UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.    )

 

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MERCK & CO., INC.

 

(Name of Registrant as Specified In Its Charter)

 

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

 

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NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS

 

MEETING INFORMATION May 28, 2019 9:00 a.m. EST Bridgewater, New Jersey

TO THE MERCK SHAREHOLDERS: The shareholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, May 28, 2019, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807.

 

 

THE PURPOSES OF THE MEETING ARE TO:

•     Elect the 12 Director nominees named in the proxy statement; •    Consider and act upon a proposal to approve, by non-binding advisory vote, the compensation of our Named Executive Officers; •    Consider and act upon a proposal to adopt the 2019 Incentive Stock Plan; •    Consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2019;

•     Consider and act upon a shareholder proposal concerning an independent board chairman, if properly presented at the meeting; •     Consider and act upon a shareholder proposal concerning executive incentives and stock buybacks, if properly presented at the meeting; •     Consider and act upon a shareholder proposal concerning drug pricing, if properly presented at the meeting; and •     Transact such other business as may properly come before the meeting.

 

 

Only shareholders listed on the Company’s records at the close of business on March 29, 2019, are entitled to vote.

 

Merck began distributing its Notice of Internet Availability of Proxy Materials, proxy statement, the 2018 Annual Report on Form 10-K, and proxy card/voting instruction form, as applicable, to shareholders and to employee benefit and stock purchase plan participants on April 8, 2019.

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

 

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IT IS MY PLEASURE TO INVITE YOU TO THE 2019 ANNUAL MEETING OF SHAREHOLDERS OF MERCK & CO., INC. (“MERCK,” KNOWN AS “MSD” OUTSIDE THE UNITED STATES AND CANADA), WHICH WILL BE HELD ON TUESDAY, MAY 28, 2019, AT 9:00 A.M., AT THE BRIDGEWATER MARRIOTT, LOCATED AT 700 COMMONS WAY, BRIDGEWATER, NEW JERSEY 08807.

 

The attached Notice of Annual Meeting of Shareholders and proxy statement will serve as your guide to the business to be conducted and provides details regarding admission to the meeting.

 

“We built on our legacy and commitment by bringing forward the kind of medical innovation the world needs. This progress is validation of our long-term investment in R&D, and together with our focused commercial execution, led to a strong year.”

 

Merck was established 128 years ago to help address the world’s most pressing health challenges. Today, our commitment to be the premier research-intensive biopharmaceutical company in the world fuels our pursuit of medical breakthroughs that will benefit patients, our shareholders and society at large for today and for generations to come.

 

This past year was an especially notable one. We built on our legacy and commitment by bringing forward the kind of medical innovation the world needs. This progress is validation of our long-term investment in R&D, and together with our focused commercial execution, led to a strong year. Our Company saw meaningful top- and bottom-line growth — the highest in years.

 

Going forward, we are confident in the growth potential of our portfolio of market-leading products in oncology, vaccines, and hospital and specialty products, as well as our industry-leading animal health business.

 

In 2018, Merck continued to redefine the standard of care in oncology with our foundational cancer medicine, KEYTRUDA. This treatment continues its unprecedented trajectory and is now approved for 16 indications across 10 different types of cancer; by the end of 2018, approximately 175,000 patients had been treated with this therapy since launch. Today, there are more than 900 clinical trials studying KEYTRUDA across a wide variety of treatment and cancer settings. In 2018, our leadership in immuno-oncology was exemplified by the launch of our KEYTRUDA plus chemotherapy indications in non-small cell lung cancer. It was further bolstered by Lynparza and Lenvima — both results of strategic business development — and a pipeline of more than 20 novel mechanisms that show early promise for continuing to turn the tide in the fight against cancer.

 

We also saw significant advancement within our vaccines portfolio, led by GARDASIL, our HPV vaccine. Health authorities around the world are increasingly recognizing how this vaccine helps prevent certain HPV-related cancers, including cervical cancer. Our vaccines pipeline is perhaps the strongest it has ever been.

 

Our hospital and specialty care business is performing well, driven by sales of BRIDION. In addition, in 2018, two new medicines for HIV were approved in the United States and Europe that build on our legacy in this therapeutic area.

 

Meanwhile, our animal health business continues to deliver strong results. As the world struggles to feed nearly 100 million new people each year, we believe we can make an important contribution to sustainable food supply.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

 

LETTER FROM THE CHAIRMAN, PRESIDENT AND CEO

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MERCK & CO., INC. 2019 PROXY STATEMENT

 

 

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MERCK & CO., INC. 2019 PROXY STATEMENT

 

 

TABLE OF CONTENTS

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CONTENTS

 

Proxy Summary	8
Corporate Governance	13
Board’s Role in Strategic Planning	13
Independence of Directors	14
Board Leadership Structure	15
Lead Director	16
Criteria for Board Membership and Director Nomination Process	17
Succession Planning	18
Annual Board Evaluation	19
Risk Oversight	19
Related Person Transactions	20
Board Meetings and Committees	20
Compensation Consultants	23
Shareholder Engagement	24
Shareholder Communications with the Board	25
Political Contributions and Lobbying Expenditure Oversight and Disclosure	25
Commitment to Corporate Responsibility	26
Stock Ownership Information	28
Stock Ownership of Directors and Officers	28
Stock Ownership of Certain Beneficial Owners	29
Section 16(a) Beneficial Ownership Reporting Compliance	29
Proposal 1. Election of Directors	30
2019 Nominees for Director	30
Director Compensation	37
2018 Director Compensation	38
Proposal 2. Non-Binding Advisory Vote to Approve the Compensation of Our Named Executive Officers	40
Compensation Discussion and Analysis	42
Summary Compensation Table	57
Grants of Plan-Based Awards	61
Outstanding Equity Awards	63
Option Exercises and Stock Vested	65

 

Pension Benefits	66
Nonqualified Deferred Compensation	69
Potential Payments Upon Termination or a Change in Control	70
Proposal 3. Proposal to Adopt the 2019 Incentive Stock Plan	75
Proposal 4. Ratification of Appointment of Independent Registered Public Accounting Firm for 2019	84
Audit Committee’s Report	85
Pre-Approval Policy for Services of Independent Registered Public Accounting Firm	85
Fees for Services Provided by the Independent Registered Public Accounting Firm	86
Shareholder Proposals	87
Proposal 5. Shareholder Proposal Concerning An Independent Board Chairman	87
Proposal 6. Shareholder Proposal Concerning Executive Incentives and Stock Buybacks	90
Proposal 7. Shareholder Proposal Concerning Drug Pricing	92
Questions and Answers About the Annual Meeting and Voting	94
Shareholder Proposals and Director Nominations for the 2020 Annual Meeting of Shareholders	98
Forward Looking Statements	99
Other Matters	99
Appendix A — Non-GAAP Income and Non-GAAP EPS	100
Appendix B — Explanation of Adjustments to Non-GAAP Results for Incentive Plans	102
Appendix C — Merck & Co., Inc. 2019 Incentive Stock Plan	103

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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BUSINESS HIGHLIGHTS

 

5% Revenue Growth despite the negative impact of $1.2B in loss of exclusivity

$9.8B GAAP investment in R&D in 2018

 

SHAREHOLDER VALUE CREATION

 

$14.3B Capital Returned to Shareholders (dividends and share repurchases)		15% increase to quarterly dividend beginning in January 2019			TOTAL SHAREHOLDER RETURN
					Year-end 2018
					1-YEAR 40.0%	3-YEAR 16.6%		5-YEAR 12.3%
					TOP QUARTILE			ABOVE MEDIAN

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROXY SUMMARY 2018 NEOs AND COMPENSATION HIGHLIGHTS

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2018 NEOs AND COMPENSATION HIGHLIGHTS (PAGE 47) 

Below is a list of our 2018 Named Executive Officers (“NEOs”) and select compensation highlights from 2018. For additional information on our elements of 2018 compensation, please refer to the Compensation Discussion and Analysis (“CD&A”), beginning on page 42.

 

		Annual Base Salary Increase%	Target Annual Incentive	Target Long-Term Incentive	Total Target Direct Compensation Increase%
	Kenneth C. Frazier Chairman, President and Chief Executive Officer	+2.2%	No change	+$500,000	+3.6%
	Robert M. Davis Executive Vice President, Global Services, and Chief Financial Officer	+2.5	No change	No change	+0.9
	Roger M. Perlmutter Executive Vice President and President, Merck Research Laboratories	+3.0	No change	No change	+1.1
	Adam H. Schechter* Former Executive Vice President and President, Global Human Health	+2.5	No change	No change	+0.9
	Jennifer L. Zachary Executive Vice President and General Counsel	New Hire

 

*Mr. Schechter served as Executive Vice President and President, Global Human Health until December 31, 2018.

 

VARIABLE COMPENSATION IS A CRITICAL COMPONENT OF OUR PAY-FOR-PERFORMANCE OBJECTIVES (PAGE 44)

Merck’s compensation programs are designed to align the interests of our executives with the interests of our shareholders. For this reason, a significant portion of the pay of our NEOs is variable and at-risk, subject to Company performance as measured against financial, operating and strategic objectives, as well as relative Total Shareholder Return (“R-TSR”). The Company’s variable incentives demonstrate a strong linkage between pay and performance.

 

Annual Cash Incentive — The Company Scorecard (described in more detail on page 50) focuses on our most critical business drivers — revenue, pre-tax income and pipeline — and is used to determine the payout of our annual incentive for all eligible employees, including our NEOs under the Executive Incentive Plan (“EIP”). Our Scorecard performance during 2018 resulted in above-target achievement of 126%.

 

Long-Term Incentive (“LTI”) — The Performance Share Units (“PSUs”) granted for the 2016-2018 performance period provided senior executives with the opportunity to earn share awards based on cumulative, three-year Operating Cash Flow (“OCF”) and R-TSR performance versus our Peer Group, each weighted at 50%. The overall payout for the three-year period ending December 31, 2018 was 126%, reflecting a score of 115% of target based on OCF results and 137% of target based on R-TSR results versus Peers. Additional details about our PSU program and the 2016-2018 PSU award cycle are provided beginning on page 53.

 

SAY-ON-PAY ADVISORY VOTE (PAGE 45)

In 2018, shareholders continued their support for our executive compensation programs with 95% of the votes cast for approval of the say-on-pay proposal. Consistent with the Company’s strong interest in shareholder engagement and our pay-for-performance approach, the Compensation and Benefits Committee has continued to examine our executive compensation program to ensure alignment between the respective interests of our executives and shareholders. No significant changes were made to our executive compensation program in 2018 as a result of the say-on-pay vote.

 

We ask that our shareholders approve, on an advisory basis, the compensation of our NEOs as further described in Proposal 2 on page 40.

 

For additional information, please refer to the CD&A in this proxy statement.

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROXY SUMMARY GOVERNANCE HIGHLIGHTS

 

 

GOVERNANCE HIGHLIGHTS

Good corporate governance benefits both our customers and our shareholders, and is essential to our long-term business success. For this reason, we devote considerable time and resources to making sure that:

•

our policies reflect our values and business goals;

•

we have an effective corporate governance structure; and

•

we are operating in a way that is open, honest and transparent.

 

We highlight some significant aspects of our corporate governance practices below.

 

RECENT DEVELOPMENTS •   Engaged a third-party to facilitate the Board’s 2018 self-evaluation •   Formally adopted a Diversity Policy within the Policies of the Board

 

Independence •   Eleven of our twelve director nominees are independent. •   We have a strong independent lead director. •   Our independent directors convene regular executive sessions. •   All four of our standing Board committees (Audit, Compensation and Benefits, Governance and Research) are comprised solely of independent directors.   Accountability •   Every director stands for re-election every year. •   Directors are elected by majority vote.   Best practices •   Our Board of Directors as a whole, and each individual Board committee, conducts a self-evaluation every year. •   The Board actively participates in CEO succession planning. •   The Board is diverse in terms of gender, ethnicity, experience, and skills.   Transparency •   We have strong control over our political spending, and disclose corporate political activity. •   We disclose aspects of our public policy engagement.   Board oversight •   The full Board and each individual Board committee is responsible for overseeing risk. •   The full Board oversees corporate strategy.

Alignment with shareholder interests •   Our officers and directors are prohibited from engaging in hedging, pledging, or short sale transactions involving Company stock. •   Executives and directors must hold prescribed meaningful amounts of Company stock. •   We have a robust shareholder engagement program. •   We have a proxy access provision in our By-Laws, under which shareholders who own 3% of our stock for at least three years may nominate up to 20% of the members of our Board. •   Holders of 15% of our shares may call a special meeting. •   We do not have a shareholder rights plan (also known as a poison pill). •   We do not have any supermajority voting provisions.   Compensation practices •   We have conducted an annual say-on-pay advisory vote since 2011. •   All incentive compensation paid to executives is subject to a clawback policy. •   Our incentive compensation awards are designed to align pay with performance.   Citizenship •   We have a longstanding commitment to corporate responsibility. •   All of our employees must adhere to a robust Code of Conduct.

 

SHAREHOLDER ENGAGEMENT AND FEEDBACK (PAGE 24)

Merck regularly communicates with shareholders to better understand their perspectives, and has established a shareholder engagement program that is both proactive and cross-functional. Members of our Board of Directors participate personally in engagements with our largest shareholders. During 2018, our Lead Director, Leslie Brun, Chair of the Compensation and Benefits Committee, Thomas Glocer, and Chair of the Audit Committee, Pamela Craig, all participated in substantive engagements with many of the Company’s largest shareholders. These discussions covered a wide range of topics of interest to shareholders, including the Board’s composition and leadership, management and director succession, executive compensation, Merck’s environmental and sustainability goals, and other governance matters. These discussions provided valuable insights into shareholder views, and we heard from many shareholders that they greatly appreciated the opportunity to engage with Directors directly.

