Merck DEF 14A 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
MERCK & CO., INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
March 10, 2008
It is my pleasure to invite you to Mercks 2008 Annual Meeting of Stockholders. We will hold the meeting on Tuesday, April 22, 2008 at 2:00 p.m., in the Edward Nash Theatre at Raritan Valley Community College, Route 28 and Lamington Road, North Branch, New Jersey. During the Annual Meeting, we will discuss each item of business described in the Notice of Annual Meeting and Proxy Statement and give a report on the Companys business operations. There will also be time for questions.
This booklet includes the Notice of Annual Meeting and Proxy Statement. The Proxy Statement provides information about Merck in addition to describing the business we will conduct at the meeting.
We hope you will be able to attend the Annual Meeting. If you need special assistance at the meeting, please contact the Company Secretary at the address above. Whether or not you expect to attend, please vote your shares using any of the following methods: vote by telephone or the Internet, as described in the instructions you receive; complete, sign and date the proxy card or voting instruction card and return it in the prepaid envelope; or vote in person at the meeting.
TABLE OF CONTENTS
April 22, 2008
To the Stockholders:
The stockholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, April 22, 2008, at 2:00 p.m., in the Edward Nash Theatre at Raritan Valley Community College, Route 28 and Lamington Road, North Branch, New Jersey. The purposes of the meeting are to:
Only stockholders listed on the Companys records at the close of business on February 25, 2008 are entitled to vote.
By order of the Board of Directors,
CELIA A. COLBERT
Senior Vice President, Secretary and
Assistant General Counsel
March 10, 2008
Merck & Co., Inc.
P. O. Box 100
Whitehouse Station, New Jersey 08889-0100
March 10, 2008
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
This proxy statement, 2007 Form 10-K Annual Report and 2007 Annual Review (the Proxy Material), along with either a proxy card or a voting instruction card, are being mailed to stockholders beginning March 10, 2008. The proxy statement summarizes the information you need to know to vote at the Annual Meeting. You do not need to attend the Annual Meeting to vote your shares.
If you are a stockholder of record, you can choose this option by marking the appropriate box on your proxy card or by following the instructions if you vote by telephone or the Internet. If you choose to access future Proxy Materials on the Internet, you will receive a proxy card in the mail next year with instructions containing the Internet address for those materials. Your choice will remain in effect until you advise us otherwise.
If you are a beneficial owner, please refer to the information provided by your broker, bank or nominee for instructions on how to elect to access future Proxy Materials on the Internet. Most beneficial owners who elect electronic access will receive an e-mail message next year containing the Internet address for access to the Proxy Material.
If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name. The Proxy Material has been forwarded to you by your
broker, bank or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker, bank or nominee how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.
If you prefer to receive multiple copies of the Proxy Material at the same address, additional copies will be provided to you promptly upon written or oral request. If you are a stockholder of record, you may contact us by writing to Merck Stockholder Services, WS3AB-40, P.O. Box 100, Whitehouse Station, NJ 08889-0100 or by calling our toll-free number 1-800-522-9114. Eligible stockholders of record receiving multiple copies of the Proxy Material can request householding by contacting Merck in the same manner.
If you are a beneficial owner, you can request additional copies of the Proxy Material or you can request householding by notifying your broker, bank or nominee.
The Board recommends a vote FOR each of the nominees to the Board of Directors and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2008.
You will also vote on the following stockholder proposals:
The Board recommends a vote AGAINST each of the stockholder proposals.
The proposal to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm and each of the stockholder proposals require the affirmative vote of a majority of the votes cast for approval. If you are present or represented by proxy at the Annual Meeting and you abstain, your abstention, as well as broker non-votes, are not counted as votes cast on any matter to which they relate.
The availability of telephone and Internet voting for beneficial owners will depend on the voting processes of your broker, bank or nominee. Therefore, we recommend that you follow the voting instructions in the materials you receive.
If you are a beneficial owner of shares, you may submit new voting instructions by contacting your broker, bank or nominee. You may also vote in person at the Annual Meeting if you obtain a legal proxy as described in the answer to the previous question.
However, the proxy card does not include shares held for participants in the Merck & Co., Inc. Employee Savings and Security Plan, Merck & Co., Inc. Employee Stock Purchase and Savings Plan, Hubbard LLC Employee Savings Plan, Merck Puerto Rico Employee Savings and Security Plan, Merck Frosst Canada Inc. Stock Purchase Plan (Merck Frosst Plan), MSD Employee Share Ownership Plan, and Merial 401(k) Savings Plan (Merial Plan). Instead, these participants will receive from plan trustees separate voting instruction cards covering these shares. If voting instructions are not received from participants in the Merck Frosst Plan, the plan trustee will vote the shares in accordance with the recommendations of the Board of Directors. If voting instructions are not received from participants in the Merial Plan, the plan trustee will vote the shares in the same proportion as it votes shares for which voting instructions are received. Trustees for the other plans will not vote shares for which no voting instructions are received from plan participants.
See Security Ownership of Certain Beneficial Owners and Management on page 21 for more information.
Under provisions of our By-laws, in order for a stockholder to present a proposal or other business for consideration by our stockholders at the 2009 Annual Meeting of Stockholders, the Secretary of the Company must receive by December 23, 2008 a written notice containing the following information: (a) the name and address of the stockholder who intends to present the business at the meeting of the stockholders, a brief description of the business intended to be presented, the reasons for conducting this business at the meeting and any material interest of the stockholder in the business; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote on the business at that meeting and intends to appear in person or by proxy at the meeting to present the business; (c) a description of all arrangements or understandings between the stockholder and any other person or persons (naming such person or persons) with respect to the business to be presented; and (d) such other information regarding the business to be presented as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had such business been presented, or intended to be presented, by the Board of Directors. This notice requirement does not apply to stockholder proposals properly submitted for inclusion in our proxy statement in accordance with the rules of the SEC and stockholder nominations of director candidates which must comply with the notice provisions of our By-laws described on page 17.
1. ELECTION OF DIRECTORS
Thirteen directors are to be elected by stockholders at this Annual Meeting for one-year terms expiring at the 2009 Annual Meeting of Stockholders. The Board has recommended as nominees for election Mr. Richard T. Clark, Dr. Johnnetta B. Cole, Mr. Thomas H. Glocer, Mr. Steven F. Goldstone, Mr. William B. Harrison, Jr., Dr. Harry R. Jacobson, Dr. William N. Kelley, Ms. Rochelle B. Lazarus, Dr. Thomas E. Shenk, Ms. Anne M. Tatlock, Dr. Samuel O. Thier, Mr. Wendell P. Weeks and Mr. Peter C. Wendell. Mr. Glocer, Mr. Goldstone and Dr. Jacobson were elected to the Board effective November 27, 2007, September 25, 2007 and December 18, 2007, respectively, to serve until this Annual Meeting and to stand for election by stockholders at the meeting. All other candidates have previously been elected by stockholders.
Information on the nominees follows.
Independence of Directors
The Board of Directors has determined that to be considered independent, an outside director may not have a direct or indirect material relationship with the Company. A material relationship is one which impairs or inhibitsor has the potential to impair or inhibita directors exercise of critical and disinterested judgment on behalf of the Company and its stockholders. In determining whether a material relationship exists, the Board considers, for example, the sales or charitable contributions between Merck and an entity with which a director is affiliated (as an executive officer, partner or substantial stockholder). The Board consults with the Companys counsel to ensure that the Boards determinations are consistent with all relevant securities and other laws and regulations regarding the definition of independent director, including but not limited to those set forth in pertinent listing standards of the New York Stock Exchange as in effect from time to time. The Committee on Corporate Governance reviews the Boards approach to determining director independence periodically and recommends changes as appropriate for consideration and approval by the full Board.
Consistent with these considerations, the Board has reviewed all relationships between the Company and the members of the Board and has determined that all directors are independent directors except Mr. Clark, who is a Company employee.
Key to Chart:
A - Sales to and purchases from the other organization (i) amount to less than the greater of $1 million or 2% of that organizations consolidated gross revenues during each of 2007, 2006 and 2005; and (ii) during all relevant years were not of an amount or nature to impede the exercise of independent judgment.
B - Merck (including The Merck Company Foundation) contributed less than the greater of $1 million or 2% of the charitable organizations consolidated gross revenues during each of 2007, 2006 and 2005. Moreover, contributions during all relevant years were not of an amount or nature to impede the exercise of independent judgment.
Related Person Transactions
The Company recognizes that relationships between the Company and outside firms can present potential or actual conflicts of interest. Accordingly, the Company has a written conflict of interest policy that requires directors, executive officers and employees to report actual and potential conflicts of interest. Outside activities covered by the conflict of interest policy include those activities involving any director, executive officer, employee or members of their immediate families.
Certifications of outside activities involving actual or potential conflicts of interest are filed annually with the Company by directors and executive officers, and they are required to promptly advise the Company of any change in the information provided in their certifications. Management, with the advice of counsel, is responsible for determining whether or not an actual or potential conflict of interest exists and establishing any controls required.
In addition, the Board of Directors has adopted a written policy (Related Person Transaction Policy or 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)). Section 404(a) provides for the disclosure of transactions involving amounts exceeding $120,000 in which the Company is a participant and in which a related person has a direct or indirect material interest (related person transaction). The term related person is defined by Item 404(a) and includes Directors, executive officers, director nominees, shareholders owning five percent or greater of the Companys outstanding common stock and their immediate family members.
It is the policy of the Board that related party 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 below. The Policy is administered by the Committee on Corporate Governance and is contained in the Policies of the Board, which is available on the Companys website at www.merck.com/about/corporategovernance.
In determining whether to approve a related person transaction, the Committee on Corporate Governance considers the following factors:
Each Director 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, 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 Boards Committee on Corporate Governance, which is comprised of independent directors, for its review.
