UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

Exchange Act of 1934 (Amendment No.    )

 

Filed by the Registrant

Filed by a Party other than the Registrant

 

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MERCK & CO., INC.

 

(Name of Registrant as Specified In Its Charter)

 

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

 

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				Merck & Co., Inc.
		Kenneth C. Frazier   Chairman, President and Chief Executive Officer		2000 Galloping Hill Road Kenilworth, NJ 07033 U.S.A.
			April 13, 2015 Dear Shareholders: It is my pleasure to invite you to the 2015 Annual Meeting of Shareholders of Merck & Co., Inc. (“Merck”), which will be held on Tuesday, May 26, 2015, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807. The attached Notice of Annual Meeting of Shareholders and proxy statement will serve as your guide to the business to be conducted and provide details regarding admission to the meeting.   In 2014 we made important progress in advancing our global initiative to transform the way Merck operates in recognition of the evolution underway in healthcare markets around the world. We’ve sharpened our commercial and R&D focus, redesigned our operating model and reduced our cost base. In addition, we accelerated our business development activity, drawing on the best assets and science external to Merck, and our recent acquisitions of Idenix, Cubist and Oncoethix are proof points. Further, the sale of our Consumer Care business to Bayer resulted from a rigorous portfolio review and generated capital to fund acquisitions like these and to return cash to shareholders through our dividend and share repurchases.   We continue to firmly believe that the best way to create intrinsic, long-term value for society and our shareholders is through the discovery and development of transformational medicines and vaccines. Our success and our future will be predicated on what has long defined Merck: innovating at the intersection of scientific opportunity and global unmet medical need. We intend to stay at the forefront of biopharmaceutical science and remain steadfastly committed to making real and meaningful differences in the lives of patients and delivering value for our customers and shareholders.   Through our pipeline and commercial portfolio, Merck is focused on many of the most urgent global health challenges facing humankind, and we are poised to play a leading role in addressing them. We now have more than 10 Phase 3 programs targeting many of the world’s most urgent public health issues, and Merck scientists are heavily engaged in the most innovative areas in biomedical research today:   The top area is immuno-oncology, which is using the body’s own immune system to fight cancer. Merck’s KEYTRUDA, the first anti-PD-1 treatment approved in the U.S. for advanced melanoma, is now being studied in over 30 cancers in more than 20 combination settings.   We are also concentrating on the major global health challenges of Hepatitis C, cardio-metabolic disease, resistant microbial infection and Alzheimer’s disease.   Further, we entered into an exclusive worldwide license agreement with NewLink Genetics to research, develop, manufacture and distribute its investigational Ebola vaccine candidate.

2015 Proxy Statement     3

			In addition, we continue to address some of the most critical areas of growing and unmet medical need:   Diabetes is a growing global epidemic with over 100 million patients. Merck maintains a leadership position with the JANUVIA franchise, which continues to be an important treatment option for type 2 diabetes patients.   Vaccines have provided numerous innovations to improve global health. As just one example, our GARDASIL 9 vaccine, recently approved by the U.S. Food and Drug Administration, improves the coverage against cancer-causing human papillomavirus (HPV) to nearly 90 percent.   In summary, in 2014 Merck colleagues worked with passion and diligence to help ensure we can continue delivering on our mission to save and improve lives around the world for years to come. Going forward, we will continue to focus our resources on those internal and external opportunities that can generate the greatest benefit to patients, customers and shareholders.   We hope that you will participate in the Annual Meeting, either by attending and voting in person or by voting through other acceptable means as described in this proxy statement as promptly as possible. Merck began mailing its Notice of Internet Availability of Proxy Materials, proxy statement and the 2014 Annual Report on Form 10-K, and proxy card/voting instruction form to shareholders and to employee benefit and stock purchase plans participants on April 13, 2015. Your vote is important. We urge you to exercise your right to do so.   Sincerely,

 

2015 Proxy Statement     4

TABLE OF CONTENTS

 

Voting Information	6
Proxy Summary	8
Notice of Annual Meeting of Shareholders	13
Corporate Governance	14
Board’s Role in Strategic Planning	14
Independence of Directors	15
Board Leadership Structure	16
Lead Director	16
Succession Planning	17
Annual Board Evaluation	17
Risk Oversight	17
Related Person Transactions	18
Board Meetings and Committees	19
Shareholder Engagement	22
Shareholder Communications with the Board	23
Political Contributions and Lobbying Expenditure Oversight and Disclosure	23
Commitment to Corporate Responsibility	23
Stock Ownership Information	24
Section 16(a) Beneficial Ownership Reporting Compliance	25
Proposal 1: Election of Directors	26
Criteria and Director Nomination Process	26
2015 Nominees for Director	27
Director Compensation	34
Proposal 2. Non-Binding Advisory Vote to Approve the Compensation of our Named Executive Officers	36
Compensation Discussion and Analysis	37
Executive Summary	37
Results of 2014 Shareholder Advisory Vote	38
Pay for Performance Alignment	38
Understanding the Increase in Disclosed Compensation	39
Key 2015 Compensation Actions	40
Compensation Policies and Practices	40
Detailed Discussion and Analysis	41
The Elements of 2014 Compensation	41
Executive Compensation Program Objectives and Strategy	47
Compensation Risk Assessment	51
Compensation and Benefits Committee Report	51
Summary Compensation Table	52
Grants of Plan-Based Awards	54
Outstanding Equity Awards	56
Option Exercises and Stock Vested	58
Pension Benefits	59
Nonqualified Deferred Compensation	62
Potential Payments Upon Termination or a Change in Control	63
Proposal 3. Ratification of Appointment of Independent Registered Public Accounting Firm for 2015	68
Audit Committee’s Report	68
Pre-Approval Policy for Services of Independent Registered Public Accounting Firm	69
Fees for Services Provided by Independent Registered Public Accounting Firm	69
Proposal 4. Proposal to Amend and Restate the 2010 Incentive Stock Plan	70
Proposal 5. Proposal to Amend and Restate the Executive Incentive Plan	76
Shareholder Proposals	78
Proposal 6. Shareholder Proposal Concerning Shareholders’ Right to Act by Written Consent	78
Proposal 7. Shareholder Proposal Concerning Accelerated Vesting of Equity Awards	80
Questions and Answers About the Annual Meeting and Voting	81
Requirements For Submitting Proxy Proposals and Transaction of Business at Annual Meeting	83
Date for Receipt of Shareholder Proposals for Inclusion in the Proxy Statement for the 2016 Annual Meeting of Shareholders	83
Procedure for Transaction of Business at Annual Meeting	83
Forward Looking Statements	84
Other Matters	84
Appendix A - Merck & Co., Inc. 2010 Incentive Stock Plan	A-1
Appendix B - Merck & Co., Inc. Executive Incentive Plan	B-1

 

2015 Proxy Statement     5

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

 

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

 

If you hold your shares through a broker, bank or nominee, your broker is not permitted to vote on your behalf on the election of directors and other matters to be considered at the Annual Meeting of Shareholders (except on ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2015), unless you provide specific instructions by completing and returning the voting instruction form or following the instructions provided to you to vote your shares via telephone or the internet. For your vote to be counted, you will need to communicate your voting decisions to your broker, bank or nominee before the date of the shareholder meeting.

 

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

 

		More information	Board’s recommendation	Broker discretionary voting allowed?	Abstentions	Votes required for approval
PROPOSAL 1	Election of Directors	Page 26	FOR each Nominee	No
PROPOSAL 2	Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay)	Page 36	FOR	No		Majority
PROPOSAL 3	Ratification of Appointment of Independent Registered Public Accounting Firm for 2015	Page 68	FOR	Yes	Do not count for all seven proposals	of shares cast required for all seven proposals
PROPOSAL 4	Amendment and Restatement of the 2010 Incentive Stock Plan	Page 70	FOR	No
PROPOSAL 5	Amendment and Restatement of the Executive Incentive Plan	Page 76	FOR	No
PROPOSALS 6 - 7	Shareholder Proposals	Pages 78-80	AGAINST each proposal	No

 

Vote right away

 

Advance Voting Methods and Deadlines

 

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

 

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

 

 

The telephone and internet voting facilities will close at 11:59 p.m. Eastern Time on May 25, 2015.

 

2015 Proxy Statement     6

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

 

Voting at the Meeting

 

All shareholders of record may vote in person at the 2015 Annual Meeting of Shareholders. Meeting details are provided below. Beneficial owners may vote in person at the meeting if they have a legal proxy, as described in the response to question “How do I vote?” on page 81 of “Questions and Answers About the Annual Meeting and Voting”.

 

Merck & Co., Inc. 2015 Annual Meeting of Shareholders Details

 

Date and Time:	Tuesday, May 26, 2015, at 9:00 a.m., local time
Location:	Bridgewater Marriott
	700 Commons Way
	Bridgewater, New Jersey 08807
Record Date:	March 31, 2015

 

Admission

 

All shareholders as of the record date may attend the Annual Meeting but must have an admission ticket and photo identification. You may request a ticket by writing to the Office of the Secretary, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, New Jersey 07033 U.S.A., by faxing your request to 908-735-1224, or by calling 908-740-4000. If you are a shareholder of record (your shares are held in your name), you must write your name on the request exactly as it appears on your stock ownership records from Wells Fargo Bank, N.A. If you are a beneficial owner (your shares are held through a broker, bank, or nominee), you must provide current evidence of your ownership of shares with your ticket request, which you can obtain from your broker, bank, or nominee. Your request for an admission ticket must be received on or before May 18, 2015.

 

Webcast

 

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

 

Questions and Answers About the Annual Meeting and Voting

 

Please see the “Questions and Answers About the Annual Meeting and Voting” section beginning on page 81 for answers to common questions on the rules and procedures surrounding the proxy and Annual Meeting process.

 

2015 Proxy Statement     7

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

 

NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS

 

May 26, 2015

 

To the Shareholders:

 

The shareholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, May 26, 2015, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807. The purposes of the meeting are to:

 

	•	elect 12 directors;
	•	consider and act upon a proposal to approve, by non-binding advisory vote, the compensation of our Named Executive Officers;
	•	consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2015;
	•	consider and act upon a proposal to amend and restate the 2010 Incentive Stock Plan;
	•	consider and act upon a proposal to amend and restate the Executive Incentive Plan;
	•	consider and act upon a shareholder proposal concerning shareholders’ right to act by written consent;
	•	consider and act upon a shareholder proposal concerning accelerated vesting of equity awards; and
	•	transact such other business as may properly come before the meeting.

 

Only shareholders listed on the Company’s records at the close of business on March 31, 2015, are entitled to vote.