 

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

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROXY SUMMARY NOMINEES FOR DIRECTOR

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NOMINEES FOR DIRECTOR (PAGE 31)

The following provides summary information about each Director nominee. Each Director stands for election annually. Detailed information about each individual’s background, skill set and areas of expertise can be found beginning on page 31.

 

					Current Committee Memberships
					Audit	Compensation   and Benefits	Governance	Research
	Director nominee	Age	Director   Since	Title
	Leslie A. Brun  Lead Independent Director	66	2008	Chairman and Chief Executive Officer, Sarr Group, LLC
	Thomas R. Cech, Ph.D.	71	2009	Distinguished Professor, University of Colorado
	Mary Ellen Coe	52	2019	President, Global Customer Solutions, Alphabet Inc. (formerly Google Inc.)
	Pamela J. Craig	62	2015	Former Chief Financial Officer, Accenture plc
	Kenneth C. Frazier  Management	64	2011	Chairman, President and Chief Executive Officer, Merck & Co., Inc.
	Thomas H. Glocer	59	2007	Former Chief Executive Officer, Thomson Reuters Corporation
	Rochelle B. Lazarus	71	2004	Chairman Emeritus, Ogilvy & Mather
	Paul B. Rothman, M.D.	61	2015	Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, and CEO, Johns Hopkins Medicine
	Patricia F. Russo	66	1995	Chairman, Hewlett Packard Enterprise Company; Former Chief Executive Officer and Director, Alcatel-Lucent
	Inge G. Thulin	65	2018	Executive Chairman of the Board, 3M Company
	Wendell P. Weeks	59	2004	Chairman, Chief Executive Officer and President, Corning Incorporated
	Peter C. Wendell	68	2003	Managing Director, Sierra Ventures
	Number of Meetings in 2018				9	6	3	4

 

  Committee Chair

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROXY SUMMARY BOARD COMPOSITION AND REFRESHMENT

 

 

BOARD COMPOSITION AND REFRESHMENT

On an annual basis, the Governance Committee considers the size, structure and needs of the Board, reviews possible candidates for the Board, and recommends director nominees to the Board for approval.

 

In selecting director nominees, the Board considers its own composition, including its diversity, and the skills, areas of expertise and experience represented. The Board also takes into account the Company’s current and future global business strategies, opportunities, and challenges. Such considerations have resulted in the election of three new Board members over the last three years. For more information, see “Criteria For Board Membership And Director Nomination Process” beginning on page 17.

 

In consideration of the factors noted above, the Board elected Ms. Mary Ellen Coe, President Global Customer Solutions of Alphabet Inc. (formerly Google Inc.), as a new independent Director in 2019. Dr. Craig B. Thompson retired from the Board effective October 2, 2018. Due to other commitments, Dr. John H. Noseworthy will not be standing for re-election to the Board.

 

OUR 2019 DIRECTOR NOMINEES SNAPSHOT

Our Board possesses broad expertise, skills, experience, and perspectives that facilitate the strong oversight and strategic direction required to govern the Company’s business and strengthen and support senior management. As illustrated by the following chart, our Board is made up of individuals with expertise in fields that align with the Company’s business and long-term strategy, and reflects a mixture of tenure that allows for both new perspectives and continuity.

 

 

 

 

 

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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The Board has the legal responsibility for overseeing the affairs of the Company and for the overall performance of the Company. The Board’s primary mission is to represent and protect the interests of our shareholders. To that end, the Board selects and oversees the senior management team, which is charged with conducting Merck’s daily business.

 

 

BOARD’S ROLE IN STRATEGIC PLANNING

The Board — acting both as a whole and through its four standing committees — is fully involved in the Company’s strategic planning process. All of our Directors have an obligation to keep informed about the Company’s business and strategies, so they can provide guidance to management in formulating and developing plans and knowledgeably exercise their decision-making authority on matters of importance to the Company.

 

The Board’s oversight and guidance are inextricably linked to the development and review of the Company’s strategic plan. By exercising sound and independent business judgment on the strategic issues that are important to the Company’s business, the Board facilitates Merck’s long-term success.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE INDEPENDENCE OF DIRECTORS

 

 

OUR STRATEGIC PLANNING CYCLE

 

 

INDEPENDENCE OF DIRECTORS

The Policies of the Board require that a substantial majority of our Directors be independent. In making independence determinations, the Board observes all relevant criteria established by the U.S. Securities and Exchange Commission (the “SEC”) and the New York Stock Exchange (the “NYSE”), as well as categorical independence standards set forth in the Policies of the Board. The Board considers all relevant facts and circumstances in making an independence determination.

 

To be considered independent, an outside director must meet the bright line independence tests established by the NYSE, and the Board must affirmatively determine that the director has no direct or indirect material relationship with the Company.

 

The Board also rigorously considers all relevant heightened independence requirements for members of the Audit Committee and the Compensation and Benefits Committee. The Governance Committee reviews the Board’s approach to determining director independence periodically and recommends changes, as appropriate, for consideration and approval by the full Board.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE BOARD LEADERSHIP STRUCTURE

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INDEPENDENCE DETERMINATIONS

In accordance with the NYSE Corporate Governance Listing Standards and the categorical standards reflected in the Policies of the Board, the Board reviewed relationships between the Company and each Director. As a result of that review, the Board has determined that, with the exception of Kenneth C. Frazier, our Chairman and CEO, each Director has only immaterial relationships with the Company, and accordingly, each is independent under these standards. The Board also has determined that each member of the Audit Committee, the Compensation and Benefits Committee, and the Governance Committee is independent within the meaning of the NYSE Corporate Governance Listing Standards and the rules of the SEC.

 

In making these determinations, the Board considered relationships that exist between the Company and other organizations where each Director serves, and the fact that in the ordinary course of business, transactions may occur between the Company, or one of our subsidiaries, and such organizations. The Board also evaluated whether there were any other facts or circumstances that might impair a Director’s independence.

 

As previously disclosed, the Company and Corning Incorporated (“Corning”), for which Mr. Weeks serves as Chairman, Chief Executive Officer and President, are parties to a Joint Research and Development Agreement (“R&D Agreement”) aimed at developing new glass materials. In 2011, the R&D Agreement was first reviewed and approved by the Board’s Corporate Governance Committee and reviewed by the Board (other than Mr. Weeks) to confirm Mr. Weeks’ continued independence. The Governance Committee has conducted regular oversight of the R&D Agreement. In 2014, Merck and Corning entered into two follow-on agreements: a multi-year component supply agreement (“Supply Agreement”) with minimum volume commitments and a royalty agreement (“Royalty Agreement”). The Royalty Agreement also amended the R&D Agreement. Both agreements were reviewed and approved by the Governance Committee and the entire Board (again, with Mr. Weeks recusing himself). Prior to 2016, Merck reimbursed Corning for an aggregate of $23 million for development costs incurred under the R&D Agreement. An additional $7 million of reimbursable costs remain to be paid upon the achievement of prescribed milestones. In 2017, Merck reimbursed Corning for approximately $400,000 for intellectual property filing costs incurred in 2016, and in 2018 Merck reimbursed Corning an additional $550,000 for intellectual property filing costs incurred in 2017.

 

Merck expects to reimburse Corning for additional intellectual property filing costs in the future. In addition, in 2018 the Company made purchases from Corning in the ordinary course of business unrelated to the Supply Agreement. The Company anticipates making a milestone payment of $15 million to Corning under the Supply Agreement after the FDA approves of vials developed under the R&D Agreement as a packaging material for GARDASIL and Corning delivers to Merck 30 million vials, which is expected in 2023 or 2024. Commencing in 2020, the Company expects to receive royalties under the Royalty Agreement.

 

Drs. Cech and Rothman are employed at medical or academic institutions with which the Company engages in purchase and sale transactions in the ordinary course of business. In addition, Mr. Thulin was employed by 3M Company during 2018 and the Company also engages in routine business transactions with 3M Company. The Board reviewed transactions with each of these entities and determined that the applicable individual Director had no role with respect to the Company’s decision to make any of the purchases or sales, and the aggregate amounts in each case were less than 1% of the consolidated gross revenues of the other organization and the Company.

 

BOARD LEADERSHIP STRUCTURE

The Board of Directors is currently led by Kenneth C. Frazier, who serves as the Chairman of the Board, and by Leslie A. Brun, an independent Director, who serves as the Board’s Lead Director. The Board, made up entirely of independent Directors (other than Mr. Frazier) is highly empowered and engaged. The independent Directors evaluate our Board leadership structure at least annually.

 

The Board meets in executive session without the Chairman and CEO at each in-person Board meeting. During these executive sessions, which are led by the independent Lead Director, the Directors discuss topics such as succession planning for the CEO, key management positions, and points of follow-up with management on strategic issues.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE LEAD DIRECTOR

 

 

LEAD DIRECTOR

Merck’s independent Lead Director is appointed by the independent members of the Board of Directors to a three-year term. The position of Lead Director comes with a clear mandate and significant authority and responsibilities — all set out in the Policies of the Board. These include:

 

Board Meetings and Executive Sessions	•    The authority to call meetings of the independent members of the Board. •    Presiding at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent members of the Board.
Communicating with Management	•    Serving as the principal liaison on board-wide issues between the independent members of the Board and the Chairman/CEO.
Agendas	•    Approving meeting agendas and the information sent to the Board, including supporting material for meetings.
Meeting Schedules	•    Approving meeting schedules to ensure there is sufficient time for discussion of all agenda items.
Communicating with Shareholders and Stakeholders	•    Being available for consultation and direct communication with major shareholders, as appropriate. •    Serving as a liaison between the Board and shareholders on investor matters.
Board Performance Evaluation	•    Leading the annual performance evaluation of the Board.
Chairman and CEO Performance Evaluations	•    Leading the annual performance evaluation of the Chairman/CEO.
CEO Succession	•    Leading the CEO succession planning process.

 

In addition to a Board Chairman and an independent Lead Director, the Board of Directors has four standing committees, each of which is composed solely of independent Directors and is led by an independent chair. (The standing committees are described beginning on page 20.) The Board believes the Company and its shareholders are well-served by this leadership structure. Having an independent Lead Director vested with key duties and responsibilities and four independent Board committees chaired by independent Directors promotes strong independent oversight of the Chairman and CEO and the rest of our management team.

 

The Board believes that having Mr. Frazier serve as Chairman and CEO adds substantial strategic and operational perspective to the Chairman role. Mr. Frazier’s years of senior management and executive leadership experience at Merck provide valuable business and cultural insight into the Company to the benefit of the Board, and position Mr. Frazier to provide effective Board-level leadership.

 

In 2018, the independent Lead Director and Chairs of the Audit and Compensation and Benefits Committees played particularly important roles in engaging directly with major shareholders on a variety of matters, including the Board’s Leadership Structure. During a significant number of in-person meetings, as well as telephone conversations, these independent Directors were able to share directly the Board’s perspective regarding the benefits of the current structure, as well as the Board’s commitment to continuing to engage with shareholders on governance matters.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE CRITERIA FOR BOARD MEMBERSHIP AND DIRECTOR NOMINATION PROCESS

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CRITERIA FOR BOARD MEMBERSHIP AND DIRECTOR NOMINATION PROCESS

The Governance Committee is responsible for screening and nominating director candidates considered for election by the Board. In this capacity, the Committee considers the composition of the Board, including the depth of experience, balance of professional skills, and expertise represented. The Committee also evaluates prospective nominees identified on its own initiative as well as candidates recommended by other Board members, management, shareholders or search consultants. In 2018, the Governance Committee retained a search firm to identify possible candidates who meet our qualifications, to interview and screen such candidates (including conducting reference checks), and to assist in scheduling candidate interviews with Board members.

 

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

 

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be of proven integrity with a record of substantial achievement in an area of relevance to the Company;

 

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have demonstrated ability and sound judgment that usually will be based on broad experience;

 

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be able and willing to devote the required amount of time to the Company’s affairs, including attendance at Board meetings, Board committee meetings and annual shareholder meetings;

 

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possess a judicious and critical temperament that will enable objective appraisal of management’s plans and programs; and

 

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be committed to building sound, long-term Company growth.

 

 

INDIVIDUAL EXPERIENCE, QUALIFICATIONS, ATTRIBUTES AND SKILLS

In its regular discussions regarding Board composition — and especially in conjunction with the annual Board and Committee evaluations — the Governance Committee works with the Board to determine the appropriate mix of professional experience, expertise, educational background, and other qualifications that are particularly desirable for our Directors to possess in light of our current and future business strategies. The Governance Committee uses this input in its planning and Director search process. In addition to the five broad criteria listed above, the following chart highlights the background, experience and skills the Board takes into account for future candidates. These attributes are amply represented by current Director nominees.

 

DIRECTOR NOMINEE SKILLS	OF 12 NOMINEES
CEO Leadership Experience serving as a chief executive officer at a publicly traded or private organization
Financial Experience or expertise in financial accounting and reporting processes or the financial management of a major organization
Scientific Scientific expertise related to the health care industry and the Company’s long-term commitment to research and development strategies
Health Care Industry Experience with complex issues within the health care industry
Global Strategy & Operations Leadership experience overseeing and/or driving strategic direction and growth of an organization globally
Marketing or Public Relations Experience in digital marketing, advertising, social media, and consumer insight functions, including product development and brand building
Digital/Technology Experience or expertise in information technology (including cybersecurity and data privacy) or the use of digital media or technology to facilitate business objectives
Public Company Governance Experience as a board member of another publicly-traded company
Talent Management Experience in executive recruiting, succession planning and talent management, including retaining key talent and driving employee engagement
Capital Markets Experience Experience in corporate lending or borrowing, capital market transactions, significant mergers or acquisitions, private equity or investment banking

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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18

CORPORATE GOVERNANCE SUCCESSION PLANNING

 

 

DIVERSITY

Diversity is an important factor considered when identifying prospective nominees for our Board. In 2019, the Governance Committee recommended, and the full Board adopted, a formal diversity policy. The policy reflects the Board’s long-standing commitment to ensure that Directors represent diverse perspectives and areas of expertise important to fostering the Company’s business success. Our new diversity policy provides that the Board does not discriminate against potential Directors on the basis of gender, race, age, sexual orientation or ethnic and national background, and further provides that having a board composed of diverse individuals is an important contributor to the Board’s overall effectiveness.

