DEF 14A 1 lmrk2016_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.    )

 

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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.
   
  2000 Galloping Hill Road
Kenilworth, NJ 07033 U.S.A.

 

 

       
        Merck & Co., Inc.
         
   

Kenneth C. Frazier
Chairman,
President and Chief Executive Officer
  2000 Galloping Hill Road
Kenilworth, NJ 07033 U.S.A.

 

 

 

 

April 11, 2016

 

 

Dear Shareholders:

 

It is my pleasure to invite you to the 2016 Annual Meeting of Shareholders of Merck & Co., Inc. (“Merck”, known as “MSD” outside the United States and Canada), which will be held on Tuesday, May 24, 2016, 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.

 

This year marks the Company’s 125th year in business. Merck has an unparalleled legacy of invention that to this day continues to bring important products to patients. Our scientists are working relentlessly to find solutions for devastating diseases like cancer, Alzheimer’s and cardio-metabolic disease; our vaccines have helped to nearly eliminate once life-threatening diseases like measles, mumps, and rubella; and we continue to invent and innovate treatments for some of the world’s most vexing health challenges, including HIV, Human Papillomavirus (HPV), hepatitis C and Ebola.

 

Ultimately, Merck is built on the simple premise that great medicines change the world. We believe that a research-driven enterprise dedicated to world-class science can create medicines and vaccines that will make a difference for society and deliver value to shareholders at the same time.

 

This past year we made significant progress in optimizing our organization and executing on our strategy. We advanced our late-stage pipeline, gained new product approvals, launched innovative products and delivered strong financial results.

 

We continued to streamline our internal R&D governance and further strengthened our compliance and decision making processes, enabling us to advance our pipeline in a more efficient and effective manner. As a result, our pipeline now has approximately 20 programs in Phase 2 or 3, as well as significant programs in earlier stages of development in a variety of key disease areas.

 

On the commercial front, we drove operational excellence, prioritizing resources to our highest growth areas, such as diabetes, oncology, vaccines and hospital acute care, and focusing on key markets and customers. The continued clinical development and launches of our anti-PD-1 therapy KEYTRUDA in countries around the world have the potential to bring new hope in a range of cancers. Additionally, disciplined execution within our diabetes franchise resulted in gains in an intensely competitive market. Regulatory submissions for ZEPATIER, our new chronic hepatitis C medicine, culminated in January of this year when we gained approval in the United States and Canada.

       

2016 Proxy Statement      3

 

         
     

Business development is a critical part of our strategy, and in 2015, we were very active with multiple collaborations and partnerships. We look to pair our best internal inventions with the best external innovation to deliver a balanced and differentiated portfolio of medicines and vaccines, and we expect to remain very active as we continue to aggressively seek attractive external opportunities that can further bolster our scientific leadership while complementing the current assets in our pipeline.

 

We continue to invest resources to launch and grow our strongest brands, support the most promising research programs, enhance our pipeline with the best available external science, and maintain a balanced and differentiated portfolio, with the goal of delivering long-term growth and shareholder value.

 

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 distributing its Notice of Internet Availability of Proxy Materials, proxy statement and the 2015 Annual Report on Form 10-K, and proxy card/voting instruction form, as applicable, to shareholders and to employee benefit and stock purchase plans participants on April 11, 2016. Your vote is important. We urge you to exercise your right to do so.

 

Sincerely,

 

         

2016 Proxy Statement     4

 

TABLE OF CONTENTS

 

Voting Information 6
Proxy Summary 8
Notice of Annual Meeting of Shareholders 13
Corporate Governance 14
Board’s Role in Strategic Planning 14
Independence of Directors 15
Board Leadership Structure 16
Lead Director 16
Succession Planning 17
Annual Board Evaluation 17
Risk Oversight 17
Related Person Transactions 18
Board Meetings and Committees 19
Shareholder Engagement 21
Shareholder Communications with the Board 23
Political Contributions and Lobbying Expenditure Oversight and Disclosure 23
Commitment to Corporate Responsibility 23
Stock Ownership Information 24
Section 16(a) Beneficial Ownership Reporting Compliance 25
Proposal 1: Election of Directors 26
Criteria and Director Nomination Process 26
2016 Nominees for Director 27
Director Compensation 35
Proposal 2. Non-Binding Advisory Vote to Approve the Compensation of our Named Executive Officers 38
Compensation Discussion and Analysis 39
Executive Summary 39
Results of 2015 Shareholder Advisory Vote 40
Pay for Performance Alignment 40
Understanding the Increase in Disclosed Compensation 41
Compensation Policies and Practices 42
Detailed Discussion and Analysis 42
The Elements of 2015 Compensation 43
Key 2016 Compensation Actions 49
Executive Compensation Program Objectives and Strategy 49
Compensation Risk Assessment 53
Compensation and Benefits Committee Report 53
Summary Compensation Table 54
Grants of Plan-Based Awards 56
Outstanding Equity Awards 58
Option Exercises and Stock Vested 60
Pension Benefits 61
Nonqualified Deferred Compensation 64
Potential Payments Upon Termination or a Change in Control 65
Proposal 3. Ratification of Appointment of Independent Registered Public Accounting Firm for 2016 70
Audit Committee’s Report 70
Pre-Approval Policy for Services of Independent Registered Public Accounting Firm 71
Fees for Services Provided by Independent Registered Public Accounting Firm 71
Shareholder Proposals 72
Proposal 4. Shareholder Proposal Concerning Shareholders’ Right to Act by Written Consent 72
Proposal 5. Shareholder Proposal Concerning Independent Board Chairman 74
Proposal 6. Shareholder Proposal Concerning Disposal of Unused or Expired Drugs 76
Questions and Answers About the Annual Meeting and Voting 78
Shareholder Proposals and Director Nominations for the 2017 Annual Meeting of Shareholders 80
Deadline for Receipt of Shareholder Proposals for Inclusion in the Proxy Materials for the 2017 Annual Meeting of Shareholders 80
Director Nominees for Inclusion in the Proxy Materials for the 2017 Annual Meeting of Shareholders (Proxy Access) 80
Shareholder Proposals and Business to be Brought Before the 2017 Annual Meeting of Shareholders 81
Shareholder Nomination of Directors to Be Brought Before the 2017 Annual Meeting of Shareholders 81
Forward Looking Statements 81
Other Matters 81

 

2016 Proxy Statement     5

 

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 appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2016), 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
and Broker
Non-Votes
Votes required
for approval
PROPOSAL 1 Election of Directors Page 26 FOR
each Nominee
No    
PROPOSAL 2 Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay) Page 38 FOR No Do not count
for all six
Majority of
votes cast
PROPOSAL 3 Ratification of Appointment of Independent Registered Public Accounting Firm for 2016 Page 70 FOR Yes proposals (no effect) required for all six proposals
PROPOSALS 4 - 6 Shareholder Proposals Pages 72-77 AGAINST
each proposal
No    

 

Vote right away

 

Advance Voting Methods and Deadlines

 

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    
             
     
Registered Owners   Registered Owners in   Scan this QR code 24/7   Cast your ballot,
Visit 24/7   the U.S. or Canada dial toll-free 24/7   to vote with your mobile device   sign your proxy card
www.proxyvote.com   1-800-690-6903   (may require free software)   and send by free post

 

You will need the 16-digit number included in your proxy card, voting instruction form or Notice of Internet Availability of Proxy Materials.

 

The telephone and internet voting facilities will close at 11:59 p.m. Eastern Time on May 23, 2016.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, your ability to vote by telephone or over the internet depends on your broker’s voting process. Please follow the directions provided to you by your broker, bank or nominee.

 

2016 Proxy Statement    6

 

Voting at the Meeting

 

All shareholders of record may vote in person at the 2016 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 78 under the “Questions and Answers About the Annual Meeting and Voting” section.

 

Merck & Co., Inc. 2016 Annual Meeting of Shareholders Details

 

Date and Time: Tuesday, May 24, 2016, at 9:00 a.m., local time
   
Location: Bridgewater Marriott
  700 Commons Way
  Bridgewater, New Jersey 08807
   
Record Date: March 31, 2016

 

Admission

 

All shareholders as of the record date may attend the Annual Meeting but must have an admission ticket and a valid, government-issued photo identification. You may request a ticket by writing to the Office of the Secretary, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, New Jersey 07033 U.S.A., by faxing your request to 908-740-0244, or by calling 908-740-4000. 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. Your request for an admission ticket must be received on or before May 16, 2016.

 

Webcast

 

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 www.merck.com/investors/webcasts-and-presentations.html and click on “Shareholder Meetings”.

 

Questions and Answers About the Annual Meeting and Voting

 

Please see the “Questions and Answers About the Annual Meeting and Voting” section beginning on page 78 for answers to common questions on the rules and procedures surrounding the proxy and Annual Meeting process.

 

2016 Proxy Statement    7

 

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:

 

12 of our 13 Director Nominees are Independent   Risk Oversight by Full Board and Committees
Annual Election of Directors   Strong Governance and Disclosure of Corporate Political Spending
Strong Independent Lead Director   Active Board Participation in CEO Succession Planning
Annual Board and Committee Evaluation Process   Board Oversight of Company Strategy
Active Shareholder Engagement   Diverse Board in Terms of Gender, Ethnicity, Experience and Skills
3%, 3-year ownership for Proxy Access   The Threshold to Call a Special Meeting is 15% of Shareholders
Majority Voting for All Directors   Transparent Public Policy Engagement
No Shareholder Rights Plan (“Poison Pill”)   Longstanding Commitment to Corporate Responsibility
No Supermajority Voting Provisions   Policy Providing for Return of Incentive Compensation (“Clawback Policy”)
Annual “Say on Pay” Advisory Votes   Share Ownership Requirements for Executives and Directors and Share Retention Policy for Executives
Board and Committee Authority to Retain Independent Advisors   Policies Prohibiting Hedging, Short Sales and Pledging of Company Stock
Robust Code of Ethics   Strong Alignment Between Pay and Performance for Incentive Plans
Regular Executive Sessions of Independent Directors      

 

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
  26
PROPOSAL 2   Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay)   FOR   38
PROPOSAL 3   Ratification of Appointment of Independent Registered Public Accounting Firm for 2016   FOR   70
Shareholder Proposals        
PROPOSAL 4   Shareholder Proposal Concerning Shareholders’ Right to Act by Written Consent   AGAINST   72
PROPOSAL 5   Shareholder Proposal Concerning Independent Board Chairman   AGAINST   74
PROPOSAL 6   Shareholder Proposal Concerning Disposal of Unused or Expired Drugs   AGAINST   76

 

 

2016 Proxy Statement    8

 

Nominees for Director (page 28)

 

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

 

New Directors. In light of upcoming retirements and with a focus on Board refreshment that prioritizes skills that the Board considers important and desirable based on the Company’s current needs and business priorities, we have added the following two new independent Directors in 2015: Pamela J. Craig, the former Chief Financial Officer of Accenture and Paul B. Rothman, M.D., the Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, and CEO, Johns Hopkins Medicine.

 

Name   Age   Director since   Occupation and
Experience
  Independent   Committee
Memberships
  Other Public
Company Boards
Leslie A. Brun   63   2008   Chairman and Chief Executive Officer, Sarr Group, LLC    

Audit (Chair)

Governance, Public Policy and Corporate Responsibility

 

Broadridge Financial Solutions, Inc.

CDK Global, Inc.

Hewlett Packard Enterprise Company

 

Thomas R. Cech, Ph.D.   68   2009   Distinguished Professor, University of Colorado    

Audit

Research

   
Pamela J. Craig   59   2015   Former Chief Financial Officer, Accenture plc     Audit  

Akamai Technologies, Inc.

Wal-Mart Stores, Inc.

Kenneth C. Frazier   61   2011   Chairman, President and Chief Executive Officer, Merck & Co., Inc.         Exxon Mobil Corporation
Thomas H. Glocer   56   2007   Retired Chief Executive Officer, Thomson Reuters Corporation    

Compensation and Benefits (Chair)

Governance, Public Policy and Corporate Responsibility

  Morgan Stanley
C. Robert Kidder   71   2005   Former Chairman and Chief Executive Officer, 3Stone Advisors LLC    

Audit

Research

  Advanced Drainage Systems, Inc.
Rochelle B. Lazarus   68   2004   Chairman Emeritus, Ogilvy & Mather     Governance, Public Policy and Corporate Responsibility  

The Blackstone Group L.P.

General Electric

Carlos E. Represas   70   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

Paul B. Rothman, M.D.   58   2015   Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, and CEO, Johns Hopkins Medicine     Research    
Patricia F. Russo   63   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 Enterprise Company

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

Craig B. Thompson, M.D.   63   2008   President and Chief Executive Officer, Memorial Sloan-Kettering Cancer Center     Research (Chair)   Charles River Laboratories International, Inc.
Wendell P. Weeks   56   2004   Chairman, Chief Executive Officer and President, Corning Incorporated    

Audit

Research

 

Amazon.com, Inc.

Corning Incorporated

Peter C. Wendell   65   2003   Managing Director, Sierra Ventures    

Compensation and Benefits

Research

   

 

 

2016 Proxy Statement    9

 

Select Performance and Compensation Highlights for 2015 (page 39)

 

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

 

Business Highlights.