 

Merck began mailing its Notice of Internet Availability of Proxy Materials, proxy statement, the 2014 Annual Report on Form 10-K, and proxy card/voting instruction form to shareholders and to employee benefit and stock purchase plans participants on April 13, 2015.

 

April 13, 2015

 

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

 

 

2015 Proxy Statement    13

CORPORATE GOVERNANCE

 

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

 

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

 

 

Board’s Role in Strategic Planning

 

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

 

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

 

At subsequent Board meetings, the Board continues to review substantively the Company’s progress against its strategic plans and to exercise oversight and decision-making authority regarding strategic areas of importance and associated funding authorizations. For example, in the winter, the Board typically reviews the Company’s overall annual performance and considers the operating budget and capital plan for the year. In this time period, the Board also usually finalizes specific criteria against which the Company’s performance will be evaluated. In addition, Board meetings held throughout the year target specific strategies (for example, basic research) and important areas of the business (for example, oncology) for extended, focused Board input and discussion. These time frames are flexible, however, and the

 

2015 Proxy Statement    14

Board adjusts its meeting agendas and plans to reflect business priorities and developments.

 

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

 

Independence of Directors

 

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

 

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

 

Categorical Independence Standards

 

The Board has adopted categorical standards as part of the Policies of the Board to assist it in making independence determinations. The standards as set forth in the Policies of the Board are available on our website at www.merck.com/about/leadership.

 

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

 

Independence Determinations

 

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

 

In making these determinations, the Board considered relationships that exist between the Company and other organizations where each of the Directors serves or served in the past, and that in the ordinary course of business, transactions may occur between the Company and such organizations. The Board also evaluated whether there were any other facts or circumstances that might impair a Director’s independence. In particular, the Board examined payments for advertising and marketing-related services made by the Company to Ogilvy & Mather (“Ogilvy”), for which Ms. Lazarus served as Chairman until July 2012, and previously also served as Chief Executive Officer, as well as to WPP Group, plc, of which Ogilvy is a subsidiary.

 

Also, as previously disclosed, the Company and Corning Incorporated (“Corning”), for which Mr. Weeks serves as Chairman, Chief Executive Officer and President, are parties to a Joint Research and Development Agreement (“R&D Agreement”) aimed at developing new glass materials. The R&D Agreement was reviewed by the Board’s Committee on Corporate Governance (the “Committee”) and reviewed and approved by the Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to this agreement. The Committee has conducted regular oversight of the R&D Agreement. In 2014, Merck and Corning entered into two follow-on agreements: a multi-year component supply agreement (“Supply Agreement”) with minimum volume commitments and a royalty agreement (“Royalty Agreement”), which Royalty Agreement also amended the R&D Agreement. Both agreements were reviewed and approved by the Committee and the entire Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to these

 

2015 Proxy Statement    15

agreements. As previously disclosed, prior to 2014 Merck reimbursed Corning $8 million for development costs incurred under the R&D Agreement. In 2014, Merck reimbursed Corning an additional $14 million for development costs incurred based on the achievement of certain agreed milestones under the R&D Agreement. An additional $8 million of reimbursable costs remain to be paid upon the achievement of final milestones set forth in the R&D Agreement. In addition to the reimbursable development expenses referred to above, in March 2014, Merck reimbursed Corning for approximately $0.4 million of intellectual property filing costs it incurred prior to 2014 under the R&D Agreement. Merck is presently reviewing the intellectual property filing costs incurred by Corning in 2014 and expects to reimburse Corning approximately an additional $0.5 million in such costs in early 2015. Merck also expects to reimburse Corning for additional intellectual property filing costs in the future. Merck made purchases from Corning totaling approximately $0.4 million under the Supply Agreement in 2014. Also, commencing in 2017, the Company expects to receive royalties under the Royalty Agreement. In addition, in 2014 the Company made purchases from Corning in the ordinary course of business unrelated to the Supply Agreement.

 

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

 

The Board reviewed all transactions with each of these entities and determined that the individual Director had no role with respect to the Company’s decision to make any of the purchases or sales and the aggregate amounts in each case were less than 1% of the consolidated gross revenues of the other organization and the Company.

 

Board Leadership Structure

 

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

 

Lead Director

 

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

 

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

 

The Board of Directors has four standing committees, each of which is comprised solely of independent directors and is led by an independent chair. The role of these committees is described beginning on page 20.

 

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

 

2015 Proxy Statement    16

Succession Planning

 

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

 

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

 

Annual Board Evaluation

 

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

 

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

 

 

Risk Oversight

 

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

 

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

 

Strategy	Macro risks that may impact our ability to achieve long-term business objectives
Operations	Risks in operations that may impact our ability to achieve business objectives
Compliance	Risks related to compliance with laws, regulations and Company policies
Reporting	Risks to maintaining accurate financial statements and timely, complete financial disclosures
Reputation and Responsibility	Risks that may impact our reputation or the well-being of the Company or its employees

 

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

 

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

 

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

 

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

 

2015 Proxy Statement    17

Related Person Transactions

 

Related Person Transaction Policy

 

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

 

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

 

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

 

•	Company management is responsible for identifying transactions that are or would be related person transactions requiring review under this Policy through annual submission of and any interim update to Director and Officer questionnaires (“D&O Questionnaire”) or conflict of interest certifications, review of existing or proposed transactions with any shareholders owning five percent or greater of the Company’s outstanding common stock as of the date upon which we received notice of such party’s status as a related person, and through other disclosures to and reviews by management. Management is required to provide the Governance, Public Policy and Corporate Responsibility Committee all material information relevant to all related person transactions, with the exception of related person transactions that are excluded from the reporting requirements under Item 404(a), which shall not be subject to review, approval or ratification by the Governance, Public Policy and Corporate Responsibility Committee pursuant to this policy.
•	Charitable contributions, grants or endowments by the Company to a university or other academic institution at which a related person’s only interest is as a professor of such university or other academic institution and the aggregate amount involved does not exceed 0.5% of the recipient organization’s total annual revenues shall be deemed pre-approved pursuant to this policy. Notwithstanding the foregoing, a charitable contribution, grant or endowment shall not be deemed pre-approved where the related person has any role in the proposal or review of the contribution, grant or endowment or will specifically benefit from it personally or professionally.
•	The members of the Governance, Public Policy and Corporate Responsibility Committee review the material facts of related person transactions, and the disinterested members of the Committee shall either approve or disapprove of the transactions. The Committee only approves the transaction(s) if it determines that such transaction(s) is fair and reasonable. If advance approval by the Committee is not feasible, then the related person transaction is considered and, if the Committee determines it to be appropriate, ratified by the disinterested members of the Committee. If after considering the relevant facts and circumstances in connection with such transaction, the Committee determines that it cannot ratify the related person transaction, then the Committee takes such course of action as it deems appropriate under the circumstances.
•	As necessary, the Committee reviews approved (including pre-approved) or ratified related person transactions throughout the duration of the term of the transaction, but no less than annually, to ensure that such transaction remains fair and reasonable.
•	In determining whether a related person transaction is fair and reasonable, the Committee considers all relevant factors, including as applicable: (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those generally available to an unaffiliated third party under the same or similar circumstances; (iv) the extent of the related person’s interest in the transaction; (v) the potential for the transaction to lead to an actual or apparent conflict of interest; and (vi) the impact on a director’s independence in the event the related person is a director or director nominee, an immediate family member of a director or director nominee, or an entity in which a director or director nominee is a partner, shareholder or executive officer.

 

Certain Related Person Transactions

 

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

 

After review of the D&O Questionnaires by the Office of the Secretary, the responses are collected, summarized and distributed to responsible areas within the Company to identify any potential transactions. All relevant relationships and any

 

2015 Proxy Statement    18

transactions, along with payables and receivables, are compiled for each person and affiliation. Management submits a report of the affiliations, relationships, transactions and appropriate supplemental information to the Board’s Governance, Public Policy and Corporate Responsibility Committee, which is comprised of independent directors, for its review.

 

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

 

Board Meetings and Committees

 

In 2014, the Board of Directors met eight times. Under the Policies of the Board, Directors are expected to attend regular Board meetings, Board committee meetings and annual shareholder meetings.

 

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

 

Non-management Directors of the Company met in eight executive sessions in 2014. Mr. Harrison, Lead Director of the Board, presided over the executive sessions. Eleven of the twelve Directors attended the 2014 Annual Meeting of Shareholders.

 

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

 

Members of the individual standing committees, as of April 1, 2015, are named below:

 

			Governance, Public
		Compensation	Policy and Corporate
Board Member	Audit	and Benefits	Responsibility	Research
Leslie A. Brun(1)	Chair
Thomas R. Cech
Thomas H. Glocer		Chair
William B. Harrison, Jr.(2)			Chair
C. Robert Kidder
Rochelle B. Lazarus
Carlos E. Represas
Patricia F. Russo
Craig B. Thompson				Chair
Wendell P. Weeks
Peter C. Wendell
Number of meetings in 2014	8	6	4	4

 

(1)	Audit Committee Financial Expert as defined under SEC rules
(2)	Lead Director of the Board

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

 

2015 Proxy Statement    19

Audit Committee

 

The primary functions of this Committee are to:

 

•	oversee our accounting, financial reporting process, internal controls and audits, and consult with management, the internal auditors and the independent registered public accounting firm (the independent auditors) on, among other items, matters related to the annual audit, the published financial statements and the accounting principles applied;
•	appoint, evaluate and retain our independent auditors;
•	maintain direct responsibility for the compensation, termination and oversight of our independent auditors and evaluate the independent auditors’ qualifications, performance and independence;
•	monitor compliance with the Foreign Corrupt Practices Act and the Company’s policies on ethical business practices and reports on these items to the Board; and
•	oversee the ERM process.

 

The Audit Committee has established policies and procedures for the pre-approval of all services provided by the independent auditors, which are described on page 69 of this proxy statement and the approval of the annual internal audit plan as executed by the Internal Audit organization. Further, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints received by the Company, which are described under Shareholder Communications with the Board on page 23 of this proxy statement.

 

The Audit Committee’s Report is included on page 68 of this proxy statement and the Audit Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors/home.html.

 

Financial Expert on Audit Committee

 

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

 

The Governance, Public Policy and Corporate Responsibility Committee

 

The primary functions of this Committee are to:

 

•	consider and make recommendations on matters related to the practices, policies and procedures of the Board and take a leadership role in shaping the corporate governance of the Company;
•	assess the size, structure and composition of the Board and Board committees, coordinate evaluation of Board performance, and review Board compensation, related person transactions, D&O indemnity and Fiduciary Liability insurance coverage for the Company’s Officers and non-employee Directors;
•	act as a screening and nominating committee for candidates considered for nomination by the Board for election as Directors as further described on page 26 and oversee the Board’s Incumbent Director Resignation Policy as further described on page 27;
•	advise the Board of Directors and management on company policies and practices that pertain to our responsibilities as a global corporate citizen, our obligations as a pharmaceutical company whose products and services affect health and quality of life around the world, and our commitment to high standards of ethics and integrity; and
•	review social, political and economic trends that affect our business; review the positions and strategies that we pursue to influence public policy; monitor and evaluate our corporate citizenship programs and activities, including the support of charitable, political and educational organizations and political candidates and causes; and review legislative, regulatory, privacy and other matters that could impact our shareholders, customers, employees and communities in which we operate.