 

From time to time and including in 2018, the Governance Committee has retained independent search firms to assist in identifying candidates that reflect our Director succession priorities, including these diversity objectives. The full diversity policy is incorporated into the Policies of the Board.

 

 

SHAREHOLDER RECOMMENDATIONS OF DIRECTOR CANDIDATES

The Governance Committee will consider recommendations for Director candidates made by shareholders and will evaluate those individuals using the same criteria as are applied to other candidates. Shareholder recommendations must be sent to the Secretary of the Company, Merck & Co., Inc., 2000 Galloping Hill Road, K1-4157, Kenilworth, New Jersey 07033 U.S.A., and must include detailed background information regarding the recommended candidate that demonstrates how the individual meets the Board membership criteria.

 

Candidates initially are evaluated based on materials submitted by them or on their behalf. If a proposed or recommended candidate continues to be of interest to the Governance Committee, we obtain additional information through inquiries to various sources and, if warranted, interviews.

 

SUCCESSION PLANNING

The Board regularly reviews short- and long-term succession plans for the CEO and for other executive officers. In assessing possible CEO candidates, the independent Directors identify the skills, experience and attributes they believe are required for an effective CEO in light of the Company’s global business strategies, opportunities and challenges. The Board also ensures that Directors have substantial opportunities to engage with possible succession candidates and have access to external consultants, as needed.

 

In 2018, the Board decided to eliminate the existing policy regarding mandatory retirement of the CEO at age 65. Eliminating this policy allows the Board appropriate flexibility in determining the optimal timing of the succession process.

 

The Board also considers its own composition and succession plans. Discussion of these topics is an important part of the annual Board evaluation process. In Director succession planning, the Governance Committee and the Board take into account, among other things, the needs of the Board and the Company in light of the overall composition of the Board, with a view toward achieving a balance of the skills, experience and attributes that are essential to the Board’s oversight role. In addition, under the Policies of the Board, Directors may not be nominated for re-election to our Board after they reach the age of 72. The Board believes this policy promotes regular refreshment of the Board. The Governance Committee considers this policy and the schedule of upcoming Director retirements in determining the right approach to maintaining a strong composition of Director skills and experience.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE ANNUAL BOARD EVALUATION

19

 

  

ANNUAL BOARD EVALUATION

The Board conducts an evaluation of its performance and effectiveness, as well as that of the four standing committees, on an annual basis. The purpose of the evaluation is to track progress in certain areas targeted for improvement and to identify ways to enhance the overall effectiveness of the Board and its committees.

 

The evaluation process is led by the independent Lead Director. The Governance Committee also periodically engages an independent third party to manage the process to ensure it remains as thorough and transparent as possible. In 2018, the Board engaged the services of an independent governance expert to support the annual evaluation process.

 

First, each Director completed a written questionnaire developed by the Governance Committee to provide feedback on the effectiveness of the Board, the Board’s leadership structure, the committees, and the level and quality of the Directors’ individual contributions. The written evaluation also provided Directors with an opportunity to suggest any areas that they believe warrant heightened focus in the year ahead.

Second, the independent consultant conducted a private interview with each Board member to gather additional suggestions for improving Board effectiveness and to solicit additional feedback on Board operations, composition, and priority agenda topics.

Finally, the collective feedback of the Directors was compiled and presented, both in writing and in an oral presentation, to the full Board. During discussion led by independent Lead Director, Leslie A. Brun, Directors considered areas of strength and opportunities to enhance the operations of the Board.

The Board evaluation process resulted in a number of recommendations, including recommendations regarding priority agenda topics for the Board to address in 2019. A key recommendation was to allot additional time for full-Board discussion of Director succession priorities established by the Governance Committee.

 

 

RISK OVERSIGHT

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

 

Management has established an ERM process to ensure a complete Company-wide approach to evaluating risk over six distinct but overlapping risk areas:

 

Responsibility and Reputation	Risks that may impact the well-being of the Company, its employees, customers, patients, communities or reputation
Strategy	Macro risks that may impact our ability to achieve long-term business objectives
Operations	Risks in operations and cybersecurity that may impact our ability to achieve business objectives
Compliance	Risks related to compliance with laws, regulations and Company values, ethics, and policies
Reporting	Risks to maintaining accurate financial statements and timely, complete financial disclosures
Safety	Risks to employee, patient, or community health and safety

 

The goal of the ERM process is to provide an ongoing review, implemented across the Company and aligned to Company values and ethics, to identify and assess risk, and to monitor risk and agreed-upon mitigating action. Furthermore, if a risk transforms into an incident, the ERM process ensures that effective response and business continuity plans are in place. If the ERM process identifies a material risk, it will be elevated through the CEO and the Executive Committee to the full Board of Directors for consideration.

 

The Audit Committee periodically reviews the ERM process to ensure it is robust and functioning effectively. In addition, the Audit Committee has primary responsibility for overseeing the Company’s risk-management program relating to cybersecurity. However, the full Board participates in periodic reviews and discussion dedicated to the Company’s cyber risks, threats and protections.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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20

CORPORATE GOVERNANCE RELATED PERSON TRANSACTIONS

 

 

Through the ERM process, each Board committee oversees specific areas of risk relevant to the committee through direct interactions with the CEO, members of the Company’s Executive Committee, and the heads of business divisions and corporate functions. For instance, the Audit Committee oversees risk relating to finance, business integrity and Sarbanes-Oxley reporting through its interactions with the Chief Financial Officer, Chief Compliance Officer, Controller, and the Head of Internal Audit. A committee may address risks directly with management, or, where appropriate, may elevate a risk for consideration by the full Board or another Board committee.

 

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

 

RELATED PERSON TRANSACTIONS

RELATED PERSON TRANSACTION POLICY

The Board of Directors has adopted a written Related Person Transaction Policy (the “Policy”), which is incorporated into the Policies of the Board and administered by the Governance Committee. The Policy governs the review and approval of any transactions involving amounts exceeding $120,000 to which the Company or a subsidiary is a party and in which a “related person” has a direct or indirect material interest. A “related person” is any Director, Director nominee, executive officer, or holder of more than 5% of any outstanding class of the Company’s voting securities, as well as immediate family members or certain affiliated entities of any of the foregoing persons.

 

Pursuant to the Policy, management determines whether a transaction requires review by the Governance Committee, in which case the transaction along with all material information will be disclosed to the Governance Committee for review, approval, ratification or termination. In the event a related person transaction is approved by the Governance Committee, such transaction will be subject to ongoing monitoring to ensure that the transaction remains fair and reasonable to the Company. For additional information, the full Policy is available on the Company’s website at www.merck.com/about/leadership.

 

 

CERTAIN RELATED PERSON TRANSACTIONS

Each Director, Director nominee, and executive officer of Merck annually completes and submits to the Company a D&O Questionnaire. The D&O Questionnaire requests, among other things, information regarding whether any Director, Director nominee, executive officer or their immediate family members had an interest in any transaction or proposed transaction with Merck or its subsidiaries, or has a relationship with a company that has entered 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 Governance Committee for its review. Based on this information for 2018, the Governance Committee has determined that no transactions require disclosure under Item 404(a) of Securities and Exchange Commission Regulation S-K.

 

BOARD MEETINGS AND COMMITTEES  

In 2018, the Board of Directors met six times. Under the Policies of the Board, Directors are expected to attend regular Board meetings, applicable Board committee meetings, and annual shareholder meetings.   The independent Directors of the Board met in thirteen executive sessions in 2018. Mr. Brun, Lead Director of the Board, presided over the executive sessions. Eleven of the twelve Directors attended the 2018 Annual Meeting of Shareholders.

All Directors attended at least 75% of the meetings of the Board and of the committees on which they served in 2018.

  

The Board of Directors has four standing committees, each of which is made up solely of independent Directors: Audit Committee; Compensation and Benefits Committee; Governance Committee; and Research Committee. In addition, the Board from time to time establishes special purpose committees. All of our standing committees are governed by Board-approved charters, which are available on our website at www.merck.com/about/leadership/board-of-directors. The committees evaluate their performance and review their charters annually. Additional information about the committees is provided below. As a non-independent director, Mr. Frazier is not a member of any Board committee.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE BOARD COMMITTEES

21

 

 

AUDIT COMMITTEE    

 

Pamela J. Craig Chair         OTHER MEMBERS Leslie A. Brun Thomas R. Cech, Ph.D. Mary Ellen Coe(1) Paul B. Rothman, M.D.   NUMBER OF MEETINGS IN 2018: 9   FINANCIAL EXPERTS ON AUDIT COMMITTEE The Board has determined that Mr. Brun and Ms. Craig are “audit committee financial experts” as defined by the SEC and that each has accounting or related financial management expertise as required by NYSE Corporate Governance Listing Standards.

OVERVIEW     The Audit Committee oversees our accounting and financial reporting processes, internal controls and audits and consults with management, the internal auditors and the independent auditors on, among other items, matters related to the annual audit, the published financial statements and the accounting principles applied. The Audit Committee has established policies and procedures for the pre-approval of all services provided by the independent auditors (as described on page 85 of this proxy statement) and for the approval of the annual internal audit plan as executed by the Internal Audit organization.   The Audit Committee’s Report is included on page 85 of this proxy statement.

THE PRIMARY FUNCTIONS OF THIS COMMITTEE ARE TO:     •      appoint, evaluate and retain our independent auditors; •      maintain direct responsibility for the compensation, termination and oversight of our independent auditors and evaluate the independent auditors’ qualifications, performance and independence; •      monitor compliance with the Foreign Corrupt Practices Act and the Company’s policies on ethical business practices, and report on these items to the Board; •      establish procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by the Company (as described under “Shareholder Communications with the Board” on page 25 of this proxy statement); and •      oversee the ERM process.

(1) Joined the Board of Directors on March 18, 2019

 

COMPENSATION AND BENEFITS COMMITTEE   

 

Thomas H. Glocer Chair         OTHER MEMBERS Rochelle B. Lazarus Patricia F. Russo Inge G. Thulin Peter C. Wendell   NUMBER OF MEETINGS IN 2018: 6   COMPENSATION AND BENEFITS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There were no C&B Committee interlocks or insider (employee) participation during 2018.

OVERVIEW     The Compensation and Benefits Committee (the “C&B Committee”) annually reviews and approves corporate goals and objectives relevant to the total direct compensation opportunity for the Chairman and CEO and certain other officers; evaluates their performance against these goals and objectives; and, based on this evaluation, sets their target total direct compensation and determines payouts under our variable compensation plans. The details of the processes and procedures involved are described in the CD&A beginning on page 42. The independent members of the full Board ultimately make the final decisions regarding the Chairman and CEO’s total direct compensation.   The C&B Committee Report is included on page 56 of this proxy statement.

THE PRIMARY FUNCTIONS OF THIS COMMITTEE ARE TO:     •      establish and maintain a competitive portfolio of executive compensation and benefits programs designed to attract, motivate and retain the talent necessary to execute the Company’s long-term strategic plan; •      discharge the Board’s responsibilities for compensating our officers; •      oversee and monitor –      the competence and qualifications of our executive officers, –      officer succession, –      the soundness of the organizational structure, and –      other related matters necessary to ensure the effective management of the business; and •      review the Compensation Discussion and Analysis (“CD&A”) for inclusion in our proxy statement.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE BOARD COMMITTEES

 

 

GOVERNANCE COMMITTEE   

 

Leslie A. Brun Chair | Lead Director       OTHER MEMBERS Pamela J. Craig Thomas H. Glocer Rochelle B. Lazarus Patricia F. Russo Inge G. Thulin   NUMBER OF MEETINGS IN 2018: 3

OVERVIEW     The Governance Committee oversees the Company’s corporate governance, including the practices, policies and procedures of the Board and its committees. Further, the Committee annually reviews the size, structure and needs of the Board and Board committees, reviews possible candidates for the Board, and recommends Director nominees to the Board for approval. The details of the review process and assessment of candidates are described under “Criteria for Board Membership and Director Nomination Process” beginning on page 17 of this proxy statement.

THE PRIMARY FUNCTIONS OF THIS COMMITTEE ARE TO:     •      coordinate an annual evaluation of Board performance, and review Board compensation, related person transactions, and D&O indemnity and fiduciary liability insurance coverage for the Company’s officers and non-employee Directors; •      oversee the Board’s Incumbent Director Resignation Policy; •      review the Company’s Good Manufacturing Practice compliance, including internal and external audits; our Environmental, Health and Safety practices; our supply chain manufacturing strategy and governance, as well as our third-party sourcing program; our business continuity plans; and our privacy policies and practices; •      review social, political and economic trends that affect our business; review the positions and strategies we pursue to influence public policy; •      monitor and evaluate our corporate citizenship programs and activities, including the support of charitable, political and educational organizations and political candidates and causes; and •      review legislative, regulatory, privacy and other matters that could impact our shareholders, customers, employees and the communities in which we operate.

 

 

RESEARCH COMMITTEE   

 

 

Thomas R. Cech, Ph.D. Chair       OTHER MEMBERS Paul B. Rothman, M.D. Wendell P. Weeks Peter C. Wendell   NUMBER OF MEETINGS IN 2018: 4

OVERVIEW        The Research Committee oversees the overall strategy, direction and effectiveness of the Company’s research and development operations. Details about the Company’s latest R&D accomplishments for 2018 are described under “Research & Development Highlights” on page 2 of this proxy statement.