Exceeded our financial goals, delivering revenue at the high end of our original 2015 guidance range and achieving non-GAAP EPS above the high end of our original 2015 guidance range
Excluding the impact of foreign exchange, drove growth in sales across diabetes, vaccines, hospital acute care and oncology
Exceeded our three-year goal of $2.5 billion in annual net cost savings, compared to 2012
Continued to advance KEYTRUDA, receiving U.S. regulatory approval for 2nd line non-small cell lung cancer and European Union approval for advanced (unresectable or metastatic) melanoma
Broadened KEYTRUDA clinical development with over 200 studies for more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, melanoma, multiple myeloma, non-small cell lung, and triple negative breast, several of which are currently in Phase 3 clinical development
Filed ZEPATIER in the U.S. and EU for the treatment of chronic hepatitis C virus infection (received U.S. approval in January 2016)
Strengthened pipeline by acquiring Cubist Pharmaceuticals (antibiotics) and cCAM Biotherapeutics (immuno-oncology), and reached agreements with NGM Biopharmaceuticals (diabetes & obesity) and Moderna Therapeutics (messenger RNA-based vaccines & therapies)

 

Shareholder Value Creation.

Returned $9.3 billion to shareholders through dividends and share repurchases
Increased the dividend paid by 2.2% during 2015, representing the fifth consecutive year dividends have been increased

 

 

Pay is Aligned to 2015 Company Performance (page 40)

 

Merck’s compensation programs are designed to align the interests of our executives with the interests of our shareholders. For this reason, a significant portion of our Named Executive Officers’ (“NEO”) pay is variable and at risk, subject to company and individual performance measured against financial, operating and research-based objectives, as well as relative total shareholder return. The Company’s variable incentives demonstrate a strong linkage between pay and performance.

 

Annual Incentive – Strong 2015 performance resulted in above-target achievement (144 points vs. a target of 100 points) of the financial and research-based objectives of our Company Scorecard, which focuses on our critical business drivers: revenue, EPS and pipeline milestones. These results, combined with individual performance, led to average annual incentive payouts for the Named Executive Officers of 156% of target. The 2015 Company Scorecard is described in more detail beginning on page 44.
  
Long-Term Incentive – Final payout of the 2013-2015 Performance Share Unit (“PSU”) award cycle was 105% of target, which reflected a score of 131% of target based on EPS results, and a 20% reduction based on our total shareholder return versus peers over the same 3-year period. Additional details about our PSU program and the 2013-2015 PSU award cycle are provided beginning on page 47.

 

2016 Proxy Statement    10

 

2015 Executive Total Compensation Mix (page 43)

 

Under our executive compensation program, a significant portion (90% and 82%, respectively) of the CEO’s and other Named Executive Officers’ target annual direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

Understanding the Increase in Disclosed Compensation (page 41)

 

As explained in the 2015 Proxy Statement, the 2014 revision to the PSU program design caused a significant increase in the NEO compensation accounting value disclosed in the Summary Compensation Table, but it did not affect the actual value of the equity granted.

 

The chart below (using CEO salary, annual cash incentive and equity compensation) illustrates how the accounting impact of the 2014 PSU program design change increased Mr. Frazier’s disclosed compensation relative to his target compensation in 2014 and to a lesser extent in 2015.

 

Compensation disclosures for 2016 and beyond will not be impacted by the previous PSU plan design. The estimated 2016 compensation disclosure shown below uses the known 2016 equity grant value, current base salary and target annual incentive.

 

2014 - 2016 CEO Compensation
Summary Compensation Table Disclosure vs. Target Total Compensation
($ millions)
 
 

 

 

2016 Proxy Statement    11

 

Response to “Say on Pay” Advisory Vote (page 40)

 

In 2015, shareholders continued their support of our executive compensation programs with approximately 95% of the votes cast for approval of the “say on pay” proposal. 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.

 

Shareholder Engagement and Feedback (page 21)

 

Beyond consideration of the annual “say on pay” vote, Merck regularly communicates with its shareholders to better understand their perspectives and has established a shareholder engagement program that is proactive and cross-functional. During 2015, we held discussions with a number of our largest shareholders on topics such as management and shareholder proposals, including written consent; Board-related matters, including Board composition; executive compensation; proxy access and other governance matters. These discussions provided valuable insights into shareholder views.

 

Proxy Access. Also in 2015, our Board made a decision to proactively adopt proxy access. This decision grew out of an open and constructive dialogue with our shareholders and our commitment to maintaining strong governance practices. The “Proxy Access for Director Nominations” By-Law permits eligible shareholders, meeting certain eligibility requirements, to nominate candidates for election to the Merck Board. We believe that this proxy access framework strikes the right balance for the Company and its shareholders by ensuring that Board nominees are supported by long-term shareholders representing a significant, but attainable, proportion of outstanding shares.

 

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 70)

 

We ask that our shareholders ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2016. Below is summary information about PricewaterhouseCoopers LLP’s fees for 2015 and 2014.

 

Type of Fees (in Millions)   2015   2014
Audit Fees  $27.3  $28.9
Audit-Related Fees   3.5   10.1
Tax Fees   6.8   6.6
All Other Fees   1.7   1.8
TOTAL FEES  $39.3  $47.4

 

 

2016 Proxy Statement    12

 

 

   
    Merck & Co., Inc.
     
    2000 Galloping Hill Road
Kenilworth, NJ 07033 U.S.A.

 

NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS

May 24, 2016

 

To the Shareholders:

 

The shareholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, May 24, 2016, 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 the 13 Directors named in the proxy statement;
    
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 2016;
    
consider and act upon a shareholder proposal concerning shareholders’ right to act by written consent, if properly presented at the meeting;
    
consider and act upon a shareholder proposal concerning independent board chairman, if properly presented at the meeting;
    
consider and act upon a shareholder proposal concerning disposal of unused or expired drugs, if properly presented at the meeting; 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, 2016, are entitled to vote.

 

Merck began distributing its Notice of Internet Availability of Proxy Materials, proxy statement, the 2015 Annual Report on Form 10-K, and proxy card/voting instruction form, as applicable, to shareholders and to employee benefit and stock purchase plans participants on April 11, 2016.

 

April 11, 2016

   
    By order of the Board of Directors,
     
    Michael J. Holston
    Executive Vice President and General Counsel
     
   

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 24, 2016:

 

The Notice of Annual Meeting of Shareholders, proxy statement and the 2015 Annual Report on Form 10-K are available free of charge at: www.proxyvote.com.

 

2016 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 subjects addressed by the Policies of the Board are the philosophy and functions of the Board, composition of the Board including Lead Director responsibilities, categorical independence standards, qualifications of members, assessment of the 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 via our website at
www.merck.com/about/leadership

 

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


 

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.

 

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 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. In addition, Board meetings held throughout the year target specific strategies (for example, basic research) and important areas of the business

 

2016 Proxy Statement    14

 

(for example, oncology) 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 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 U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “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.

 

In accordance with the NYSE Corporate Governance Listing Standards, in determining the independence of any director who will serve on the Compensation and Benefits Committee, the Board also considers all factors specifically relevant to determining whether the director has a relationship with the Company that is material to the director’s ability to be independent from management in connection with the duties of a member of the Compensation and Benefits Committee.

 

Categorical Independence Standards

 

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.

 

The 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 reflected in the Policies of the Board, the Board reviewed 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, Pamela J. Craig, Thomas H. Glocer, C. Robert Kidder, Rochelle B. Lazarus, Carlos E. Represas, Paul B. Rothman, Patricia F. Russo, Craig B. Thompson, Wendell P. Weeks, Peter C. Wendell and William B. Harrison, Jr., who will retire from the Board at the Annual Meeting) 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 Corporate Governance 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, or one of our subsidiaries, and such organizations. The Board also evaluated whether there were any other facts or circumstances that might impair a Director’s independence.

 

As previously disclosed, the Company and Corning Incorporated (“Corning”), for 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 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. The Governance, Public Policy and Corporate Responsibility Committee (the “Committee”) has conducted regular oversight of the 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. As previously disclosed, prior to 2014, Merck reimbursed Corning $8 million for development costs incurred under the R&D Agreement. In 2014 and 2015, Merck reimbursed Corning an additional $14 million and $1 million, respectively, for development costs incurred based on the achievement of certain agreed milestones under the R&D Agreement. An additional $7 million of reimbursable costs remain to be paid upon the achievement of final milestones

 

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set forth in the R&D Agreement. In addition to the reimbursable development expenses referred to above, in March 2014 and 2015, Merck reimbursed Corning for approximately $0.9 million of intellectual property filing costs it incurred from 2011 to 2014 under the R&D Agreement. Merck is presently reviewing the intellectual property filing costs incurred by Corning in 2015 and expects to reimburse Corning approximately an additional $0.6 million in such costs in early 2016. Merck also expects to reimburse Corning for additional intellectual property filing costs in the future. Merck made purchases from Corning totaling approximately $0.4 million under the Supply Agreement in 2014. Also, commencing in 2018, the Company expects to receive royalties under the Royalty Agreement. In addition, in 2015 the Company made purchases from Corning in the ordinary course of business unrelated to the Supply Agreement.

 

Dr. Cech, Dr. Rothman and Dr. Thompson are employed at medical or academic institutions with which the Company engages in the ordinary course of business transactions in the form of purchases and sales.

 

The Board reviewed 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 independent Directors of the Board have appointed Mr. Leslie A. Brun to replace Mr. Harrison as the Lead Director upon Mr. Harrison’s retirement at the Annual Meeting. 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.

 

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 Chair/CEO.
Agendas Approving meeting agendas for the Board and the information sent to the Board, including supporting material for meetings.
Meeting Schedules Approving meeting schedules to ensure that there is sufficient time for discussion of all agenda items.
Communicating with Shareholders Being available for consultation and direct communication with major shareholders, as appropriate.
and Stakeholders 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 20.

 

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.

 

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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 ensures that Directors have substantial opportunities over the course of the year to engage with possible succession candidates.

 

The Board also considers its own composition and succession plans. Discussion of these topics is an important part of the annual Board evaluation process. In Director succession planning, the Governance, Public Policy and Corporate Responsibility Committee and the 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 of achieving a balance of the skills, experience and attributes that would be beneficial to the Board’s oversight role. For more information, see “Criteria and Director Nomination Process” on page 26.

 

Annual Board Evaluation

 

The Board conducts an evaluation of its performance and effectiveness as well as that of the four standing committees on an annual basis. The purpose of the evaluation 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 evaluation, 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, the Committees, as well as each individual Director’s own contributions. The Lead Director, who serves as the 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, composition, and priority agenda topics. The collective ratings and comments of the Directors are compiled and then presented by the Lead Director to the Governance, Public Policy and Corporate Responsibility Committee and to the full Board for discussion and action.

 

Each year, the Lead Director conducts a personal interview with each Board member to gather in-depth perspectives and candid insight about Board, Committee and individual Director performance and suggestions for improvement.

 

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:

 

Strategy Macro risks that may impact our ability to achieve long-term business objectives
Operations Risks in operations that may impact our ability to achieve business objectives
Compliance Risks related to compliance with laws, regulations and Company policies
Reporting Risks to maintaining accurate financial statements and timely, complete financial disclosures
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 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 of the Company 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 Company’s 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.

 

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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 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 to 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 require disclosure under Item 404(a).

 

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Board Meetings and Committees

 

In 2015, the Board of Directors met eight times. Under the Policies of the Board, Directors are expected to attend regular Board meetings, Board committee meetings and annual shareholder meetings.

 

The independent Directors of the Board met in seven executive sessions in 2015. Mr. Harrison, Lead Director of the Board, presided over the executive sessions. All twelve Directors then serving on the Board attended the 2015 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.

 

All Directors attended at least 75% of the meetings of the Board and of the committees on which they served in 2015.

 

Members of the individual standing committees, as of April 1, 2016, are named below:

 

Board Member Audit Compensation
and Benefits
Governance, Public
Policy and Corporate
Responsibility
Research
Leslie A. Brun(1)(5) Chair    
Thomas R. Cech, Ph.D.    
Pamela J. Craig(1)(2)      
Thomas H. Glocer   Chair  
William B. Harrison, Jr.(3)(4)   Chair  
C. Robert Kidder    
Rochelle B. Lazarus      
Carlos E. Represas    
Paul B. Rothman, M.D.(2)      
Patricia F. Russo    
Craig B. Thompson, M.D.       Chair
Wendell P. Weeks    
Peter C. Wendell    
Number of meetings in 2015 9 5 4 4
(1)Audit Committee Financial Expert
(2)Effective September 1, 2015
(3)Lead Director of the Board until May 24, 2016
(4)Will retire at the 2016 Annual Meeting of Shareholders
(5) Lead Director effective May 24, 2016

 

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

 

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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 71 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 23 of this proxy statement.

 

“The Audit Committee’s Report” is included on page 70 of this proxy statement and the Audit Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors.

 

Financial Experts on Audit Committee

 

The Board has determined that Mr. Brun and Ms. Craig are “audit committee financial experts” as defined by the SEC and that each has accounting or related financial management expertise as required by NYSE Corporate Governance Listing Standards.