Upon review by the Committee of Corporate Governance of the report of related person transactions, no transactions concerning the Companys directors, executive officers or immediate family members of these individuals require disclosure under Item 404(a), except as set forth below.
Ms. Rochelle B. Lazarus is a director of the Company and is the Chairman and Chief Executive Officer of Ogilvy & Mather Worldwide (Ogilvy & Mather). The Company has retained Ogilvy & Mather to provide advertising services in the past, including in 2007 and expects Ogilvy to continue providing advertising services in 2008. The Company paid Ogilvy & Mather approximately $6.3 million in 2007.
In addition, according to a filing made with the Securities and Exchange Commission, Fidelity owns more than 5 percent of the Companys outstanding Common Stock. Fidelity acts as directed trustee and recordkeeper, and provides certain investment options, for the Companys savings plans, and also acts as recordkeeper of the Companys health and welfare benefit plans.
The Board of Directors has six standing committees: Audit Committee, Committee on Corporate Governance, Compensation and Benefits Committee, Finance Committee, Committee on Public Policy and Social Responsibility, and Research Committee. In April 2007, the Executive Committee, which served as a collective chairman of the Board and to assist Mr. Clark as he transitioned to his new responsibilities in May 2005 as Chief Executive Officer and President of the Company, was disbanded. In addition, the Board from time to time establishes special purpose committees.
Members of the individual standing committees are named below:
The Audit Committee, which is comprised of independent directors, is governed by a Board-approved charter that contains, among other things, the Audit Committees membership requirements and responsibilities. The Audit Committee oversees the Companys accounting, financial reporting process, internal controls and audits, and consults 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. As part of its duties, the Audit Committee appoints, evaluates and retains the Companys independent auditors. It maintains direct responsibility for the compensation, termination and oversight of the Companys independent auditors and evaluates the independent auditors qualifications, performance and independence. The Audit Committee also monitors compliance with the Foreign Corrupt Practices Act and the Companys policies on ethical business practices and reports on these items to the Board. 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 67 of this proxy statement. 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 Stockholder Communications with the Board on page 19 of this proxy statement. The Audit Committees Report is included on page 67 of this proxy statement and the Audit Committee Charter is available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests it.
Financial Expert on Audit Committee: The Board has determined that Mr. Peter C. Wendell, who currently is the Managing Director of Sierra Ventures, is the Audit Committee financial expert. The Board made a qualitative assessment of Mr. Wendells level of knowledge and experience based on a number of factors, including his formal education and experience as chief financial officer of Sierra Ventures.
The Committee on Corporate Governance, which is comprised of independent directors, considers and makes recommendations on matters related to the practices, policies and procedures of the Board and takes a leadership role in shaping the corporate governance of the Company. As part of its duties, the Committee on Corporate Governance assesses the size, structure and composition of the Board and Board committees, coordinates evaluation of Board performance and reviews Board compensation.
The Committee on Corporate Governance also acts as a screening and nominating committee for candidates considered for nomination by the Board for election of directors. In this capacity it concerns itself with the composition of the Board with respect to depth of experience, balance of professional interests, required expertise and other factors. The Committee on Corporate Governance evaluates prospective nominees identified on its own initiative as well as candidates referred or recommended to it by Board members, management, stockholders or search companies. The Committee on Corporate Governance uses the same criteria for evaluating candidates recommended by stockholders in accordance with the procedures outlined below as it does for those proposed by other Board members, management and search companies. To be considered for membership on the Board, a proposed or recommended candidate must meet the following criteria, which are also set forth in the Policies of the Board: (a) be of proven integrity with a record of substantial achievement; (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 Companys affairs, including attendance at Board meetings, Board committee meetings and annual stockholder meetings; (d) possess a judicious and critical temperament that will enable objective appraisal of managements plans and programs; and (e) be committed to building sound, long-term Company growth. Evaluation of proposed or recommended candidates occurs on the basis of materials submitted by or on behalf of the proposed or recommended candidate. If a proposed or recommended candidate continues to be of interest to the Committee on Corporate Governance, additional information about her/him is obtained through inquiries to various sources and, if warranted, interviews. As explained on page 3, the Committee on Corporate Governance also oversees the Boards Incumbent Director Resignation Policy.
In addition to being able to recommend candidates for nomination by the Board, stockholders may themselves nominate a candidate or candidates for election as directors. For a stockholder to nominate a candidate or candidates for election as a director at the 2009 Annual Meeting, the stockholder must deliver to the Secretary of the Company by December 23, 2008 a written notice of the stockholders intention to nominate the candidate or candidates. As set forth in the Companys By-Laws, the notice of nomination must contain the following information: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Company if so elected. All the director nominees named in this proxy statement met the Boards criteria for membership and were recommended by the Committee on Corporate Governance for election by stockholders at this Annual Meeting.
All nominees for election at this Annual Meeting were previously elected by stockholders, except for Mr. Glocer, Mr. Goldstone and Dr. Jacobson.
The Committee on Corporate Governance Charter, the Companys By-Laws and the Policies of the Board, which are the Companys corporate governance guidelines, are available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests them.
The Compensation and Benefits Committee, which is comprised of independent directors, in general
More specifically, the Compensation and Benefits Committee annually reviews and approves corporate goals and objectives relevant to the total direct compensationthat is, changes in base salary, and non-equity and equity incentive plan compensationof the Chief Executive Officer and other executive officers, evaluates their performance against these goals and objectives, and, based on its evaluation, sets their total direct compensation. The details of the processes and procedures involved are described in the CD&A beginning on page 22 for the executives total direct compensation.
The Companys full Board ultimately makes the final decisions regarding the CEOs total direct compensation.
The Compensation and Benefits Committee Charter is available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests it.
The Compensation and Benefits Committee Report is included on page 38 of this proxy statement.
Role of Compensation Consultants. The Compensation and Benefits Committee has continued to retain Mercer Human Resource Consulting (Mercer) as its compensation consultant. Mercer is retained by and reports directly to the Compensation and Benefits Committee and provides assistance in evaluating the Companys executive compensation program and policies, and, where appropriate, assists with the redesign and enhancement of elements of the program. The Committee regularly includes Mercer in its Executive Sessions without Company management in order to ensure that there is no actual or perceived conflict of interest. During 2007, Mercer assisted by:
In addition to the work Mercer performs for the Compensation and Benefits Committee, the Company utilizes various other products and services of the firm in those instances Mercer is deemed to provide the best product or service to meet Mercks needs. The Compensation and Benefits Committee does not believe Mercers provision of services to management affects in any way the advice Mercer provides to the Compensation and Benefits Committee on executive compensation matters. The Compensation and Benefits Committee is satisfied that Mercer follows rigorous guidelines and practices to guard against any conflict and ensure the objectivity of their advice. There is no overlap between the members of the consulting team giving advice to the Compensation and Benefits Committee and those involved with other work for the Company. There is also no overlap between the members of Company management who are working with the Compensation and Benefits Committee and those doing other work with Mercer.
Also, in 2007, the Companys Human Resources department retained Towers Perrin to provide various services including some pertaining to executive compensation. These services included assistance with the design of compensation and incentive programs for Mercks Human Resources departments consideration. Towers Perrin had no direct role with the Compensation and Benefits Committees deliberations or decisions.
The Finance Committee, which is comprised of independent directors, considers and makes recommendations on matters related to the financial affairs and policies of the Company, including capital structure issues, dividend policy, investment and debt policies, asset and portfolio management and financial transactions, as necessary. The Finance Committee Charter is available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests it.
The Committee on Public Policy and Social Responsibility, which is comprised of independent directors, advises the Board of Directors and management on Company policies and practices that pertain to the
Companys responsibilities as a global corporate citizen, its obligations as a pharmaceutical company whose products and services affect health and quality of life around the world, and its commitment to high standards of ethics and integrity. It reviews social, political and economic trends that affect the Companys business; reviews the positions and strategies that the Company pursues to influence public policy; monitors and evaluates the Companys corporate citizenship programs and activities; and reviews legislative, regulatory, privacy and other matters that could impact the Companys stockholders, customers, employees and communities in which it operates. The Committee on Public Policy and Social Responsibility Charter is available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests it.
The Research Committee, which is comprised of independent directors, assists the Board in its oversight of matters pertaining to the Companys strategies and operations for the research and development of pharmaceutical products and vaccines. The Research Committee identifies areas and activities that are critical to the success of the Companys drug and vaccine discovery, development and licensing efforts, as well as evaluates the effectiveness of the Companys drug and vaccine discovery, development and licensing strategies and operations. The Research Committee also keeps the Board apprised of this evaluation process and findings and makes appropriate recommendations to the President of Merck Research Laboratories and to the Board on modifications of strategies and operations. The Research Committee Charter is available on the Companys website www.merck.com/about/corporategovernance and in print to any stockholder who requests it.
Compensation Committee Interlocks and Insider Participation
Mr. William B. Harrison, Jr., Dr. William N. Kelley, Ms. Anne M. Tatlock and Mr. Peter C. Wendell served on the Compensation and Benefits Committee during 2007. There were no Compensation and Benefits Committee interlocks or insider (employee) participation during 2007.
Board and Board Committee Meetings
In 2007, the Board of Directors met 13 times. Board committees met as follows during 2007: Committee on Corporate Governance, 12 times; Research Committee, eight times; Compensation and Benefits Committee, seven times; Audit Committee, six times; Executive Committee, four times; Committee on Public Policy and Social Responsibility, twice; and the Finance Committee, once. All Directors who served for the entire year attended at least 75 percent of the meetings of the Board and of the committees on which they served, with an average attendance of 93 percent. All of the Directors who joined the Board during the year attended at least 75% of the Board meetings held after their election to the Board.
Under the Policies of the Board, directors are expected to attend regular Board meetings, Board committee meetings and annual stockholder meetings. All of the Companys ten directors, who then comprised the Board, attended the 2007 Annual Meeting of Stockholders.