THE PRIMARY FUNCTIONS OF THIS COMMITTEE ARE TO:     •      assist the Board in its oversight of matters pertaining to our strategies and operations for the research and development of pharmaceutical product and vaccines; •      identify areas and activities that are critical to the success of our product and vaccine discovery, development and licensing efforts, and evaluate the effectiveness of our strategies and operations in those areas; •      keep the Board apprised of this evaluation process and findings and make appropriate recommendations to the President of Merck Research Laboratories and to the Board on modifications of strategies and operations; and •      assist the Board in its oversight responsibilities to ensure compliance with the highest standards of scientific integrity in the conduct of Merck research and development.

 

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CORPORATE GOVERNANCE COMPENSATION CONSULTANTS

23

 

 

COMPENSATION CONSULTANTS

 

ROLE OF COMPENSATION CONSULTANTS

The C&B Committee retains the services of a compensation consultant to serve as an objective third-party advisor on the reasonableness of compensation levels and on the appropriateness of the compensation program structure in supporting our business strategy and human resource objectives. Since 2008, the C&B Committee has retained FW Cook as its compensation consultant. In addition, FW Cook is periodically retained by the Governance Committee to assist with a review of the Directors’ compensation program.

 

INDEPENDENCE OF COMPENSATION CONSULTANT

The C&B Committee annually reviews the services provided by FW Cook and has concluded that FW Cook is independent in providing executive compensation consulting services. The C&B Committee conducted a specific review of its relationship with FW Cook in 2019, and, consistent with the guidance provided under the Dodd-Frank Act, and by the SEC and the NYSE, determined that FW Cook’s work for the C&B Committee did not raise any conflicts of interest. In making this determination, the C&B Committee reviewed information provided by FW Cook on the following factors:

 

•

the provision of other services to Merck by FW Cook;

 

•

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

 

•

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

 

•

any business or personal relationship between any member of FW Cook’s consulting team advising the C&B Committee or any other employee of FW Cook and a member of the C&B Committee;

 

•

any business or personal relationship between any member of FW Cook’s consulting team advising the C&B Committee or any other employee at FW Cook and an executive officer of Merck; and

 

•

any stock of Merck owned by any member of FW Cook’s consulting team advising the C&B Committee or any other employee at FW Cook or their immediate family members.

 

In particular, the C&B Committee noted that (i) FW Cook provided no other services to Merck, other than occasional assistance to the Human Resources staff arising from FW Cook’s C&B Committee-related duties; and (ii) FW Cook’s work is performed directly on behalf of the Board working in cooperation with management, to assist both the C&B and the Governance Committees with executing their respective responsibilities.

 

SERVICES PERFORMED DURING 2018

During 2018, FW Cook supported the C&B Committee by:

 

•

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

 

•

providing guidance and analysis on executive compensation plan design, market trends, regulatory developments and best practices;

 

•

assisting with design and setting of performance goals in the variable incentive plans;

 

•

assisting in determining the CEO’s target total direct compensation and payouts under the Executive Incentive Plan; and

 

•

assisting with the preparation of public filings related to executive compensation, including the CD&A, CEO pay ratio and the accompanying tables and footnotes.

 

Since 2010, management has retained Pay Governance LLC to provide consulting services on an as needed basis. In 2018, Pay Governance performed a risk-assessment of our executive compensation program, policies and practices. Their report, which was presented to the C&B Committee, indicated that our programs do not create incentives for excessive risk-taking and include meaningful safeguards to mitigate compensation program risk.

  

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE SHAREHOLDER ENGAGEMENT

 

 

SHAREHOLDER ENGAGEMENT

Merck regularly communicates with shareholders to better understand their perspectives and has established a shareholder engagement program that is proactive and cross-functional. Throughout the year, members of our Investor Relations department, the Office of the Secretary, the Human Resources department, and the Office of Corporate Responsibility, as well as other subject-matter experts within the Company, engage with our shareholders to remain well-informed regarding their perspective on current issues and to address any questions or concerns. These teams serve as liaisons between shareholders, members of senior management, and the Board.

 

In addition, we conduct an extensive shareholder outreach program twice a year focused on governance and executive compensation. We believe it is most productive to discuss governance and compensation issues well in advance of the Annual Meeting so management and the Board can gather information about investor perspectives and make educated and deliberate decisions that are balanced and appropriate for Merck’s diverse shareholder base and in the best interest of the Company.

 

During 2018, we held discussions with a number of our shareholders in the spring before the Annual Meeting and once again in late Fall. In Fall 2018, our Lead Director, Leslie Brun, Chair of the Compensation and Benefits Committee, Thomas Glocer, and Chair of the Audit Committee, Pamela Craig, all participated in substantive engagements with many of the Company’s largest shareholders. We also regularly seek to take advantage of other engagement opportunities and events.

 

Given our large shareholder base, we concentrate our outreach efforts on our largest 30 shareholders, which represents approximately 43% of our ownership.

  

“Ensuring that our company has meaningful, direct engagement with our shareholders is a top priority for our Board. We believe our company and shareholders benefit greatly from open and candid dialogue, which is a key reason why we expanded our program in 2018 to include greater Board member involvement in the engagement meetings. We will continue to enhance our engagement initiatives to foster transparency and build relationships between our company and its shareholders.”

 

Leslie A. Brun

LEAD INDEPENDENT DIRECTOR

  

	Topics Discussed with Shareholders during 2018
	•	Company strategy		•	Director tenure		•	Global access to Merck products
	•	Board leadership, composition and refreshment		•	Board evaluation process		•	Merck Animal Health
	•	CEO succession		•	Risk oversight		•	ESG reporting
	•	Board and management diversity		•	Cybersecurity		•	Merck culture
	•	Director overboarding		•	Executive compensation programs		•	Reputation
				•	Policy and pricing environment

 

These discussions provided valuable insights into shareholder views of our current governance practices, corporate responsibility practices and executive compensation programs as well as the shareholders’ voting processes and policies. We were pleased that, in the aggregate, our top shareholders expressed no consistent concerns about our Board, corporate governance, or executive compensation programs or practices. The feedback received was summarized and presented to the Governance Committee, the C&B Committee, and the full Board. We have incorporated certain suggestions to enhance or clarify our disclosures into this proxy statement.

 

Our Board is committed to continuing to engage with shareholders on a regular basis to better understand and consider their views.

   

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE SHAREHOLDER COMMUNICATIONS WITH THE BOARD

25

 

 

PROXY ACCESS

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

 

SHAREHOLDER COMMUNICATIONS WITH THE BOARD

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

 

Board of Directors

Merck & Co., Inc.

2000 Galloping Hill Road, K1-4157
Kenilworth, NJ 07033 U.S.A.

 

In order to manage efficiently the volume of correspondence received, communications will be reviewed by the Corporate Secretary for the purpose of determining whether the contents are appropriate for submission to the entire Board, the Chairman, the independent Lead Director, or the Chair of a particular committee. The Corporate Secretary will not transmit:

 

•

communications that advocate that the Company engage in illegal activity;

 

•

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

 

•

communications that have no relevance to the role of the Board or to the business of the Company;

 

•

resumes or other job-related inquiries; and

 

•

mass mailings, solicitations and advertisements.

 

Comments or questions regarding the nomination of Directors and other corporate governance matters will be referred to the Chair of the Governance Committee. Comments or questions regarding executive compensation will be referred to the Chair of the C&B Committee.

 

In addition, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. These procedures are described in the Merck Code of Conduct — Our Values and Standards.

 

The Merck Code of Conduct and general information on communications to the Board are available on our website at www.merck.com/about/leadership.

 

POLITICAL CONTRIBUTIONS AND LOBBYING EXPENDITURE OVERSIGHT AND DISCLOSURE

Merck is committed to participating constructively and responsibly in the policymaking process, and to providing information and analysis on the issues that affect our business and patient care. As described on our website, our participation in the public policy debate is focused on two key objectives: encouraging innovation and improving patient access to quality healthcare. The Company’s public policy positions are determined by senior management with oversight by the Governance Committee. Our political contributions are made in accordance with all applicable laws and Company policies and procedures, and are overseen by senior management. The Governance Committee monitors all such contributions and the full Board receives a bi-annual report. In addition, the Company publicly discloses and regularly updates information regarding its public policy positions and advocacy expenditures on our website at www.merck.com/about/views-and-positions and www.msdresponsibility.com/our-approach/public-policy.

  

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE COMMITMENT TO CORPORATE RESPONSIBILITY

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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CORPORATE GOVERNANCE COMMITMENT TO CORPORATE RESPONSIBILITY

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MERCK & CO., INC. 2019 PROXY STATEMENT

 

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STOCK OWNERSHIP INFORMATION STOCK OWNERSHIP OF DIRECTORS AND OFFICERS

 

 

STOCK OWNERSHIP

INFORMATION

 

STOCK OWNERSHIP OF DIRECTORS AND OFFICERS

The table below reflects the number of shares of Merck common stock beneficially owned by (a) each of our Directors; (b) each of our executive officers named in the Summary Compensation Table; and (c) all Directors and executive officers as a group. As of February 28, 2019, 2,581,617,358 shares of Merck common stock were issued and outstanding. Unless otherwise noted, the information is stated as of February 28, 2019, and the beneficial owners exercise sole voting and/or investment power over their shares. In addition, unless otherwise indicated, the address for each person named below is c/o Merck & Co., Inc., 2000 Galloping Hill Road, Kenilworth, New Jersey 07033.

	Company Common Stock
Name of Beneficial Owner(1)	Shares Beneficially Owned	(2)	Right to Acquire Beneficial Ownership Under Options/Stock Units Exercisable/Distributable Within 60 Days	(3)	Percent of Class	Phantom Stock Units	(4)
Kenneth C. Frazier	801,725		2,890,538		*	—
Leslie A. Brun	1,948		5,000		*	39,363
Thomas R. Cech	100		—		*	34,165
Pamela J. Craig	1,715		—		*	11,095
Thomas H. Glocer	5,100		—		*	62,689
Rochelle B. Lazarus	6,351	(5)	—		*	81,270
John H. Noseworthy(6)	100		—		*	8,879
Paul B. Rothman	100		—		*	11,095
Patricia F. Russo	13,148		—		*	32,506
Inge G. Thulin	100		—		*	4,920
Wendell P. Weeks	100		5,000		*	86,031
Peter C. Wendell	1,000		—		*	87,084
Robert M. Davis	137,659		631,012		*	—
Roger M. Perlmutter	175,335		678,409		*	—
Adam H. Schechter(7)	33,491		428,888		*	—
Jennifer L. Zachary(8)	—		—		*	—
All Directors and Executive Officers as a Group (24 individuals)	1,455,768		5,564,887		*	478,818

 

*

Less than 1% of the Company’s outstanding shares of common stock.

 

(1)

Ms. Coe was elected to the Board effective March 18, 2019 and is not included in this table.

 

(2)

Includes equivalent shares of common stock held by the Trustee of the Merck U.S. Savings Plan, for the accounts of individuals as follows: Mr. Frazier — 4,010 shares, and all Directors and executive officers as a group — 7,869 shares.

 

(3)

This column reflects the number of shares that could be acquired within 60 days of February 28, 2019, through the exercise of outstanding stock options.

 

(4)

Represents phantom shares denominated in Merck common stock under the Plan for Deferred Payment of Directors’ Compensation or the Merck Deferral Program.

 

(5)

Includes shares of common stock in which the beneficial owners share voting and/or investment power as follows: 1,757 shares held by Ms. Lazarus’ spouse.

 

(6)

Dr. Noseworthy is not standing for re-election as a Merck Director in 2019.

 

(7)

Mr. Schechter served as Executive Vice President and President, Global Human Health until December 31, 2018.

 

(8)

Ms. Zachary was hired on April 16, 2018 and will acquire 5,772 shares (subject to tax withholding) at her first equity vesting and 24,397 vested options in May 2019.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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STOCK OWNERSHIP INFORMATION STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

29

 

 

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The table below reflects the number of shares beneficially owned by persons or entities known to us to own more than 5% of the outstanding shares of Merck common stock as of December 31, 2018. As of December 31, 2018, 2,592,567,018 shares of Merck common stock were issued and outstanding.

 

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent of Class
The Vanguard Group 100 Vanguard Blvd., Malvern, PA 19355	205,593,589	(1)	7.90%
BlackRock, Inc. 55 East 52nd Street, New York, NY 10055	194,589,541	(2)	7.50%

 

(1)

As reported on Amendment No. 4 to Schedule 13G (the “Vanguard filing”) filed with the SEC on February 11, 2019. According to the Vanguard filing, of the 205,593,589 shares of Merck common stock beneficially owned by The Vanguard Group (“Vanguard”), as of December 31, 2018, Vanguard has the sole power to vote or direct the vote with respect to 3,058,113 shares, shared power to vote or direct the vote with respect to 623,813 shares, sole power to dispose or to direct the disposition of 201,983,205 shares, and shared power to dispose or to direct the disposition of 3,610,384 shares.