 

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

 

Compensation and Benefits Committee

 

The primary functions of this Committee are to:

 

•	establish and maintain a competitive, fair and equitable compensation and benefits policy designed to retain and motivate executives on behalf of the Company and to attract the talent necessary to successfully execute the Company’s long-term strategic plan;
•	discharge the Board’s responsibilities for compensating our executives;
•	oversee and monitor
	–	competence and qualifications of our senior management,
	–	senior management succession,
	–	soundness of the organizational structure, and
	–	other related matters necessary to ensure the effective management of the business; and
•	review the Compensation Discussion and Analysis (“CD&A”) for inclusion in our proxy statement.

 

2015 Proxy Statement    20

More specifically, the Compensation and Benefits Committee (the “C&B Committee”) annually reviews and approves corporate goals and objectives relevant to the total direct compensation opportunity—that is, changes in base salary, and non-equity and equity incentive plan compensation—of the Chairman and Chief Executive Officer (“CEO”) and other executive officers; evaluates their performance against these goals and objectives; and, based on this evaluation, sets their target total direct compensation and determines payouts under our variable compensation plans. The details of the processes and procedures involved are described in the CD&A beginning on page 37. The independent members of the full Board ultimately make the final decisions regarding the Chairman and CEO’s total direct compensation.

 

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

 

The C&B Committee Report is included on page 51 of this proxy statement.

 

Role of Compensation Consultants

 

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

 

Independence of Compensation Consultant

 

The C&B Committee annually reviews the services provided by Cook and believes that Cook is independent in providing executive compensation consulting services. The C&B Committee conducted a specific review of its relationship with Cook in 2014, and determined that Cook’s work for the C&B Committee did not raise any conflicts of interest, consistent with the guidance provided under the Dodd-Frank Act, and by the SEC and the NYSE. In making this determination, the C&B Committee reviewed information provided by Cook on the following factors:

 

•	The provision of other services to Merck by Cook;
•	The amount of fees received from Merck by Cook as a percentage of the total revenue of Cook;
•	The policies and procedures of Cook that are designed to prevent conflicts of interest;
•	Any business or personal relationship of the C&B Committee’s advisor with a member of the C&B Committee;
•	Any stock of Merck owned by the C&B Committee’s advisor or the advisor’s immediate family members; and
•	Any business or personal relationship of the C&B Committee’s advisor or any other employee at Cook with an executive officer of Merck.

 

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

 

Services performed during 2014

 

During 2014, Cook supported the C&B Committee by:

 

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

 

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

 

Compensation and Benefits Committee Interlocks and Insider Participation

 

Mr. Thomas H. Glocer, Mr. William B. Harrison, Jr., Mr. Carlos E. Represas, Ms. Patricia F. Russo, and Mr. Peter C. Wendell served on the C&B Committee during 2014. There were no C&B Committee interlocks or insider (employee) participation during 2014.

 

Research Committee

 

The primary functions of the Committee are to:

 

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

 

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

 

2015 Proxy Statement    21

Shareholder Engagement

 

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

 

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

 

During 2014, we held discussions with many of our shareholders in the spring before the 2014 Annual Meeting of Shareholders and once again in the late fall. In addition, we also participated in several other ad hoc meetings during the year, including at the invitation of shareholders. We also regularly seek to take advantage of other engagement opportunities and events.

 

Given our large shareholder base, we concentrate our shareholder outreach efforts on our largest 25-30 shareholders that represent approximately 40-45% of our ownership. In 2014, among the specific matters we discussed were as follows:

 

•	management and shareholder proposals, including written consent and special shareholders meetings;
•	Board-related matters, including Board composition, leadership, succession planning and shareholder-director engagement;
•	executive compensation, including changes in our executive compensation program; and
•	other governance matters including any policy changes recently adopted or under consideration at our shareholders.

 

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

 

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

 

Action by Written Consent

 

As discussed above, during our shareholder engagement in 2014, we continued our discussions regarding shareholder views on the right to act by written consent. As a matter of policy, some investors support written consent proposals under any circumstances; however, similar to feedback we received in 2013, most of our largest investors continue to believe that shareholder interests are appropriately protected by a well-structured right to call a special meeting. Based on feedback we received in 2013, the Board took action in early 2014 to amend the Company’s By-Laws to provide that special meetings of shareholders may be called by shareholders owning at least 15% of the combined voting power of the then outstanding shares of all classes and series of capital stock of the Company entitled generally to vote in the election of directors of the Company. As discussed further in the Board of Directors’ Statements in Opposition to shareholder Proposal 6 on page 78, we believe that the limitation on shareholders’ ability to act by written consent, coupled with the ability of shareholders to call a special meeting at relatively low thresholds, best protects the interests of all shareholders in a fair and balanced manner.

 

2015 Proxy Statement    22

Shareholder Communications with the Board

 

The Board of Directors welcomes input from shareholders and other interested parties and has established a process to receive these communications. Shareholders and interested parties who wish to do so may communicate directly with members of the Board by writing to the following address:

 

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

 

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

 

•	communications that advocate that the Company engage in illegal activity;
•	communications that, under community standards, contain offensive or abusive content;
•	communications that have no relevance to the role of the Board or to the business of the Company;
•	resumes or other job-related inquiries; and
•	mass mailings, solicitations and advertisements.

 

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

 

In addition, the Audit Committee has established procedures for the receipt, retention and treatment, on a confidential basis, of complaints regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters. These procedures are described in the Merck Code of Conduct—Our Values and Standards, which is also available on our website as noted on page 14.

 

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

 

Political Contributions and Lobbying Expenditure Oversight and Disclosure

 

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

 

The Company publicly discloses and regularly updates information regarding its public policy positions and advocacy expenditures (http://www.merck.com/about/views-and-positions/home.html and http://www.merckresponsibility.com/our-approach/public-policy-advocacy).

 

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

 

Commitment to Corporate Responsibility

 

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

 

2015 Proxy Statement    23

STOCK OWNERSHIP INFORMATION

 

Stock Ownership Guidelines

 

The Company imposes stock ownership guidelines for Directors and executive officers. Guidelines for Directors are discussed in the Director Compensation section, beginning on page 34 and ownership requirements for executive officers are discussed in the Compensation Discussion and Analysis section, beginning on page 50.

 

Stock Ownership of Directors and Officers

 

The table below reflects the number of shares of Merck common stock beneficially owned by (a) each of our Directors; (b) each of our executive officers named in the Summary Compensation Table; and (c) all Directors and executive officers as a group. Unless otherwise noted, the information is stated as of February 28, 2015, and the beneficial owners exercise sole voting and/or investment power over their shares.

 

		Company Common Stock
Name of Beneficial Owner		Shares Owned		(a)		Right to Acquire Beneficial Ownership Under Options/Stock Units Exercisable/Distributable Within 60 Days(b)			Percent of Class			Phantom Stock Units(c)
Kenneth C. Frazier			441,781				2,207,337			*			—
Leslie A. Brun			100				10,000			*			24,129
Thomas R. Cech			100				5,000			*			19,544
Thomas H. Glocer			5,100				15,000			*			37,160
William B. Harrison, Jr.			6,400				30,000			*			69,244
C. Robert Kidder			10,339	(d)			5,000			*			18,081
Rochelle B. Lazarus			6,352	(d)			20,000			*			54,229
Carlos E. Represas			11,500	(d)			—			*			23,649
Patricia F. Russo			13,148				5,000			*			18,081
Craig B. Thompson			3,352				5,000			*			18,081
Wendell P. Weeks			200	(d)			25,000			*			58,174
Peter C. Wendell			1,000				25,000			*			59,357
Robert M. Davis			—				—			*			—
Bruce N. Kuhlik			143,670				206,284			*			—
Roger M. Perlmutter			25,000				75,174			*			—
Adam H. Schechter			92,992	(d)			643,370			*			—
Peter N. Kellogg			295,770				331,000			*			—
All Directors and Executive Officers as a Group			1,386,974				4,784,126			*			399,729

*	Less than 1% of the Company’s outstanding shares of common stock.
(a)	Includes equivalent shares of common stock held by the Trustee of the Merck U.S. Savings Plan, as applicable, as of January 8, 2015, for the accounts of individuals as follows: Mr. Frazier—3,545 shares and all Directors and executive officers as a group—13,385 shares.
(b)	This column reflects the number of shares that could be acquired within 60 days of February 28, 2015, through the exercise of outstanding stock options.
(c)	Represents phantom shares denominated in Merck common stock under the Plan for Deferred Payment of Directors’ Compensation or the Merck Deferral Program.
(d)	Includes shares of common stock in which the beneficial owners share voting and/or investment power as follows: 1,022 shares held in a trust for the benefit of Mr. Kidder’s children; 1,757 shares held by Ms. Lazarus’ spouse; 11,500 shares held in a trust for the benefit of Mr. Represas’ family; 70,794 shares held in a trust for the benefit of Mr. Schechter’s family; and 100 shares held in a custodial account for Mr. Weeks’ minor child.