Non-management directors met in six executive sessions in 2007. Dr. Thier, Lead Director of the Board, presided over the executive sessions.
Stockholder Communications with the Board
Merck will forward all communications from security holders and interested parties to the full Board, to non-management directors, to an individual director or to the chairperson of the Board Committee that is most closely related to the subject matter of the communication, except for the following types of communications:
The Corporate Secretary, in consultation with the General Counsel, will determine when a communication is not to be forwarded.
The Companys acceptance and forwarding of communications to the directors does not imply that the directors owe or assume any fiduciary duties to persons submitting the communications.
Stockholders and interested parties who wish to do so may communicate directly with the Board, or specified individual directors, by writing to the following address: Board of Directors, Merck & Co., Inc., P.O. Box 1150, Whitehouse Station, NJ 08889. Further information on communications to the Board can be found on the Companys website at www.merck.com/about/corporategovernance.
In addition, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by the Company, including the Board and the Audit Committee, regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. These procedures are described in the Merck Code of ConductOur Values and Standards, which is also available on the Companys website noted above.
Boards Role in Strategic Planning
The Board of Directors has the legal responsibility for overseeing the affairs of the Company and, thus, an obligation to keep informed about the Companys 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 Boards six standing committees (Audit Committee, Committee on Corporate Governance, Compensation and Benefits Committee, Finance Committee, Committee on Public Policy and Social Responsibility, and Research Committee), the Board is fully involved in the Companys strategic planning process.
Each year, typically in the summer, senior management sets aside a specific period to develop, discuss and refine the Companys long-range operating plan and overall corporate strategy. Strategic areas of importance include basic research and clinical development, global marketing and sales, manufacturing strategy, capability and capacity, and the public and political environments that affect the Companys business and operations. Specific operating priorities are developed to effectuate the Companys long-range plan. Some of the priorities are short-term in focus; others are based on longer-term planning horizons. Senior management reviews the conclusions reached at its summer meeting with the Board at an extended meeting that usually occurs in the fall. This meeting is focused on corporate strategy and involves both management presentations and input from the Board regarding the assumptions, priorities and strategies that will form the basis for managements operating plans and strategies.
At subsequent Board meetings, the Board continues to substantively review the Companys progress against its strategic plans and to exercise oversight and decision-making authority regarding strategic areas of importance and associated funding authorizations. For example, the Board typically reviews the Companys overall annual performance at a meeting in the fall and considers the following years operating budget and capital plan in December. The Board at its February meeting usually finalizes specific criteria against which the Companys performance will be evaluated for that year. In addition, Board meetings held throughout the year target specific strategies (for example, basic research) and critical areas (for example, U.S. healthcare public policy issues) for extended, focused Board input and discussion.
The role that the Board plays is inextricably linked to the development and review of the Companys strategic plan. Through these procedures, the Board, consistent with good corporate governance, encourages the long-term success of the Company by exercising sound and independent business judgment on the strategic issues that are important to the Companys business.
Security Ownership of Certain Beneficial Owners and Management
The table below reflects the number of shares beneficially owned by (a) each director of the Company; (b) each executive officer of the Company named in the Summary Compensation Table; (c) all directors and executive officers as a group; and (d) each person or group known to the Company to own more than 5 percent of the outstanding shares of Merck Common Stock. Unless otherwise noted, the information is stated as of December 31, 2007 and the beneficial owners exercise sole voting and/or investment power over their shares.
Does not include restricted stock units denominated in Merck Common Stock under the 2007 Incentive Stock Plan as follows: Mr. Clark163,583 shares, Mr. Kellogg80,000 shares, Ms. Lewent23,750 shares, Dr. Kim154,767 shares, Mr. Frazier117,483 shares, Mr. Anstice0 shares, and all directors and executive officers as a group845,581 shares.
Compensation Discussion and Analysis
The following Compensation Discussion and Analysis (CD&A) describes the material elements of compensation for the Merck executive officers identified in the Summary Compensation Table (Named Executive Officers). As more fully described on page 17, the Compensation and Benefits Committee of the Board (the Committee) makes all decisions for the total direct compensationthat is, the base salary, annual cash and long term incentive awardsof the Companys executive officers, including the Named Executive Officers. The Committees recommendations for the total direct compensation of the Companys Chief Executive Officer are subject to approval of the Board of Directors.
The day-to-day design and administration of pension, savings, health, welfare and paid time-off plans and policies applicable to salaried U.S.-based employees in general are handled by teams of Company Human Resources, Shared Services, Finance and Legal Department employees. The Committee (or Board) remains responsible for certain fundamental changes outside the day-to-day requirements necessary to maintain these plans and policies.
Mercks Business Environment
Merck is a global research-driven pharmaceutical company dedicated to putting patients first. Established in 1891, Merck discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The Company also devotes extensive efforts to increase access to medicines through far-reaching programs that not only donate Merck medicines but help deliver them to the people who need them most.
Our Mission. Mercks mission is to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.
Our Values. Our business is preserving and improving human life. All of our actions must be measured by our success in achieving this goal. We value, above all, our ability to serve everyone who can benefit from the appropriate use of our products and services, thereby providing lasting consumer satisfaction.
We are committed to the highest standards of ethics and integrity. We are responsible to our customers, to Merck employees and their families, to the environments we inhabit, and to the societies we serve worldwide. In discharging our responsibilities, we continuously strive to exhibit professional and ethical standards beyond reproach in all that we do. We are dedicated to the highest level of scientific excellence and commit our research to improving human and animal health and the quality of life. We strive to identify the most critical needs of consumers and customers, and we devote our resources to meeting those needs. Our ability to meet our responsibilities depends on maintaining a financial position that allows for investment in leading-edge research and that makes possible effective delivery of research results. We recognize that the ability to excelto most competitively meet societys and customers needsdepends on the integrity, knowledge, imagination, skill, diversity and teamwork of our employees, and we value these qualities most highly. To this end, we strive to create an environment of mutual respect, encouragement and teamworkan environment that rewards commitment and performance and is responsive to the needs of our employees and their families.
Compensation Program Objectives and Strategy
Mercks compensation and benefits programs are driven by Mercks business environment and are designed to enable us to achieve our mission and adhere to Company values. The programs objectives are to:
All of Mercks compensation and benefits for its Named Executive Officers described below have as a primary purpose the Companys need to attract, retain and motivate the highly talented individuals to lead the Company in achieving its mission while upholding our values in a highly competitive marketplace.
Due to Mercks mission of being a leader in discovering and bringing to market proven innovative medicines for unmet medical needs, it is critical to hire, engage and retain the best talent and thought leaders in the academic and pharmaceutical industry on a global basis to leverage diverse experiences and cutting edge thinking. Each compensation component has a specific purpose in meeting the Companys program objectives described above.
Individual executive officers are compared to a peer group of large pharmaceutical companies that participate in a pharmaceutical industry compensation survey. The survey is conducted by Towers Perrin HR Services, an independent consulting firm and is monitored by a 3rd party antitrust counsel. In 2007, in addition to Merck, the participating companies included: Abbott Laboratories, Amgen, Astra Zeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Hoffman-LaRoche, Johnson & Johnson, Novartis, Pfizer, Sanofi-Aventis, Schering-Plough, and Wyeth (collectively, the Peer Companies). In general, commensurate with performance, our overarching strategy is to position Merck executive compensation as follows:
Compensation for individual executives may be positioned above or below the 50th percentile based on scope of responsibility versus the Peer Groups, market availability of top proven talent, and/or the critical need to ensure the employee remains with the Company.
The Elements and Design of Mercks Compensation Program
Executive officer base salaries are based on job responsibilities and individual contribution, with reference to base salary levels of executives at the Peer Companies. Base salaries are included in determining an employees retirement benefits (as more fully described on page 48) and are the only element of compensation used in determining the amount of contributions permitted under the Companys Employee Savings and Security Plan (the 401(k) Plan).
As of March 1 2007, Mr. Clarks salary of $1,700,004 positioned him closer, yet still below, the 50th percentile of CEOs at peer companies. Following an in-depth analysis of Mr. Clarks significant business and leadership contributions in his role to date, the Companys overall improved performance during his tenure as Chief Executive Officer, and Mr. Clarks historical pay position below the 50th percentile versus the Company compensation strategy, the Committee recommended and the Board (other than Mr. Clark) reviewed and approved, an increase in Mr. Clarks base salary from $1,700,004 to $1,800,000, effective March 1, 2008. This increase positioned Mr. Clarks base salary at the 50th percentile of CEOs at the Peer Companies.
Other Named Executive Officers
The Committee determines base salaries for executive officers, including the Named Executive Officers, early every year. The Companys CEO proposes new base salary amounts based on:
In early 2007, as part of the annual total compensation management process applicable to all Merck salaried employees throughout the world. Mr. Clark recommended, and the Committee reviewed and approved, base salary increases ranging from 3% to 6% for the Named Executive Officers.
In August of 2007, Mr. Clark reviewed with the Committee the critical nature of cutting edge research and the importance of the research pipeline to Mercks mission, led by the President, Merck Research Laboratories (MRL). Mr. Clark proposed, and the Committee agreed, that the total cash (base salary and target EIP award) for Dr. Kim should be positioned above the 50th percentile given Dr. Kims proven leadership, contributions and performance. Therefore, in light of Dr. Kims leadership in maintaining MRLs focus on innovation, the Committee approved Mr. Clarks recommendation to increase Dr. Kims base salary by 13.4 percent, from $881,496 to $1,000,008 effective August 1, 2007.
As a result of Mr. Fraziers appointment as Executive Vice President and President, Global Human Health (formerly, Executive Vice President and General Counsel), his base salary was increased to $980,004 (a 21 percent increase). The increase was made to align his pay more closely with similar positions at Peer Companies. This increase also reflects the significant increase in scope, complexity and responsibility that comes with leading a global sales and marketing organization that accounts for almost half of Mercks employees.