 

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 26 and oversee the Board’s Incumbent Director Resignation Policy as further described 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 the talent necessary to successfully execute the Company’s long-term strategic plan;
  
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 (the “C&B Committee”) annually reviews and approves corporate goals and objectives relevant to the total direct compensation opportunity—that is, changes in base salary, non-equity and equity incentive plan compensation—of the Chairman and 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 39. The independent members of the full Board ultimately make the final decisions regarding the Chairman and CEO’s total direct compensation.

 

The C&B Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors.

 

The C&B Committee Report is included on page 53 of this proxy statement.

 

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Role of Compensation Consultants

 

The C&B 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 C&B Committee has retained Frederic W. Cook & Co., Inc. (“Cook”) as its compensation consultant.

 

Independence of Compensation Consultant

 

The C&B Committee annually reviews the services provided by Cook and has concluded that Cook is independent in providing executive compensation consulting services. The C&B Committee conducted a specific review of its relationship with Cook in 2015, and determined that Cook’s work for the C&B 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 C&B 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 C&B Committee’s advisor with a member of the C&B Committee;
  
Any stock of Merck owned by the C&B Committee’s advisor or the advisor’s immediate family members; and
  
Any business or personal relationship of the C&B Committee’s advisor or any other employee at Cook with an executive officer of Merck.

 

In particular, the C&B 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 C&B Committee, working in cooperation with management, to assist the C&B Committee with executing its responsibilities.

 

Services performed during 2015

 

During 2015, Cook supported the C&B Committee by:

 

Reviewing our competitive market data with respect to the CEO’s and senior executives’ compensation;
  
Providing guidance and analysis on executive compensation plan design, market trends and best practices;
  
Assisting in determining Chairman and CEO target total direct compensation and payouts under the Executive Incentive Plan; and
  
Assisting with the preparation of public filings related to executive compensation, including the CD&A and the accompanying tables and footnotes.

 

In addition, at the direction of the Governance, Public Policy and Corporate Responsibility Committee, Cook performed a review of the Director’s compensation program.

 

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 C&B 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 C&B Committee during 2015. There were no C&B Committee interlocks or insider (employee) participation during 2015.

 

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; and
  
assist the Board in its oversight responsibilities to ensure compliance with the highest standards of scientific integrity in the conduct of Merck research and development.

 

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

 

Shareholder Engagement

 

Merck regularly communicates with its shareholders to better understand their perspectives and has established a shareholder engagement program that is proactive and cross-functional. Throughout the year, members of Investor Relations, the Office of the Secretary, Human Resources and other subject-matter experts within the Company engage with our shareholders to

 

2016 Proxy Statement    21

 

remain well-informed regarding their perspective on current issues, as well as to address any questions or concerns. These teams serve as liaisons between shareholders, members of senior management and the Board.

 

In addition, we conduct an extensive shareholder outreach program with our largest shareholders twice a year focused on governance and executive compensation. We believe 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 interest of the Company.

 

During 2015, we held discussions with a number of our shareholders in the spring before the 2015 Annual Meeting of Shareholders and once again in late fall. We also regularly seek to take advantage of other engagement opportunities and events.

 

Given our large shareholder base, we concentrate our shareholder outreach efforts on our largest 25-30 shareholders that represent approximately 40% of our ownership. In 2015, among the specific matters we discussed were:

 

management and shareholder proposals, including written consent and special shareholders meetings;
  
Board-related matters, including Board composition, leadership and succession planning;
  
executive compensation, including changes in our executive compensation program and the related disclosures; and
  
other governance matters including proxy access and any policy changes recently adopted or under consideration by our institutional shareholders.

 

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 policies. We were pleased that in the aggregate, our top shareholders expressed no consistent concerns about our Board, corporate governance or executive compensation programs or practices. The feedback received was summarized and presented to the Governance, Public Policy and Corporate Responsibility Committee, the C&B Committee and full Board. We have also incorporated certain suggestions to enhance or clarify our disclosures into this proxy statement.

 

Our Board also considered shareholder-director engagement and has confirmed the availability of the Board’s independent Lead Director or other members of the Board for consultation with major shareholders in appropriate situations. We will continue to engage with shareholders on a regular basis to better understand and consider their views.

 

Proxy Access

 

After carefully observing proxy access developments, particularly the rapid developments in 2015, and engaging with a number of our largest shareholders, our Board of Directors proactively amended our By-Laws on July 22, 2015, to give shareholders a right to proxy access for Director nominations. Our amended By-Laws allow a shareholder or a group of no more than 20 shareholders, who has maintained continuous qualifying ownership of at least 3% of the Company’s outstanding common stock for at least three years and has complied with the other requirements set forth in the By-Laws, to include director nominees constituting up to 20% of the Board in the Company’s proxy materials for an annual meeting of shareholders. The amended By-Laws are available on our website at www.merck.com/about/leadership.

 

In considering whether to adopt proxy access for Director nominations, our Board reviewed the potential impact of proxy access on Merck, as well as current standards for proxy access terms. We also took into consideration the various views of our investors concerning this issue. We evaluated our investors’ publicly stated positions on this issue and inquired about the views of a number of our largest shareholders on the topic during our regular outreach. Our investors generally support proxy access and those investors with whom we spoke generally indicated support for the core terms of our By-Laws.

 

Our Board concluded that the best course of action for Merck and our shareholders was to adopt a proxy access By-Law provision with terms based on our particular circumstances and consistent with current standards in proxy access By-Laws for publicly traded U.S. companies.

 

Action by Written Consent

 

As discussed above, during our shareholder engagement in 2015, we continued our discussions regarding shareholder views on the right to act by written consent. As a matter of policy, some investors support written consent proposals under any circumstances; however, similar to feedback we received during the past engagement, most of our largest investors continue to believe that shareholder interests are appropriately protected by a well-structured right to call a special meeting. Based on feedback we received in 2013, the Board took action in early 2014 to amend 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. As discussed further in the Board of Directors’ Statements in Opposition to shareholder Proposal 4 beginning on page 72, 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 relatively low thresholds, best protects the interests of all shareholders in a fair and balanced manner.

 

2016 Proxy Statement    22

 

Shareholder Communications with the Board

 

The Board of Directors welcomes input from shareholders and other interested parties and has established a process to receive these communications. Shareholders and interested parties who wish to do so may communicate directly with the Board, the Lead Director, the non-management or independent Directors as a group, or other members of the Board by writing to the following address:

 

Board of Directors
Merck & Co., Inc.
2000 Galloping Hill Road, K1-4157
Kenilworth, NJ 07033 U.S.A.

 

In order to manage efficiently the volume of correspondence received, communications will be reviewed by the Corporate Secretary for the purpose of determining whether the contents are appropriate for submission to the entire Board, the Chairman, the independent Lead Director or Chair of the relevant committee. Examples of communications that would be considered inappropriate for submission to members of the Board include the following:

 

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 role of the Board or to the business of the Company;
  
resumes or other job-related inquiries; and
  
mass mailings, solicitations and advertisements.

 

Comments or questions regarding the nomination of directors and other corporate governance matters will be referred to the Chair of the Governance, Public Policy and Corporate Responsibility Committee. Comments or questions regarding executive compensation will be referred to the Chair of the C&B Committee.

 

In addition, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints 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 at www.merck.com/about/leadership.

 

Information on communications to the Board may also be found on our website at www.merck.com/contact.

 

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 (www.merck.com/about/views-and-positions and www.merckresponsibility.com/our-approach/public-policy).

 

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

 

Corporate responsibility is integral to the fabric of our Company and reflected in every aspect of our business. -- Ken Frazier

 

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 aspects of 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 www.merckresponsibility.com/ethics-transparency/transparency-disclosures.

 

2016 Proxy Statement    23

 

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 ownership requirements for executive officers are discussed in the Compensation Discussion and Analysis section on page 52.

 

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 29, 2016, and the beneficial owners exercise sole voting and/or investment power over their shares.

 

   Company Common Stock   
       Right to Acquire Beneficial       
       Ownership Under       
   Shares   Options/Stock Units     Phantom 
   Beneficially   Exercisable/Distributable  Percent  Stock 
Name of Beneficial Owner  Owned(a)    Within 60 Days(b)  of Class  Units(c) 
Kenneth C. Frazier   526,147    2,818,346   *    
Leslie A. Brun   100    10,000   *   27,476 
Thomas R. Cech   100    5,000   *   22,735 
Pamela J. Craig   1,715       *   1,696 
Thomas H. Glocer   5,100    15,000   *   42,595 
William B. Harrison, Jr.   11,400    25,000   *   76,846 
C. Robert Kidder   10,339(d)    5,000   *   21,223 
Rochelle B. Lazarus   6,351(d)    20,000   *   60,476 
Carlos E. Represas   11,500(d)       *   26,979 
Paul B. Rothman   100       *   1,696 
Patricia F. Russo   13,148    5,000   *   21,223 
Craig B. Thompson   3,352    5,000   *   21,223 
Wendell P. Weeks   200(d)    20,000   *   64,743 
Peter C. Wendell   1,000    20,000   *   65,779 
Robert M. Davis       64,190   *    
Michael J. Holston   64,081    96,889   *    
Roger M. Perlmutter   50,227    214,484   *    
Adam H. Schechter   130,215(d)    887,278   *    
All Directors and Executive Officers as a Group (26 individuals)   1,265,342    5,546,344   *   454,690 
*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, 2016, for the accounts of individuals as follows: Mr. Frazier—3,670 shares and all Directors and executive officers as a group— 14,316 shares.
(b)This column reflects the number of shares that could be acquired within 60 days of February 29, 2016, 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; 11,000 shares held in a trust for the benefit of Mr. Represas’ family; 92,992 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.

 

2016 Proxy Statement    24

 

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, 2015:

 

Name and Address of  Amount and Nature of     
Beneficial Owner  Beneficial Ownership   Percent of Class 
BlackRock, Inc.          
55 East 52nd Street          
New York, NY 10055   193,639,860(a)    6.90%
Wellington Management Group LLP and affiliates          
c/o Wellington Management Company LLP          
280 Congress Street          
Boston, MA 02210   182,000,941(b)    6.52%
The Vanguard Group          
100 Vanguard Blvd.          
Malvern, PA 19355   167,627,208(c)    6.00%
(a)As reported on Amendment No. 6 to Schedule 13G/A (the “BlackRock filing”) filed with the SEC on February 10, 2016. According to the BlackRock filing, of the 193,639,860 shares of Merck common stock beneficially owned by BlackRock, Inc. (“BlackRock”), as of December 31, 2015, BlackRock has the sole power to vote or direct the vote with respect to 167,712,388 shares, sole power to dispose or to direct the disposition of 193,586,434 shares, and shared voting and shared dispositive power with respect to 53,426 shares.
(b)As reported on Amendment No. 2 to Schedule 13G/A (the “Wellington filing”) filed with the SEC on February 11, 2016. According to the Wellington filing, as of December 31, 2015, Wellington Management Group LLP has the shared power to vote or direct the vote with respect to 53,635,606 shares and the shared power to dispose or to direct the disposition of 182,000,941 shares; Wellington Group Holdings LLP has the shared power to vote or direct the vote with respect to 53,635,606 shares and the shared power to dispose or to direct the disposition of 182,000,941 shares; Wellington Investment Advisors Holdings LLP has the shared power to vote or direct the vote with respect to 53,635,606 shares and the shared power to dispose or to direct the disposition of 182,000,941 shares; and Wellington Management Company LLP has the shared power to vote or direct the vote with respect to 48,970,693 shares and the shared power to dispose or to direct the disposition of 174,454,498 shares. Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP have no sole voting or sole dispositive power with respect to any of these shares. According to the Wellington filing, the securities as to which this Schedule 13G/A is filed are owned of record by clients of one or more investment advisers identified therein directly or indirectly owned by Wellington Management Group LLP. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of this class of securities.
(c)As reported on Amendment No. 1 to Schedule 13G/A (the “Vanguard filing”) filed with the SEC on February 10, 2016. According to the Vanguard filing, of the 167,627,208 shares of Merck common stock beneficially owned by The Vanguard Group (“Vanguard”), as of December 31, 2015, Vanguard has the sole power to vote or direct the vote with respect to 5,183,209 shares, shared power to vote or direct the vote with respect to 281,900 shares, sole power to dispose or to direct the disposition of 162,118,197 shares, and shared power to dispose or to direct the disposition of 5,509,011 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 U.S. 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 2015, 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 2015 fiscal year.

 

2016 Proxy Statement    25

 

PROPOSAL 1. ELECTION OF DIRECTORS

 

Criteria and 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, the Committee concerns itself with the composition of the Board with respect to depth of experience, balance of professional interests, required expertise and other factors. The Committee evaluates prospective nominees identified on its own initiative as well as candidates 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 www.merck.com/about/ leadership.

 

To be considered for membership on the Board, a candidate must meet the following minimum 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.

 

Individual Experience, Qualifications, Attributes and Skills

 

In its regular discussions regarding Board composition and especially in conjunction with the annual Board and Committee evaluations, the Governance, Public Policy and Corporate Responsibility Committee works with the Board to determine the appropriate mix of professional experiences, areas of expertise, educational backgrounds and other qualifications that are particularly desirable for our directors to possess in light of our current and future business strategies. The input gathered is then used by the Governance, Public Policy and Corporate Responsibility Committee in its planning and director search process.