 

2015 Proxy Statement    24

Stock Ownership of Certain Beneficial Owners

 

The table below reflects the number of shares beneficially owned by persons or entities known to us to own more than 5% of the outstanding shares of Merck common stock as of December 31, 2014:

 

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership				Percent of Class
BlackRock, Inc.
40 East 52nd Street
New York, NY 10022			188,561,141	(a)			6.60	%
Capital World Investors
333 South Hope Street
Los Angeles, CA 90071			170,766,040	(b)			5.90	%
Wellington Management Group LLP
c/o Wellington Management Company LLP
280 Congress Street
Boston, MA 02210			156,621,508	(c)			5.49	%
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355			155,705,154	(d)			5.46	%

(a)	As reported on Amendment No. 5 to Schedule 13G/A (the “BlackRock filing”) filed with the SEC on February 9, 2015. According to the BlackRock filing, of the 188,561,141 shares of Merck common stock beneficially owned by BlackRock, Inc. (“BlackRock”), as of December 31, 2014, BlackRock has the sole power to vote or direct the vote with respect to 156,376,520 shares, sole power to dispose or to direct the disposition of 188,507,715 shares, and shared voting and shared dispositive power with respect to 53,426 shares.
(b)	As reported on Amendment No. 5 to Schedule 13G/A (the “Capital World filing”) filed with the SEC on February 13, 2015. According to the Capital World filing, as of December 31, 2014, Capital World Investors (“Capital World”), a division of Capital Research and Management Company (“CRMC”), may be deemed to have the beneficial ownership of 170,766,040 shares of Merck common stock as a result of CRMC acting as an investment advisor to various investment companies registered under Section 8 of the Investment Company Act of 1940. Capital World disclaims beneficial ownership of the shares pursuant to Rule 13d-4. Capital World has sole voting authority and sole dispositive power over the shares.
(c)	As reported on Amendment No. 1 to Schedule 13G/A (the “Wellington filing”) filed with the SEC on February 12, 2015. According to the Wellington filing, as of December 31, 2014, Wellington Management Group LLP (“Wellington”), in its capacity as investment adviser, may be deemed to have the beneficial ownership of 156,621,508 shares of Merck common stock which are held of record by clients of Wellington. Wellington has the shared power to vote or direct the vote with respect to 48,833,608 shares and the shared power to dispose or to direct the disposition of 156,621,508 shares. Wellington does not have sole voting or dispositive power with respect to any other shares.
(d)	As reported on Schedule 13G (the “Vanguard filing”) filed with the SEC on February 11, 2015. According to the Vanguard filing, of the 155,705,154 shares of Merck common stock beneficially owned by The Vanguard Group (“Vanguard”), as of December 31, 2014, Vanguard has the sole power to vote or direct the vote with respect to 4,932,731 shares, sole power to dispose or to direct the disposition of 151,030,521 shares, and shared power to dispose or to direct the disposition of 4,674,633 shares.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

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

 

Based solely upon a review of the copies of the forms furnished to us during fiscal year 2014, or written representations from certain reporting persons that no Forms 5 were required, we believe that all filing requirements applicable to our officers and Directors were complied with during the 2014 fiscal year.

 

2015 Proxy Statement    25

PROPOSAL 1. ELECTION OF DIRECTORS

 

Criteria and Director Nomination Process

 

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

 

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

 

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

 

Individual Experience, Qualifications, Attributes and Skills

 

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

 

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

 

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

 

Diversity

 

Diversity is a factor considered when identifying prospective nominees for our Board, although the Governance, Public Policy and Corporate Responsibility Committee does not have a formal diversity policy. Nominees are selected so that the Board of Directors represents a diversity of expertise in areas needed to foster the Company’s business success as well as a diversity of personal characteristics, including gender, race, ethnic origin and national background. From time to time and including in 2015, the Committee has retained independent search firms to assist in identifying candidates that reflect these diversity objectives.

 

Shareholder Recommendation and Nomination of Directors

 

In addition to being able to recommend candidates for nomination by the Board, shareholders may themselves nominate a candidate or candidates for election as directors. For a shareholder to nominate a candidate or candidates for election as a director at the 2016 Annual Meeting, the shareholder must deliver to the Secretary of the Company by January 27, 2016, a written notice of the shareholder’s intention to nominate the candidate or candidates. As set forth in our By-Laws, the notice of nomination must contain the following information:

 

(a)	the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated;
(b)	a representation that the shareholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice;
(c)	a description of all arrangements or understandings between the shareholder and each nominee and any other person

 

2015 Proxy Statement    26

	or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder;
(d)	such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had each nominee been nominated, or intended to be nominated, by the Board of Directors; and
(e)	the consent of each nominee to serve as a director of the Company if so elected.

 

Evaluation of candidates occurs on the basis of materials submitted by or on behalf of the candidates. If a proposed or recommended candidate continues to be of interest to the Governance, Public Policy and Corporate Responsibility Committee, additional information about her/him is obtained through inquiries to various sources and, if warranted, interviews.

 

All the Director nominees named in this proxy statement met the Board’s criteria for membership and were recommended by the Governance, Public Policy and Corporate Responsibility Committee for election by shareholders at this Annual Meeting.

 

2015 Nominees for Director

 

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

 

Each of the nominees currently serves on the Board and was elected by the shareholders at the 2014 Annual Meeting. If elected, each nominee will hold a term expiring at the 2016 Annual Meeting of Shareholders or until his or her successor has been duly elected and qualified. The Governance, Public Policy and Corporate Responsibility Committee believes that each nominee possesses the qualifications and personal characteristics that would contribute to a diverse and well-functioning Board. All of the nominees hold, or have held, senior leadership positions in large, complex organizations including muti-national corporations, educational institutions and/or charitable organizations. In these positions, they have demonstrated their leadership, intellectual and analytical skills and gained deep experience in core disciplines significant to their oversight responsibilities as Director. Their roles in these organizations also permit them to offer quality advice and counsel to the Company’s management.

 

A Director nominee who does not receive a majority of the votes cast with respect to his or her election will not be re-elected as a Director of the Company. However, under the New Jersey Business Corporation Act, incumbent directors who are not re-elected in an uncontested election because of a failure to receive a majority of the votes cast in favor of their re-election, will be “held over” and continue as directors of the Company until they resign or their successors are elected at the next election of directors. Under the Incumbent Director Resignation Policy (the “Resignation Policy”) of the Policies of the Board, an incumbent director who is not re-elected will be required to submit his or her resignation and the Governance, Public Policy and Corporate Responsibility Committee will be responsible for evaluating whether to accept the resignation and making a recommendation to the full Board. Under the Resignation Policy, the Board will be required to act on the recommendation of the Governance, Public Policy and Corporate Responsibility Committee no later than 90 days following certification of the shareholder vote.

 

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

 

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

 

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

 

2015 Proxy Statement    27

	LESLIE A. BRUN Independent Director Age: 62		Director since:		2008
			Committees:	•	Audit (Chair)
				•	Governance, Public Policy and Corporate Responsibility
			Other Current Public Directorships: Automatic Data Processing, Inc. (2003), Non-executive Chairman (2007); Broadridge Financial Solutions, Inc. (2007), Non-executive Chairman (2011); CDK Global, Inc. (2014), Non-executive Chairman (2014)

 

Career Highlights:

 

Sarr Group, LLC, an investment holding company

 

– Chairman and Chief Executive Officer (2006-present)

 

CCMP Capital Advisors, LLC, global private equity firm

 

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

 

Hamilton Lane, private equity firm

 

– Chairman and Chief Executive Officer (1991-2005)

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

	THOMAS R. CECH, PH.D. Independent Director Age: 67		Director since:		2009
			Committees:	• •	Audit Research
			Other Current Public Directorships: None

 

Career Highlights:

 

University of Colorado

 

– Distinguished Professor, Chemistry and Biochemistry (1990-present)

 

– Director, BioFrontiers Institute (2009-present)

 

Howard Hughes Medical Institute, non-profit medical research organization

 

– President (2000-2009)

 

– Investigator (1988-present)

 

Awards:

 

– National Medal of Science (1995)

 

– Nobel Prize in Chemistry (1989)

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

2015 Proxy Statement    28

	KENNETH C. FRAZIER Management Age: 60		Director since:		2011
			Other Current Public Directorships: Exxon Mobil Corporation (2009)

 

Career Highlights:

 

Merck & Co., Inc.

 

– Chairman and Chief Executive Officer (2011-present)

 

– President (2010-present)

 

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

 

– Executive Vice President and General Counsel (2006-2007)

 

– Senior Vice President and General Counsel (1999-2006)

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

	THOMAS H. GLOCER Independent Director Age: 55		Director since:		2007
			Committees:	•	Compensation and Benefits (Chair)
				•	Governance, Public Policy and Corporate Responsibility
			Other Current Public Directorships: Morgan Stanley (2013)
			Former Directorships Held During the Past 5 Years: Thomson Reuters Corporation (2008-2011)

 

Career Highlights:

 

Thomson Reuters Corporation, multinational media and information firm

 

– Chief Executive Officer (2008-2011)

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

2015 Proxy Statement    29

	WILLIAM B. HARRISON, JR. Independent Lead Director Age: 71		Director since:		1999
			Committees:	•	Governance, Public Policy and Corporate Responsibility (Chair)
				•	Compensation and Benefits
			Other Current Public Directorships: None
			Former Directorships Held During the Past 5 Years: Cousins Properties Incorporated (2006-2012)

 

Career Highlights:

 

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

 

– Chairman and Chief Executive Officer (2001-2007)

 

– President and Chief Executive Officer (1999-2001)

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

	C. ROBERT KIDDER Independent Director Age: 70		Director since:		2005
			Committees:	•	Audit
				•	Research
			Other Current Public Directorships: Advanced Drainage Systems, Inc. (2014), Morgan Stanley (1993)
			Former Directorships Held During the Past 5 Years: Chrysler Group LLC (2009-2011)

 

Career Highlights:

 

Chrysler Group LLC, automobile manufacturer

 

– Non-Executive Chairman (2009-2011)

 

3Stone Advisors LLC, private investment firm

 

– Chairman and Chief Executive Officer (2006-2011)

 

Stonehenge Partners, Inc., private investment firm

 

– Principal (2004-2006)

 

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

 

– Chairman of the Board (1995-2004)

 

– Chief Executive Officer (1995-2002)

 

Duracell International Inc., batteries and smart power systems manufacturer

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Kidder, the Board considered his extensive management, operational and financial expertise as well as his experience and demonstrated success holding corporate leadership roles in multiple industries. In addition, his directorships at other public companies provide him with valuable experience on governance issues facing public companies.