Base salaries paid to executive officers are not considered performance-based compensation under Section 162(m) of the Internal Revenue Code (the Code). Therefore, for federal income tax purposes a corporate deduction is allowed for covered employeesgenerally, the Named Executive Officers from year to year but excluding the Executive Vice President, Finance and Chief Financial Officer(s)to the extent base salary plus other compensation subject to Section 162(m) does not exceed $1 million. If the executive defers the excess into the Merck & Co., Inc. Deferral Program, the Company can deduct the amount when the income is taxable to the executive. Mr. Clark is paid more than $1 million in base salary but he defers a portion into the Deferral Program and will receive distribution in a future year or years when it will be deductible to the Company. No other employee received a base salary in excess of $1 million in 2007.
Annual Cash Awards
Annual cash awards, shown as Non-Equity Incentive Plan Compensation in the Summary Compensation Table, are based on job responsibilities, with reference to the levels of total cash compensation of executives at the Peer Companies. The Company pays actual annual cash awards at a level commensurate with performance against objectives. These awards are determined with reference to Company-wide and individual goals, based on measures that permit comparisons with competitors performances, if appropriate, and internal targets set at the start of each fiscal year.
Target annual cash awards for Named Executive Officers (along with other employees) are based on market data. Each level has a unique target annual cash award percentage, with the most senior executives who have more impact on the Company having the largest target (e.g. 140%) and less senior executives having lower targets (between 95% and 105% among the Named Executive Officers). The Committee annually reviews officer compensation levels to ensure internal equity as well as appropriate positioning to our Peer Companies. Although these reviews occur annually, targets within an employee band are adjusted (up or down) only if a sustained difference between Merck targets and the market exists. In addition, as discussed above, Dr. Kims target was increased during 2007 as part of an overall increase of his target for total cash compensation.
Cash Award Methodology
The EIP is a shareholder-approved plan that is administered by the Compensation and Benefits Committee. It is designed to provide for cash awards to employees who are subject to Section 16 of the Securities Exchange Act of 1934.
Beginning in 2007, the Committee approved a new methodology for determining annual cash awards for executive officers (as well as other senior management employees). There are two components with specific weightings:
No annual cash award will be paid to an individual if Company or individual performance is below minimum performance expectations as determined by the Committee. The new methodology is intended to reinforce consistency and uniformity of performance standards across the global organization at all levels, create a better line of sight between results and rewards, and underscore the importance of leadership in driving the Companys transformation to a high performance organization.
As approved by the Board, the Company Scorecard for 2007 contained 24 specific measures and associated targets aligned with the Companys strategy. Achieving the target performance for all measures would yield a score of 100 points. Consistent with the Companys new Strategy Map, which is focused on reclaiming our leadership in the discovery, development and commercialization of innovative medicines and vaccines, there were four sections in the 2007 Company Scorecard:
The Strategy Map emphasizes:
The Company Scorecard is calibrated so that results will range between 50 and 200, commensurate with performance. The stretch and threshold targets are set by ensuring the Companys financial performance achieved in each scenario will cover the cost of the cash awards. However, the Committee has the discretion to
determine that no annual cash awards will be made to any employees, including the Named Executive Officers, if it determines, on a qualitative basis, that overall performance on the Company Scorecard is too low. Moreover, the Company Scorecard achievements are always assessed based on whether the Company achieved the Scorecard results extraordinarily well, or poorly, considering (1) Sales and marketing compliance as determined by outcomes of regulatory review and inspections, such as those of the Food and Drug Administration and (2) Progress on health and safety outcomes as determined by other regulatory and environmental matters. These factors are all deeply embedded in the day-to-day culture of the Company.
The Committee did not make any fundamental changes to the process or Company Scorecard for 2008.
CEOObjectives and Performance
Mr. Clarks 2007 performance and resulting EIP award are based on achievement of the Company Scorecard objectives (70% weight) and his Personal Performance Grid (PPG) objectives (30% weight), both of which were established at the beginning of 2007 with the Committee. The PPG objectives are based on Leadership and Personal Development. Based on the Committees evaluation of Mr. Clarks performance against these metrics, it was determined that Mr. Clark had an exceptionally strong performance year in 2007 through his demonstrated leadership. Overall, the Company achieved 139% of plan with particularly strong performance in the following areas: (1) Financial performance exceeded expectations across all measures; (2) Market performance for key growth products all exceeded plan; (3) All savings goals met or exceeded plan; and (4) Strong progress in creating change, customer focus, and innovation.
With respect to the remaining Named Executive Officers, each is rated on between four and 12 different measures, which varied by area of influence within the Company. Some of the material metrics included:
Other Named Executive OfficersObjectives and Performance
Mr. Kelloggs award reflects Finances significant contributions to Mercks financial performance which was driven by Tax and Treasury achievements, exceptional financial support of licensing and acquisition opportunities and Plan to Win initiatives. Mr. Kelloggs leadership style allowed him to demonstrate strong collaborative skills that have allowed him to become recognized as a key member of the executive team and to establish excellent relationships with both internal and external stakeholders.
Dr. Kims award reflects Merck Research Laboratories strong performance in managing operating expenses as well as advancing products and product candidates through development. Dr. Kim played a significant change management and leadership role as a key sponsor of the Companys End-to-End product life cycle initiative.
Mr. Fraziers award reflects his overall performance for the time in his prior position as Executive Vice President and General Counsel and his current position as Executive Vice President and President, Global Human Health. His award is in recognition of his successful litigation strategy, strong performance in obtaining and maintaining patent and marketing exclusivity, legal support of licensing and acquisition opportunities, and managing operating expenses. In addition, his award also reflects the exceptional performance of Global Human Health across all financial and key product measures. Mr. Fraziers demonstrated strong leadership in both his roles provided for seamless and successful transitions as he moved from one leadership position to another.
Mr. Anstices EIP award reflects his performance and contributions in leading and guiding the key strategic initiatives of the Company. In addition, Mr. Anstice also effectively served as interim head of Global Human Health and Banyu in 2007, which was above and beyond his appointed position as Executive Vice President, Strategy Initiatives. His interim leadership provided a new vision for the organizations and enabled them to continue to make significant progress toward their business objectives.
The table below shows the 2007 annual cash awards calculated under the current methodology.
The Company intends that executive officer compensation be fully deductible for federal income tax purposes, taking into account Section 162(m), provided that other compensation objectives are met. The Company believes annual cash awards paid to executive officers under the stockholder-approved EIP generally are deductible for federal income tax purposes because they qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.
Annual Cash awards are included in determining an employees retirement benefits in the year paid whether or not deferred into the Deferral Program (as more fully described under Nonqualified Deferred Compensation beginning on page 51).
Special Bonus Awards
As a new hire in 2007, Peter Kellogg was provided with a sign-on bonus of $150,000. This bonus was part of the offer made to attract Mr. Kellogg, and offset any financial out-of-pocket personal costs related to his departure at Biogen Idec as Executive Vice President, Finance and Chief Financial Officer and transition to Merck.
On February 20, 2007, Ms. Lewent announced her intention to retire in July 2007. As an incentive to extend her employment beyond July 2007 so that she could assist with the Companys close of the second quarter 2007 and transition to a new Chief Financial Officer, Mr. Clark agreed to recommend that the Committee approve a bonus of at least $1 million, subject to the Company meeting its minimum performance goals for the annual cash award described above. This cash bonus was paid in lieu of an EIP award.
Long-term incentive (LTI) grants to executive officers are based on job responsibilities and potential for individual contribution, with reference to the levels of total direct compensation (total cash compensation plus the value of LTI) of executives at the Peer Companies. When grants are made, the Committee also considers previous LTI grants. As with the determination of base salaries and annual cash awards, the Committee exercises judgment and discretion in view of the above criteria and its general policies. While LTI grants are made with reference to total direct compensation of executives at the Peer Companies, they are not intended to achieve a precise percentile in any given year. Rather, the Committee generally compares LTI grants for Company senior officers, including the Named Executive Officers, to their peers outside of the Company based on the Committees view of what is required to attract, retain and motivate our top executives over the long term.
The Company provides non-qualified stock options, performance share units (PSUs) and/or restricted stock units (RSUs) to certain employees, including the Named Executive Officers. The combination of stock-based incentives is intended to benefit employees and stockholders by focusing the Companys senior officers on the long-term goals of achieving Mercks mission while enabling the Company to better attract and retain top talent in a marketplace where such incentives are prevalent. PSUs closely align senior management with the Companys achievement of longer-term financial objectives that enhance stockholder value.
To provide financial flexibility for executives and still align multi-year Merck stock performance with senior management rewards, the Company allows executives to choose how they will receive 30% of their annual LTI grants. The Named Executive Officers except the CEO were offered a choice between (a) 70% stock options/30% PSUs or (b) 40% stock options/30% RSUs/30% PSUs with a 4-for-1 exchange ratio between options and share units.
Long Term Incentive Guidelines
Each executive level has a unique target grant, with the most senior executives who have more impact on the Company having the largest target and less senior executives having lower target grants (as shown below). In determining how much of the target grant will actually be made, the Committee and, in the case of Mr. Clark, the full Board of Directors (other than Mr. Clark) exercises discretion after considering criteria primarily related to market data, as well as other factors including the executives future potential contributions, sustained performance, and special considerations. Long Term Incentive grants have no effect on the amount of an employees retirement or other benefits (although RSUs and PSUs may be deferred into the Deferral Program). The Named Executive Officer target annual LTI levels and actual grants in 2007 (excluding Leader Share grants of RSUs described below) are shown in the following table:
In February 2008, the Committee recommended, and the Board approved, an increase in Mr. Clarks target LTI grant from 600,000 to 1,230,000. The increase was intended to position Mr. Clarks total direct compensation slightly above the median and to maintain a competitive pay mix between base, bonus and LTI. His target LTI increase is the long-term performance-based component of his pay. The overall positioning is slightly above median based on Mr. Clarks success and contribution in his role to date, the Companys improved performance and his relatively low position compared to his peer group CEOs over the past few years.