 

In addition to meeting the criteria specified by the Policies of the Board, as listed above, the Board has also identified the following experiences, qualifications and skills as important and desirable to be represented on the Board based on the Company’s current needs and business priorities:

 

Experience, Qualifications & Skills
Leadership Health Care Delivery Systems
Finance and Accounting Regulatory
Business Operations and Strategic Planning Corporate Governance
Global Business Perspective Expertise in Technology and Related Trends
Medicine, Science, Research and Development Talent Management

 

Diversity

 

Diversity is a factor considered when identifying prospective nominees for our Board, although the Governance, Public Policy and Corporate Responsibility Committee does not have a formal diversity policy. Nominees are selected so that the Board of Directors represents a diversity of expertise in areas needed to foster the Company’s business success as well as a diversity of personal characteristics, including gender, race, ethnic origin and national background. From time to time and including in 2015, the Committee has retained independent search firms to assist in identifying candidates that reflect these diversity objectives. The search firm retained by the Governance, Public Policy and Corporate Responsibility Committee during 2015 was asked to identify possible candidates who meet the qualifications being sought in candidates, to interview and screen such candidates (including conducting reference checks), and assist in scheduling candidate interviews with Board members.

 

Shareholder Recommendations of Director Candidates

 

The Governance, Public Policy and Corporate Responsibility Committee will consider recommendations for director candidates made by shareholders and evaluate them using the same criteria as for other candidates. Any such shareholder recommendation must be sent to the Secretary of the Company, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, New Jersey 07033 U.S.A., and must include detailed background information regarding the recommended candidate that demonstrates how the individual meets the Board membership criteria.

 

Evaluation of candidates occurs on the basis of materials submitted by or on behalf of the candidates. 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.

 

2016 Proxy Statement    26

 

2016 Nominees for Director

 

The Board has recommended thirteen nominees for election as Directors at this Annual Meeting, Mr. Leslie A. Brun, Dr. Thomas R. Cech, Ms. Pamela J. Craig, Mr. Kenneth C. Frazier, Mr. Thomas H. Glocer, Mr. C. Robert Kidder, Ms. Rochelle B. Lazarus, Mr. Carlos E. Represas, Dr. Paul B. Rothman, 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. Mr. William B. Harrison, Jr. will retire from the Board at the Annual Meeting in accordance with the retirement policy for the Board of Directors.

 

Ms. Craig and Dr. Rothman were elected to the Board effective September 1, 2015, to serve until this Annual Meeting and to stand for election by shareholders at the meeting. All other nominees currently serving on the Board were elected by the shareholders at the 2015 Annual Meeting. Ms. Craig was first identified as a possible director candidate by a third party search firm and then recommended to the Board by the Governance, Public Policy and Corporate Responsibility Committee. Dr. Rothman was first identified as a possible director candidate by the Company’s CEO and then recommended to the Board by the Governance, Public Policy and Corporate Responsibility Committee. All the Director nominees named in this proxy statement meet the Board’s criteria for membership and were recommended by the Governance, Public Policy and Corporate Responsibility Committee for election by shareholders at this Annual Meeting. 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 including multi-national corporations, medical or academic institutions and/or charitable 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. If elected, each nominee will hold a term expiring at the 2017 Annual Meeting of Shareholders or until his or her successor has been duly elected and qualified.

 

A Director nominee who does not receive a majority of the votes cast with respect to his or her election will not be re-elected 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 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.

 

Following the biographical information for each director nominee below, we describe the key experience and some of the qualifications and skills our Directors bring to the Board that, for reasons discussed above, are important in light of our current needs and business priorities.

 

The Board of Directors recommends that Shareholders vote FOR the election of each of the Director nominees.

 

2016 Proxy Statement    27

 
           

LESLIE A. BRUN
Independent Director
Age: 63

 

  Director since: 2008

Committees: Audit (Chair)

• Governance, Public Policy and Corporate Responsibility

Other Current Public Directorships: Broadridge Financial Solutions, Inc. (2007), Non-executive Chairman (2011); CDK Global, Inc. (2014), Non-executive Chairman (2014); Hewlett Packard Enterprise Company (2015)
Former Directorships Held During the Past 5 Years: Automatic Data Processing, Inc. (2003-2015)
 
 

 

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 in a highly-regulated industry, as well as his demonstrated success throughout his tenure as the Chairman and CEO of Sarr Group, LLC and Chairman and CEO 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 service as their Non-executive Chairman of two public boards, provide him with extensive experience on corporate governance issues.

 

           

THOMAS R. CECH, PH.D.
Independent Director
Age: 68

 

  Director since: 2009

Committees: Audit

• Research

Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: None
 
 

 

Career Highlights:

 

University of Colorado

 

Distinguished Professor, Chemistry and Biochemistry (1990-present)

 

Director, BioFrontiers Institute (2009-present)

 

Howard Hughes Medical Institute, non-profit medical research organization

 

President (2000-2009)

 

Investigator (1988-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.

 

2016 Proxy Statement    28

 
           

PAMELA J. CRAIG
Independent Director
Age: 59

 

  Director since: 2015
Committees: Audit
Other Current Public Directorships: Akamai Technologies, Inc. (2011), Wal-Mart Stores, Inc. (2013)
Former Directorships Held During the Past 5 Years: VMware, Inc. (2013-2015)
 
 

 

Career Highlights:

 

Accenture plc, global management consulting, technology services and outsourcing company

 

Chief Financial Officer (2006-2013)

 

Senior Vice President, Finance (2004-2006)

 

Group Director, Business Operations and Services (2003-2004)

 

Managing Partner, Global Business Operations (2001-2003)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Ms. Craig, the Board considered her extensive finance, management, operational, technology and international business expertise, and her history of accomplishment and executive ability as Chief Financial Officer of Accenture plc. Ms. Craig’s financial expertise is also demonstrated throughout her tenure at Accenture. In addition, her directorships at other public companies, including her service on the Audit Committees at Wal-Mart Stores, Inc. and Akamai Technologies, Inc., provide her with valuable experience on governance issues facing public companies.

 

           

KENNETH C. FRAZIER
Management
Age: 61

 

  Director since: 2011
Other Current Public Directorships: Exxon Mobil Corporation (2009)
Former Directorships Held During the Past 5 Years: None
 
 
 
 

 

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. In addition, his role as the Chair of the Board Affairs Committee of Exxon Mobil Corporation has provided him with important experience on governance issues facing public companies.

 

2016 Proxy Statement     29

 
           

THOMAS H. GLOCER
Independent Director
Age: 56

 

  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:

 

Angelic Ventures LP, a family office investing in early-stage technology and data companies

 

Founder and Managing Partner (2012-Present)

 

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 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.

 

           

C. ROBERT KIDDER
Independent Director
Age: 71

 

  Director since: 2005

Committees: Audit

•  Research

Other Current Public Directorships: Advanced Drainage Systems, Inc. (2014)
Former Directorships Held During the Past 5 Years: Chrysler Group LLC (2009-2011), Morgan Stanley (1993-2015)
 
 

 

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)

 

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 directorships at other public companies provide him with valuable experience on governance issues facing public companies.

 

2016 Proxy Statement    30

 
           

ROCHELLE B. LAZARUS
Independent Director
Age: 68

 

Director since: 2004
Committees:  Governance, Public Policy and Corporate Responsibility
Other Current Public Directorships: The Blackstone Group L.P. (2013),
General Electric (2000)
Former Directorships Held During the Past 5 Years: None
 
 
 

 

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 (including talent management), marketing, 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. 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 Governance and Public Affairs 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.

 

           

CARLOS E. REPRESAS
Independent Director
Age: 70

 

  Director since: 2009

Committees: Compensation and Benefits

• Governance, Public Policy and Corporate Responsibility

Other Current Public Directorships: Bombardier Inc. (2004), Swiss Re Group (2010)
Former Directorships Held During the Past 5 Years: None
 
 

 

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 and 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 corporate governance.

 

2016 Proxy Statement     31

 
           
PAUL B. ROTHMAN, M.D. 
Independent Director
Age: 58
  Director since: 2015
Committees: Research
Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: Cancer Genetics, Incorporated (2014)
 
 
 

 

Career Highlights:

 

The Johns Hopkins University

 

Dean of the Medical Faculty and Vice President for Medicine (2012-present)

 

Johns Hopkins Medicine

 

Chief Executive Officer (2012-present)

 

Carver College of Medicine at the University of Iowa

 

Dean (2008-2012)

 

Head of Internal Medicine (2004-2008)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Rothman, the Board considered his extensive scientific and medical expertise relevant to the pharmaceutical industry and the Company’s research focus, including his positions as the CEO of Johns Hopkins Medicine and the Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, as well as his past experience as Dean and Head of Internal Medicine at Carver College of Medicine at the University of Iowa.

 

           

PATRICIA F. RUSSO
Independent Director
Age: 63

 

  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 Enterprise Company (2015), Non-executive Chairman (2015); KKR Management LLC (the managing partner of KKR & Co., L.P.) (2011)
Former Directorships Held During the Past 5 Years: Hewlett-Packard Company (2011-2015)
 
 

 

Career Highlights:

 

Hewlett Packard Enterprise Company

 

Chairman (2015-present)

 

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, broad understanding of the technology industry, 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 roles as the Non-executive Chairman of Hewlett Packard Enterprise Company and the Chair of the Governance and Corporate Responsibility Committee of General Motors, provide her with deep experience on governance issues facing large public companies.

 

2016 Proxy Statement    32

 
           

CRAIG B. THOMPSON, M.D.
Independent Director
Age: 63

 

  Director since: 2008
Committees: Research (Chair)
Other Current Public Directorships: Charles River Laboratories International, Inc. (2013)
Former Directorships Held During the Past 5 Years: None
 
 
 

 

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. The Board also considered Dr. Thompson’s extensive experience in managing a cutting-edge cancer hospital and consequent deep understanding of the complexities of U.S. healthcare delivery system and policy environment.

 

           
WENDELL P. WEEKS
Independent Director
Age: 56
  Director since: 2004

Committees: Audit

• Research

Other Current Public Directorships: Amazon.com, Inc. (2016), Corning Incorporated (2000)
Former Directorships Held During the Past 5 Years: None
 
 

 

Career Highlights:

 

Corning Incorporated, materials science and specialty glass company for the consumer electronics, telecommunications, transportation, and life sciences industries

 

Chairman, Chief Executive Officer and President (2010-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 possesses broad industry experience based on Corning’s diverse businesses and a demonstrated ability to manage effectively through market volatility. In addition, he brings unique insight into managing innovation, based on his experience with new product development.

 

2016 Proxy Statement     33

 
           

PETER C. WENDELL
Independent Director
Age: 65

 

  Director since: 2003

Committees: Compensation and Benefits

• Research

Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: 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 $23 billion Princeton University endowment.

 

2016 Proxy Statement    34

 

DIRECTOR COMPENSATION

 

During 2015, Directors who were not Merck employees were compensated for their service as a director as shown in the chart below:

 

2015 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.
** The Audit Committee Chair retainer includes the Audit Committee Member retainer fee in the amount of $10,000.
*** Pursuant to the Governance, Public Policy and Corporate Responsibility Committee charter, the independent Lead Director shall be the Chairperson of this Committee. As a result of the combined responsibility, the Lead Director retainer totals $45,000 in the aggregate.
**** Eleven of our thirteen non-employee Directors met this guideline as of December 31, 2015. Ms. Craig and Dr. Rothman joined the Board effective September 1, 2015, and have not yet met the stock ownership guideline.

 

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 Directors’ Deferral Plan 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.

 

2016 Proxy Statement    35

 

2015 Director Compensation

 

As described more fully below, this chart summarizes the annual compensation for our non-employee Directors during 2015.

 

Director Compensation for Fiscal Year Ended December 31, 2015
Name  Fees Earned or
Paid in Cash
($)
  Option
Awards
($)(2)
  All Other
Compensation
($)(3)
  Total
($)
Leslie A. Brun   $125,000     $165,000   $290,000
Thomas R. Cech   110,000      168,394   278,394
Pamela J. Craig(1)   36,667      87,500   124,167
Thomas H. Glocer   115,000      150,000   265,000
William B. Harrison, Jr.   145,000      175,000   320,000
C. Robert Kidder   110,000      150,000   260,000
Rochelle B. Lazarus   100,000      155,000   255,000
Carlos E. Represas   100,000      150,000   250,000
Paul B. Rothman(1)   33,333      87,500   120,833
Patricia F. Russo   100,000      155,000   255,000
Craig B. Thompson   115,000      150,000   265,000
Wendell P. Weeks   110,000      180,000   290,000
Peter C. Wendell   100,000      180,000   280,000
(1) Elected to the Board effective September 1, 2015.
(2) 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 became exercisable in substantially equal installments on the first, second and third anniversaries of the grant date. All stock options previously issued to Directors are fully vested and exercisable. 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, 2015, the aggregate number of option awards outstanding for Directors who served during 2015 was:

 

Director Name Outstanding Option
Awards at 12/31/15
L.A. Brun 10,000
T.R. Cech 5,000
P.J. Craig 0
T.H. Glocer 15,000
W.B. Harrison, Jr. 25,000
C.R. Kidder 5,000
R.B. Lazarus 20,000
C.E. Represas 0
P.B. Rothman 0
P.F. Russo 5,000
C.B. Thompson 5,000
W.P. Weeks 20,000
P.C. Wendell 20,000
(3) Represents Company credits (in the form of deferred stock units) 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 $18,394
W.B. Harrison, Jr. $25,000
R.B. Lazarus $ 5,000
P.F. Russo $ 5,000
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 2014 contributions that were paid in calendar year 2015.