 

2015 Proxy Statement    30

	ROCHELLE B. LAZARUS Independent Director Age: 67		Director since:		2004
			Committees:		Governance, Public Policy and Corporate Responsibility
			Other Current Public Directorships: The Blackstone Group L.P. (2013), General Electric (2000)

 

Career Highlights:

 

Ogilvy & Mather, global advertising and marketing communication company

 

– Chairman Emeritus (2012-present)

 

– Chairman, Ogilvy & Mather Worldwide (2008-2012)

 

– Chairman and Chief Executive Officer (1996-2008)

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

	CARLOS E. REPRESAS Independent Director Age: 69		Director since:		2009
			Committees:	•	Compensation and Benefits
				•	Governance, Public Policy and Corporate Responsibility
			Other Current Public Directorships: Bombardier Inc. (2004), Swiss Re Group (2010)

 

Career Highlights:

 

Bombardier Inc., aerospace and transportation company

 

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

 

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

 

Swiss Re Group, a reinsurance and financial services group

 

– Director (2010-present)

 

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

 

– Director (2010-present)

 

Nestlé, S.A, multinational food and beverage company

 

– Chairman, Nestlé Group Mexico (1983-2011)

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

2015 Proxy Statement    31

	PATRICIA F. RUSSO Independent Director Age: 62		Director since:		1995
			Committees:	•	Compensation and Benefits
				•	Governance, Public Policy and Corporate Responsibility
			Other Current Public Directorships: Alcoa Inc. (2008), General Motors Company (2009), Hewlett-Packard Company (2011), KKR Management LLC (the managing partner of KKR & Co., L.P.) (2011)

 

Career Highlights:

 

Alcatel-Lucent, global telecommunications equipment company

 

– Chief Executive Officer and Director (2006-2008)

 

– Chairman, Lucent Technologies Inc. (2003-2006)

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

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

 

	CRAIG B. THOMPSON, M.D. Independent Director Age: 62		Director since:		2008
			Committees:		Research (Chair)
			Other Current Public Directorships: Charles River Laboratories International, Inc. (2013)

 

Career Highlights:

 

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

 

– President and Chief Executive Officer (2010-present)

 

The University of Pennsylvania

 

– Director, Abramson Cancer Center (2006-2010)

 

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

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Thompson, the Board considered his extensive scientific and medical expertise relevant to the pharmaceutical industry and the Company’s research focus, including his positions as President and CEO of Memorial Sloan-Kettering Cancer Center and past experience as a Professor of Medicine at the University of Pennsylvania School of Medicine, Director of the Abramson Cancer Center and Associate Vice President for Cancer Services of the University of Pennsylvania Health System. The Board also considered Dr. Thompson’s extensive experience in managing a cutting-edge cancer hospital and consequent deep understanding of the complexities of U.S. healthcare delivery system and policy environment.

 

2015 Proxy Statement    32

	WENDELL P. WEEKS Independent Director Age: 55		Director since:		2004
			Committees:	•	Audit
				•	Research
			Other Current Public Directorships: Corning Incorporated (2000)

 

Career Highlights:

 

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

 

– Chairman, Chief Executive Officer and President (2010-Present)

 

– President and Chief Executive Officer (2005-2007)

 

– President and Chief Operating Officer (2002-2005)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Weeks, the Board considered his extensive management, commercial, operational, and financial expertise, as well as his track record of success evidenced by his history at Corning Incorporated. Mr. Weeks possesses broad industry experience based on Corning’s diverse businesses and a demonstrated ability to manage effectively through market volatility. In addition, he brings unique insight into managing innovation, based on his experience with new product development.

 

	PETER C. WENDELL Independent Director Age: 64		Director since:		2003
			Committees:	•	Compensation and Benefits
				•	Research
			Other Current Public Directorships: None

 

Career Highlights:

 

Sierra Ventures, technology-oriented venture capital firm

 

– Managing Director (1982-present)

 

Stanford University

 

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

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Mr. Wendell, the Board considered his extensive management, financial and venture capital expertise as demonstrated by his positions as a Managing Director of Sierra Ventures, his status as a Lecturer in strategic management at the Stanford University Graduate School of Business for over 20 years, and his former Chairmanship of the $21 billion Princeton University endowment.

 

2015 Proxy Statement    33

DIRECTOR COMPENSATION

 

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

 

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

*	All annual retainers are paid in quarterly installments.
**	Each of our non-employee Directors met this guideline as of December 31, 2014.

 

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

 

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

 

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

 

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

 

2015 Proxy Statement    34

2014 Director Compensation

 

As described more fully below, this chart summarizes the annual compensation for our non-employee directors during 2014.

 

Director Compensation for Fiscal Year Ended December 31, 2014
Name	Fees Earned or Paid in Cash ($)			Option Awards ($)(1)		All Other Compensation ($)(2)			Total ($)
Leslie A. Brun	$	125,000		—		$	180,000		$	305,000
Thomas R. Cech		110,000		—			156,532			266,532
Thomas H. Glocer		115,000		—			155,000			270,000
William B. Harrison, Jr.		145,000		—			180,000			325,000
C. Robert Kidder		110,000		—			150,000			260,000
Rochelle B. Lazarus		100,000		—			196,000			296,000
Carlos E. Represas		100,000		—			150,000			250,000
Patricia F. Russo		100,000		—			170,000			270,000
Craig B. Thompson		115,000		—			150,000			265,000
Wendell P. Weeks		110,000		—			180,000			290,000
Peter C. Wendell		100,000		—			180,000			280,000

(1)	Beginning in 2011, no further grants will be made under the 2010 Non-Employee Directors Stock Option Plan, subject to the Board’s right to further amend the Plan. Stock options previously issued to directors under the 2010 Non-Employee Directors Stock Option Plan and any predecessor plans become exercisable in substantially equal installments on the first, second and third anniversaries of the grant date. All options expire on the day before the tenth anniversary of their grant. The exercise price of the options is the closing price of our common stock on the grant date as quoted on the New York Stock Exchange.
	On December 31, 2014, the aggregate number of option awards outstanding for Directors who served during 2014 was:

 

Director Name		Outstanding Option Awards at 12/31/14
L.A. Brun			10,000
T.R. Cech			5,000
T.H. Glocer			15,000
W.B. Harrison, Jr.			30,000
C.R. Kidder			5,000
R.B. Lazarus			20,000
C.E. Represas			0
P.F. Russo			5,000
C.B. Thompson			5,000
W.P. Weeks			25,000
P.C. Wendell			30,000

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

 

Director Name		Matched Charitable Contribution
L.A. Brun		$	30,000
T.R. Cech		$	6,532
T.H. Glocer		$	5,000
W.B. Harrison, Jr.		$	30,000
R.B. Lazarus		$	46,000
P.F. Russo		$	20,000
W.P. Weeks		$	30,000
P.C. Wendell		$	30,000

For Mr. Brun, Dr. Cech, Mr. Glocer, Mr. Harrison, Ms. Lazarus and Mr. Weeks, matching contributions include 2013 contributions that were paid in calendar year 2014. For Ms. Lazarus, includes contributions for calendar year 2013 and 2014.

 

2015 Proxy Statement    35

PROPOSAL 2.

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

 

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

 

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

 

In order to align executive pay with operational performance and the creation of long-term shareholder value, a significant portion of compensation paid to our Named Executive Officers is allocated to annual cash and long-term equity incentives which are directly linked to Company and/or stock price performance. For 2014, 89% and 82%, respectively, of the CEO’s and other Named Executive Officers’ annual target total direct compensation was variable based on our operating performance and/or our stock price.

 

The Named Executive Officers received above target payouts under our 2014 annual incentive plan and our long-term incentive plan for the three-year performance period ended December 31, 2014. The Company’s operating performance was above target in 2014, and the operation of our variable incentives demonstrates strong linkage between pay and performance and fosters alignment between executive compensation and the degree to which we achieve our operating objectives and successfully create value for shareholders over time.

 

In addition, management and the Compensation and Benefits Committee of the Board of Directors (the “C&B Committee”) continually review the compensation programs for the Named Executive Officers to ensure they achieve the desired goals of reinforcing senior management’s alignment with the interests of shareholders and linking compensation to performance as measured by operational results. As a result, we have adopted the policies and practices described on page 40 to further align pay with operational performance and increases in long-term shareholder value while minimizing excessive risk taking.

 

We are asking shareholders to indicate their support for the Named Executive Officer compensation as described in this proxy statement. Accordingly, the following resolution will be submitted for approval by shareholders at the 2015 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 37 to 67 of this proxy statement, is hereby APPROVED.”

 

The shareholder vote on this resolution will not be binding on management or the Board of Directors and will not be construed as overruling any decision by management or the Board. However, the Board of Directors and the C&B Committee value the opinions of our shareholders as expressed through their votes and other communications. For example, in 2014, shareholders continued their support of our executive compensation programs with approximately 96% of the votes cast for approval of a similar proposal. In addition, this year we are providing shareholders the opportunity to cast binding votes on the plans under which the variable compensation is provided — see Proposals 4 (Proposal to Amend and Restate the 2010 Incentive Stock Plan) and 5 (Proposal to Amend and Restate the Executive Incentive Plan). We will continue to give careful consideration to the outcome of the advisory vote on executive compensation and to the opinions of our shareholders when making compensation decisions.

 

The Board of Directors has adopted a policy providing for annual “say on pay” advisory votes. Accordingly, the next “say on pay” vote will occur in 2016.

 

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

 

2015 Proxy Statement    36

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

In 2014, Merck made significant progress bringing forward exciting new products that will make a meaningful difference in people’s lives. We continued to execute on our multi-year initiative to sharpen our commercial and R&D focus, redesign our operating model and reduce our cost base in order to transform Merck into a more competitive and innovative company with a platform for sustainable growth.

 

We are operating more efficiently and effectively across the enterprise while redeploying resources to invest in our pipeline of potential new medicines and vaccines. We strengthened our portfolio through strategic partnerships, acquisitions and divestitures, and are better positioned to drive innovation in all areas of our business. Given the long-term nature of value creation in the biopharmaceutical industry, it is important to recognize that investments in research and development made today will not necessarily be reflected in the Company’s near-term operating performance and share price.

 

Merck delivered revenue consistent with expectations and earnings per share (“EPS”) at the high end of our 2014 guidance range largely due to the continuing reduction of the Company’s cost structure. Merck’s Research Laboratories made major strides in advancing the pipeline, with six new product approvals in the U.S., including KEYTRUDA, and several important programs progressing into clinical studies.

 

We continue to be excited about the potential of our near- and long-term pipeline where Merck is focused on many of the world’s most urgent global health challenges, including cancer, Hepatitis C, cardio-metabolic disease, antimicrobial resistance and Alzheimer’s disease.

