price of Merck common stock as reported on the New York Stock Exchange on the grant date (unless a higher grant price is required under local law).

 

Subject to their terms, stock options generally vest in equal installments on the first, second, and third anniversaries of the grant date and expire on the day before the tenth anniversary of the grant date.

 

Stock Units. Restricted Stock Units (“RSUs”) and Performance Share Units (“PSUs”) provide for the payout of shares of Company stock, generally in three years, if the recipient has met certain performance and/or service requirements.

 

 RSUs
 
Subject to their terms, RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of the grant date. For RSUs granted in and after 2010, dividend equivalents are accrued and paid out in cash if and when the RSUs vest.
 
•  PSUs
 
PSU awards are granted and payouts are determined under a four-step process that spans a three-year performance cycle:
 
Step 1: Within the first 90 days of the performance period,the Committee will approve an award of PSUs to eligible executives. One third of the award is a target annual tranche.
   
Step 2: Within the first 90 days of each year of the performance cycle, the Committee will set an annual EPS goal by adopting a schedule reflecting EPS minimum, target,and stretch goals (and interim points) applicable to that annual tranche.
   
Step 3: After the end of the third year of the performance period, the results of the three annual tranches as determined in Step 2 will be aggregated to determine a preliminary award.
   
Step 4: The result from Step 3 will be increased or decreased by up to 20% based on the Company’s three-year total shareholder return ranking (including the impact of dividends, if any) as compared to our pharmaceutical peer group (described on page 48).

 

Failure to attain the minimum performance goal results in forfeiture of the shares applicable to the respective award opportunity.

 

2014 Proxy Statement    54

 

OUTSTANDING EQUITY AWARDS

 

The following table provides details about each outstanding equity award held by the Named Executive Officers as of December 31, 2013.

 

Outstanding Equity Awards at Fiscal Year Ended December 31, 2013
Option Awards    Stock Awards
Name Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Grant
Date
  Option
Exercise
Price
($)
  Vesting
Date
  Option
Expiration
Date
    Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(6)
  Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#)
   Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)(6)
K.C. Frazier  45,000(1)          02/27/04  $48.24  02/27/05  02/26/14                  
   42,500(1)          02/25/05   31.84  02/25/06  02/24/15                  
   112,000(1)         03/03/06   35.09  03/03/07  03/02/16                  
   131,040(1)        03/02/07   44.19  03/02/08  03/01/17                  
   60,000(1)         08/01/07   51.02  08/01/08  07/31/17                  
   252,000(1)         02/29/08   44.30  02/28/09  02/28/18                  
   280,000(1)         04/24/09   23.45  04/24/10  04/23/19                  
   228,091(1)         05/07/10   33.49  05/07/11  05/06/20                  
   373,134(1)   186,567(1)     05/04/11   36.56  05/04/12  05/03/21                  
   231,566(1)   463,132(1)    05/02/12   39.29  05/02/13  05/01/22                  
        644,122(1)      05/06/13   44.98  05/06/14  05/05/23                  
                           41,028(2)   $2,053,451          
                                     356,251(4)   $17,830,363
                                     375,684(5)   18,802,984
P.N. Kellogg  175,000(3)         11/13/07  $57.49  11/13/08  11/12/17                  
   62,400(1)          02/29/08   44.30  02/28/09  02/28/18                  
   93,600(1)         04/24/09   23.45  04/24/10  04/23/19                  
   210,084(1)         05/07/10   33.49  05/07/11  05/06/20                  
   159,204(1)   79,602(1)    05/04/11   36.56  05/04/12  05/03/21                  
   78,001(1)   156,003(1)    05/02/12   39.29  05/02/13  05/01/22                  
        206,119(1)    05/06/13   44.98  05/06/14  05/05/23                  
                           33,794(2)  $1,691,390          
                                     79,999(4)  $4,003,950
                                     120,218(5)   6,016,911
B.N. Kuhlik  24,000(1)          03/02/07  $44.19  03/02/08  03/01/17                  
   50,000(1)         08/01/07   51.02  08/01/08  07/31/17                  
   62,400(1)         02/29/08   44.30  02/28/09  02/28/18                  
   58,825(1)         05/07/10   33.49  05/07/11  05/06/20                  
        44,776(1)    05/04/11   36.56  05/04/12  05/03/21                  
   56,063(1)   112,127(1)    05/02/12   39.29  05/02/13  05/01/22                  
        148,148(1)    05/06/13   44.98  05/06/14  05/05/23                  
                           21,555(2)  $1,078,828          
                                     57,499(4)   $2,877,825
                                     86,407(5)    4,324,670
R.M. Perlmutter       225,443(1)     05/06/13  $44.98  05/06/14  05/05/23                  
                           44,464(2)  $2,225,423          
                                     129,629(5)   $6,487,931

 

2014 Proxy Statement    55

 
Outstanding Equity Awards at Fiscal Year Ended December 31, 2013

Option Awards

  Stock Awards
Name  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
 Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
 