 

(2)

As reported on Amendment No. 9 to Schedule 13G (the “BlackRock filing”) filed with the SEC on February 6, 2019. According to the BlackRock filing, of the 194,589,541 shares of Merck common stock beneficially owned by BlackRock, Inc. (“BlackRock”), as of December 31, 2018, BlackRock has the sole power to vote or direct the vote with respect to 170,066,424 shares and sole power to dispose or to direct the disposition of 194,589,541 shares.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

 

Based solely upon a review of the copies of the forms furnished to us during fiscal year 2018, or written representations from certain reporting persons that no Forms 5 were required, we believe that all filing requirements applicable to our officers and Directors were complied with during 2018.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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2019 NOMINEES FOR DIRECTOR

The Board has recommended 12 nominees for election as Directors at this Annual Meeting: Mr. Leslie A. Brun, Dr. Thomas R. Cech, Ms. Mary Ellen Coe, Ms. Pamela J. Craig, Mr. Kenneth C. Frazier, Mr. Thomas H. Glocer, Ms. Rochelle B. Lazarus, Dr. Paul B. Rothman, Ms. Patricia F. Russo, Mr. Inge G. Thulin, Mr. Wendell P. Weeks and Mr. Peter C. Wendell. All nominees, other than Mr. Frazier, our Chief Executive Officer, satisfy the NYSE independence requirements.

 

Ms. Coe was elected to the Board effective March 18, 2019, to serve until this Annual Meeting and to stand for election by shareholders at the meeting. All other nominees currently serve on the Board and were elected by the shareholders at the 2018 Annual Meeting. Ms. Coe was first identified as a possible Director candidate by a third-party search firm and her candidacy was discussed with the Governance Committee. She also met with multiple members of the Board in advance of her election.

 

In recommending to the full Board the re-election of Wendell Weeks, the members of the Governance Committee considered policies at a few of the Company’s major shareholders regarding the number of outside boards on which an active CEO should participate, and several Directors engaged directly with shareholders on this topic. Given the importance of the digital transformation of the healthcare industry, the Committee determined that Mr. Weeks’ service on the Amazon and Corning Boards was a strategic advantage because he can provide relevant perspective and expertise. The Committee also took into account Mr. Weeks’ distinguished history of insightful contributions and near-perfect meeting attendance during his tenure on the Merck Board.

 

Dr. John H. Noseworthy has served on the Board since 2017. The Board has benefited from his deep experience in patient care, science and medicine. Due to other commitments, Dr. Noseworthy will not be standing for re-election as a Merck Director in 2019.

 

All the Director nominees named in this proxy statement meet the Board’s criteria for membership and were recommended by the Governance Committee for election by shareholders at this Annual Meeting. All of the nominees hold, or have held, senior leadership positions in large, complex organizations, including multi-national corporations, medical or academic institutions, or charitable organizations. In these positions, our nominees have demonstrated their leadership, intellect and analytical skills, and gained deep experience in core disciplines significant to their oversight responsibilities at Merck. Their roles in these organizations also enable them to offer quality advice and counsel to the Company’s management. If elected, each nominee will serve until the 2020 Annual Meeting of Shareholders or until a successor has been duly elected and qualified.

 

Any nominee who does not receive a majority of the votes cast with respect to his or her election will not be re-elected as a Director of the Company. However, under the New Jersey Business Corporation Act, incumbent Directors who are not re-elected in an uncontested election because of a failure to receive a majority of the votes cast in favor of their re-election will be “held over” and continue as Directors of the Company until they resign, or their successors are elected at the next election of directors. Our Incumbent Director Resignation Policy, included in the Policies of the Board, provides that an incumbent Director who is not re-elected must submit a resignation. The Governance Committee will evaluate whether to accept such resignation and make a recommendation to the full Board, which must act on the recommendation no later than 90 days following certification of the shareholder vote.

 

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

 

There are no family relationships among Merck’s executive officers and Directors.

 

We provide biographical information for each Director nominee below, including the key experience and some of the qualifications and skills each Director brings to the Board that are important in light of our current needs and business priorities.

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROPOSAL 1 ELECTION OF DIRECTORS

31

 

 

LESLIE A. BRUN

INDEPENDENT | LEAD DIRECTOR

 

	AGE: 66   DIRECTOR SINCE: 2008   COMMITTEES:       Audit      Governance (Chair)	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Brun has extensive management, investment banking, commercial banking and financial advisory experience in a highly-regulated industry, as well as demonstrated success throughout his tenure as the Chairman and CEO of Sarr Group, LLC and Chairman, CEO and founder of Hamilton Lane. Mr. Brun’s depth of financial expertise also derives from his experience as a Managing Director and co-founder of the investment banking group of Fidelity Bank. In addition, his directorships at other public companies, including service as the Non-executive Chairman of CDK Global, Inc., Lead Director of Broadridge Financial Solutions, Inc., and Chair of the HR and Compensation Committee at Hewlett Packard Enterprise Company, provide him with extensive experience on corporate governance issues.	Sarr Group, LLC, an investment holding company  •     Chairman and Chief Executive Officer (2006-present)  CCMP Capital Advisors, LLC, global private equity firm  •  Managing Director and Head of Investor Relations (2011-2013)  Hamilton Lane, private equity firm  •      Chairman and Chief Executive Officer (1991-2005)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •       Broadridge Financial Solutions, Inc. (since 2007), Non-executive Chairman (2011-2018)  •       CDK Global, Inc. (since 2014),  Non-executive Chairman (2014)  •       Corning Incorporated (since 2018)   FORMER   •        Automatic Data Processing, Inc. (2003-2015)  •        Hewlett Packard Enterprise Company (2015-2018)

 

 

THOMAS R. CECH, PH.D.

INDEPENDENT

 

	AGE: 71   DIRECTOR SINCE: 2009   COMMITTEES:       Audit       Research  (Chair)	EXPERIENCE	CAREER HIGHLIGHTS
		Dr. Cech has extensive scientific expertise relevant to the pharmaceutical industry, including being a Nobel Prize-winning chemist and a Professor at the University of Colorado. In addition, his role as the former President of the Howard Hughes Medical Institute provides Dr. Cech with extensive managerial experience with direct relevance to scientific research.   AWARDS  •     National Medal of Science (1995)  •     Nobel Prize in Chemistry (1989)	University of Colorado  •       Distinguished Professor, Chemistry and Biochemistry (1990-present)  •       Director, BioFrontiers Institute (2009-present)   Howard Hughes Medical Institute,  non-profit medical research organization  •      President (2000-2009)  •       Investigator (1988-present)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  None  FORMER  None

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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32

PROPOSAL 1 ELECTION OF DIRECTORS

 

 

MARY ELLEN COE

INDEPENDENT

 

	AGE: 52   DIRECTOR SINCE: 2019   COMMITTEES:       Audit	EXPERIENCE	CAREER HIGHLIGHTS
		Ms. Coe has a deep understanding of the digital landscape, as well as global strategy and operations, due to her experience as a senior leader at Alphabet (formerly Google Inc.). She also has extensive consumer marketing and sales expertise from her leadership position at McKinsey and other global marketing consulting firms.	Alphabet Inc. (formerly Google Inc.)  •      President, Global Customer Solutions (2017-present)  •      Vice President, Go-to-Market Operations and Strategy (2012-2017)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  None  FORMER  •      Whole Foods Market, Inc. (2016-2017)

 

 

PAMELA J. CRAIG

INDEPENDENT

 

	AGE: 62   DIRECTOR SINCE:  2015   COMMITTEES:       Audit (Chair)       Governance	EXPERIENCE	CAREER HIGHLIGHTS
		Ms. Craig has extensive finance, management, operational, technology and international business expertise, including her history of accomplishment and executive ability as Chief Financial Officer of Accenture plc. In addition, her directorships at other public companies, including her service as the Chair of the Audit Committee at Akamai Technologies, Inc., provide her with valuable experience on governance issues facing public companies.	Accenture plc, global management consulting, technology services and outsourcing company  •       Chief Financial Officer (2006-2013)  •       Senior Vice President, Finance (2004-2006)  •       Group Director, Business Operations and Services (2003-2004)  •       Managing Partner, Global Business Operations (2001-2003)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •       Akamai Technologies, Inc. (since 2011)  •       Progressive Insurance (since 2018)  FORMER  •       VMware, Inc. (2013-2015)  •       Wal-Mart Stores, Inc. (2013-2017)

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROPOSAL 1 ELECTION OF DIRECTORS

33

 

 

KENNETH C. FRAZIER

MANAGEMENT

 

	AGE: 64   DIRECTOR SINCE: 2011	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Frazier has broad managerial and operational expertise and deep institutional knowledge, as well as a track record of achievement, integrity and sound judgment demonstrated prior to, and during his long tenure with Merck. In addition, his role as the Chair of the Board Affairs Committee of Exxon Mobil Corporation has provided him with important experience on governance issues facing public companies.	Merck & Co., Inc.  •      Chairman and Chief Executive Officer (2011-present)  •      President (2010-present)  •      Executive Vice President and President, Global Human Health (2007-2010)  •      Executive Vice President and General Counsel (2006-2007)  •      Senior Vice President and General Counsel (1999-2006)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      Exxon Mobil Corporation (since 2009)  FORMER  None

 

 

THOMAS H. GLOCER

INDEPENDENT

 

	AGE: 59   DIRECTOR SINCE:  2007   COMMITTEES:      Compensation  and Benefits (Chair)       Governance	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Glocer has extensive management, operational, technology and international business expertise, including his history of accomplishment and executive ability as CEO and a Director of Thomson Reuters Corporation. In addition, his directorships at other public companies, including his service as Lead Director and as a member of the Operations and Technology Committee at Morgan Stanley, provide him with valuable experience on governance issues facing public companies.	Angelic Ventures LP, a family office investing in early-stage technology and data companies  •      Founder and Managing Partner (2012-present) Thomson Reuters Corporation,  multi-national media and information firm  •      Chief Executive Officer (2008-2011)  •      Chief Executive Officer, Reuters Group PLC (2001-2008)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      Morgan Stanley (since 2013)  •        Publicis Groupe (since 2016)  FORMER  None

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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34

PROPOSAL 1 ELECTION OF DIRECTORS

 

 

ROCHELLE B. LAZARUS

INDEPENDENT

 

	AGE: 71   DIRECTOR SINCE:  2004   COMMITTEES:      Compensation  and Benefits      Governance	EXPERIENCE	CAREER HIGHLIGHTS
		Ms. Lazarus has extensive expertise in management, including talent management, marketing, and communications, as well as a track record of achievement and sound judgment, as demonstrated by her history as Chairman and CEO of Ogilvy & Mather. Through her role as Trustee of New York Presbyterian Hospital, she has also gained experience in overseeing the management of medical providers, a key stakeholder group of the Company. In addition, her strong background in reputation management and consumer insight provides the Board with valuable insight into the Company’s branding strategy. She also has extensive experience as a director of charitable and civic organizations.	Ogilvy & Mather, global advertising and marketing communication company  •      Chairman Emeritus (2012-present)  •      Chairman, Ogilvy & Mather Worldwide (2008-2012)  •      Chairman and Chief Executive Officer (1996-2008)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      The Blackstone Group L.P. (since 2013)  FORMER  •      General Electric (2000-2018)

 

 

PAUL B. ROTHMAN, M.D.

INDEPENDENT

 

	AGE: 61    DIRECTOR SINCE:  2015    COMMITTEES:        Audit       Research	EXPERIENCE	CAREER HIGHLIGHTS
		Dr. Rothman has extensive expertise in patient care, science and medicine relevant to the pharmaceutical industry, including his positions as the CEO of Johns Hopkins Medicine and the Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, and his past experience as Dean and Head of Internal Medicine at Carver College of Medicine at the University of Iowa. In addition, his vast operational and management experience of a large-scale medical organization provide him with a deep understanding of the complexities of the U.S. healthcare delivery system and policy environment.	Johns Hopkins University  •      Dean of the Medical Faculty and Vice President for Medicine (2012-present)  Johns Hopkins Medicine  •      Chief Executive Officer (2012-present)  Carver College of Medicine at the University of Iowa  •      Dean (2008-2012)  •      Head of Internal Medicine (2004-2008)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  None  FORMER  None

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROPOSAL 1 ELECTION OF DIRECTORS

35

 

 

PATRICIA F. RUSSO

INDEPENDENT

 

	AGE: 66    DIRECTOR SINCE:  1995(1)    COMMITTEES:       Compensation  and Benefits      Governance	EXPERIENCE	CAREER HIGHLIGHTS
		Ms. Russo has extensive management, operational, international business and financial expertise, broad understanding of the technology industry, which includes her career achievements during her tenure as CEO and Director of Alcatel-Lucent and Lucent Technologies Inc. In addition, her directorships at other public companies, including her roles as the Non-executive Chairman of Hewlett Packard Enterprise Company and Chair of the Governance and Corporate Responsibility Committee of General Motors, provide her with deep experience on governance issues facing large public companies.	Hewlett Packard Enterprise Company, technology company  •      Non-executive Chairman (2015-present)  Alcatel-Lucent, global telecommunications equipment company  •      Chief Executive Officer and Director (2006-2008)  •      Chairman, Lucent Technologies Inc. (2003-2006)  •      President and Chief Executive Officer, Lucent Technologies Inc. (2002-2006)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      General Motors Company (since 2009)  •      Hewlett Packard Enterprise Company (since 2015), Non-executive Chairman (2015)  •      KKR Management Inc. (the managing partner of KKR & Co., L.P.) (since 2011)  FORMER  •      Hewlett-Packard Company (2011-2015)  •      Arconic, Inc. (2016-2018) formerly Alcoa, Inc. (2008-2016)

 

(1)	Ms. Russo was on the Board of Directors of Schering-Plough Corporation from 1995 until 2009 when the Company became Merck & Co., Inc.