 

2016 Proxy Statement    36

 

Changes to Directors’ Compensation Program. During 2015, the Board of Directors completed a review of compensation for non-employee Directors. The last time the Directors’ compensation program had changed was in 2011.

 

The review was conducted by the Compensation and Benefits Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc., at the request of the Governance, Public Policy and Corporate Responsibility Committee. The review included an analysis of both compensation and program design compared to Merck’s two peer groups that are used for executive compensation competitive benchmarking—a U.S. pharmaceutical peer group and a supplemental peer group comprised of the Dow Jones Industrial Average companies, excluding financial services companies (as described on page 51). The findings from this review indicated that the competitive positioning of Merck’s Director compensation had eroded since 2011, falling below the 25th percentile of both peer groups, and that the overall design continued to align with market peer best practice corporate governance policies.

 

Based on the analysis, the Board approved changes to the Director compensation program to more closely align with the market median.

 

Effective January 1, 2016, the following changes to the Directors’ compensation program were adopted:

 

Increased annual cash retainer from $100,000 to $110,000;
   
Increased annual mandatory deferral credit from $150,000 to $170,000; and
   
Increased all Committee Chair retainers by $5,000.

 

In the future, we plan to review compensation for non-employee Directors every other year with the goal of maintaining it at or near the median of our external peer groups.

 

2016 Proxy Statement    37

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

 

We are pleased to provide 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 2015, 90% and 82%, 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 above-target payouts under our 2015 annual incentive plan due to strong performance (144%) against our financial and research-based objectives. The payout under our long-term incentive plan for the three-year performance period ending December 31, 2015 was 105%, reflecting a score of 131% of target based on EPS results, but a downward adjustment of 20% based on our total shareholder return versus peers over the same 3-year period. 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 create value for shareholders over time.

 

In addition, management and the Compensation and Benefits Committee of the Board of Directors (the “C&B Committee”) 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 42 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 2016 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 39 to 69 of this proxy statement, is hereby APPROVED on an advisory basis.”

 

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 C&B Committee value the opinions of our shareholders as expressed through their votes and other communications. For example, in 2015, shareholders continued their support of our executive compensation programs with approximately 95% 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 2017.

 

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

 

2016 Proxy Statement    38

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

Merck has a long legacy of bringing innovative medicines to patients. In fact, 2016 marks our 125th anniversary, and today that legacy continues as we are at the forefront of inventing products for the fight against some of the world’s toughest global health challenges. This includes more than 30 different cancers, hepatitis C, Alzheimer’s disease, Ebola, antibiotic-resistant “superbugs,” cardio-metabolic diseases, and many others.

 

In 2015, Merck made significant progress in optimizing our organization and executing on our strategy to develop a sustainable platform for growth. We aim to innovate across our entire business, focusing our commercial and R&D efforts, redesigning our operating model and instilling a culture focused on continuous productivity to deliver the best medicines and vaccines to patients around the world and maximize returns to shareholders.

 

We continue to enhance our internal research capabilities and actively pursue the most promising science externally through strategic partnerships, collaborations and acquisitions in key growth areas to advance our pipeline and create a balanced and differentiated portfolio of products. Given the long-term nature of value creation in the pharmaceutical industry, it is important to recognize that the investments we make in research and development today will often take many years before being reflected in the Company’s operating performance and share price. However, we strongly believe that investing in our innovation engine is what will drive Merck to remain a leader in the pharmaceutical industry for decades to come. Commercially, Merck is directing resources to our highest growth products and focusing on key customers and markets, enabling us to deliver strong financial results.

 

Having a direct impact on compensation, our performance during 2015 resulted in above-target achievement (144%) of the financial and research-based objectives in our annual incentive plan. The payout under our Performance Share Unit program for the period 2013 - 2015 was 105% of target, which reflected a score of 131% of target based on EPS results, but a downward adjustment of 20% based on our total shareholder return versus peers over the same 3-year period.

 

Looking to the future, we are excited about the potential of our near- and long-term pipeline with the progress of KEYTRUDA in multiple cancer tumor types, the launch of ZEPATIER for chronic hepatitis C, and other promising opportunities with more than 20 programs in Phase 3 and significant programs in Phase 1 and 2 in a variety of key disease areas.

 

  Positioned for Long-Term Growth through Internal and External Innovation
  Focused Commercial Strategy for Growth
  Continued Focus on Increased Productivity and Operating Efficiency

 

Select Business Highlights for 2015
TOP LINE / BOTTOM LINE RESULTS:
Exceeded our financial goals, delivering revenue at the high end of our original 2015 guidance range and achieving non-GAAP EPS above the high end of our original 2015 guidance range
Excluding the impact of foreign exchange, drove growth in sales across diabetes, vaccines, hospital acute care and oncology
Through disciplined cost management, exceeded our three-year goal of $2.5 billion in annual net cost savings, compared to 2012
SHAREHOLDER VALUE CREATION:
Returned $9.3 billion to shareholders through dividends and share repurchases
Increased the dividend paid by 2.2% during 2015, representing the fifth consecutive year dividends have been increased
Strengthened pipeline by acquiring Cubist Pharmaceuticals (antibiotics) and cCAM Biotherapeutics (immuno-oncology), and reached agreements with NGM Biopharmaceuticals (diabetes & obesity) and Moderna Therapeutics (messenger RNA-based vaccines & therapies)
CLINICAL & REGULATORY:
Continued to advance KEYTRUDA, receiving U.S. regulatory approval for 2nd line non-small cell lung cancer and European Union approval for advanced (unresectable or metastatic) melanoma
Broadened KEYTRUDA clinical development with over 200 studies for more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, melanoma, multiple myeloma, non-small cell lung, and triple negative breast, several of which are currently in Phase 3 clinical development
  In the U.S., KEYTRUDA was also granted Breakthrough Therapy Designation for the treatment of patients with microsatellite instability high metastatic colorectal cancer
Filed ZEPATIER in the U.S. and EU for the treatment of chronic hepatitis C virus infection (received U.S. approval in January 2016)
Received U.S. approval for BRIDION for the reversal of two types of neuromuscular blocking agents used during surgery
Submitted marketing applications for bezlotoxumab in the U.S. and EU for the prevention of Clostridium difficile (C. difficile) infection recurrence
Submitted application for Emergency Use Assessment and Listing for the V920 Ebola Vaccine (accepted for review by the World Health Organization)

 

2016 Proxy Statement    39

 

Results of 2015 Shareholder Advisory Vote on Executive Compensation

 

Each year, the C&B Committee considers the outcome of shareholder advisory votes on executive compensation when making decisions relating to the compensation of the executive officers identified in the Summary Compensation Table (the “Named Executive Officers” or “NEOs”) and our executive compensation programs and policies.

 

In 2015, shareholders continued their support of our executive compensation programs with approximately 95% of the votes cast for approval of the “say on pay” proposal at the Annual Meeting of Shareholders. The C&B Committee believes that the voting results conveyed our shareholders’ 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 number of our largest shareholders during the spring and fall of 2015 about various corporate governance and executive compensation-related issues.

 

Pay for Performance Alignment

 

Merck’s compensation programs are designed to align the interests of our executives with the interests of our shareholders. For this reason, a significant portion of our NEOs’ pay is variable and at risk, subject to company and individual performance measured against financial, operating and strategic objectives, as well as relative total shareholder return (“TSR”). The Company’s variable incentives demonstrate a strong linkage between pay and performance. In 2015, the Company exceeded its financial goals for both revenue and EPS, and made significant progress across various stages of the pipeline, which we believe will yield longer-term returns as new products are approved and launched. The manner in which our compensation plans operate relative to performance is described in detail below.

 

Annual Incentive – The Company Scorecard, which focuses on our most critical business drivers—revenue, EPS and pipeline—is described in more detail beginning on page 44. Our performance during 2015 resulted in above-target achievement (144 points vs. a target of 100 points) of our financial and research-based objectives. These results, combined with individual performance, determine annual incentive payouts to the majority of our employees, including the NEOs. Strong Company operating performance in 2015 along with NEO individual performance that ranged from 100% to 125% resulted in average annual incentive payouts for the NEOs of 156% of target in 2015.

 

Long-Term Incentive (“LTI”) – The Performance Share Units (“PSUs”) granted for the 2013-2015 performance period provided senior executives the opportunity to earn share awards based on EPS performance measured over each of the three years during the period, modified by a three-year TSR ranking versus our peer group. Based on the annual achievement of EPS results during the 2013-2015 performance period, the preliminary payout was 131% of target. However, the payout was reduced by 20% due to our three-year annualized TSR of 10.6%, which ranked 10 of 12 among our industry peers. As a result, the final payout of the 2013-2015 PSU award cycle was 105% of target. Additional details about our PSU program and the 2013-2015 PSU award cycle are provided beginning on page 47.

 

Based on discussions with our largest investors, management and the C&B Committee, Merck introduced a new PSU program design for awards beginning in 2014 to create a stronger linkage to operational excellence and shareholder value over the long term. Performance is now measured using equal components of relative TSR and adjusted operating cash flow, both over a cumulative three-year period, as opposed to the prior design that measured EPS in three separate 12-month periods with a 3-year TSR modifier. The use of operating cash flow and relative TSR in the revised PSU program complements the revenue and EPS financial measures used to fund the annual incentive plan. The first PSU payout under this new design will occur in 2017 for the 2014-2016 award cycle.

 

The redesign described above was intended to improve pay-for-performance alignment in support of longer-term Company and shareholder interests; however, under applicable reporting rules, the changes also resulted in higher disclosed PSU values in 2014 and 2015. While several factors contributed to the increase in the disclosed compensation of our NEOs in 2014 and 2015, the primary driver was the change to our PSU program design, as described in more detail on the following page.

 

Continued our strong pay-for-performance alignment of incentive plans


 

2016 Proxy Statement    40

 

Understanding the Increase in Disclosed Compensation

 

As explained in detail in the 2015 Proxy Statement, the 2014 revision to the PSU program design caused a significant increase in the NEO compensation accounting value disclosed in the Summary Compensation Table (“SCT”), but did not affect the actual value of the equity granted.


 

The chart below illustrates how the accounting impact of the 2014 PSU program design change increased Mr. Frazier’s disclosed compensation relative to his target compensation in 2014 and to a lesser extent in 2015. Compensation disclosures for 2016 and beyond will not be impacted by the previous PSU plan design.

 

2014 - 2016 CEO Compensation (1)
Summary Compensation Table Disclosure vs. Target Total Compensation
($ millions)
 

 

(1)CEO Compensation does not include Change in Pension Value or All Other Compensation.
(2)The estimated 2016 compensation disclosure is based on the known 2016 equity grant value, current base salary and target annual incentive (actual 2016 annual incentive paid will vary based on performance against 2016 objectives).

 

The table below provides more detail of the accounting impact of the PSU design change in the 2014 and 2015 disclosed values. In addition to the full 3-year value of the 2014 and 2015 PSU grants, the table includes the recognition of the trailing annual value of the applicable performance periods from the 2012 and 2013 grants. Beginning with the 2016 compensation disclosure in the 2017 Proxy Statement, only the 3-year value of the annual PSU grant will be included in the Summary Compensation Table.

 

2014 - 2016 CEO Performance Share Unit Award Disclosure Valuation ($ millions)
Components of  2014   2015   Estimated 2016 
Disclosure Requirement  Disclosed Value   Disclosed Value   Disclosed Value 
A. 33.3% of 2012 PSU Award  $2.9   $   $ 
B. 33.3% of 2013 PSU Award   2.8    2.7     
C. 100% of 2014 PSU Award   7.3(1)         
D. 100% of 2015 PSU Award       7.2(2)     
E. 100% of 2016 PSU Award           7.2(3) 
Total  $13.0   $9.9   $7.2 
(1)Actual value on grant date was $6.0 million. Increase of $1.3 million attributable to per-unit accounting valuation of $69.15 (vs. $56.77 on grant date).
(2)Target PSU award increased from $6.0 million in 2014 to $7.2 million in 2015 based on the Board’s recommendation to increase Mr. Frazier’s total LTI award. See “2015 LTI Grants” on page 47 for more information.
(3)Estimated value on grant date is $7.2 million (at target).