 

•	Positioned for Long-Term Growth through Innovation
•	Focused Commercial Strategy for Growth
•	Reduced Cost Base Driving Profitability and Investment in R&D

 

Select Business Highlights for 2014
TOP LINE / BOTTOM LINE RESULTS:
•	Met our financial goal for revenue and delivered non-GAAP EPS at the high end of our 2014 guidance range
•	Strong growth of key brands including JANUVIA/JANUMET, REMICADE, SIMPONI and ISENTRESS
SHAREHOLDER VALUE CREATION:
•	Returned $12.9 billion to shareholders through dividends and share repurchases
•	Increased the dividend paid by 2.3% during 2014
•	Drove a total shareholder return of 17%
•	Strengthened product portfolio by acquiring Cubist Pharmaceuticals, a global leader in antibiotics (deal closed January 2015)
•	Divested Consumer Care business to Bayer for more than $14 billion
CLINICAL & REGULATORY:
•	Received six product approvals in the U.S., more than in any previous year at Merck, including novel medicines such as KEYTRUDA (first anti-PD-1 therapy approved in the U.S.), BELSOMRA, ZONTIVITY and GARDASIL 9
•	Accelerated KEYTRUDA and Hepatitis C virus (HCV) clinical development programs
	–	Received Breakthrough Therapy Designation from the FDA for advanced melanoma and non-small cell lung cancer; studies continue in more than 30 cancers and in 20 combination settings
	–	Positioned to file a New Drug Application with the FDA in the first half of 2015 for our investigational oral, once daily combination regimen for the treatment of chronic HCV infection
•	Strengthened our hepatitis and oncology pipelines by acquiring Idenix and Oncoethix, respectively
•	Initiated Phase III trials for MK-1439, our investigational HIV medicine
•	Working with NewLink Genetics on the development of an investigational Ebola vaccine
MANAGING COSTS AND OPERATING EFFICIENCIES:
•	Through disciplined cost management and increased focus on key priorities, Merck reduced non-GAAP operating expenses by approximately $1.3 billion compared to 2013 while continuing to invest for future growth
•	On track to meet our goal of realizing $2.5 billion in annual net cost savings, compared to 2012, by the end of 2015

 

2015 Proxy Statement    37

Results of 2014 Shareholder Advisory Vote on Executive Compensation

 

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

 

In 2014, shareholders continued their support of our executive compensation programs with approximately 96% of the votes cast for approval of the “say on pay” proposal at the Annual Meeting of Shareholders. The C&B Committee believes that the voting results conveyed our shareholders’ support of the philosophy, strategy and objectives of our executive compensation programs.

 

Furthermore, we continue to engage in direct dialogue with our shareholders regarding our executive compensation programs and policies to ensure that investors understand the manner in which our policies support our long-term strategic objectives. Through our proactive shareholder engagement process, we held discussions with many of our largest shareholders during the spring and fall of 2014 about various corporate governance and executive compensation-related issues.

 

Pay for Performance Alignment

 

Based on feedback from our largest investors and discussions with the C&B Committee and senior management, Merck implemented design changes in 2014 to better align our incentive plans with our long-term business strategy. The Company’s operating performance was above target in 2014 and our variable incentives demonstrate a strong linkage between pay and performance, reinforcing alignment between executive compensation and the degree to which we achieve our operating objectives and successfully create value for shareholders over time.

 

Annual Incentive – The Company Scorecard, which was streamlined for 2014 to create a sharper focus on our most critical business drivers—revenue, EPS and pipeline—is described in more detail beginning on page 42. Our performance during 2014 resulted in above-target achievement (135 points vs. a target of 100 points) of the financial and research-based objectives of our 2014 Company Scorecard. These results, combined with individual performance, determine annual incentive payouts to the majority of our employees, including the NEOs. Strong Company performance in 2014 as compared to 2013 (135 points vs. 72 points) along with NEO individual performance that ranged from 100% to 125% resulted in average annual incentive payouts for the NEOs of 148% of target in 2014 vs. 71% of target in 2013.

 

Long-Term Incentive (“LTI”) – The Performance Share Units (“PSUs”) granted for the 2012-2014 performance period provided senior executives the opportunity to earn share awards based on EPS performance measured over each of the three years during the period, modified by a three-year total shareholder return (“TSR”) ranking versus our peer group. Based on the annual achievement of EPS results during the 2012-2014 performance period, the preliminary payout was 113.7% of target. However, notwithstanding that our three-year annualized TSR was 21.7%, we ranked 9 of 12 among our industry peers, which reduced the payout by 10% based on the schedule that was established by the C&B Committee at the time of grant. As a result, the final payout of the 2012-2014 PSU award cycle was 102% of target. Additional details about our PSU program and the 2012-2014 PSU award cycle are provided beginning on page 46.

 

As described in last year’s proxy, Merck introduced a new PSU program design for awards granted in 2014 and beyond to create a stronger linkage to operational excellence and shareholder value over the long term. Performance is now measured using equal components of relative TSR and adjusted operating cash flow, both over a cumulative three-year period, as opposed to measuring EPS in three separate 12-month periods with a 3-year TSR modifier under the prior design. The use of operating cash flow and relative TSR in the PSU program complements the revenue and EPS financial measures used to fund the annual incentive plan.

 

The redesign described above improves pay-for-performance alignment in support of longer-term Company and shareholder interests. In the short term, the changes have increased PSU accounting value disclosures. While several factors contributed to the increase in the disclosed compensation of our NEOs in 2014, the primary driver was the change to our PSU program design, as described in more detail on the following page.

 

 

2015 Proxy Statement    38

Understanding the Increase in Disclosed Compensation

 

 

•	The increase in PSU accounting value was due to 1) the 2014 design change, which requires recognition of the full 3-year value of the 2014 grant, plus the annual value of the two 2014 performance periods from the 2012 and 2013 grants, and 2) the incremental per-unit appreciation since the grant date.
•	The increase in the annual incentive was due to above-target performance in 2014 vs. below-target performance in 2013.

 

To illustrate, the charts below provide further detail of Mr. Frazier’s target, earned and disclosed compensation, focusing on salary, annual incentive and stock components.

 

2013 vs. 2014 CEO Compensation
($ millions)

 

 

2013 vs. 2014 CEO Performance Share Unit Award Disclosure Valuation ($ millions)
Components of Disclosure Requirement		2013 Disclosed Value				2014 Disclosed Value				Change in SCT Disclosure Value Attributable To:
A. 33.3% of 2011 PSU Award		$	1.1			$	–			2011 PSU Award fully vested prior to 2014
B. 33.3% of 2012 PSU Award			2.0				2.9			Increase in per-unit valuation due to stock price appreciation
C. 33.3% of 2013 PSU Award			2.0				2.8			Increase in per-unit valuation due to stock price appreciation
D. 100% of 2014 PSU Award			–				7.3	(1)		Requirement to recognize full award value in year of grant
TOTAL		$	5.1			$	13.0			$7.9 million increase

 

(1)	Actual value on grant date was $6.0 million. Increase of $1.3 million attributable to per-unit accounting valuation of $69.15 (vs. $56.77 on grant date).

 

2015 Proxy Statement    39

Key 2015 Compensation Actions

 

As noted, there were significant changes to the Company Scorecard and PSU program for 2014. The new Scorecard approach and PSU program remain in effect for 2015 and no other major program or policy changes have been adopted. However, several changes have been made to NEO compensation levels as outlined below.

 

•	2015 CEO Annual Target Compensation Opportunity - Based on the Board’s assessment of Mr. Frazier’s strong business results and leadership, experience and relative position of his target compensation versus industry peers, the Board approved a $2 million increase to his target long-term incentive opportunity. In support of the Company’s pay-for-performance philosophy and to focus on long-term results, the Board delivered the entire increase in Mr. Frazier’s annual target compensation opportunity through equity awards, maintained his base salary at $1.5 million, which has not increased since he became CEO in 2011, and kept his target annual incentive unchanged at 150% of base salary.
•	2015 Named Executive Officer Annual Target Compensation Opportunity - Due to below-target results in 2013, the C&B Committee froze the Named Executive Officers’ annual target direct compensation opportunity (base salary, target annual cash incentive and target long-term incentive) for 2014. Given the Company’s strong performance in 2014, the C&B Committee determined that merit increases and other selective adjustments would resume in 2015. Mr. Frazier recommended, and the C&B Committee approved, base salary increases for the NEOs effective in April 2015 ranging from 1.75% to 3%, consistent with the merit budget approved for all other U.S. salaried employees. In addition, the C&B Committee decided that annual incentive targets and long-term incentives would remain the same for 2015, with the exception of a $500,000 increase to Dr. Perlmutter’s annual target long-term incentive opportunity based on 2014 pipeline achievements, his experience and the continued importance of his role to Merck’s long-term success.

 

Compensation Policies and Practices

 

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

 

•	Include double trigger vesting of equity in the event of a change in control (i.e., both a change in control and an involuntary termination)
•	Utilize a total shareholder return metric in the PSU program to align with long-term stock performance
•	Provide dividend equivalents only on earned RSUs or PSUs
•	Monitor LTI program share utilization regularly relative to both historic standards and versus our industry peers
•	Conduct competitive benchmarking to ensure executive officer compensation is aligned to market
•	Offer only limited perquisites supported by business interests
•	Include caps on annual cash incentive and PSU program payouts
•	Retain an independent compensation consultant that does not do other work for the Company
•	Maintain robust stock ownership guidelines and share retention policies
•	Maintain an incentive recoupment policy
•	Conduct assessments to identify and mitigate risk in compensation programs
•	Prohibit the hedging or pledging of Company stock
•	Avoid the use of time-vested restricted stock units for NEOs as part of the annual LTI program
•	Prohibit re-pricing of underwater stock options without shareholder approval
•	Prohibit excise tax gross ups in the event of a change in control
•	Avoid employment and severance agreements

 

2015 Proxy Statement    40

Detailed Discussion and Analysis

 

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

 

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

 

The C&B Committee makes all decisions relative to the total direct compensation (base salary, annual cash incentives, and long-term incentive awards) of our executive officers other than for the CEO. The C&B Committee’s recommendations for the total direct compensation of the CEO are subject to approval by the Board. Additional details regarding the roles and responsibilities of the C&B Committee are provided beginning on page 20.

 

In April 2014, Mr. Robert M. Davis was appointed Executive Vice President and Chief Financial Officer, replacing Peter N. Kellogg. In connection with his offer, Mr. Davis was provided with a compensation and benefits package that is aligned with the external market for executives in comparable roles and with the requisite experience. Mr. Davis also received cash and stock sign-on incentives to secure his employment with Merck, more than 70% of which was to compensate him for equity awards that he forfeited upon leaving his prior employer. Additional details are provided beginning on page 64.

 

The Elements of 2014 Compensation

 

This section describes the elements of our NEOs’ 2014 compensation, which consisted of the following:

 

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

 

Under our executive compensation program, a significant portion (89% and 82%, respectively) of the CEO’s and other NEOs’ annual target total direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

2015 Proxy Statement    41

Base Salary

 

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

 

•	Evaluation of individual performance;
•	Breadth, scope and complexity of the role;
•	Review of survey data to ensure competitive compensation against our pharmaceutical peer group (as described in more detail on page 49); and
•	Comparison of non-CEO executive officers’ base salaries to ensure reasonable internal equity.

 

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

 

In addition, Mr. Frazier recommended, and the C&B Committee reviewed and approved, that no base salary increases would be made for any of the other NEOs in 2014.

