Merck & Co., Inc.
Summary:
Merck appears to have a pretty solid executive compensation program in place. There are a few issues with discretion and severance, but overall, it looks good. We are, however, interested to see how the company will react to what is shaping up to be a severe fall from grace in 2008. Will the execs' pay fall with it? Only time will tell.
Analysis:
The big drug companies have been struggling to match their production of the "boom period," a two decade period from 1983-2003. They have seen increased competition from generic drug manufacturers and have had difficulty developing highly profitable new drugs, despite high investments in R&D.
Merck has been hurt by these industry problems, as well as their own issues. A recent drug trial, termed the ENHANCE trial, showed that two of their main drugs on the market, Vytorin and Zetia, do not slow heart disease faster than cheaper drug options. This combined with slower sales than expected for another drug, a $5 billion settlement in the Vioxx case, and no "can't miss" drugs in the development pipeline have resulted in a rocky performance for Merck lately. The stock price did rise steadily for a two-year period from 2006 to 2007, but has plummeted in 2008. Judging from their 2007 performance, we expected moderate to above average compensation for Merck's top execs. Did they meet our expectations?
So… What Are They Paid?
In most areas, the company rewarded executives as we had anticipated. The salary is average for the CEO and above average for the NEOs. Merck did reward the CEO with a "high" bonus for exceptional work, but the bonus itself was fairly modest when compared to other companies, approximately $4.3 million. The stock market did well in 2006 & 2007, so stock and option awards of $5.85 million and $2.95 million, respectively, for the CEO were well within reason. The NEOs also were rewarded with an average amount of stock and option awards.
Perks were very minimal, with the exception of a category called "dividend equivalents". An unusual category, the money given out for this purpose was large: $230,000 to the CEO and comparable amounts to some of the NEOs.
After reviewing the perquisite program, we took a look at the termination and change in control section. This section showed some concerns, but overall was not too bad. The areas for concern are the severance payment ($12.3 million) and the tax gross-up payment ($7.2 million). These made up the bulk of the severance package, which totaled $26.2 million with these two payments. Although the total termination compensation is average, the severance payment is too high, in our opinion.
Compensation Details:
| CEO | NEO Avg. | |
|---|---|---|
| Base Salary | $1,616,670 | $833,596 |
| Bonus | $0 | $150K sign-on bonus for new CFO & $1,000,000 for old CFO. |
| Stock | $5,846,754 | $1,605,321 |
| Options | $2,946,722 | $850,689 |
| non-Equity Incentives | $4,311,059 | $1,362,106 |
Reference Links:
(1) Annual
Proxy Statement
(2) Annual
Report