 

2016 Proxy Statement    41

 

Compensation Policies and Practices

 

Our executive compensation and corporate governance 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 over time:

 

Include double trigger vesting of equity in the event of a change in control (i.e., both a change in control and an involuntary termination)
Utilize a total shareholder return metric in the PSU program to align with long-term stock performance and shareholder experience
Provide dividend equivalents only on earned Restricted Stock Units (“RSUs”) or PSUs
Monitor LTI program share utilization regularly relative to both historic standards and versus our industry peers
Conduct competitive benchmarking to ensure executive officer compensation is aligned to market
Offer only limited perquisites supported by business interests
Include caps on annual cash incentive and PSU program payouts
Retain an independent compensation consultant that reports directly to the C&B Committee
Maintain robust stock ownership guidelines and share retention policies
Maintain an incentive recoupment policy
Conduct assessments to identify and mitigate risk in compensation programs
Prohibit the hedging or pledging of Company stock
Avoid the use of time-vested restricted stock units for NEOs as part of the annual LTI program
Prohibit re-pricing of underwater stock options without shareholder approval
Prohibit excise tax gross ups in the event of a change in control
Avoid employment agreements

 

Detailed Discussion and Analysis

 

This Compensation Discussion and Analysis or “CD&A” describes the material elements of compensation for the Named Executive Officers, who are listed below.

 

Kenneth C. Frazier   Chairman, President and Chief Executive Officer
Robert M. Davis   Executive Vice President and Chief Financial Officer
Michael J. Holston   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 C&B Committee makes all decisions relative to the total direct compensation (base salary, annual cash incentives, and long-term incentive awards) of our executive officers other than for the CEO. The C&B Committee’s recommendations for the total direct compensation of the CEO are subject to approval by the full Board of Directors (not including Mr. Frazier). Additional details regarding the roles and responsibilities of the C&B Committee are provided beginning on page 20.

 

Effective July 1, 2015, Mr. Michael J. Holston was appointed Executive Vice President and General Counsel by the Board in conjunction with the retirement of Bruce N. Kuhlik. The C&B Committee reviewed and approved the following compensation package, given Mr. Holston’s performance in his role as our Executive Vice President and Chief Compliance Officer at Merck, as well as his prior experience as General Counsel at Hewlett-Packard:

 

  Annual Base Salary of $725,000;
    
  Target Annual Cash Incentive of 95% of Base Salary; and
    
  Target Long-Term Incentive of $2,000,000.

 

2016 Proxy Statement    42

 

The Elements of 2015 Compensation

 

This section describes the elements of our NEOs’ 2015 compensation, which consisted of the following:

 

 Direct Compensation   Indirect Compensation
 • Base Salary   Other Employee Benefits
 • Annual Cash Incentive    
 • Long-Term Equity Incentives    

 

Under our executive compensation program, a significant portion (90% and 82%, respectively) of the CEO’s and other NEOs’ target annual direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

Base Salary

 

The C&B Committee, and in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier), determines base salaries for the NEOs 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 51); and
  
Comparison of non-CEO executive officers’ base salaries to ensure reasonable internal equity.

 

For 2015, the Board maintained Mr. Frazier’s base salary at $1.5 million—unchanged since he became CEO in 2011. A substantial majority of his compensation is variable (90%) 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 for 2015, Mr. Frazier recommended, and the C&B Committee reviewed and approved, base salary increases of 3% for Dr. Perlmutter, and 2.0% for Mr. Davis and Mr. Schechter. These increases were in line with the annual merit budget for all other U.S. salaried employees for 2015 and follow a year in which no salary increases were provided for the NEOs. Mr. Holston was appointed Executive Vice President and General Counsel effective July 1, 2015, and his salary was adjusted as described in the “Detailed Discussion and Analysis” section on page 42.

 

Annual Cash Incentive

 

The NEOs 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 (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.

 

2016 Proxy Statement    43

 

For 2015, the absolute maximum awards for the CEO and each of the other NEOs under the EIP were $25.5 and $19.1 million, respectively. Using a process commonly referred to as negative discretion, the maximum awards are adjusted down to the actual amounts paid to each NEO based primarily on performance against the Company Scorecard, as described in the following section. The EIP award amounts for NEOs and other Executive Committee members are limited to 250% of target, and the maximum award for each NEO is listed in the Grants of Plan-Based Awards table on page 56.

 

2015 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. The Scorecard focuses on our most important business drivers: (1) revenue, (2) earnings per share, and (3) pipeline milestones. The revenue and earnings metrics are equally weighted because the C&B Committee believes they are the key financial measures of our success during the year, and the pipeline metric is included because it is a leading indicator of the Company’s ability to create sustainable value for shareholders over the long term. As described in more detail below, these three elements, taken together, are intended to measure our progress and performance against both annual operating goals and critically important long-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 established for each participant. The stretch (200%) and threshold (50%) goals are set in relation to the Board-approved financial plan and the expectations of shareholders. Failure to achieve threshold performance goals (i.e., the level at which 50% of the target award opportunity is payable) results in forfeiture of the entire opportunity. The C&B Committee may 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 C&B Committee may 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. Beginning in 2015, the C&B Committee approved measurement of revenue and EPS on a constant currency basis—removing the impact of fluctuations in foreign exchange rates, thereby strengthening the focus on operational performance. The Scorecard structure and results supporting the final 2015 Company score of 144 points are summarized on the following page.

 

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2015 Merck Company Scorecard Results
Measure  Results  Target Points     Final Score
Top Line     40    49
Revenue vs. Plan  For purposes of the Scorecard, reported revenue of $39.5 billion was adjusted to $40.0 billion, which exceeded our internal adjusted revenue target of $39.6 billion. The adjustments reflect the Company’s portion (50%) of joint venture sales (not reported externally as Merck revenue) and remove the positive impact of foreign exchange (vs. foreign exchange budgeted in plan).         
Bottom Line     40    63
EPS vs. Plan  For purposes of the Scorecard, reported non-GAAP EPS of $3.59 was adjusted to $3.56 to remove the positive impact of foreign exchange (vs. foreign exchange budgeted in plan) and share repurchases in excess of plan, exceeding our non-GAAP EPS goal of $3.40.         
Pipeline Milestones     20    32
U.S. Filing/Approval of KEYTRUDA for Non- Small Cell Lung Cancer  U.S. filing and approval of KEYTRUDA for treatment of patients with metastatic non-small cell lung cancer whose tumors express PD-L1 were achieved ahead of schedule.  4    8.0
U.S. Filing/Approval of ZEPATIER for chronic HCV  U.S. filing of ZEPATIER for treatment of patients with chronic hepatitis C virus (HCV) infection was achieved slightly ahead of schedule.  4    4.2
Other Approvals and Submissions  Received approval of five other products, including BRIDION in the U.S., MARIZEV in Japan, and KEYTRUDA, ZERBAXA and SIMPONI (new indication for Spondyloarthritis) in the European Union. In the U.S., submitted filings for KEYTRUDA for ipilimumab-naïve melanoma patients and for IMPROVE-IT study results for ZETIA and VYTORIN.  4    6.0
Late-Stage Development  Progressed late-stage drugs through various stages of development, including products for cancer, Alzheimer’s disease, diabetes and C. difficile infection.  4    8.0
Early Development/ Discovery Research and Business Development  Augmented pipeline through an agreement with NGM Biopharmaceuticals (diabetes & obesity) and the acquisition of cCAM Biotherapeutics (immuno-oncology). Exceeded goals relative to advancing products in early development.  4    6.0
      100    144

 

2015 Named Executive Officer Performance

 

All of the NEOs’ 2015 annual incentive awards reflect the achievement of the Company Scorecard result at 144% of target, coupled with individual performance versus objectives, including leadership.

 

Mr. Frazier’s award reflects Merck’s significant achievements during 2015 as evidenced by the overall Company scorecard result of 144 points. Merck’s overall financial performance exceeded expectations for revenue and EPS due to strong performance across core therapeutic areas, improvement in operating cash flow and reductions in the Company’s cost structure. R&D continued to deliver, with filings and/or approvals of key products in many markets, including KEYTRUDA and ZEPATIER, as well as business development activity in several promising growth areas. Mr. Frazier was instrumental in defining Merck’s long-term strategy, which outlines key actions that will deliver sustainable value creation for the Company and its shareholders. He demonstrated strong leadership with the executive team, including developing leadership talent, guiding robust succession planning and effectively transitioning senior leadership for both the General Counsel and Chief Compliance Officer roles. The Board considered these accomplishments and leadership as Mr. Frazier continues to transform Merck into a more competitive and innovative company positioned for sustainable growth in both the near- and long-term.

 

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Mr. Davis’ award reflects Merck’s solid financial performance, disciplined capital allocation and overall business development strategy and execution. Under Mr. Davis’ leadership, Merck implemented rigorous operational reviews and enhanced integrated planning and forecasting, which accelerated decision-making and improved cross-Company alignment. His focus on expense discipline resulted in exceeding our three-year $2.5 billion cost reduction commitment versus 2012 and delivering a leveraged P&L, while returning cash to shareholders through dividends and share repurchases of approximately $9.3 billion. Mr. Davis facilitated development of an integrated 10-year Company strategy, and he continues to build a robust talent pipeline within his organization.

 

Mr. Holston’s award reflects his execution of a smooth and successful transition into the General Counsel role. He provided sound legal counsel to senior management on important governance issues, business development transactions and litigation matters, including reaching a class-action settlement in the VIOXX securities litigation. He successfully partnered with the business to enhance compliance effectiveness and played a key senior leadership role beyond his areas of direct accountability. Mr. Holston strengthened his leadership team across the legal organization while shifting the compliance-based activities to the new Chief Compliance Officer, who joined the organization effective April 1, 2015.

 

Dr. Perlmutter’s award reflects the significant advancement of Merck’s pipeline, including the accelerated U.S. filing and approval of KEYTRUDA for certain metastatic non-small cell lung cancer (NSCLC) patients, the filing of ZEPATIER for the treatment of chronic hepatitis C virus infection as well as U.S. approval for BRIDION. Under Dr. Perlmutter’s leadership, more than fifteen programs, including several new KEYTRUDA indications, have advanced into Phase 2 or Phase 3 clinical trials. In addition, agreements with NGM Biopharmaceuticals and Moderna Therapeutics, as well as the acquisition of cCAM Biotherapeutics, have strengthened the early-stage pipeline. He continues to transform the R&D function, having assembled an accomplished leadership team that is improving internal productivity and external presence.

 

Mr. Schechter’s award reflects Global Human Health’s solid operating performance and expense management, which, along with ex-exchange growth across diabetes, vaccines, hospital acute care and oncology, contributed to Merck’s above-target revenue. Under Mr. Schechter’s leadership, Merck successfully launched several key products, including KEYTRUDA for melanoma, which achieved and maintains a leadership position in many markets around the world. He has focused the organization on the top customers across many markets, integrated Cubist Pharmaceuticals on schedule and ensured readiness for the critical launches of ZEPATIER for hepatitis C and KEYTRUDA for non-small cell lung cancer. Finally, Mr. Schechter has made critical leadership changes in key markets and continues to build strong global teams.

 

2015 Annual Incentive Payouts

 

The table below shows the 2015 annual cash incentives paid to the Named Executive Officers. The total annual incentive paid to each NEO is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Annual
Base Salary
X Target Annual
Incentive %
X Company
Performance %
X Individual
Performance %
=  Final Award

 

Named Executive Officer 2015 Annual Incentive Payments
      Target  Actual
Named Executive
Officer
  Annual Base
Salary
(as of 12/31/15)
  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    144 %   105 %  $3,402,000    151 %
R.M. Davis   969,000     95   920,550    144    105    1,391,872    151 
M.J. Holston   725,000     95   688,750    144    100    991,800    144 
R.M. Perlmutter   1,030,000     105   1,081,500    144    125    1,946,700    180 
A.H. Schechter   981,636     105   1,030,718    144    105    1,558,446    151 

 

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Long-Term Equity Incentives

 

2015 Award Mix

 

We use 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 and operational objectives and shareholder alignment. The earned award varies based on results versus pre-determined performance goals, as well as long-term returns to shareholders as measured by 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 2015 LTI award mix for the NEOs is shown in the following chart:

 

 

2015 LTI Grants

 

The C&B Committee and, in the case of Mr. Frazier, the full Board (not including Mr. Frazier), determined the value of 2015 annual LTI grants for the NEOs 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 $10 million to $12 million based on strong business results and his leadership, experience and relative position of his target total direct compensation versus industry peers. The entire increase of Mr. Frazier’s compensation was delivered through equity awards in support of the Company’s pay-for-performance philosophy and to focus on long-term results. The C&B Committee increased Dr. Perlmutter’s annual target LTI from $3.5 million to $4 million based on continued pipeline achievements, his experience and the continued importance of his role to Merck’s long-term success.

 

The 2015 annual 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 56.

 

Named Executive Officer 2015 Annual LTI Grant Values
Named
Executive Officer
  PSUs(1)   Stock Options(2)   Total LTI Value 
K.C. Frazier  $7,200,000   $4,800,000   $12,000,000 
R.M. Davis   2,100,000    1,400,000    3,500,000 
M.J. Holston   1,200,000    800,000    2,000,000 
R.M. Perlmutter   2,400,000    1,600,000    4,000,000 
A.H. Schechter   2,280,000    1,520,000    3,800,000 
(1)PSU dollar values were converted to a number of units using the fair market value as calculated in accordance with FASB ASC Topic 718 on the grant date, March 31, 2015, which was $57.48. The 2015 PSU values shown in the Summary Compensation Table, beginning on page 54, and Grants of Plan-Based Awards table, beginning on page 56, 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 as of May 1, 2015 of $6.46 per share.