 

Annual Cash Incentive

 

The NEOs participate in the Executive Incentive Plan (“EIP”). The EIP was previously approved by shareholders and is being resubmitted this year for re-approval as described on page 76. Award amounts under the EIP are determined based upon achievement of company performance measures as reflected by the Company Scorecard and individual performance against pre-established objectives. The EIP provides for an award fund of up to 2.5% of the Company’s adjusted net income (which is the Company’s non-GAAP earnings after certain adjustments). The CEO may receive a maximum award equal to 10% of the award fund, and the maximum award for the other EIP participants is equal to 90% of the award fund for that year divided by the number of participants other than the CEO.

 

For 2014, the maximum awards for the CEO and other NEOs were $25.6 and $17.7 million, respectively. Using a process commonly referred to as negative discretion, the maximum awards are adjusted down to the actual amounts paid to each NEO based primarily on performance against the Company Scorecard, as described in the following section.

 

2014 Merck Company Scorecard

 

Our Company Scorecard helps translate our strategic priorities into operational terms that outline how we will track and measure the achievement of our key objectives during the year. As compared to 2013 and prior years, we decreased the number of Scorecard measures used to fund the annual incentive pool from eight to three, creating a sharper focus on our most important business drivers: (1) revenue, (2) earnings per share, and (3) pipeline milestones. The revenue and earnings metrics are equally weighted because the C&B Committee believes they are the key financial measures of our success during the year, and the pipeline metric is included because it is a leading indicator of the Company’s ability to create sustainable value for shareholders over the long term. The streamlined approach more effectively measures the key drivers of our success and tightens the alignment of pay to performance. As described in more detail below, these three elements, taken together, are intended to measure our progress and performance against both annual operating goals and critically important long-term strategic drivers of sustainable value creation that are tied to our research and development processes and outcomes.

 

 

2015 Proxy Statement    42

The Company Scorecard is calibrated so that results will range between 50% and 200% of the target award opportunity established for each participant. The stretch (200%) and threshold (50%) goals are set in relation to the Board-approved financial plan and the expectations of shareholders. Failure to achieve threshold performance goals (i.e., the level at which 50% of the target award opportunity is payable) results in forfeiture of the entire opportunity. The C&B Committee may adjust the results of individual measures to exclude charges or items from the measurement of performance relating to restructurings, discontinued operations, purchase accounting items, merger-related costs, extraordinary items and other unusual or nonrecurring charges and/or events. Similarly, the C&B Committee may determine that no annual cash incentives be paid if it determines, on a qualitative basis, that overall performance on the Company Scorecard is too low. Moreover, the Company Scorecard achievements are also evaluated in the context of compliance, health and safety outcomes. The Scorecard structure and results supporting the final 2014 Company score of 135 points are summarized below.

 

2014 Merck Company Scorecard Results
Measure		Results		Target Points				Final Score
Top Line				40				40
Revenue vs. Plan		Revenue of $42.2 billion was consistent with expectations. For purposes of the Scorecard, reported revenue was adjusted upward to $43.1 billion to account for approximately $300 million in unrealized revenue for divestitures not included in the annual plan (primarily Consumer Care 4Q revenue) and for the Company’s portion (50%) of joint venture sales, which were achieved at target, but not reported externally as Merck revenue.
Bottom Line				40				62
EPS vs. Plan		Reported non-GAAP EPS of $3.49 exceeded our planned non-GAAP EPS goal of $3.41. For purposes of the Scorecard, reported non-GAAP EPS was adjusted upward $0.07 for divestitures not included in the annual plan (primarily Consumer Care).
Pipeline Milestones				20				33
U.S. Approval of KEYTRUDA for Melanoma		U.S. approval of KEYTRUDA for treatment of advanced melanoma was achieved ahead of schedule, making it the first anti-PD-1 therapy approved in the U.S.		5				8.2
Other Approvals and Submissions		Received approval of six other products, including GARDASIL 9, GRASTEK, RAGWITEK, ZONTIVITY and BELSOMRA in the U.S., and VANIHEP in Japan. Submitted BRIDION for approval in the U.S.		5				7.5
Late-Stage Development		Progressed late-stage drugs through various stages of clinical trials, including products for Hepatitis C, HIV, Alzheimer’s disease and cardiovascular disease.		5				10.0
Early Development/ Discovery Research and Business Development		Augmented pipeline through agreements with Bayer (cardiovascular), Idenix (Hepatitis C), Oncoethix (oncology) and NewLink Genetics (Ebola). Exceeded goals relative to advancing products in early development.		5				7.5
				100				135

 

2015 Proxy Statement    43

2014 Named Executive Officer Performance

 

Each of the NEO’s 2014 annual incentive awards reflects the achievement of the Company Scorecard result at 135% of target, coupled with his individual performance versus objectives, including leadership, with final payouts not to exceed the maximum amount determined under the EIP as described on page 42.

 

Mr. Frazier’s award reflects Merck’s significant achievements during 2014 as evidenced by the overall Company scorecard result of 135 points. Merck continued to execute in R&D with six new product approvals in the U.S. and several key programs advancing into Phase 3 clinical trials. Mr. Frazier was instrumental in executing on multiple business development transactions, including the divestiture of the Consumer Care business, and the acquisitions of Idenix, Cubist and Oncoethix, which have strengthened the pipeline and refined the portfolio in key therapeutic areas. Mr. Frazier effectively led the executive team, including developing leadership talent and recruiting a new Chief Financial Officer. The Board considered these accomplishments, along with Mr. Frazier’s strong leadership in continuing to transform Merck into a more competitive and innovative company positioned for sustainable growth in both the near- and longer-term.

 

Mr. Davis’ award reflects Merck’s solid financial performance, disciplined capital allocation and overall business development strategy and execution. Under Mr. Davis’ leadership, Merck maintained a rigorous focus on expense discipline resulting in operating expense reductions of 7% while returning cash to shareholders through dividends and share repurchases of approximately $12.9 billion. Mr. Davis developed a fully integrated 2015 business plan that more clearly defined operating priorities and interdependencies across the business. In addition, Mr. Davis was instrumental in executing on Merck’s business development transactions, namely Idenix and Cubist.

 

Mr. Kuhlik’s award reflects his leadership and counsel on important global business development transactions and litigation matters that served to strengthen our pipeline and address litigation risks. Mr. Kuhlik supported the Consumer Care sale to Bayer, acquisitions of Idenix and Cubist, the NewLink agreement for Ebola and numerous immuno-oncology licensing agreements. Mr. Kuhlik was also instrumental in ensuring a smooth and successful transition of the Global Public Policy, Communications and Security organizations to new leadership teams.

 

Dr. Perlmutter’s award reflects the significant progress in advancing Merck’s pipeline while building a strong senior team to help transform the Merck Research Laboratories. Under Dr. Perlmutter’s leadership, six drugs were approved in the U.S., more than in any previous year at Merck, and several pipeline enhancing transactions were closed, including Idenix and Oncoethix. The Company gained accelerated approval for KEYTRUDA, which is the first FDA-approved anti-PD-1 therapy in the U.S., initiated studies in more than 30 cancers and in 20 combination settings, and achieved breakthrough designation for non-small cell lung cancer.

 

Mr. Schechter’s award reflects Global Human Health’s solid operating performance and expense management, which, despite global economic challenges and increased competitiveness, contributed to Merck’s on-target revenue and above-target earnings. Under Mr. Schechter’s leadership, the commercial business returned the diabetes franchise of JANUVIA and JANUMET to growth and delivered strong growth in the Immunology area. The business launched KEYTRUDA in the U.S. and drove growth in China and emerging markets. Mr. Schechter also played a major role in the acquisition of Cubist and the divestiture of non-core products during 2014.

 

2014 Annual Incentive Payouts

 

The table below shows the 2014 annual cash incentives paid to the Named Executive Officers. The total annual incentive paid to each NEO is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Annual Base Salary

X

Target Annual Incentive %

X

Company Performance %

X

Individual Performance %

=

Final Award

 

Named Executive Officer 2014 Annual Incentive Payments(1)
					Target								Actual
Named Executive Officer		Annual Base Salary (as of 12/31/14)				Target Annual Incentive %				Target Annual Cash Incentive $				Company Performance %				Individual Performance %				Final Award $			Final Award as % of Target
K.C. Frazier		$	1,500,000				150	%		$	2,250,000				135	%			110	%		$	3,341,250				149	%
R.M. Davis(2)			950,000				95				601,667				135				100				812,250				135
B.N. Kuhlik			807,492				95				767,117				135				100				1,035,608				135
R.M. Perlmutter			1,000,000				105				1,050,000				135				125				1,771,875				169
A.H. Schechter			962,388				105				1,010,507				135				105				1,432,934				142

(1)	Mr. Kellogg was not eligible for a 2014 Annual Incentive award due to his employment end date of May 16, 2014.
(2)	Mr. Davis’ award is pro-rated based on his April 2014 employment start date.

 

2015 Proxy Statement    44

Long-Term Equity Incentives

 

2014 Award Mix

 

We make grants under the Merck & Co., Inc. 2010 Incentive Stock Plan (the “ISP”), which is being submitted for shareholder approval (see Proposal 4, Proposal to Amend and Restate the 2010 Incentive Stock Plan) beginning on page 70.

 

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

 

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

 

The 2014 LTI award mix for the NEOs is shown in the following chart:

 

 

2014 LTI Grants

 

The C&B Committee and, in the case of Mr. Frazier, the full Board (not including Mr. Frazier) determines the value of 2014 annual LTI grants for the NEOs based on competitive market data, the executives’ future potential contributions, sustained performance, degree of importance of their contributions to Merck, tenure and experience in the role, and skill set relative to industry peers and other executives of a comparable level. There were no changes to NEO target LTI values for 2014.

 

While we do not grant time-based restricted stock awards to our NEOs as part of the normal annual program, we do occasionally use such awards as part of new hire offer packages and to enhance the retentive power of the overall compensation system for select executives. For example, in addition to the amounts shown below, Mr. Davis received a grant of Restricted Stock Units with a grant date fair market value of $5,000,000 as part of his new-hire package to compensate him for equity grants he forfeited upon leaving his prior employer.

 

The 2014 annual LTI grant values for the Named Executive Officers are shown in the following table. The number of shares associated with each award is set forth in the Grants of Plan-Based Awards table on page 54.

 

Named Executive Officer 2014 Annual LTI Grant Values
Named Executive Officer			PSUs(1)			Stock Options(2)				Total LTI Value
K.C. Frazier		$	6,000,000			$	4,000,000			$	10,000,000
R.M. Davis			2,100,000				1,400,000				3,500,000
B.N. Kuhlik			1,380,000				920,000				2,300,000
R.M. Perlmutter			2,100,000				1,400,000				3,500,000
A.H. Schechter			2,280,000				1,520,000				3,800,000
P.N. Kellogg			1,920,000				1,280,000				3,200,000

(1)	PSU dollar values were converted to a number of units using the fair market value as calculated in accordance with FASB ASC Topic 718 on the grant date, March 31, 2014, which was $56.77 (May 9, 2014, $58.22 fair market value per share for Mr. Davis). The 2014 PSU values shown in the Summary Compensation Table, beginning on page 52, and Grants of Plan-Based Awards table, beginning on page 54, will be different from what is shown above as the amounts in those tables are calculated pursuant to SEC disclosure rules.
(2)	Stock option dollar values were converted to a number of shares using the Black-Scholes value as of May 2, 2014 of $7.27 per share.