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 grant is set at the fair market value on the grant date. Under the stockholder-approved Incentive Stock Plan, the Company may not grant stock options at a discount to fair market value or reduce the exercise price of outstanding stock options (except in the case of a stock split or other similar event). The Company does not grant stock options with a so-called reload feature, nor does it loan funds to employees to enable them to exercise stock options. The Companys long-term performance ultimately determines the value of stock options, because gains from stock option exercises are entirely dependent on the long-term appreciation of the Companys stock price. Stock options granted since 2002 are exercisable in equal installments on the first, second and third anniversaries of the grant date and expire ten years from the grant date.
Because a financial gain from stock options is only possible after the price of Merck common stock has increased, the Company believes grants encourage executives and other employees to focus on behaviors and initiatives that should lead to a sustained long-term increase in the price of Merck common stock, which benefits all Merck stockholders.
Pursuant to his offer letter, Mr. Kellogg received options to purchase 175,000 shares of Merck common stock in the November quarterly cycle. Subject to its terms, this stock option grant will vest in equal installments on the first, second, third, fourth, and fifth anniversaries of the grant date and expire on the day before the tenth anniversary of the grant date. However,
No Backdating or Spring Loading: Merck does not backdate options or grant options retroactively. In addition, we do not intentionally coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information. Mercks options are granted at fair market value on a fixed date or event (such as the first business day of the quarter following a new employees start date), with all required approvals obtained in advance of or on the actual grant date. All grants to executive officers require the approval of the Compensation and Benefits Committee. The Companys general practice is to grant options only on the annual grant date and on a specified date each quarter, although there are occasions when grants have been made on other dates.
Fair market value is determined as the closing price on the grant date. In order to ensure that its exercise price fairly reflects all material informationwithout regard to whether the information seems positive or negativeevery grant of options is contingent upon a determination by the Companys General Counsel that the Company is not in possession of material undisclosed information. If the Company is in possession of such information, grants are suspended until the day after a full trading day following public dissemination of the information. (In 2007 and prior years, grants were suspended until the second day after public dissemination of the information.) In certain countries outside the United States, a higher, but not lower, grant price may be used to satisfy provisions of local applicable law.
Performance Share Units (PSUs) and Restricted Stock Units (RSUs) grants provide for the payout of shares of Merck Common Stock, generally in three years, if the recipient has met certain continued service requirements.
PSU payouts are contingent on the Companys performance against a pre-set objective or set of objectives. The performance period for all PSUs granted through December 31, 2007 is three years. The payout range is a number of shares equal to 0 percent to 200 percent of the number of target shares covered by the PSU grant. Payouts generally depend on earnings per share (EPS) growth compared to other leading healthcare companies (LHC) over the three-year award period. No dividends or dividend equivalents are paid during or after the award period. Through 2007, the Company made four PSU grantsin 2004, 2005, 2006 and 2007.
For the 2007 PSU grant, EPS growth will be calculated (on a percentage basis) and a rank will be determined for Merck and each of the LHC including Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Novartis, Pfizer, Sanofi-Aventis, Schering-Plough and Wyeth (the PSU Peers). At the end of the performance period, the three annual ranks will be averaged for each company and arranged from high to low. Mercks final rank will be determined by its three-year average rank position within the PSU Peers. The payout will then be determined according to the following table.
The 2004 PSU grant did not pay out at the end of the three-year performance period. The 2005 PSU grant paid out at 120% of target.
For grants made in 2008, the Committee changed the PSU performance measures. As compared to the prior PSU measures, the revised performance measures
The Committee believes the revised measures will further motivate executives to achieve the Companys financial goals, address key retention issues, focus executive efforts and balance short-term decision making to achieve annual results with the longer-term three-year performance objectives in mind.
Starting with 2008 grants, PSU awards will be made under a four-step process that spans the three-year performance cycle:
The table below shows the payout schedule described in Step 2 for grants made in 2008. Interim points of EPS achievement between stretch, target and minimum goals are interpolated
The Committee may adopt different performance measures for PSU grants from time to time, as it deems appropriate at the time of each grant. Additional information regarding PSUs is provided under Grants of Plan-Based Awards beginning on page 41 and Outstanding Equity Awards beginning on page 43.
Payouts, if any, of all PSUs granted in 2007 to executive officers under the stockholder-approved Incentive Stock Plan are expected to be fully deductible for federal income tax purposes because they qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.
As part of the 2007 annual Long Term Incentive grant process, executives and certain other management employees could elect to receive one RSU in lieu of receiving four options for a portion of their annual grant (if any). The election is made before the amount of any persons Long Term Incentive grant is determined.
The Company also grants RSUs to employees under special circumstances outside of the annual Long Term Incentive process. Grants under the Leader Shares program are made from time to time to a very limited employee population in connection with talent management objectives, giving particular attention to employees leadership potential and potential future contributions in achieving critical business goals and objectives. For example, on the same day as the annual grant, Dr. Kim and Mr. Frazier were granted 16,000 and 14,000 Leader Shares, respectively. All Leader Share grants vest in their entirety three years after grant date (earlier in the case of a retirement; earlier and pro rata for a separation).
The Company may also grant RSUs, as deemed appropriate, in new-hire situations. As part of his employment offer, Mr. Kellogg was granted 80,000 RSUs in early November. Subject to their terms, half will vest on each of the third and sixth anniversaries of the grant dates. However, the RSUs also will vest immediately on the last day of employment if employment terminates for reasons other than his voluntary termination or termination by Merck for gross misconduct but will continue to be payable on the third and sixth anniversary of their grant. RSUs terminate immediately if employment terminates for Mr. Kelloggs voluntary termination or termination by Merck for gross misconduct.
Dividend equivalents are paid on RSUs.
RSUs and dividend equivalents generally do not qualify as performance based compensation under Section 162(m) of the Internal Revenue Code, and so may not be deductible to the extent that when they vest (or are paid in the case of dividend equivalents), their value when aggregated with a Named Executive Officers other aggregate compensation which is subject to Section 162(m) exceeds $1 million, and the executive does not defer the excess under the Merck & Co., Inc. Deferral Program.
LTI Scheduled Grant Dates
Grants were made to the Named Executive Officers as part of an annual process that encompasses planning for all eligible Company employees globally, though not all receive grants. In 2007and consistent with the process in place for every year since 2000annual grants of options described in the Summary Compensation Table were made by the Compensation and Benefits Committee to the Named Executive Officers as of the first Friday following the Boards meeting on the last Tuesday in February. The Company also plans to make quarterly grants, on a selective basis, on the first business day of February, May, August and November. In 2007, the General Counsel determined the Company was in possession of material information on the date scheduled for November grants, so they were delayed until November 13, 2007. Stock options were granted to Named Executive Officers in 2007 only in accordance with these guidelines.
Stock Ownership Guidelines
In addition to aligning interests between employees and shareholders through potential stock ownership, the CEO and other senior management globally are expected to acquire and hold Merck Common Stock in an amount representing a multiple of base salary. There are four tiers within senior management globally covered by the guidelines, but the Named Executive Officers are all part of the first or second tier. The granting of stock options, PSUs, and RSUs are intended to help these executives satisfy the ownership guidelines. Until the designated multiple of base salary is reached, executives are expected to retain in Merck stock a percentage of the after-tax net proceeds associated with stock option exercises and/or PSU and RSU payouts.
Derivatives Trading. The Company grants stock-based incentives in order to align the interests of Mercks employees with those of its stockholders. Accordingly, the Company strongly discourages executive officers from buying or selling derivative securities related to Merck common stock such as puts or calls on Merck
Common stock since such securities may diminish the alignment that the Company is trying to foster. Company-issued options are not transferable during the executives life, other than certain gifts to family members (or trusts, partnerships, etc. that benefit family members). PSUs and RSUs are not transferable while the executive is alive under any circumstances.
Return of Incentive Compensation by an Executive
In 2007, the Compensation and Benefits Committee adopted the following policies to address a circumstance in which incentive compensation has been provided to certain executives, including Named Executive Officers, based on financial results that may become the subject of a significant restatement. For performance year 2007 and thereafter, in the case of a significant restatement of financial results caused by executive fraud or willful misconduct, the Board will
For these policies, executives means executive officers as defined under the Securities Exchange Act of 1934, as amended, and includes the Named Executive Officers.
The Audit Committee of the Board will determine whether a financial restatement is significant and will make an initial determination of the cause of the restatement. If the Audit Committee determines that fraud or willful misconduct may have been a factor causing the restatement, the Audit Committee will appoint an independent investigator whose decision will be final and binding to determine if an executives fraud or willful misconduct was a cause of the restatement. These policies do not apply to restatements that the Audit Committee determines are
For years before 2007, the Board will apply the above policies to the extent permitted by applicable law.
As salaried, U.S.-based employees, the Named Executive Officers participate in a variety of retirement, health and welfare, and paid time-off benefits designed to enable the Company to attract and retain its workforce in a competitive marketplace. Health and welfare and paid time-off benefits help ensure that the Company has a productive and focused workforce. Pension and savings plans help employees, especially long-service employees, save and prepare financially for retirement.