 

PSU Program

 

For PSUs granted before 2014, which are reflected in the Outstanding Equity Awards and Option Exercises and Stock Vested tables on pages 58 and 60, respectively, executives received a target award opportunity at the beginning of a three-year performance cycle denominated in units of our common stock and paid in actual shares. The number of shares ultimately earned varied based on performance against earnings per share (“EPS”) goals, further modified for relative total shareholder return over the performance period. The C&B 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 would have resulted 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 57.

 

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Payouts under the 2013-2015 PSU Award Cycle

 

For the 2013-2015 award cycle, preliminary payouts were 131.3% based on the average annual achievement of a pre-established EPS goal for each year during the performance period (2013, 2014 and 2015). 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 (“U.S. GAAP”), or other significant legislative changes.

 

The preliminary award was then adjusted downward by 20% to 105% based on our three-year (2013-2015) annualized total shareholder return (“TSR”) ranking against our eleven pharmaceutical peers (see page 51 for additional details about our peer group). The C&B Committee believes that having this TSR modifier helps to ensure that final awards are aligned with the relative return delivered to our shareholders for the three-year performance period.

 

The following table shows the calculation of the EPS results and final payout:

 

2013-2015 PSU Award Cycle - EPS Results and Final Payout
   Threshold   Target   Stretch   Reported(1)   Final   Payout 
2013 EPS:  $3.25   $3.61  $3.90   $3.49   $3.49    82.7%
2014 EPS:   3.07    3.41    3.68    3.49    3.56(2)    154.2%
2015 EPS:   3.06    3.40    3.67    3.59    3.56(3)    157.1%
Preliminary Payout: (3-yr average)                            131.3%
TSR Modifier: (see derivation below)                            80%
FINAL PAYOUT:                            105%
(1)For a reconciliation of non-GAAP EPS to GAAP results, see page 53 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
(2)EPS approved by the C&B Committee for PSU award determination is the reported non-GAAP EPS of $3.49 plus $0.07 for divestitures not included in the annual plan.
(3)EPS approved by the C&B Committee for PSU award determination is the reported non-GAAP EPS of $3.59 minus $0.03 to remove the impact of foreign exchange (vs. foreign exchange budgeted in the annual plan) and share repurchases exceeding the annual plan.

 

The tables below show our TSR ranking and the resulting modifier for the 2013-2015 PSU award cycle:

 

Company Annualized TSR(1)  TSR Percentile  Rank               
Bristol-Myers Squibb 32.2%  100th   1              
Amgen 24.5%  91st   2              
Eli Lilly 24.1%  82nd   3              
AbbVie 22.6%  73rd   4              
AstraZeneca 17.6%  64th   5      TSR Percentile  Rank  Payout Modifier 
Johnson & Johnson 16.8%  55th   6      81% to 100%  1,2,3  120% 
Novartis 14.3%  45th   7      61% to 80%  4,5  110% 
Roche 14.2%  36th   8      41% to 60%  6,7  100% 
Pfizer 12.4%  27th   9      21% to 40%  8,9  90% 
Merck 10.6%  18th   10     0% to 20%  10,11,12  80% 
GlaxoSmithKline 2.4%  9th   11              
Sanofi 0.6%  0   12              
(1)TSR as reported by Bloomberg and calculated using the average closing price of common stock for December 2012 and December 2015, assuming reinvestment of dividends.

 

Based on the final payout of 105%, the NEOs 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   156,535    164,362 
M.J. Holston   15,654    16,437 
R.M. Perlmutter   54,012    56,713 
A.H. Schechter   59,483    62,457 
(1)Mr. Davis was not a participant in this PSU award cycle.

 

Additional information regarding the payouts under the 2013-2015 PSU award cycle is provided in the Option Exercises and Stock Vested table on page 60.

 

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Other Employee 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 NEOs, along with other senior management employees, are provided a limited number of other benefits, which the C&B 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 benefits described below 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, which is generally taxable to the NEOs. We believe that these benefits provide better security for executives and allow them to devote additional time to Company business.
   
Reimbursement for the installation, maintenance and remote access 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.

 

Key 2016 Compensation Actions

 

Previously described compensation programs and policies continued during 2015; however, selective adjustments have been made to individual NEO compensation levels for 2016.

 

2016 CEO Compensation - Based on the Board’s assessment of Mr. Frazier’s strong business results and leadership, experience and relative position of his annual target compensation versus industry peers, the Board approved a 2.5% increase to his base salary, effective in April 2016, which is the average increase provided to other U.S. salaried employees. This is the first increase to Mr. Frazier’s base salary since he became CEO in 2011, and his target annual incentive and long-term incentives will remain unchanged from 2015.
   
2016 Named Executive Officer Compensation - Mr. Frazier recommended, and the C&B Committee approved, the selective compensation adjustments noted in the table below. The increases for Mr. Davis and Mr. Holston were intended to align their overall total compensation to the market median for the CFO and General Counsel roles.
   
Pay Component 2016 C&B Committee Actions
Base Salary – Annual Merit Increase Increases for NEOs ranged from 2.3% to 3.2%, aligned to increases for the broader U.S. salaried employee population
Base Salary – Market Adjustment Increase for Mr. Holston of 4.5%
Target Annual Incentive Increase for Mr. Davis from 95% to 105%
Target Long-Term Incentive Increases for Mr. Davis and Mr. Holston of $200,000 each

 

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 who 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.

 

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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- 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.

 

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 from 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 Cash Incentive Motivate executives to achieve financial and non-financial performance objectives that are key to our annual operating and strategic plans.
Long-Term Equity 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 Assist employees, especially long-service employees, to save and prepare financially for retirement; and
(Retirement, Health and Welfare) 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.

 

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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 Willis Towers Watson, an independent consulting firm. In setting compensation levels for 2015, the C&B Committee reviewed 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 total direct compensation (base salary, target cash incentive and target long-term equity 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 use 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). Merck is a member of the Dow Jones Industrial Average and we believe this group provides insight into practices among companies of similar complexity.

 

Current LTI Grant Practices

 

All grants to executive officers are approved by the C&B Committee, and in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier). 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 C&B 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.

 

Stock options are granted at no less than 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.

 

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Stock Ownership Requirements

 

The C&B 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 NEOs as of February 29, 2016.

 

 

Return of Incentive Compensation (“Clawback Policy”)

 

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, for incentive compensation awarded in and after 2014, an 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.

 

Hedging and Pledging

 

As part of our insider trading policy, Merck prohibits engagement in short sales, publicly traded options, hedging transactions and pledging of Company stock.

 

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 1) annual cash incentives paid to executive officers under the shareholder-approved EIP and 2) 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. Although our intent is to maximize the deductibility of compensation, under certain circumstances that are in the best interest of the Company and our shareholders, the C&B Committee may authorize compensation that is not deductible if it is determined to be appropriate.

 

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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 C&B 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 42.

 

We last 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 C&B 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. In addition to ongoing monitoring of our programs and policies, we are committed to performing formal assessments on a periodic basis and plan to conduct a formal assessment of our programs, policies and practices in 2016.

 

Compensation and Benefits Committee Report

 

The C&B Committee, comprised of independent Directors, reviewed and discussed the above CD&A with management. Based on the review and discussions, the C&B 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

 

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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, 2015, 2014 and 2013. 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, 2015.

 

                        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,  2015    $1,500,000  $0   $9,912,966  $4,800,000  $3,402,000  $4,309,645   $283,472  $24,208,083 
Chairman, President  2014     1,500,000   0    13,025,313   3,323,244   3,341,250   3,642,161    197,402   25,029,370 
and Chief Executive Officer  2013     1,500,000   0    5,105,338   3,999,998   1,620,000   917,774    232,825   13,375,935 
Robert M. Davis,  2015     963,884   1,250,000(7)    2,103,993   1,399,998   1,391,872   116,994    92,257   7,318,998 
Executive Vice President  2014     650,384   2,500,000(7)    7,294,765   1,163,135   812,250   35,771    306,213   12,762,518 
and Chief Financial Officer  2013(9)                             
Michael J. Holston,  2015     691,346   0    1,472,234   800,000   991,800   168,667    69,827   4,193,874 
Executive Vice President  2014(10)                             
and General Counsel  2013(9)                             
Roger M. Perlmutter, M.D., Ph.D.,  2015     1,021,926   0    3,335,960   1,600,000   1,946,700   256,255    140,416   8,301,257 
Executive Vice President and  2014     1,000,000   500,000(7)    3,538,245   1,163,135   1,771,875   178,536    91,663   8,243,454 
President, Merck Research Laboratories  2013     711,538   500,000(7)    2,699,987   1,400,001   623,700   34,439    16,459   5,986,124 
Adam H. Schechter,  2015     976,453   0    3,310,050   1,519,999   1,558,446   0(8)    144,183   7,509,131 
Executive Vice President
and President,
  2014     962,388   0    4,623,673   1,262,831   1,432,934   1,941,516    103,994   10,327,336 
Global Human Health  2013     957,306   0    1,813,702   1,520,003   691,187   0    160,359   5,142,557 

(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 2015, Mr. Frazier deferred $525,000 into the Merck Deferral Program. For more information about deferred amounts, see the Nonqualified Deferred Compensation table and related footnotes on page 64.
(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 2015, 2014 and 2013, 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; please refer to page 41 for more information on the PSU award disclosures. For discussion of the assumptions used in these valuations, see Note 12 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015.
  
 The maximum value of the PSU awards granted to the Named Executive Officers during 2015 and the 2015 performance period tranche from the 2013 grant, assuming achievement of the highest level of performance (200% of target for 2015 awards and 240% of target for 2013 awards), was:

 

   Maximum Value 
NEO  of PSU Awards 
K.C. Frazier   $ 20,905,606 
R.M. Davis   4,207,986 
M.J. Holston   3,052,438 
R.M. Perlmutter   7,044,458 
A.H. Schechter   7,030,374 

 

 For more information on the awards granted during 2015, see the Grants of Plan-Based Awards table and related narrative and footnotes.
  
(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 2015, 2014 and 2013, respectively, as calculated in accordance with FASB ASC Topic 718. The stock option values were calculated using the Black-Scholes option pricing model and may not represent the actual value realized by the Named Executive Officers during the respective year. For example, in 2014 the annual grant date for our senior executives was delayed for one week due to the imminent announcement of the sale of the Merck Consumer Care division. Stock options were granted based on the higher Merck stock price (and resulting Black-Scholes value) for the originally scheduled grant date. This resulted in a decreased number of stock options granted and reduced the disclosed stock option value for 2014. For discussion of the assumptions used in these valuations, see Note 12 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015.
 For more information on stock options granted during 2015, see the Grants of Plan-Based Awards table and related narrative and footnotes.

 

2016 Proxy Statement    54

 
(4)Represents amounts paid under the EIP. For more information, see the Grants of Plan-Based Awards table and related narrative and footnotes.
 Amounts shown are not reduced to reflect the Named Executive Officers’ elections, if any, to defer receipt of awards into the Merck Deferral Program. For more information, see the Nonqualified Deferred Compensation table and related notes and narrative on page 64.
(5)Change in 2015 Pension Value for Mr. Frazier is mainly attributable to one additional year of age and service and increase in five-year average pay which now considers five years of CEO compensation (vs. four in 2014). Negative impact to pension value of higher discount rates was mostly offset by the positive impact of revised actuarial mortality rates.
 Amounts shown are solely an estimate of the change in actuarial present value of the Named Executive Officers’ accrued benefits under the Company’s pension plans from December 31, 2014 to December 31, 2015. 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 61.
 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 on page 64.
(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.
(8)The present value of accumulated benefits for Mr. Schechter decreased from December 31, 2014 to December 31, 2015. The decrease in value is mainly due to the higher discount rate used to determine the lump sum values of his benefit.
(9)Was not a Named Executive Officer during 2013.
(10)Was not a Named Executive Officer during 2014.

 

All Other Compensation

 

         Financial/Tax            Installation,       Savings Plan     
         Counseling &        Company   Maintenance and       Company     
         Tax Preparation     Company   Car and   Remote Access   Relocation   Match and     
Named Executive Officer   Year    Services(3)    Aircraft(4)   Driver(5)   of Home Security(3)   Expense   Credits(6)   TOTAL 
K.C. Frazier   2015    $ 10,000    $ 8,476   $ 42,565   $ 4,575   $ 0   $ 217,856   $ 283,472 
    2014    10,000    0   39,816   7,186   0   140,400   197,402 
    2013    10,000    0   37,955   5,130   0   179,740   232,825 
R.M. Davis   2015    10,000    0   0   0   2,331   79,926   92,257 
    2014    0    0   0   0   298,569   7,644   306,213 
    2013(1)                        
M.J. Holston   2015    10,000    0   1,379   0   0   58,448   69,827 
    2014(2)                        
    2013(1)                        
R.M. Perlmutter   2015    0    0   14,695   0   0   125,721   140,416 
    2014    0    0   18,596   0   0   73,067   91,663 
    2013    0    0   14,728   0   0   1,731   16,459 
A.H. Schechter   2015    10,000    0   6,972   18,813   0   108,398   144,183 
    2014    10,000    0   15,803   3,780   0   74,411   103,994 
    2013    10,000    0   27,857   23,145   0   99,357   160,359 
(1)Was not a Named Executive Officer during 2013.
(2)Was not a Named Executive Officer during 2014.
(3)Financial planning, tax preparation, and installation, maintenance and remote access of home security are valued at actual costs billed by outside vendors.
(4)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.
(5)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.
(6)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 and 4.5% credit of eligible compensation in excess of the IRS limit to the NEOs’ accounts under the Merck Deferral Program.