 

INGE G. THULIN

INDEPENDENT

 

	AGE: 65    DIRECTOR SINCE:  2018    COMMITTEES:       Compensation  and Benefits      Governance	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Thulin has extensive management, operational, technology and international business expertise, as demonstrated by a track record of success leading 3M Company. Mr. Thulin possesses broad industry experience drawn from 3M’s diverse businesses, commitment to research, and strong life sciences division. He also brings valuable insight into driving innovation, based on his experience with new product development and manufacturing.	3M Company, global technology company  •      Executive Chairman (2018-present)  •      Chairman, President and Chief Executive Officer (2012-2018)  •      President and Chief Executive Officer (2012)  •      Executive Vice President and Chief Operating Officer (2011-2012)  •      Executive Vice President, International Operations (2004-2011)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      3M Company (since 2012)  •      Chevron Corporation (since 2015)  FORMER  None

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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PROPOSAL 1 ELECTION OF DIRECTORS

 

 

WENDELL P. WEEKS

INDEPENDENT

 

	AGE: 59    DIRECTOR SINCE:  2004    COMMITTEES:        Research	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Weeks has extensive management, commercial, operational, and financial expertise, as well as a track record of success evidenced by his history at Corning Incorporated. Mr. Weeks possesses broad experience based on Corning’s diverse businesses and a demonstrated ability to manage effectively through market volatility. Mr. Weeks also has unique insight into managing innovation and supply chain complexities based on Corning’s global operations. In addition, Mr. Weeks’ experience as a member of the Board of Amazon.com, Inc. provides him with an important perspective on potential future disruption in the healthcare marketplace and expertise in digital technology strategy.	Corning Incorporated, glass and materials science innovator for the optical communications, mobile consumer electronics, display, automotive, and life sciences industries  •      Chairman, Chief Executive Officer and President (2010-present)  •      Chairman and Chief Executive Officer (2007-2010)  •      President and Chief Executive Officer (2005-2007)  •      President and Chief Operating Officer (2002-2005)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  •      Amazon.com, Inc. (since 2016)  •      Corning Incorporated (since 2000)  FORMER  None

 

 

PETER C. WENDELL

INDEPENDENT

 

	AGE: 68    DIRECTOR SINCE:  2003    COMMITTEES:       Compensation  and Benefits       Research	EXPERIENCE	CAREER HIGHLIGHTS
		Mr. Wendell has extensive management, financial and venture capital expertise as demonstrated by his positions as a Managing Director of Sierra Ventures, his status as a Lecturer in strategic management at the Stanford University Graduate School of Business for over 20 years, and his former Chairmanship of the Princeton University endowment.	Sierra Ventures, technology-oriented venture capital firm  •      Managing Director (1982-present)  Stanford University  •      Faculty, Stanford University Graduate School of Business (1991-present)
			OTHER PUBLIC DIRECTORSHIPS
			CURRENT  None  FORMER  None

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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DIRECTOR COMPENSATION

37

 

 

DIRECTOR COMPENSATION

 

Our non-employee Directors receive cash compensation, as well as cash settled equity compensation in the form of deferred stock units, for their Board service. During 2018, non-employee Directors were compensated for their Board service as shown in the chart below.

 

2018 SCHEDULE OF DIRECTOR FEES

Compensation Element(1)	Director Compensation Program
Annual Retainer	$  115,000, which may be deferred, at the Director’s election
Annual Mandatory Deferral	$  185,000 credit to Director’s Merck common stock account under the Plan for Deferred Payment of Directors’ Compensation
Committee Chair Retainer	$  30,000 for the Audit Committee(2)
	$  20,000 for the Governance Committee(3)
	$  20,000 for the Compensation and Benefits Committee
	$  20,000 for the Research Committee
Audit Committee Member Retainer	$  10,000(2)
Lead Director Retainer	$  30,000(3)

 

(1)

All annual retainers are paid in quarterly installments.

(2)

The Audit Committee Chair retainer includes the Audit Committee Member retainer fee in the amount of $10,000.

(3)

The independent Lead Director is the Chairperson of the Governance Committee as prescribed by the committee charter.

As a result of the combined responsibility, the Lead Director retainer totals $50,000 in the aggregate.

 

DIRECTORS’ DEFERRAL PLAN

Annual Retainer

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

 

Annual Mandatory Deferral

In addition to the annual retainer, each Director will receive a deferred stock unit — that is, a credit to the Director’s Merck common stock account under the Directors’ Deferral Plan — with a value of $185,000 annually upon election (or re-election) at the Annual Meeting of Shareholders. Directors who join the Board after that date are credited with a pro-rata portion. All distributions from the Directors’ deferred account are settled in cash.

 

EXPENSES AND MATCHING GIFT PROGRAM

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

 

DIRECTOR STOCK OWNERSHIP GUIDELINES

Upon joining the Board, each Director must own at least one share of Merck common stock. Directors must attain a target Merck common stock ownership level having a value equal to five times the annual cash retainer within five years of joining the Board, or as soon thereafter as practicable. Deferred stock units held in the Merck common stock account under the Directors’ Deferral Plan are counted toward the target goal. Any Director may request that the Governance Committee consider whether the target ownership level is appropriate in view of such Director’s personal circumstances.

 

As of December 31, 2018, all Directors serving at least five years have either met or exceeded these stock ownership requirements. Mr. Thulin joined the Board effective March 1, 2018 and Ms. Coe joined the Board effective March 18, 2019. These two Directors are making progress toward meeting the stock ownership guidelines.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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38

DIRECTOR COMPENSATION

 

 

2018 DIRECTOR COMPENSATION

 

The table below summarizes the annual compensation for our non-employee Directors for the fiscal year ended December 31, 2018.

 

Mr. Frazier is the only Director who is an officer and employee of the Company, and he does not receive any additional compensation for his Board service.

		Director Compensation for Fiscal Year Ended December 31, 2018
Name(1)		Fees Earned or Paid in Cash ($)			Option Awards ($)(5)			All Other Compensation ($)(6)				Total ($)
Leslie A. Brun			$175,000			—			$185,000			$360,000
Thomas R. Cech			130,000			—			217,776			347,776
Pamela J. Craig			145,000			—			210,000			355,000
Thomas H. Glocer			135,000			—			185,000			320,000
Rochelle B. Lazarus			115,000			—			245,000			360,000
John H. Noseworthy			115,000			—			185,000			300,000
Carlos E. Represas(2)			47,917			—			—			47,917
Paul B. Rothman			125,000			—			230,000			355,000
Patricia F. Russo			115,000			—			215,000			330,000
Craig B. Thompson(3)			101,250			—			185,000			286,250
Inge G. Thulin(4)			95,833			—			199,167	(7)		295,000
Wendell P. Weeks			115,000			—			245,000			360,000
Peter C. Wendell			115,000			—			245,000			360,000

 

(1)	Ms. Coe was elected to the Board effective March 18, 2019 and is not included in this table.

(2)

Mr. Represas retired from the Board effective May 22, 2018.

(3)

Dr. Thompson retired from the Board effective October 2, 2018.

(4)

Mr. Thulin was elected to the Board effective March 1, 2018.

(5)

No grants have been made under the 2010 Non-Employee Directors Stock Option Plan since 2011, though the Board has the right to further amend the Plan. Stock options previously issued to Directors under the 2010 Non-Employee Directors Stock Option Plan and any predecessor plans became exercisable in substantially equal installments on the first, second and third anniversaries of the grant date. All stock options previously issued to Directors are fully vested and exercisable. All options expire on the day before the tenth anniversary of their grant. The exercise price of the options is the closing price of our common stock on the grant date as quoted on the New York Stock Exchange.

 

On December 31, 2018, the number of option awards outstanding for each Director who served during 2018 were:

 

Director Name	Outstanding Option Awards at 12/31/18
L.A. Brun	10,000
T.R. Cech	0
P.J. Craig	0
T.H. Glocer	10,000
R.B. Lazarus	0
J.H. Noseworthy	0
C.E. Represas	0
P.B. Rothman	0

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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DIRECTOR COMPENSATION

39

 

 

Director Name	Outstanding Option Awards at 12/31/18
P.F. Russo	0
C.B. Thompson	5,000
I.G. Thulin	0
W.P. Weeks	10,000
P.C. Wendell	0

 

(6)

Represents Company credits (in the form of deferred stock units) to the Directors’ Deferral Plan. Mr. Represas did not receive a Company credit to the Directors’ Deferral Plan because he retired from the Board at the 2018 Annual Meeting of Shareholders, which occurred prior to the award date.

Figures also include charitable contributions made by the Merck Foundation under its matching gift program on behalf of the following Directors:

Director Name	Matched Charitable Contribution ($)
T.R. Cech	$32,776
P.J. Craig	25,000
R.B. Lazarus	60,000
P.B. Rothman	45,000
P.F. Russo	30,000
W.P. Weeks	60,000
P.C. Wendell	60,000

The matching contribution amounts shown above include 2017 and 2018 contributions that were paid in calendar year 2018.

 

(7)

During 2018, Mr. Thulin received a prorated portion of the 2017 credit when he joined the Board on March 1, 2018, as well as the full 2018 portion at the 2018 Annual Meeting.

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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We are pleased to provide our shareholders the opportunity to vote on a non-binding, advisory resolution to approve the compensation of our Named Executive Officers (“NEOs”) as disclosed in this proxy statement, including the Compensation Discussion and Analysis, compensation tables and the narrative discussion accompanying the tables, beginning on page 42.

 

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

 

In order to align executive pay with operational performance and the creation of long-term shareholder value, a significant portion of compensation paid to our NEOs is allocated to annual cash and long-term equity incentives, which are directly linked to Company and/or stock price performance. For 2018, 90% and approximately 81%, respectively, of the CEO’s and other NEOs’ annual target total direct compensation was variable based on our operating performance and/or our stock price.

 

The NEOs received above-target payouts of 126% under our 2018 Executive Incentive Plan due to over-achievement against our financial and research-based objectives. Our 2016 PSU program measured performance over a cumulative three-year period using equal components of relative-TSR and Operating Cash Flow. The overall payout for this plan for the three-year performance period ending December 31, 2018 was 126%, reflecting achievement of 115% of Operating Cash Flow targets and relative-TSR results of 137% versus our Peer Group.

 

In addition, management and the C&B Committee of the Board of Directors continually review the compensation programs for the NEOs to ensure they achieve the desired goals of reinforcing alignment of officer incentives with the interests of shareholders and linking compensation to performance as measured by operational results. As a result, we have adopted the policies and practices described on page 45 to further align pay with operational performance and increases in long-term shareholder value while minimizing excessive risk-taking.

 

We are asking shareholders to indicate their support for the NEO compensation as described in this proxy statement. Accordingly, the following resolution will be submitted for approval by shareholders at the 2019 Annual Meeting:

 

“Resolved, that the compensation paid to the Company’s Named Executive Officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and the narrative discussion described in pages 42 to 74 of this proxy statement, is hereby APPROVED on an advisory basis.”

 

The shareholder vote on this resolution will not be binding on management or the Board of Directors and will not be construed as overruling any decision by management or the Board. However, the Board of Directors and the C&B Committee value the opinions of our shareholders as expressed through their votes and other communications. In 2018, shareholders continued their support of our executive compensation programs with 95% of the votes cast for approval of a similar proposal. We will continue to give careful consideration to the outcome of the advisory vote on executive compensation and to the opinions of our shareholders when making compensation decisions.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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

41

 

 

At our 2017 Annual Meeting of Shareholders, our shareholders voted in support of annual advisory votes on future executive compensation proposals. The Board of Directors has adopted a practice providing for annual say-on-pay advisory votes. The Board expects that the next say-on-pay vote will occur in 2020.

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

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SIGNIFICANT ACHIEVEMENTS IN 2018

 

	Generated meaningful growth in sales and earnings
	Cemented leadership in immuno-oncology
	Advanced pipeline of innovative therapies
	Invested for future growth behind R&D pipeline and in manufacturing capacity
	Executed value-enhancing business development transactions
	Delivered robust capital returns to shareholders through increased dividend and share repurchases

 

 

 

 

* Mr. Schechter served as Executive Vice President and President, Global Human Health until December 31, 2018.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS EXECUTIVE SUMMARY

43

 

 

EXECUTIVE SUMMARY

 

2018 was a momentous year in which Merck shifted fundamental treatment and prevention paradigms. The continued growth of our oncology franchise exceeded expectations with KEYTRUDA capturing greater market share based on strong patient outcomes across many tumor types. Our investigational vaccine for Ebola became the backbone of global public health authority efforts to contain outbreaks of this life-threatening disease and our GARDASIL patient base expanded significantly with the FDA approval for GARDASIL 9 in males and females ages 27–45 and the commercial launch in China. Animal Health sales increased 9% driven primarily by sales growth in the Bravecto product line and companion animal vaccines. The acquisition of Antelliq, a leader in digital animal identification, traceability and monitoring solutions will augment our already broad and fast-growing animal health portfolio by adding market-leading digital products providing further growth opportunities.

 

Our full-year results reflect our success in focusing on our growth drivers — oncology, vaccines, select hospital and specialty care and animal health with top and bottom line results exceeding expectations. In the context of our Scorecard, which is used to determine payouts for our annual cash incentives, including the Executive Incentive Plan (“EIP”), revenue slightly exceeded target despite the loss of exclusivity of several products, heightened competition and increasing pricing pressure. Pre-tax income exceeded target by 3% as a result of our ongoing discipline in managing Sales, General and Administrative (“SG&A”) costs.

 

Our performance in 2018 demonstrates our progress in establishing ourselves as the premier, research-intensive, biopharmaceutical company with sustainable revenue growth driven by a strong R&D pipeline. In the context of our Scorecard, we significantly outperformed against our Pipeline objectives as a result of over-achievement in the number of approval, filing and global development milestones.

 

We continue to invest meaningfully in R&D, allocating capital and resources toward the discovery and development of our most promising assets and in pursuit of acquisitions and collaborations. One notable example is our strategic partnership with Eisai for Lenvima which received approval in the U.S., China and Europe for the first-line treatment of patients with unresectable liver cancer and its second breakthrough therapy designation when used in combination with KEYTRUDA.