Mercks qualified 401(k) Plan allows highly compensated employees, including the Named Executive Officers, to contribute up to 15 percent of their base salary, up to the limits imposed by the Internal Revenue Code$230,000 for 2008on a pre- or after-tax basis. The Company provides a 75 percent match on the first 6 percent of employee contributions, which vests immediately. Participants choose to invest their account balances from an array of investment options as selected by plan fiduciaries from time to time, plus a Company
stock fund. The 401(k) Plan is designed to provide for distributions in a lump sum or up to 10 installments after termination of service. However, loansand in-service distributions under certain circumstances such as a hardship, attainment of age 59 1/2 or a disabilityare permitted. Named Executive Officers and other senior level executives also may defer annual cash awards, base salary, PSUs and RSUs into the Merck Deferral Program described under Nonqualified Deferred Compensation beginning on page 51. All amounts in the Deferral Program represent employee contributions and earningsthe Company does not make its own contributions, such as matching or profit sharing amounts.
The pension plans are more fully described under Retirement Plan Benefits beginning on page 48. The Supplemental Retirement Plan (SRP) provides benefits that would be provided under the Retirement Plan for the Salaried Employees of Merck & Co., Inc. (the Qualified Retirement Plan) but for the limits imposed on similar plans by the Internal Revenue Code. In addition, the SRPrather than the Qualified Retirement Planincludes in Final Average Compensation (one of the factors for the amount of benefit) compensation that is deferred into the Merck Deferral Program. The SRP provides a $50,000 minimum benefit to certain employees subject to mandatory retirement, but no Named Executive Officer is expected to benefit from that minimum. The only other difference between the Qualified Plan and the SRP is that additional credited service was provided for certain employees subject to mandatory retirement, a feature which was deleted for future accruals, effective in 1995. Mr. Frazier is the only Named Executive Officer who might benefit from this legacy provision.
Mercks Named Executive Officers, along with other senior management employees, are provided a limited number of perquisites whose primary purpose is the Companys desire to minimize distractions from the executives attention to important Merck initiatives. An item is not a perquisite if it is integrally and directly related to the performance of the executives duties. An item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the Company, unless it is generally available on a non-discriminatory basis to all employees. Amounts payable as perquisites are not included in determining an employees retirement benefits (as more fully described under Retirement Plan Benefits beginning on page 48).
The Company provides the following, all of which are quantified in the Summary Compensation Table on page 39.
In addition, Mr. Kellogg will be reimbursed, in accordance with Mercks Relocation Policy, certain reasonable expenses associated with his relocation to corporate headquarters upon joining the Company. Mr. Kellogg has been reimbursed $42,690 through December 31, 2007 for expenses related to temporary lodging, relocation allowance and tax gross-up.
The Company does not provide the Named Executive Officers with other perquisites such as split-dollar life insurance, reimbursement for legal counseling for personal matters, or tax reimbursement payments. The Company does not provide loans to executive officers. It does provide other employees with relocation loans in certain circumstances.
Separation, Change in Control and Other Arrangements
The Named Executive Officers are eligible for the benefits and payments if employment terminates in a Separation or if there is a Change in Control, as described under Potential Payments on Termination or Change in Control beginning on page 53, or under some circumstances pursuant to individual agreements described beginning on page 57. All fit into Mercks overall compensation structure by enhancing the Companys ability to attract, retain and motivate the highly talented individuals to lead the Company in achieving its mission while upholding our values in a highly competitive marketplace.
The primary focus of all of the foregoing is generally on termination of employment. As such, their value arises in the context of an imminent termination of employment. They do not generally enhance an employees current income, and therefore are independent of the direct compensation decisions made by the Committee from year to year.
Separation Benefits. The Separation Benefits Program covers regular full- and part-time non-unionized U.S. employees whose employment is terminated by the Company due to reorganization or reduction in workforce (i.e., a Separation). Until 2006, the plan had covered all employee levels except the most senior executive level of the Company (including all Named Executive Officers). In 2006, the Company extended its Separation Benefits Program to those senior executives on the terms previously provided to certain other high-level management employees. The extension was intended to facilitate extensive reorganization efforts Merck is undertaking to ensure that it has the right personnel to guide it in the competitive marketplace in which it operates.
The Separation Benefits Program provides severance payments and other benefits in an amount the Company believes is appropriate, taking into account the time it is expected to take a separated employee to find another job. The payments and other benefits are provided because the Company considers a Separation to be a Company-initiated termination of employment that under different circumstances would not have occurred and which is beyond the control of a separated employee. Separation benefits are intended to ease the consequences to an employee of an unexpected termination of employment. The Company benefits by requiring a general release from separated employees. In addition, the Company may request non-compete and non-solicitation provisions in connection with individual separation agreements. Severance payments are not included in determining an employees retirement benefits (as more fully described under Retirement Plan Benefits beginning on page 48).
The Company considers it likely that it will take more time for higher-level employees to find new employment, and therefore senior management employees generally are paid severance for a longer period than other employees. The Separation Benefits Program also provides an amount measured by previous annual bonuses to recognize the separated employees efforts undertaken during the time he or she was employed by the Company. It also provides different levels of protection from a pension and health and welfare benefit perspective, taking into account a persons age and service and also whether or not he or she is then eligible to retire. Additional payments may be permitted in some circumstances as a result of negotiations with executives, especially where the Company desires particular nondisparagement, cooperation with litigation, noncompetition and nonsolicitation terms. See Individual Agreements under the Potential Payments on Termination or Change in Control beginning on page 53 for additional information.
Change in Control. The Board adopted the Change in Control Separation Benefits Plan in 2004. The Board adopted the plan as part of its ongoing, periodic review of the Companys compensation and benefits programs and in recognition of the importance to the Company and its shareholders of avoiding the distraction and loss of key management personnel that may occur in connection with rumored or actual fundamental corporate changes. A properly designed change in control program protects stockholder interests by enhancing employee focus during rumored or actual change in control activity through:
Merck stock options, RSUs and PSUs generally vest upon a change in control, either in whole or in part (as fully described under Change in Control beginning on page 59). The remainder of benefits generally requires a change in control, followed by a termination of an executives employment.
The Company was guided by three principles in adopting the so-called single trigger treatment for equity vehicles and in determining the amount of the benefits on a Change in Control:
Each of the Change in Control Plan benefits are intended to work together as a retention device during change in control discussions, especially for more senior executives, in a marketplace where similar benefits are common. As shown under Change in Control beginning on page 59, the Company will provide gross-ups for the Named Executive Officers from any taxes due under Section 4999 of the Code. The effects of Section 4999 generally are unpredictable and can have widely divergent and unexpected effects based on an executives personal compensation history. Therefore, to provide an equal level of benefit across individuals without regard to the effect of the excise tax, the Company determined that Section 4999 gross-up payments are appropriate for the Companys most senior level executives.
Compensation and Benefits Committee Report
The Compensation and Benefits Committee, comprised of independent directors, reviewed and discussed the above CD&A with the Companys management. Based on the review and discussions, the Compensation and Benefits Committee recommended to the Companys Board of Directors that the CD&A be included in these Proxy Materials.
The following table summarizes the total compensation that was paid or accrued for the Named Executive Officers for the fiscal years ended December 31, 2007 and 2006. The Named Executive Officers are the Companys Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers ranked by their total compensation in the table below (reduced by the amount in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column (h)).
for Fiscal Years Ended December 31, 2007 and 2006
All Other Compensation2007 and 2006
The following table provides information on stock options, restricted stock units and performance share units granted in 2007 to each of the Companys Named Executive Officers. There can be no assurance that the Grant Date Fair Value of Stock and Option Awards will ever be realized. The amount of these awards that were expensed in 2007 is shown in the Summary Compensation Table on page 39.
for Fiscal Year Ended
December 31, 2007
PSUs held by a retirement-eligible participant (Messrs. Clark and Anstice) are forfeited if retirement occurs within six months of grant, but otherwise a pro-rata portionbased on the number of completed months of service during the award periodwill be payable at the same time as active grantees are paid. If a grantee dies, a pro-rata portion of Target is payable to the estate soon after the grantee dies. If a grantees employment is terminated by the Company due to elimination of the grantees job, or the sale of his or her subsidiary, division or joint venture (a Separation), a pro-rata portion of the grant is distributable at the same time as active grantees, and the remainder is forfeited. If a grantees employment is terminated due to gross misconduct, the entire award is forfeited.
All PSUs have a grant date per-PSU FAS 123R value of $44.19. There can be no assurance that any amount will be paid in respect of PSUs.
RSUs held by a retirement-eligible participant are forfeited if retirement occurs within six months of grant, but otherwise will be payable as if employment had continued. If a grantee dies during the Restricted Period, a pro rata portion is distributed to his or her estate. If a grantees employment is terminated by the Company in a Separation (as described in (1) above), a pro-rata portion of the grant is distributable soon after the separation date, and the remainder is forfeited. If a grantees employment is terminated due to gross misconduct, the entire award is forfeited. Column (k) shows the grant date FAS 123R value for the RSUs. The per-RSU FAS 123R value was $44.19 for all RSUs other than Mr. Kelloggs grant, which was $57.49 per RSU. Mr. Kellogg received a grant of RSUs under terms of his employment agreement. 50% of the RSUs vest in three years and 50% vest in six years. See Note 12. Share-Based Compensation Plans to the Companys consolidated financial statements set forth in the 10-K for the assumptions made in determining FAS 123R values. There can be no assurance that the value on distribution will equal the FAS 123R value.
Options held by retirement-eligible participants who retire continue as if employment had continued. The options of grantees who die vest in their entirety and expire on the earlier of the day before the third anniversary of death, or the original expiration date. If a grantees employment is terminated by the Company in a Separation (as described in (1) above), all options vest immediately and expire the day before the second anniversary of the separation date. If a grantees employment is terminated due to gross misconduct, the entire award is forfeited. For other employment terminations, options that are then vested expire within three months of termination and unvested options expire immediately.
The exercise price of all options granted in 2007 equals the closing price of Merck Common Stock as traded on New York Stock Exchange on the grant date.