Grant
Date
  Option
Exercise
Price
($)
  Vesting
Date
  Option
Expiration
Date
  Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
  Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(6)
  Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#)
   Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)(6)
A.H. Schechter   12,500(1)         02/27/04  $ 48.24   02/27/05  02/26/14                
    2,500(1)        05/03/04  47.39   05/03/05  05/02/14                
    3,000(1)        08/02/04  45.41   08/02/05  08/01/14                
    5,000(1)        02/01/06  34.47   02/01/07  01/31/16                
    19,200(1)        03/03/06  35.09   03/03/07  03/02/16                
    50,000(1)        03/02/07  44.19   03/02/08  03/01/17                
    50,000(1)        02/29/08  44.30   02/28/09  02/28/18                
    65,335(1)        05/07/10  33.49   05/07/11  05/06/20                
    174,128(1)    87,066(1)   05/04/11  36.56   05/04/12  05/03/21                
    92,626(1)    185,253(1)  05/02/12  39.29   05/02/13  05/01/22                
         244,767(1)  05/06/13  44.98   05/06/14  05/05/23                
                          38,490(2)  $1,926,425         
                                  94,999(4)   $4,754,700
                                  142,759(5)    7,145,088
(1) Stock options generally vest and become exercisable in equal installments on the first, second and third anniversary of grant, and expire on the day before the tenth anniversary of grant. Stock options also vest upon attainment of eligibility to retire, in which case they become exercisable in equal installments on the first, second and third anniversary of grant.
(2) RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of grant.
(3) Stock option grant vests and becomes exercisable in five equal annual installments on the first through fifth anniversaries of grant, and expires on the day before the tenth anniversary of grant.
(4) Maximum (240% of target) of PSUs granted during 2012 that may be earned based on Merck’s performance, as determined by the Committee, following the completion of the three-year performance period ending December 31, 2014.
(5) Maximum (240% of target) of PSUs granted during 2013 that may be earned based on Merck’s performance, as determined by the Committee, following the completion of the three-year performance period ending December 31, 2015.
(6) The market value of the units reported in this column was computed by multiplying the number of such units by $50.05, the closing price of Merck common stock on December 31, 2013.

 

2014 Proxy Statement    56

 

OPTION EXERCISES AND STOCK VESTED

 

The following table provides information about stock options that were exercised and stock units that vested during 2013.

 

Option Exercises and Stock Vested for Fiscal Year Ended December 31, 2013
   Option Awards  Stock Awards
Name   Number of Shares
Acquired on Exercise
(#)
   Value Realized
on Exercise
($)(1)
   Number of Shares
Acquired on Vesting
(#)(2)
   Value Realized
on Vesting
 ($)(3)
K.C. Frazier           78,159(a)  $4,390,973
              35,832(b)   1,611,723
P.N. Kellogg           33,347(a)   1,873,434
              37,325(b)   1,678,879
              40,000(c)   1,903,600
B.N. Kuhlik   249,998   $3,044,889    18,758(a)   1,053,824
              33,144(b)   1,490,817
R.M. Perlmutter               
A.H. Schechter           36,473(a)   2,049,053
              22,858(b)   990,168
   
(1) This column represents the values realized upon stock option exercises during 2013 which were calculated based on the difference between the market price of Merck common stock at the time of exercise and the exercise price of the option.
   
(2)

This column represents the vesting during 2013 of the following:

 

  (a) PSUs granted in 2011 that were paid on February 24, 2014;
     
  (b) RSUs granted in 2010; and
     
  (c) 50% of the special 2007 RSU grant to Mr. Kellogg.

 

(3) The value realized for RSUs was determined by multiplying the number of units that vested by the market price of Merck common stock on the respective vesting date. The value realized for PSUs was determined by multiplying the number of units that vested by the market price of Merck common stock on February 24, 2014.

 

2014 Proxy Statement    57

 

PENSION BENEFITS

 

The table below sets forth information concerning the present value of benefits accumulated by the Named Executive Officers from two defined benefit pension plans—the Retirement Plan for the Salaried Employees of MSD (the “Qualified Plan”) and the MSD Supplemental Retirement Plan (the “SRP”). The terms of the plans are described below.

 

Pension Benefits for Fiscal Year Ended December 31, 2013
Name  Plan Name   Number of Years
Credited
Service
(#)(2)
    Number of Years
Cash Balance
Service
(#)(3)
   Present Value
of Accumulated
Benefit
($)(4)
   Payments During Last Fiscal Year
($)
K.C. Frazier(1)  Qualified Plan   21.50    21.58   $899,446   $0 
   SRP   21.50    21.58    12,984,659    0 
P.N. Kellogg  Qualified Plan   6.00    6.33    227,366    0 
   SRP   6.00    6.33    1,852,324    0 
B.N. Kuhlik  Qualified Plan   8.50    8.58    314,357    0 
   SRP   8.50    8.58    2,016,265    0 
R.M. Perlmutter  Qualified Plan   3.50    4.58    99,499    0 
   SRP   3.50    4.58    265,140    0 
A.H. Schechter  Qualified Plan   25.50    25.50    699,754    0 
   SRP   25.50    25.50    5,898,781    0 
   
(1) As of December 31, 2013, Mr. Frazier was eligible for early retirement subsidies under the Qualified Plan and SRP.
   
(2) This column shows the number of years of Credited Service for the Qualified Plan and SRP that is used for benefit accrual purposes.
   
  Credited Service for benefit accrual and eligibility purposes begins with the January or July coincident with or next following a participant’s hire date and ends with his last full month of employment for employees actively employed on December 31, 2012, and eligible for prior formula transition provisions of the Qualified Plan and SRP. A maximum of 35 years of Credited Service may be earned. For hires and rehires after December 31, 2012 (Dr. Perlmutter), Credited Service for benefit accrual purposes ends at his prior