 

In September, the Board made the decision to eliminate the Mandatory CEO Retirement Policy, facilitating Mr. Frazier’s continued leadership as Chairman, President and Chief Executive Officer. As a result of the elimination of the Mandatory CEO Retirement Policy, Mr. Frazier lost a pension benefit from his tenure prior to becoming CEO. To restore the loss of the benefit, the Board approved a $2.5 million credit to Mr. Frazier’s deferred compensation account. The credit will be forfeited if his employment ends before January 2020 (unless due to his earlier death or disability).

 

As we enter 2019 under his leadership, we are well-positioned for growth and value creation and optimistic about our ability to address unmet medical needs, deliver innovation that will matter to the patients we serve and return capital to our shareholders.

 

TOP AND BOTTOM LINE GROWTH

 

5%  Revenue Growth despite the negative impact of $1.2B in loss of exclusivity

7%  Increase in Non-GAAP pre-tax income from 2017 to 2018

$9.8B GAAP investment in R&D in 2018

 

SHAREHOLDER VALUE CREATION

$14.3B Capital Returned to Shareholders (dividends and share repurchases)		15% increase to quarterly dividend beginning in January 2019			TOTAL SHAREHOLDER RETURN
					Year-end 2018
					1-YEAR 40.0%	3-YEAR 16.6%		5-YEAR 12.3%
					TOP QUARTILE			ABOVE MEDIAN

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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44

COMPENSATION DISCUSSION AND ANALYSIS EXECUTIVE COMPENSATION PROGRAM OBJECTIVES AND STRATEGY

 

 

EXECUTIVE COMPENSATION PROGRAM OBJECTIVES AND STRATEGY

 

OUR INDUSTRY ENVIRONMENT

The pharmaceutical industry is science-focused and requires experimentation to foster innovation. Ultimately, the work we do has an enormous impact on global health and well-being. Because of the inherent complexity and dynamic science of human and animal health, even with flawless execution we risk failure.

 

•

Our customers are struggling with the unsustainable economics of healthcare

 

•

The costs associated with innovation are increasing while relative return is decreasing due to ongoing pricing pressure

 

•

The competition density against key products limits their commercial life, putting additional pressure on our pipeline

 

•

It takes 10 to 15 years to discover, develop, and bring a new product to market

 

OUR COMPENSATION PROGRAM MUST ADDRESS THE INDUSTRY ENVIRONMENT WE OPERATE WITHIN, BE MARKET-COMPETITIVE AND PAY-FOR-PERFORMANCE

We strive to balance the need to deliver market-competitive pay within a framework that provides the appropriate mix of fixed and variable, at-risk compensation to attract, retain and motivate talent and align with our pay-for-performance objectives.

 

	Our program must…
		Support our efforts to attract and retain the brightest and most innovative minds in business, research and academia.
		Align the interests of our executives with the interests of our shareholders to ensure prudent actions that will benefit long-term value.
		Reward our executives based on the achievement of sustained financial and operating performance and demonstrated leadership.
		Support a shared, one-company mindset of performance and accountability to deliver on business objectives.

 

 

VARIABLE COMPENSATION IS A CRITICAL COMPONENT OF OUR PAY-FOR-PERFORMANCE OBJECTIVES

 

Annual Cash Incentive

The Company Scorecard (described in more detail on page 50) focuses on our most critical business drivers — revenue, pre-tax income and pipeline — and is used to determine the payout for our annual incentive for all employees, including our NEOs under the EIP. Our Scorecard performance for 2018 resulted in above-target achievement of 126%.

 

Long-Term Incentive (LTI)

The long-term incentive program provides our NEOs with the opportunity to own Merck stock, directly linking a substantial portion of their compensation to the long-term performance of our stock.

 

For the 2016-2018 performance period (described in more detail on page 53), PSUs paid out at 126% based on cumulative, three-year Operating Cash Flow (“OCF”) and relative Total Shareholder Return (“R-TSR”) during the performance period, each weighted at 50%.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS COMPENSATION POLICIES AND PRACTICES

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COMPENSATION POLICIES AND PRACTICES

Our executive compensation and corporate governance programs are designed to closely link pay with operational performance and increases in long-term shareholder value while minimizing excessive risk-taking. To help us accomplish these important objectives, we have adopted the following policies and practices over time:

 

WE DO…	WE DO NOT…
Require double-trigger vesting of equity in the event of a change in control (i.e., there must be both a change in control and an involuntary termination)   Utilize a total shareholder return metric in the PSU program to align the payout with long-term stock performance and shareholder experience   Provide dividend equivalents only on earned Restricted Stock Units (RSUs) or PSUs   Monitor LTI program share utilization regularly relative to both industry standards and versus our pharmaceutical and supplemental peer groups   Conduct competitive benchmarking to ensure executive officer compensation is aligned to market   Offer limited perquisites that are supported by business interests   Include caps on annual cash incentive and PSU program payouts   Retain an independent compensation consultant that reports directly to the C&B Committee   Maintain robust stock ownership requirements and share retention policies   Maintain an incentive recoupment (i.e. clawback) policy   Conduct assessments to identify and mitigate risk in our compensation programs   Avoid employment agreements	Allow Directors and management employees including officers to engage in transactions involving short sales, publicly traded options, hedging or pledging of Company stock   Grant time-vested RSUs to NEOs as part of the annual LTI program   Grant stock options with an exercise price less than fair market value   Re-price underwater stock options without shareholder approval     Pay tax gross-ups in the event of a change in control

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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46

COMPENSATION DISCUSSION AND ANALYSIS PEER GROUPS

 

 

MERCK’S PRIMARY PEER GROUP

Individual executive officer compensation levels and opportunities are compared to a Peer Group of large multinational pharmaceutical companies that participate in a pharmaceutical industry compensation survey. The survey is conducted by Willis Towers Watson, an independent consulting firm. In setting compensation levels for 2018, the C&B Committee reviewed the survey results, which consisted of the following Peer companies with which Merck competes to attract talented, high-performing executives:

 

 

 

 

MERCK’S SUPPLEMENTAL PEER GROUP

In addition to the pharmaceutical Peer Group described above, we also use a Supplemental Peer Group consisting of the companies that comprise the Dow Jones Industrial Average (excluding the financial services companies) as a secondary reference for CEO compensation and for other compensation-related practices (for example, share usage and dilution, change in control policy design and share ownership and retention guidelines). Merck is a member of the Dow Jones Industrial Average and we believe this group provides insight into practices among companies of similar scale and complexity.

 

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

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS DETAILED DISCUSSION AND ANALYSIS

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DETAILED DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis or “CD&A” describes the material elements of compensation for our 2018 Named Executive Officers, who are listed below.

KENNETH C. FRAZIER		CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AGE: 64   TENURE: 26.9 YEARS	COMPENSATION DECISIONS FOR 2018
	•  Increased base salary by 2.2% •  Increased LTI target by $500,000 •  Maintained annual incentive target •  Increased Total Target Direct Compensation by 3.6%

 

*  Includes $2.5M in deferred compensation to offset the loss of pension benefits due to the elimination of the Mandatory CEO Retirement Policy. For additional details, see Pension Benefits section on page 66. 

ROBERT M. DAVIS		EXECUTIVE VICE PRESIDENT, GLOBAL SERVICES, AND CHIEF FINANCIAL OFFICER
AGE: 52   TENURE: 5.0 YEARS	COMPENSATION DECISIONS FOR 2018
	•  Increased base salary by 2.5% •  Maintained annual and LTI targets •  Increased Total Target Direct Compensation by 0.9%

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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48

COMPENSATION DISCUSSION AND ANALYSIS DETAILED DISCUSSION AND ANALYSIS

ROGER M. PERLMUTTER, M.D., PH.D.		EXECUTIVE VICE PRESIDENT AND PRESIDENT, MERCK RESEARCH LABORATORIES
AGE: 66   TENURE: 9.9 YEARS	COMPENSATION DECISIONS FOR 2018
	•  Increased base salary by 3% •  Maintained annual and LTI targets •  Increased Total Target Direct Compensation by 1.1%

ADAM H. SCHECHTER		FORMER EXECUTIVE VICE PRESIDENT AND PRESIDENT, GLOBAL HUMAN HEALTH
AGE: 55   TENURE: 30.8 YEARS	COMPENSATION DECISIONS FOR 2018
	•  Increased base salary by 2.5% •  Maintained annual and LTI targets •  Increased Total Target Direct Compensation by 0.9%

JENNIFER L. ZACHARY		EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
AGE: 41   TENURE: .7 YEARS	COMPENSATION DECISIONS FOR 2018
	•  Hired April 16, 2018 •  See page 71 for Agreement details

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS THE ELEMENTS OF 2018 COMPENSATION

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THE ELEMENTS OF 2018 COMPENSATION

 

 

The C&B Committee, and in the case of Mr. Frazier, the Board of Directors (not including Mr. Frazier), determines compensation for the NEOs each year based on a variety of factors including knowledge, skills and experience; breadth, scope and complexity of role; and competitive positioning as compared to our pharmaceutical and supplemental peer groups as described in more detail on page 46.

 

Additional details regarding the roles and responsibilities of the C&B Committee are provided beginning on page 21.

 

 

BASE SALARY

The C&B Committee must balance the need to deliver a competitive level of base salary while also ensuring the appropriate mix of fixed to variable compensation for each NEO. 

 

As shown in the table, adjustments were made to base salaries in 2018. All adjustments were based on Merck’s U.S. salary increase budget for all employees, including the NEOs.

 

Executive Officer	Annual Base Salary Increase %	Market Adjustment %	Base Salary Effective April 2018
Kenneth C. Frazier	2.2%	No Change	$1,620,000
Robert M. Davis	2.5	No Change	1,050,625
Roger M. Perlmutter	3.0	No Change	1,125,084
Adam H. Schechter	2.5	No Change	1,062,182
Jennifer L. Zachary	New Hire	New Hire	800,000

 

 

ANNUAL CASH INCENTIVE

The NEOs participate in the shareholder-approved Executive Incentive Plan.

 

Award amounts under the EIP are determined based upon achievement of Company performance measures as reflected by the Company Scorecard. The overall EIP award fund cannot exceed 200% of the aggregate total target incentive amount for all participants. The maximum award amount for each NEO for 2018, excluding the impact of the Scorecard, is listed in the Grants of Plan-Based Awards table on page 61.

 

Other than the addition of Ms. Zachary, no changes were made to EIP targets for the 2018 performance period as shown in the table.

 

Executive Officer	2017 Target Annual Incentive % of Base Salary	2018 Target Annual Incentive % of Base Salary
Kenneth C. Frazier	150%	No Change
Robert M. Davis	105	No Change
Roger M. Perlmutter	105	No Change
Adam H. Schechter	105	No Change
Jennifer L. Zachary	N/A	95%

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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50

COMPENSATION DISCUSSION AND ANALYSIS 2018 MERCK COMPANY SCORECARD

 

 

2018 Merck Company Scorecard

Our Company Scorecard helps translate our strategic priorities into operational terms that track and measure our progress and performance against annual operating goals and critically important long-term strategic drivers of sustainable value creation tied to our research and development pipeline — all of which are measured in the context of health, safety and environmental outcomes. Revenue and Pre-Tax Income are equally weighted at 40% based on the C&B Committee’s belief that they are the key financial measures of our success during the year. The Pipeline milestones are weighted at 20% and are designed to ensure that we are focused on internal and external early discovery opportunities, late-stage clinical development progression, filings and approvals.

 

As indicated above, the threshold and stretch revenue and pre-tax income goals are set in relation to the Board-approved annual operating plan and the expectations of management. The pipeline goals are established by the head of Merck Research Labs, and reviewed by the Research and C&B Committees of the Board each year. Failure to achieve threshold performance on any of the metrics would result in forfeiture of the entire opportunity for that metric. If the combined results of the three metrics do not total at least 50, the entire opportunity would be forfeited (i.e., there would be no payout). The overall results of the Scorecard are calibrated so individuals may receive between 50% and 200% of their target award opportunity established for the annual performance period. The Scorecard structure and results are summarized below.

 

 

 

*    Measured excluding foreign exchange.

 

Revenue:

For purposes of the Scorecard, reported revenue of $42.3B was adjusted to $42.6B to remove the negative impact of foreign exchange rates (vs. foreign exchange rates budgeted in the annual operating plan), and adjusted for business development transactions, exceeding our internal revenue target of $42.5B.

 

Pre-Tax Income:

For purposes of the Scorecard, reported pre-tax income of $14.5B was maintained at $14.5B after removing the negative impact of foreign exchange rates (vs. foreign exchange rates budgeted in the annual operating plan), adjusted for business development transactions, and the impact of certain other items, exceeding our internal pre-tax income target of $14.1B.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS LONG-TERM EQUITY INCENTIVES

51

 

 

2018 Annual Incentive Payouts

The table below shows the 2018 annual cash incentives paid to the NEOs. The total annual incentive amount paid to each NEO is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

 

NAMED EXECUTIVE OFFICER 2018 ANNUAL INCENTIVE PAYMENTS

Named Executive Officer	Annual Base Salary (as of 12/31/18) ($)	Target		Company Scorecard Result (%)	Final Award ($)
		Annual Incentive (%)	Annual Incentive ($)
K.C. Frazier	$1,620,000	150%	$2,430,000	126%	$3,061,800
R.M. Davis	1,050,625	105	1,103,156	126	1,389,977
R.M. Perlmutter	1,125,084	105	1,181,338	126	1,488,486
A.H. Schechter	1,062,182	105	1,115,291	126	1,405,267
J.L. Zachary	533,333(1)	95	506,667(1)	126	638,400

 

(1)

Ms. Zachary’s annual base salary and target annual cash incentive have been pro-rated to reflect her adjusted annual incentive opportunity for 2018 under the EIP based on her April 16, 2018 hire date.