Column (k) represents the aggregate FAS 123R values of options granted during the year. The per-option FAS 123R grant date value was $9.14 each for all options other than Mr. Kelloggs, which was $13.88 per option. See Note 12. Share-Based Compensation Plans to the Companys consolidated financial statements set forth in the 10-K for the assumptions made in determining FAS 123R values. There can be no assurance that the options will ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will equal the FAS 123R value.
The following table shows the number of shares covered by exercisable and unexercisable options and unvested RSUs and PSUs held by the Companys Named Executive Officers on December 31, 2007.
at Fiscal Year Ended
December 31, 2007
The table below shows the number of shares of Merck common stock acquired during 2007 upon the exercise of options.
for Fiscal Year Ended December 31, 2007
Equity Compensation Plan Information
The following table summarizes information about the options, warrants and rights and other equity compensation under the Companys equity plans as of the close of business on December 31, 2007. The table does not include information about tax qualified plans such as the Merck & Co., Inc. Employee Savings and Security Plan.
Retirement Plan Benefits
The table below quantifies the benefits expected to be paid from the Companys two defined benefit pension plansthe Retirement Plan for the Salaried Employees of Merck & Co., Inc. (the Qualified Plan) and the Merck & Co., Inc. Supplemental Retirement Plan (the SRP). The terms of the plans are described below the table.
for Fiscal Year Ended
December 31, 2007
The Named Executive Officers participate in the Companys two defined benefit plans as do other Merck salaried employees. Benefits payable under the Qualified Plan and the SRP (together with the Qualified Plan, the Retirement Plans) are based on a formula that yields an annual amount payable over the participants life beginning at age 65.
Formula. The annual amount of benefit under the Retirement Plans is under a formula which
Final average compensation means the average of a participants highest five consecutive calendar years of pay for the 10 calendar years before he or she terminates employment. Pay for this purpose means the greater of (a) or (b):
Vesting. A participant vests in his or her benefitthat is, the benefit that is accrued will not be forfeited back to the planswhen his or her employment includes any portion of five calendar years. For example, Mr. Kellogg, whose employment began in 2007, will vest if his employment continues into 2011.
A participant who is vested but terminates employment before being eligible for early retirement subsidies is referred to as a terminated vested participant and can commence receiving benefits from the Retirement Plans on the first day of any month between the month after attaining age 55 and the month after attaining age 65. The amount of the benefit is reduced from the age 65 benefit on an actuarial basis, which takes into account the participants life expectancy and expected plan returns and is substantialfor example, a participants $100 accrued benefit (at age 65) would be reduced to about $34 if it began at age 55.
Early Retirement Subsidies. If a participant terminates employment at or after age 55 when he or she has at least 10 years of credited service, then he or she is entitled to early retirement subsidiesthat is, a reduction for commencing before age 65 that is smaller than the actuarial reduction for terminated vested participants. For an early retiree, benefits are reduced by 3 percent per year that benefits begin before age 62. For example, an early retirees $100 accrued benefit would be unreduced if he or she waited until age 62, or would be reduced to $79 if he or she commenced at age 55.
However, under a so-called Rule of 85, a participant who retired from active service when his or her age plus years of Credited Service totaled at least 85 (e.g., age 55 with 30 years of credited service) could receive an unreduced immediate benefit. In addition, a Social Security Bridge Benefit represented an additional benefit for
eligible early retirees by providing a temporary monthly supplement prior to age 62 to avoid the Social Security offset described above in the benefit formula, so the offset would not apply until a participant attained age 62. Both of these benefits were eliminated from the Retirement Plans on July 1, 1995. However, transition benefits were added to replace all or part of the benefit for participants who were participating in the Retirement Plans on July 1, 1995 and were then at least age 40. The following Named Executive Officers are eligible for these transition benefits in the percentage shown.
Transition Percentage for Named Executive Officers
Other Named Executive Officers do not have any transition benefit.
In addition, a participant who terminates employment due to a disability that can reasonably be expected to permanently disable him or her from any job anywhere may be approved for a disability retirement. In such a case, the participants benefit which has then accrued is not reduced for early commencement.
SRP Benefits. The Qualified Plan benefits are limited by various applicable constraints by the Internal Revenue Code. The SRPwhich is an unfunded plan maintained to provide benefits to a select group of management and highly compensated employeesprovides the benefits according to the formula described above which exceed those limits, as well as benefits:
In addition, for employees who, prior to January 1, 1995, were determined by the Company to have occupied bona fide executive or high policymaking positions and who did not have 35 years of credited service, an enhanced benefit payable upon retirement from active service at age 65 (unless the Compensation and Benefits Committee of the Board consents to payment upon early retirement, death or disability prior to age 65). The enhanced benefit is an amount calculated under the benefit formula in the Qualified Plan using one additional month of credited service for each month of credited service accrued prior to January 1, 1995, during, or prior to attainment of, the designated position (up to the 35-year total) minus
The SRP was amended as of January 1, 1995 to prospectively eliminate this enhanced benefit. Under his prior accrual, if Mr. Frazier retires from service at age 65, he will have 30 years of Credited Service (as compared to 27.5, without benefit of this provision). The provision does not affect any other Named Executive Officer.
Forms of Benefit. Participants in the Qualified Plan generally can choose among the following array of optional forms of benefit.
All forms of benefit are actuarially equivalent to the single life annuity. All forms use a 9 percent interest rate except for the lump sum which uses interest rates based on long term U.S. Treasury interest rates, as required by the Internal Revenue Code. The interest rate changes quarterly: during 2007, the interest rates in effect were between 4.74% and 5.07%.
SRP Payments. Payments under the SRP generally follow the timing and form of benefit that applies to the Qualified Plan. However, a participant who elects a lump sum under the Qualified Plan, or one who cannot satisfy the spousal consent requirements applicable to the Qualified Plan, may choose any other form of benefit described above for his or her SRP benefit.
Nonqualified Deferred Compensation
The following table shows the executive contributions, earnings and account balances for the Named Executive Officers in the Merck & Co. Inc. Deferral Program (the Deferral Program), an unfunded, unsecured deferred compensation plan. The Deferral Program allows participants who are executive officers (including all Named Executive Officers) to defer
for Fiscal Year Ended
December 31, 2007
The Executive Contributions column above (column (b)) shows amounts that were also reported as either Salary or Non-Equity Incentive Plan Awards in the Summary Compensation Table on page 39. Those amounts, as well as amounts in the Aggregate Balance column (column (d)) that represent salary or bonus that were reported in the Summary Compensation Tables for Proxy Materials in prior years, are quantified below. The table below also quantifies the annual rate of return earned by the Named Executive Officers during 2007.
Deferral Program Investments: The Company does not make any Company contributions to the Deferral Programthe aggregate balances shown above represent amounts that the Named Executive Officers earned but elected to defer, plus earnings (or losses). Account balances may be invested in phantom investments selected by the executive from an array of investment options that mirrors the funds in the 401(k) Plan. The array changes from time to time; as of December 31, 2006, participants could choose among several different investments, including domestic and international equity, income, short term investment, blended fund investment and Company stock funds. Participants can daily change their investment selections prospectively by contacting the 401(k) Plans trustee in the same manner that applies to participants in the 401(k) Plan.
Beginning in 2007, PSUs and RSUs may be deferred into the Deferral Program instead of being paid out. However, any deferred RSU or PSU may only be invested in the phantom Merck Common Stock Fundthey may not later be redesignated out of the Merck Common Stock Fund.
Distributions: When participants elect to defer amounts into the Deferral Program, they also select when the amounts ultimately will be distributed to them. Distributions may either be made in a specific yearwhether or not employment has then endedor at a time that begins at or after the executives retirement or separation. Separation generally means a Company initiated termination of employment due to a restructure or lack of work. Distributions can be made in a lump sum or up to 15 annual installments. However, soon after a participants employment ends, his or her account balance is automatically distributed in a lump sumwithout regard to his or her electionif
In 2006, the Deferral Program was revised so that beginning in 2007, participants may change their distribution schedule, provided the new elections satisfy the requirements of Section 409A of the Internal Revenue Code. In general, 409A requires that
Potential Payments on Termination or Change in Control
The section below describes the payments that may be made to Named Executive Officers upon Separation (as defined below), pursuant to individual agreements, or in connection with a Change in Control. For payments made to a participant upon a retirement other than in connection with a Separation or Change in Control, see Retirement Plan Benefits beginning at page 48.
The Company provides separation pay and benefits to all of its most senior executives, including the Named Executive Officers, according to the Merck & Co., Inc. Separation Benefits Plan for Non-Union Employees (the Separation Plan). An amount related to prior Executive Incentive Plan awards is provided under certain circumstances. To be eligible for all of the benefits described below, a general release of claims in the form determined by the Company is required, as well as nondisparagement, cooperation with litigation and, in some cases, noncompetition and nonsolicitation agreements as determined by the Company in connection with, and at the time of, the separation.
Severance Pay. The Separation Plan provides severance pay to separated employeesthat is, eligible salaried employees whose employment is terminated by the Company due to organizational changes including discontinuance of operations, location closings or corporate restructuring or a general reduction in work force (a Separation). Under an enhancement in effect until December 31, 2008, separated employees in Bands 1 through 3, including the Named Executive Officers, will receive
Amounts are payable over the number of weeks described above. However, for the Named Executive Officers and other of the Companys highest paid employees, Section 409A of the Internal Revenue Code forbids payments on account of a severance of employment to be made during the six month period following termination of employment. To comply, the Company holds the amounts that would otherwise have been payable for the required period and pays them, in a lump sum without interest, soon after permitted under Section 409A.
Notice Pay. The Separation Plan provides that the Company will provide advance notice, or pay in lieu of notice, of an employees Separation Date, in the following amounts:
Outplacement Assistance. Under the Separation Plan, separated employees in Bands 1 through 3, including the Named Executive Officers, are eligible for up to 12 months of senior executive outplacement services from the Companys outplacement vendor at the Companys expense.