 

2016 Proxy Statement    55

 

GRANTS OF PLAN-BASED AWARDS

 

The following table provides information concerning each grant of an award made in 2015 to the Named Executive Officers under any plan.

                                         
Grants of Plan-Based Awards for Fiscal Year Ended December 31, 2015
                              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)  ($)(1)  (#)(2)  (#)(2)  (#)(2)  (#)  (#)(3)  ($ / Sh)(3)  ($)(4) 
K.C. Frazier  03/31/2015  02/23/2015  PSUs           0  125,261  250,522           $9,912,966(2) 
   05/01/2015  02/23/2015  Options                       743,034  $59.86  4,800,000(3) 
         EIP $   0  $2,250,000   $5,625,000                      
R.M. Davis  03/31/2015  02/23/2015  PSUs           0  36,534  73,068           2,103,993(2) 
   05/01/2015  02/23/2015  Options                       216,718  59.86  1,399,998(3) 
         EIP  0  920,550  2,301,375                      
M.J. Holston  03/31/2015  02/23/2015  PSUs           0  20,877  41,754           1,472,234(2) 
   05/01/2015  02/23/2015  Options                       123,839  59.86  800,000(3) 
         EIP  0  688,750  1,721,875                      
R.M. Perlmutter  03/31/2015  02/23/2015  PSUs           0  41,754  83,508           3,335,960(2) 
   05/01/2015  02/23/2015  Options                       247,678  59.86  1,600,000(3) 
         EIP  0  1,081,500  2,703,750                      
A.H. Schechter  03/31/2015  02/23/2015  PSUs           0  39,666  79,332           3,310,050(2) 
   05/01/2015  02/23/2015  Options                       235,294  59.86  1,519,999(3) 
         EIP  0  1,030,718  2,576,795                      
(1)Amounts represent awards under the EIP, which equal a specified percentage of base salary as in effect on December 31, 2015. 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 200% of target (a maximum of 240% of target for grants made prior to 2014), depending on the level of achievement of the applicable performance goals. For more information on PSUs, see the “PSU Program” section on page 47 and the Narrative to the Grants of Plan Based Awards table on the following page.
(3)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 2015 is the closing price of Merck common stock, as traded on the New York Stock Exchange on May 1, 2015. For more information on stock options granted to the Named Executive Officers in 2015, please see “Current LTI Grant Practices” on page 51.
(4)This column represents the full grant date fair value of PSUs 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 2015.

 

2016 Proxy Statement    56

 

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 C&B 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 equal to 90% of the award fund for that year divided by the number of participants other than the CEO. The C&B 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 C&B Committee’s practice to reduce the maximum awards to the amount actually paid using the following process.

 

Using negative discretion, the C&B Committee adjusts the maximum awards payable under the EIP to the actual amounts paid to executive officers with the following methodology:

 

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, including leadership, and is limited to 250% of target.

 

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 C&B 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 and become exercisable 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.

 

RSUs

 

Restricted Stock Units (“RSUs”), subject to their terms, generally vest and become payable in shares of Merck common stock on the third anniversary of the grant date. Dividend equivalents are accrued and paid out in cash if and when the RSUs vest.

 

PSUs

 

Performance Share Units (“PSUs”), subject to their terms, generally vest and become payable in shares of Merck common stock following a three-year performance cycle provided that minimum performance goals are met. Failure to attain the minimum performance goal results in forfeiture of the shares applicable to the respective award opportunity. All PSU awards and performance goals are approved by the C&B Committee within the first 90 days of the applicable performance cycle.

 

For PSUs granted prior to 2014, final payouts are determined by the following:

 

Average achievement of EPS results vs. target for the three performance years in the performance cycle.
  
Further modified by the three-year Total Shareholder Return (“TSR”) ranking as compared to our pharmaceutical peer group, which increases or decreases the final award by up to 20%.
  
Payouts can range from zero at threshold to a maximum of 240% of target.

 

Beginning with PSUs granted in 2014, final awards will be determined over a three-year cumulative performance period, determined by the following:

 

50% of the award will be determined by the Company’s Adjusted Operating Cash Flow performance vs. target for the three-year performance period.
  
50% of the award will be determined by the Company’s three-year TSR result relative to the median TSR of our pharmaceutical peers.
  
Payouts can range from zero at threshold to a maximum of 200% of target.

 

Payouts will first be made under the new design following the 2014-2016 performance period.

 

2016 Proxy Statement    57

 

OUTSTANDING EQUITY AWARDS

 

The following table provides details about each outstanding equity award held by the Named Executive Officers as of December 31, 2015.

 

Outstanding Equity Awards at Fiscal Year Ended December 31, 2015 
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
($)
  Vesting
Date
  Option
Expiration
Date
  Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(5)
   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 ($)(5)
 
K.C. Frazier   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                    
    559,701(1)           05/04/11   36.56  05/04/12  05/03/21                    
    694,698(1)           05/02/12   39.29  05/02/13  05/01/22                    
    429,414(1)    214,708(1)      05/06/13   44.98  05/06/14  05/05/23                    
    183,402(1)    366,804(1)      05/09/14   58.22  05/09/15  05/08/24                    
         743,034(1)      05/01/15   59.86  05/01/16  04/30/25                    
                                        211,380(3)   $11,165,092 
                                        250,522(4)    13,232,572 
R.M. Davis   64,190(1)    128,382(1)      05/09/14  $58.22  05/09/15  05/08/24                    
         216,718(1)      05/01/15   59.86  05/01/16  04/30/25                    
                              85,881(2)   $4,536,234           
                                        72,140(3)   $3,810,435 
                                        73,068(4)    3,859,452 
M.J. Holston   57,079(1)           08/01/12  $44.28  08/01/13  07/31/22                    
    21,470(1)    21,472(1)      05/06/13   44.98  05/06/14  05/05/23                    
    18,340(1)    36,681(1)      05/09/14   58.22  05/09/15  05/08/24                    
         123,839(1)      05/01/15   59.86  05/01/16  04/30/25                    
                                        21,138(3)   $1,116,509 
                                        41,754(4)    2,205,446 
R.M. Perlmutter   150,294(1)    75,149(1)      05/06/13  $44.98  05/06/14  05/05/23                    
    64,190(1)    128,382(1)      05/09/14   58.22  05/09/15  05/08/24                    
         247,678(1)      05/01/15   59.86  05/01/16  04/30/25                    
                              44,464(2)   $2,348,588           
                                        73,982(3)   $3,907,729 
                                        83,508(4)    4,410,893 

 

2016 Proxy Statement    58

 
Outstanding Equity Awards at Fiscal Year Ended December 31, 2015
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
($)
  Vesting
Date
  Option
Expiration
Date
 Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(5)
   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 ($)(5)
 
A.H. Schechter   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                        
    261,194(1)           05/04/11   36.56  05/04/12  05/03/21                        
    277,879(1)           05/02/12   39.29  05/02/13  05/01/22                        
    163,178(1)    81,589(1)      05/06/13   44.98  05/06/14  05/05/23                        
    69,692(1)    139,386(1)      05/09/14   58.22  05/09/15  05/08/24                        
         235,294(1)      05/01/15   59.86  05/01/16  04/30/25                        
                                            80,324(3)   $4,242,714 
                                            79,332(4)    4,190,316 
(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. Since 2013, grants for retirees that otherwise would have vested within 12 months following retirement become exercisable in accordance with their original schedule.
(2) RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of grant.
(3) Maximum (200% of target) of PSUs granted during 2014 that may be earned based on Merck’s performance, as determined by the C&B Committee, following the completion of the three-year performance period ending December 31, 2016.
(4) Maximum (200% of target) of PSUs granted during 2015 that may be earned based on Merck’s performance, as determined by the C&B Committee, following the completion of the three-year performance period ending December 31, 2017.
(5) The market value of the units reported in this column was computed by multiplying the number of such units by $52.82, the closing price of Merck common stock on December 31, 2015.

 

2016 Proxy Statement     59

 

OPTION EXERCISES AND STOCK VESTED

 

The following table provides information about stock options that were exercised and stock units that vested during 2015.

 

Option Exercises and Stock Vested for Fiscal Year Ended December 31, 2015
   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   38,622   $918,315    164,362(a)   $8,344,659
R.M. Davis               
M.J. Holston   135,624    2,092,142    16,437(a)    834,506
R.M. Perlmutter           56,713(a)    2,879,319
A.H. Schechter   74,200    1,576,827    62,457(a)    3,170,942
              19,343(b)    1,157,872
     
(1) This column represents the values realized upon stock option exercises during 2015 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 2015 of the following:
  (a) PSUs granted in 2013 that were paid on February 22, 2016; and
  (b) RSUs granted in 2012.
(3) 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 22, 2016. The value realized for RSUs was determined by multiplying the number of units that vested by the market price of Merck common stock on May 1, 2015.

 

2016 Proxy Statement    60

 

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, 2015
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   23.50    23.58   $1,247,336   $0 
   SRP   23.50    23.58    20,588,575    0 
R.M. Davis  Qualified Plan       1.67    32,143    0 
   SRP       1.67    120,622    0 
M.J. Holston  Qualified Plan   3.50    3.50    117,638    0 
   SRP   3.50    3.50    358,975    0 
R.M. Perlmutter  Qualified Plan   3.50    6.58    164,953    0 
   SRP   3.50    6.58    634,477    0 
A.H. Schechter  Qualified Plan   27.50    27.50    905,880    0 
   SRP   27.50    27.50    7,444,363    0 
     
(1) As of December 31, 2015, 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 that is used for benefit accrual purposes and eligibility purposes under the Final Average Pay formula of the Qualified Plan and SRP.
  Credited Service begins with the January 1 or July 1 coincident with or 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 rehires after December 31, 2012 (Dr. Perlmutter), Credited Service for benefit accrual purposes ends at the prior date of termination and for eligibility purposes at the full last month of employment. Mr. Davis does not have Credited Service since he entered the Plans after December 31, 2012.
(3) This column shows the number of years of Cash Balance Service that is used for benefit accrual purposes under the Cash Balance Formula of the Qualified Plan and SRP.
  Cash Balance Service begins on a participant’s first day of employment and includes all years and completed months of service and ends on the participant’s date of termination of employment. Cash Balance Service is projected to December 31 to determine benefit accrual under the Cash Balance Formula of the Qualified Plan and SRP.
(4) For the Qualified Plan and SRP, the actuarial present value is calculated using the same assumptions used for financial statement reporting purposes as set forth in the footnotes to our financial statements, except that commencement is assumed at the earliest unreduced retirement age (with no pre-retirement mortality). The earliest unreduced retirement age is age 62 and 10 years of eligibility service. For all the Named Executive Officers shown, this is age 62 except for Dr. Perlmutter for whom it is age 65. Some key assumptions include:
  Discount rate equals 4.8% for the Qualified Plan and 4.5% for the SRP;
  Mortality based on the sex distinct RP-2014 White Collar Adjusted Mortality Table with projection based on modified MP-2015 Projection Scale using a 0.75% ultimate rate after 15 years;
  Future lump sum conversion factors calculated by the implied forward rates embedded in the 12/31/2015 Towers Watson RATE:Link 60th to 90th percentile yield and mortality based on RP-2014/MP-2015 estimated for purposes of Sec 417(c)(3)(A)(ii)(l) of the Internal Revenue Code for lump sums; and
  Assumes that 80% of retirees elect a lump sum and the remaining 20% elect an annuity.

 

The Named Executive Officers participate in two defined benefit plans as do other U.S.-based Merck Sharp & Dohme Corp. salaried employees. Benefits payable under the Qualified Plan and the SRP (collectively, the “Retirement Plans”) are based on several formulas.

 

Benefit Formulas. Beginning in 2013, a Cash Balance Formula was added to replace the Final Average Pay Formula. Employees eligible for U.S. benefits on December 31, 2012, receive transition benefits, which provide the better benefit under the Cash Balance or Final Average Pay Formula through December 31, 2019, or the date the participant terminates employment or loses Retirement Plan eligibility, if earlier. All Named Executive Officers except Dr. Perlmutter and Mr. Davis are eligible for transition benefits.

 

2016 Proxy Statement     61

 
Final Average Pay Formula: For service prior to January 1, 2013, benefits are calculated under the Final Average Pay Formula, which shows Retirement Plan benefits as a single life annuity normally payable on the first of the month coincident with or following age 65 (normal retirement date or “NRD”). The amount equals:

 

* Limited to 31.25
   
Cash Balance Formula: For service starting January 1, 2013, benefits are calculated under the Cash Balance Formula, which shows Retirement Plan benefits as an account that grows with annual pay credits and annual interest credits from Merck according to the following schedule:
             
Age + Cash Balance Service at 12/31  Percent of Total Pay credited to Account Balance
 At Least   Less Than     
      40    4.5%
 40    50    5.5%
 50    60    6.5%
 60