 

 

LONG-TERM EQUITY INCENTIVES 

2018 AWARD MIX

We use two long-term incentive (“LTI”) vehicles to ensure that our LTI program remains balanced, sustainable and supportive of its objectives over a multi-year period.

	Performance Share Units   PSUs link realized compensation value to the achievement of critical financial and operational objectives and align executives’ interests with those of our shareholders. The earned award varies based on results versus pre-determined performance goals, as well as long-term returns to shareholders as measured by relative stock price performance and dividend yield.
	Stock Options   Stock options align our executives’ interests with the interests of our shareholders because options only have financial value to the recipient if the price of our stock at the time of exercise exceeds the stock price on the date of grant. As a result, we believe stock option grants encourage executives to focus on behaviors and initiatives that support sustained long-term stock price appreciation, which benefits all shareholders.

  

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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52

COMPENSATION DISCUSSION AND ANALYSIS LONG-TERM EQUITY INCENTIVES

 

 

Current LTI Grant Practices

All grants to executive officers are approved by the C&B Committee, and in the case of Mr. Frazier, the Board of Directors (not including Mr. Frazier). Annual PSU grants (with a 3-year performance period) are generally made on the last business day in March and annual stock option grants are made on the third business day following announcement of our first quarter earnings. We may also selectively grant stock options and RSUs to executive officers on the third business day following the announcement of quarterly earnings generally as part of a new hire sign-on or for retention purposes. These dates were chosen to ensure that grants are made shortly after we have released information about our financial performance to the public. However, the C&B Committee reserves the right to change the date when grants are made, in view of its responsibility to consider all facts and circumstances to ensure that grants are consistent with our compensation philosophy and objectives.

 

Stock options are granted at no less than fair market value on a fixed date or event, with all required approvals obtained in advance of or on the actual grant date. Fair market value is the closing price of a share of Company stock on the grant date. In certain countries, a higher grant price may be used to satisfy provisions of local applicable law. The re-pricing of stock options is not permitted under the Incentive Stock Plan (“ISP”) without prior shareholder approval.

 

 

2018 LTI Grant Values

The 2018 annual LTI grant values for the CEO and other NEOs as compared to the prior year are shown in the following table. The number of shares associated with each award is set forth in the Grants of Plan-Based Awards table on page 61. Mr. Frazier’s LTI grant value was increased by the Board to recognize his sustained performance and leadership.

 

Executive Officer	Target Grant Value(1)		Increase in Target Grant Value
	2017	2018
Kenneth C. Frazier	$12,500,000	$13,000,000	+$500,000
Robert M. Davis	3,800,000	3,800,000	0
Roger M. Perlmutter	4,000,000	4,000,000	0
Adam H. Schechter	3,800,000	3,800,000	0
Jennifer L. Zachary	N/A	2,000,000	New Hire

 

(1)

Grant values shown above will be different from the values shown in the Summary Compensation and Grants of Plan-Based Awards tables based on the fair value on grant date in accordance with FASB ASC Topic 718 and SEC disclosure rules which consider factors other than share price.

 

2018 PSU Program

At the beginning of each year, we establish three-year performance targets for the metrics under the PSU program. For awards granted through 2016, the performance metrics were OCF and relative-TSR, each weighted 50%. Beginning with awards granted in 2017, the metrics include cumulative Earnings Per Share (EPS), (25%), OCF (25%) and relative-TSR (50%). Payouts under the PSU program are formulaic; the C&B Committee does not consider individual performance or use discretion when determining final awards.

 

EPS and OCF targets are established based on our three-year financial plan, which considers a variety of factors including management, Board and external expectations and aspirations of our long-term performance. Relative-TSR performance versus our peer group is measured at the end of the three-year period using an out- or under-performance model that compares Merck’s average annual TSR to the median TSR of our pharmaceutical peer group. Each percentage point of out- or under-performance versus the median modifies the earned award by +/-5 percentage points. In the event of under-performance by more than 10 percentage points, there will not be a payout on the relative-TSR portion of the award. In the event of out-performance, the payout on the relative-TSR portion of the award cannot exceed 200%. If relative-TSR is negative, the payout on this portion of the award cannot exceed 100%, even if our relative-TSR out-performs the median of the peer group.

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS LONG-TERM EQUITY INCENTIVES

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PAYOUTS UNDER THE 2016-2018 PSU AWARD CYCLE

For grants issued in 2016, 60% of each Named Executive Officer’s annual target LTI was converted to units based on the closing price of Merck stock on the date of grant. The number of units ultimately earned is based on our performance against the pre-established OCF target and R-TSR performance.

 

For the 2016-2018 award cycle, our performance against three-year cumulative OCF and R-TSR versus our pharmaceutical peer group, each weighted at 50%, resulted in an actual payout of 126% as illustrated in the tables below.

 

The 126% payout was based on our strong OCF performance (115%) due to above plan After-Tax Net Income, partially offset by higher than planned working capital driven by strategic inventory build and extended payment terms for KEYTRUDA. As discussed in Appendix B on page 102, OCF was adjusted to remove the impact of business development, tax, accounting changes, and actual foreign exchange rates vs. plan rates. We outperformed the median TSR of our Peer Group by 7.3%, which increased the payout by +5% for each percentage point of outperformance, resulting in an R-TSR payout of 137%.

 

 

 

(1)

Rounded.

(2)

R-TSR as reported by Bloomberg and calculated using the average closing price of Merck and Peer company common stock for December 2015 and December 2018, assuming reinvestment of dividends.

 

Named Executive Officer PSU Distribution

Based on the final payout of 126%, the NEOs received the following number of shares of Merck common stock including dividends accrued and paid in shares:

 

Named Executive Officer	Target Award (# of shares)	Final Award (# of shares)
K.C. Frazier	136,080	183,684
R.M. Davis	41,958	56,636
R.M. Perlmutter	45,360	61,229
A.H. Schechter	43,092	58,167
J.L. Zachary	N/A	N/A

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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54

COMPENSATION DISCUSSION AND ANALYSIS OTHER EMPLOYEE BENEFITS

 

 

Additional information regarding the payouts under the 2016-2018 PSU award cycle is provided in the Option Exercises and Stock Vested table on page 65.

 

To accurately reflect the operating performance of our business, the C&B Committee has approved a framework of adjustments to our reported financial results for incentive program purposes. For further explanation of these adjustments and our GAAP versus Non-GAAP results, please refer to Appendices A and B on pages 100 and 102, respectively.

 

 

OTHER EMPLOYEE BENEFITS

Similar to Merck’s other 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 us to attract and retain our workforce in a competitive marketplace. Pension and savings plans help employees save and prepare financially for retirement. Health and welfare and paid time-off benefits help ensure that we have a productive and focused workforce.

 

Additionally, senior management employees including the NEOs are provided a limited number of other benefits, which the C&B Committee believes are reasonable, appropriate and consistent with our executive compensation philosophy.

 

These benefits, which are described in more detail below, are reflected in the “All Other Compensation” column of the Summary Compensation Table.

 

•

Reimbursement for financial counseling and tax preparation. The value is taxable to executives and is limited to $10,000 per year. This benefit is intended to encourage executives to engage knowledgeable experts to assist with financial and tax planning. This benefit supports our objectives by helping to ensure that executives understand the compensation and benefit plans in which they participate and are not unnecessarily distracted from Company responsibilities to attend to personal financial matters.

 

•

Limited personal use of Company aircraft and Company cars. These taxable benefits provide security for executives and allow them to devote additional time to Company business.

 

•

Reimbursement for the installation, maintenance and remote access of residential security systems. We believe that providing this benefit ensures that our executives have appropriate security. We do not reimburse executives for monthly security monitoring fees.

 

 

2019 COMPENSATION ACTIONS

As part of our annual compensation review for all employees, the C&B Committee reviewed and approved compensation for our executive officers, including our NEOs and the Board of Directors reviewed and approved Mr. Frazier’s compensation.

 

Mr. Frazier’s 2019 LTI grant value was increased to recognize his sustained performance and leadership and to incent a successful transition to a future CEO. His 2019 grants will include specific terms and conditions providing for full vesting if he remains employed through January 1, 2020, subject to his continued compliance with non-compete and non-solicit provisions. Mr. Davis, Dr. Perlmutter and Ms. Zachary also received increases in their annual LTI grant values to better align their overall compensation to the market.

 

The following table summarizes adjustments made to CEO and other NEO compensation for 2019.

 

Executive Officer	Annual Base Salary Increase %	Target Annual Incentive	Target Long-Term Incentive
Kenneth C. Frazier	+3.1%	No change	+$2,000,000
Robert M. Davis	+3.0	No change	+200,000
Roger M. Perlmutter	+3.0	No change	+1,000,000
Jennifer L. Zachary	+9.4	No change	+350,000

 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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COMPENSATION DISCUSSION AND ANALYSIS OTHER COMPENSATION PRACTICES

55

COMPENSATION DISCUSSION AND ANALYSIS

 

OTHER COMPENSATION PRACTICES

Stock Ownership Requirements

The C&B Committee recognizes the critical role that executive stock ownership has in aligning the interests of management with those of shareholders. As such, we maintain a formal stock ownership policy, under which the CEO and other senior executives are required to acquire and hold Merck common stock in an amount representing a multiple of base salary. Until the designated multiple of base salary is reached, executives are required to retain in stock a percentage of the after-tax net proceeds associated with stock option exercises and/or PSU and RSU distributions (100% for the CEO and 75% for the other NEOs). The following table sets forth the stock ownership requirements and current stock ownership status as a percentage of the requirement for the CEO and other NEOs as of February 28, 2019.

 

 

 

(1) Mr. Schechter served as Executive Vice President and President, Global Human Health until December 31, 2018.

 

 

Return of Incentive Compensation (“Clawback Policy”)

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

 

 

Hedging and Pledging

As part of our insider trading policy, Merck prohibits Directors and management level employees, including officers from engaging in short sales, publicly traded options, hedging transactions and pledging of Company stock.

 

 

Tax Deductibility of Compensation

In light of the repeal of the performance-based compensation exemption under Section 162(m) of the Internal Revenue Code, our intent is to maximize the deductibility of compensation under certain circumstances that are in the best interests of the Company and our shareholders. The C&B Committee may authorize compensation that is not deductible if it is determined to be appropriate. 

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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56

COMPENSATION DISCUSSION AND ANALYSIS COMPENSATION RISK ASSESSMENT

 

 

COMPENSATION RISK ASSESSMENT

Our executive compensation program and policies are driven by our business environment and designed to enable us to achieve our mission and adhere to our values. The C&B Committee and senior management continually evaluate the relationship between risk and reward as it relates to our executive compensation program and have adopted policies and practices that mitigate undue risk while preserving the incentive/variable nature of the compensation. These policies and practices are described in more detail in the chart on page 45.

 

In 2018, Merck engaged Pay Governance, an independent compensation consultant to management to perform a formal assessment of our executive compensation program, policies and practices based on generally accepted compensation practices. The results of the assessment were reviewed and discussed with the C&B Committee in November 2018. The assessment reaffirmed our belief that our compensation programs and policies are structured and operated in a manner that does not create risks that are reasonably likely to have a material adverse effect on our business. In addition to ongoing monitoring of our programs and policies, we are committed to performing formal assessments on a periodic basis. The next formal assessment is scheduled for review and discussion with the C&B Committee in November 2020.

 

 

COMPENSATION AND BENEFITS COMMITTEE REPORT

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

 

Compensation and Benefits Committee

Thomas H. Glocer (Chair)

Rochelle B. Lazarus
Patricia F. Russo
Inge G. Thulin
Peter C. Wendell

 

MERCK & CO., INC. 2019 PROXY STATEMENT

 

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SUMMARY

COMPENSATION TABLE

 

The following table summarizes the total compensation that was paid or accrued for the Named Executive Officers for the fiscal years ended December 31, 2018, 2017 and 2016. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer, and the three next most highly compensated executive officers as of December 31, 2018.

 

Name and Principal Position	Year			Salary ($)		(2)		Bonus ($)				Stock Awards ($)		(3)		Option Awards ($)		(4)		Non-Equity Incentive Plan Compensation ($)		(5)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		(6)		All Other Compensation ($)		(7)		Total ($)
Kenneth C. Frazier Chairman, President and Chief Executive Officer	2018			$	1,610,577			$	0			$	9,456,006			$	3,901,093			$	3,061,800			$	0	(8)		$	2,905,028	(9)		$	20,934,504
	2017				1,572,212				0				8,814,767				3,750,000				2,686,575				504,658				314,875				17,643,087
	2016				1,527,404				0				7,875,521				4,800,002				2,518,425				4,757,350				302,468				21,781,170
Robert M. Davis Executive Vice President, Global Services, and Chief Financial Officer	2018				1,043,726				0				2,764,058				1,140,317				1,389,977				171,067				111,695				6,620,840
	2017				1,018,269				0				2,679,655				1,140,001				1,216,163				151,849				104,962				6,310,899
	2016				991,654				1,250,000	(10)			2,428,286				1,479,998				1,092,000				160,276				117,259				7,519,473
Roger M. Perlmutter,  M.D., Ph.D. Executive Vice President and President, Merck Research Laboratories	2018				1,116,262				0				2,909,523				1,200,341				1,488,486				236,334				147,696				7,098,642
	2017				1,083,750				0				2,820,733				1,200,000				1,296,032				294,435				138,917				6,833,867
	2016				1,052,288				0				2,625,174				1,600,001				1,302,824				359,602				160,256				7,100,145
Adam H. Schechter(1)  Former Executive Vice President and President, Global Human Health	2018				1,055,207				0				2,764,058				1,140,317				1,405,267				0	(8)			140,224				6,505,073
	2017				1,029,470				0				2,679,655				1,140,001				1,229,540				1,636,712