As part of its standard practice for separated employees, the Company may pay an amount in lieu of an Executive Incentive Plan or Annual Incentive Plan (in the case of other salaried employees), depending on the Separation Date.
Effects Under Other Benefit Plans
All separated employees are entitled to certain benefits under other Merck plans as described below. In general, the benefits depend upon whether an employee is Retirement Eligible, Bridged, or Other Separated, as the terms are defined below.
Retirement Eligible Employees are separated employees who, as of their Separation Date, are at least age 55 with at least 10 years of credited service under the Retirement Plan (both the Qualified Plan and the SRP) or are at least age 65 without regard to years of credited service. For Retirement Eligible Employees, a Transition Rule of 85 is provided if the Employee is within two years of attaining eligibility for the benefit on his or her Separation Date. The Rule of 85 Transition benefit is described under Retirement Plan Benefits beginning at page 48. Payments may be made from the Retirement Plan and Supplemental Retirement Plan at the time and in the form described under Retirement Plan Benefits.
Bridged Employees generally are separated employees who are not Retirement Eligible but who, as of their Separation Date, are at least age 49 with at least nine years of credited service under the Retirement Plan. All Separated Bridged employees receive the following benefits:
In addition, a Pro-Rata Fraction of the Rule of 85 Transition Benefit described above is also provided to Bridged Separated Employees who are within two years of attaining eligibility for the benefit on their Separation Dates. Pension benefits will not be paid to a Bridged Employee before he or she attains age 55. Benefits may be paid in the forms described under Retirement Plan Benefits.
Other Separated Employees are Salaried Employees who are not Retirement Eligible or Bridged Employees. All of the Other Separated Employees are eligible for continued participation in the medical, dental and life insurance plans for the greater of six months or the number of weeks for which they are eligible for severance pay, by paying contributions at the same rate as paid by active Employees from time to time. Other Separated Employees are also treated under the provisions applicable to separated employees with respect to their options, RSUs and PSUs.
Additional Payments and Benefits
In addition to the payments and benefits described above, the Compensation and Benefits Committee of the Board may authorize additional payments when it separates a Named Executive Officer. Although not obligated to do so, the Committee in the past has provided an additional amount measured by reference to the Named Executive Officers EIP award, additional financial planning, and relocation assistance to some separated executives. In addition, if a Named Executive Officers employment was terminated but the termination was not a Separation, the above payments and benefits are not payable. However, the Company might agree to make the payments it deems necessary to negotiate a definitive termination agreement with the terms, such as a general release of claims, nondisparagement, cooperation with litigation, noncompetition and nonsolicitation agreements, as determined by the Company.
The table below estimates amounts payable upon a separation as if the individuals were separated on December 31, 2007 using the closing share price of Merck common stock as of that day.
Separation Plan Payment and Benefit Estimates
December 31, 2007
In addition to the benefits and payments provided for separated employees and following a Change in Control, Mr. Clark, Dr. Kim, and Mr. Anstice have agreements with the Company that may affect the amount paid or benefits provided following termination of their employment under certain conditions as described below.
Mr. Clark: If Mr. Clarks employment were to be terminated by the Company without cause and without a Change in Control, he would be provided with salary continuation and target bonus for two years (or until Mr. Clark attains age 65, whichever is shorter). The salary continuation would be payable according to the Companys normal payroll practices for its executive officers and the target bonus would be payable in a lump sum. The amount would have been approximately $8,160,019 if his employment would have been terminated by the Company on December 31, 2007. Any severance pay would be contingent upon a release and other customary provisions.
Mr. Kellogg: In the event that, during the period beginning on his date of hire and ending two years after the appointment of a successor CEO to Richard T. Clark, the Company terminates his employment for a reason other than gross misconduct, the Company will pay to Mr. Kellogg a lump sum in the amount of eighteen months salary, subject to appropriate tax withholding, upon such termination of his employment, provided that upon the termination of his employment he must timely sign and comply with noncompete, nonsolicitation and nondisclosure covenants and a waiver and release of claims in a format prescribed by the Company. This severance payment is in lieu of any other severance or separation pay that he might be entitled to under any applicable Merck policy or policies.
If at the time his employment terminates he is a Specified Employee as defined in Treas. Reg. Sec. 1.409A-1(i) or any successor thereto, (which in general includes the top 50 employees of a company ranked by compensation), to the extent required by Section 409A of the Internal Revenue Code of 1986, as amended, the severance payment described above will be made in a lump sum, without interest, as soon as administratively feasible on the first day of the sixth month after the termination of his employment.
Dr. Kim: If the Company terminates Dr. Kims employment for a reason other than gross misconduct before the second anniversary of Mr. Raymond Gilmartins (former Merck CEO and President) retirement date of March 30, 2006, it will make a one-time grant of $2,000,000 to an academic institution, designated by Dr. Kim, for the sole purpose of enabling him to set up and maintain a research laboratory as an employee of that institution, provided that the designated institution hires him within a year. In that case, Dr. Kim would be subject to noncompete and nondisclosure provisions and a waiver and release of claims, in a format prescribed by the Company, on terms not less favorable to Dr. Kim than to other departing MRL employees at his grade level during the preceding five years.
In connection with commencement of his employment, Dr. Kim received a non-qualified stock option to purchase 125,000 shares of Merck Common Stock, which was adjusted to 131,874 shares to reflect the spin-off of Medco Health Solutions, Inc. In addition, while an employee, Dr. Kim is eligible to receive grants of options to purchase shares of Merck Common Stock under the Incentive Stock Plans. Generally, the terms and conditions of those options are on the same terms as annual grants made to other employees at his grade level. However, during the period from the effective date of Mr. Gilmartins retirement through the second anniversary of such retirement, if the Company terminates Dr. Kims employment for any reason other than gross misconduct, all of his unvested options will vest on his termination date and be exercisable for five years thereafter.
As used in his offer letter, gross misconduct means unauthorized disclosure of information known to be proprietary or confidential; embezzlement, theft or other misappropriation of Company assets; falsification of records or reports; deliberate or reckless action that causes actual or potential injury or loss to the Company or employees of the Company; failure to carry out assigned duties after notice in writing that such failure, if not corrected, will result in termination of employment; or an illegal act on Company property or in representing the Company.
Mr. Anstice: In 2006, the Company and Mr. Anstice entered into an agreement concerning his employment status following his appointment as Executive Vice President, Strategy Initiatives. If his employment terminates before July 31, 2013except a termination by the Company for cause or a separation that would entitle him to payment under the Merck Separation PlanMr. Anstice will be entitled to the following severance payments and benefits:
In consideration of these benefits, Mr. Anstice is subject to the following obligations:
For purposes of his agreement, cause includes:
Change in Control
Participants in the Change in Control Plan include the Named Executive Officers as well as certain other senior managers. With respect to the Named Executive Officers, the following severance benefits would be provided upon qualifying terminations of employment in connection with or within two years following a change in control of the Company:
Terminations of employment that entitle a Named Executive Officer to receive severance benefits under the plan consist of (1) termination by the Company without cause or (2) resignation by the Named Executive Officer for good reason, in each case within two years following a change in control. A Named Executive Officer is not eligible for benefits under the plan if his or her termination is due to death or permanent disability.
A change in control for purposes of the plan generally consists of any of the following:
A termination for good reason for the Named Executive Officers generally includes any of the following Company actions without the executives written consent following a change in control:
However, the executive does not have good reason if he or she does not provide the Company
A termination by the Company for Cause generally includes
To receive the severance benefits under the plan, a Named Executive Officer must execute a general release of claims against the Company and its affiliates, which includes certain restrictive covenants, including a commitment by the Named Executive Officer not to solicit Company employees for two years following the
change in control. The severance benefits are in lieu of (or offset by) any other severance benefits to which a Named Executive Officer may be entitled under other arrangements of the Company. The cash severance pay is paid in the form of salary continuation, and it and the other benefits under the plan (other than the tax-qualified pension benefits) are generally subject to discontinuation in the event of breach by the Named Executive Officer of the restrictive covenants and other obligations under the release. Named Executive Officers have no obligation to mitigate the severance benefits under the plan.
The Named Executive Officers are entitled to full indemnification for any excise taxes that may be payable under Section 4999 of the Internal Revenue Code of 1986, as amended, in connection with the change in control and payment of their legal fees if they prevail on a claim for relief in an action to enforce their rights under the plan or in an action regarding the restrictive covenants contained in the general release.
In general, the Board may amend or terminate the plan prior to a change in control. However, neither the amendment of the plan in a manner that adversely affects Named Executive Officers and other participants prior to a change in control nor the termination of the plan prior to a change in control would be effective if done within one year of a change in control or at the request of an acquirer. Following a change in control, the plan may not be amended or modified in any way that would adversely affect Named Executive Officers and other participants in the plan at the time of the change in control.
Except with respect to certain incentive stock options issued before February 2005:
A change in control for purposes of these amendments has the same meaning that it has under the Change in Control Separation Benefits Plan, except as to awards that are deferred compensation subject to the American Jobs Creation Act of 2004 (the AJCA), in which event the definition permitted under the AJCA will apply.
In addition, the compensation and employee benefit plans, programs and arrangements of the Company generally provide the following:
The table below was prepared as though a Change in Control occurred and the Named Executive Officers employment was terminated on December 31, 2007 using the share price of Merck common stock as of that day (as required by the Securities and Exchange Commission). With those assumptions taken as given, the Company believes the remaining assumptions listed below, which are necessary to produce these estimates, are reasonable individually and in the aggregate. However, a change in control did not occur on December 31, 2007 and the executives were not terminated on that date. There can be no assurance that a change in control would produce the same or similar results as those described if it occurs on any other date or at any other price, or if any assumption is not correct in fact.
Change in Control Payment and Benefit Estimates
December 31, 2007