 

2015 Proxy Statement    45

PSU Program

 

For PSUs granted before 2014, which are reflected in the Outstanding Equity Awards and Option Exercises and Stock Vested tables on pages 56 and 58, executives received a target award opportunity at the beginning of a three-year performance cycle denominated in units of our common stock and paid in actual shares. The number of shares ultimately earned varies based on performance against earnings per share (“EPS”) goals, further modified for relative total shareholder return over the performance period. The C&B Committee selected EPS as the performance measure because it incorporates aspects of growth, profitability and capital efficiency, all of which are critical to our long-term financial success. Failure to attain the minimum performance goal would result in forfeiture of the shares applicable to the respective award opportunity. For more information on the PSU program, see “Narrative Information Relating to the Grants of Plan-Based Awards Table” starting on page 55.

 

Payouts under the 2012-2014 PSU Award Cycle

 

For the 2012-2014 award cycle, preliminary payouts were 113.7% based on the average annual achievement of a pre-established EPS goal for each year during the performance period (2012, 2013 and 2014). For purposes of the award, EPS is defined as the Company’s diluted earnings per share adjusted to exclude charges or items from the measurement of performance relating to (1) restructurings, discontinued operations, purchase accounting items, merger-related costs, extraordinary items and other unusual or non-recurring charges and/or events; (2) an event either not directly related to Company operations or not reasonably within the control of Company management; and (3) the effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), or other significant legislative changes.

 

The preliminary award was then adjusted downward to 102% based on our three-year (2012-2014) annualized total shareholder return (“TSR”) ranking against our eleven pharmaceutical peers (see page 49 for additional details on our peer group). The C&B Committee believes that having this TSR modifier helps to ensure that final awards are aligned with the relative return delivered to our shareholders for the three-year performance period.

 

The following table shows the calculation of the average annual EPS results.

 

2012-2014 PSU Award Cycle - EPS Results and Preliminary Payout
			Threshold				Target				Stretch				Actual				Payout
2012 EPS:		$	3.42			$	3.80			$	4.37			$	3.82				104.2	%
2013 EPS:			3.25				3.61				3.90				3.49				82.7	%
2014 EPS:			3.07				3.41				3.68				3.49	(1)			154.2	%
Preliminary Payout: (3-yr average)																			113.7	%
TSR Modifier: (see derivation below)																			90	%
FINAL PAYOUT:																			102	%

 

(1)	EPS approved by the C&B Committee for PSU award determination is reported non-GAAP EPS of $3.49 plus $0.07 for divestitures not included in the annual plan.

 

The tables below show our TSR ranking and resulting modifier for 2012-2014 PSU award cycle:

 

Company	Annualized TSR1, 2	TSR Percentile		Rank
Amgen	42.42%	100	th	1
Eli Lilly	25.53%	91	st	2
Bristol-Myers Squibb	24.80%	82	nd	3
Roche	24.58%	73	rd	4
Novartis	23.87%	64	th	5		TSR Percentile	Rank	Payout Modifier
AstraZeneca	22.70%	55	th	6		81% to 100%	1,2,3	120%
Johnson & Johnson	21.79%	45	th	7		61% to 80%	4,5	110%
Abbott	21.74%	36	th	8		41% to 60%	6,7	100%
Merck	21.73%	27	th	9		21% to 40%	8,9	90%
Pfizer	18.72%	18	th	10		0% to 20%	10,11,12	80%
Sanofi	13.78%	9	th	11
GlaxoSmithKline	4.41%	0		12

(1)	TSR as reported by Bloomberg. Assumes reinvestment of dividends.
(2)	TSR calculated using the average closing price of Merck common stock for December 2011 and December 2014.

 

2015 Proxy Statement    46

Based on the final payout of 102%, the NEOs received the following number of shares of Merck common stock:

 

Named Executive Officer PSU Distribution(1)
Named Executive Officer	Target Award (# of shares)				Final Award (# of shares)
K.C. Frazier			148,438				151,407
P.N. Kellogg(2)			33,333				26,444
B.N. Kuhlik			23,958				24,437
A.H. Schechter			39,583				40,375

(1)	Dr. Perlmutter and Mr. Davis were not participants in this PSU award cycle.
(2)	Mr. Kellogg’s Final Award reflects actual performance and is pro-rated based on the number of months he was employed during the performance period.

 

Additional information regarding the payouts under the 2012-2014 PSU award cycle is provided in the Option Exercises and Stock Vested table on page 58.

 

Other Employee Benefits

 

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

 

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

 

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

 

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

 

Executive Compensation Program Objectives and Strategy

 

Objectives

 

Our executive compensation program is designed to:

 

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

 

2015 Proxy Statement    47

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

 

Strategy

 

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

 

Compensation Element		Purpose
Base Salary		Attract and retain high-quality executives over time and mitigate pressures that might otherwise exist to support high-risk business strategies.
Annual Cash Incentive		Motivate executives to achieve financial and non-financial performance objectives that are key to our annual operating and strategic plans.
Long-Term Equity Incentives		•	Align the interests of executives with shareholders by tying the value of awards to the performance of our common stock over the long term;
		•	Encourage executives to achieve multi-year strategic and financial objectives; and
		•	Enhance the retention of key talent.
Employee Benefits (Retirement, Health and Welfare)		•	Assist employees, especially long-service employees, to save and prepare financially for retirement; and
		•	Help ensure that we have a productive and focused workforce.
Perquisites		Minimize distractions from the executives’ attention to important company initiatives and to ensure their safety and security.
Post-Employment Benefits		Provide temporary income to employees following an involuntary termination of employment. These benefits fit into our overall compensation structure by enhancing our ability to attract, retain, and motivate highly talented individuals in a highly competitive marketplace where such protections are commonly offered.

 

2015 Proxy Statement    48

Other Compensation Practices

 

Merck’s Peer Group

 

Individual executive officer compensation levels and opportunities are compared to a peer group of large multinational pharmaceutical companies that participate in a pharmaceutical industry compensation survey. The survey is conducted by Towers Watson, an independent consulting firm. In setting compensation levels for 2014, the C&B Committee used the survey, which consisted of the following peer companies with which Merck competes to attract talented, high-performing executives:

 

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

 

 

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

 

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

 

Current LTI Grant Practices

 

All grants to executive officers are approved by the C&B Committee, and in the case of Mr. Frazier, the full Board of Directors (not including Mr. Frazier). Annual stock option and RSU grants are made on the third business day following announcement of our first quarter earnings. We may also selectively grant stock options and RSUs to employees on the third business day following the announcement of second, third, and fourth quarter earnings. These dates were chosen to ensure that grants are made shortly after we have released information about our financial performance to the public. However, the C&B Committee reserves the right to change the date when grants are made, in view of its responsibility to take into account all facts and circumstances to ensure that grants are consistent with our compensation philosophy and objectives. For example, in 2014, our annual grant date was scheduled to be made when the announcement of the Company’s sale of our Merck Consumer Care division was imminent. We therefore delayed the grant to our senior executives for one week until after the announcement was made and granted based on the higher of the Merck stock price on the originally scheduled grant date and the later grant date. Using the higher stock price (and the resulting Black-Scholes value) increased the exercise price of options and decreased the number of options, RSUs and PSUs granted on that date.

 

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.

 

2015 Proxy Statement    49

Stock Ownership Requirements

 

The C&B Committee recognizes the critical role that executive stock ownership has in aligning the interests of management with those of shareholders. As such, we maintain a formal stock ownership policy, under which the CEO and other senior executives are required to acquire and hold Merck common stock in an amount representing a multiple of base salary. Until the designated multiple of base salary is reached, executives are required to retain in stock a percentage of the after-tax net proceeds associated with stock option exercises and/or PSU and RSU distributions (100% for the CEO and 75% for the other Named Executive Officers). The following table sets forth the stock ownership requirements and current holdings for the CEO and other NEOs as of February 28, 2015.

 

 

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.

 

Tax Deductibility of Compensation

 

In administering our executive compensation program, the Company takes into account the tax deductibility of the compensation, including the application of Section 162(m) of the Internal Revenue Code. We believe 1) annual cash incentives paid to executive officers under the shareholder-approved EIP and 2) PSUs, stock options and RSUs granted under the shareholder-approved ISP may be granted in a manner that qualifies as performance-based compensation under Section 162(m) and, if so, would generally be deductible by the Company for federal income tax purposes. Although our intent is to maximize the deductibility of compensation, under certain circumstances that are in the best interest of the Company and our shareholders, the C&B Committee may authorize compensation that is not deductible if it is determined to be appropriate.

 

2015 Proxy Statement    50

Compensation Risk Assessment

 

Our executive compensation program and policies are driven by our business environment and designed to enable us to achieve our mission and adhere to our values. The C&B Committee and senior management continually evaluate the relationship between risk and reward as it relates to our executive compensation program and has adopted policies and practices that mitigate undue risk while preserving the incentive/variable nature of the compensation. These policies and practices are described in more detail in the chart on page 40.

 

We last performed a formal assessment of our global compensation programs, including our executive compensation program and policies in late 2013. The results of the assessment were reviewed and discussed with the C&B Committee in February 2014. The assessment reaffirmed our belief that our compensation programs and policies are structured and operated in a manner that does not create risks that are reasonably likely to have a material adverse effect on our business. In addition to ongoing monitoring of our programs and policies, we are committed to performing formal assessments on a periodic basis.

 

Compensation and Benefits Committee Report

 

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

 

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

 

2015 Proxy Statement    51

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, 2014, 2013 and 2012. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers as of December 31, 2014, and one additional individual for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of the Company’s fiscal year.

  

																								Change in
																								Pension
																								Value and
																					Non-Equity			Nonquali-
																					Incentive			fied Deferred
																					Plan			Compen-			All Other
															Stock			Option			Compensa-			sation			Compen-
							Salary				Bonus				Awards			Awards			tion			Earnings			sation			Total
Name and Principal Position			Year				($)(2)				($)				($)(3)			($)(4)			($)(5)			($)(6)			($)(7)			($)
Kenneth C. Frazier,			2014			$	1,500,000			$	0			$	13,025,313		$	3,323,244		$	3,341,250		$	3,642,161		$	197,402		$	25,029,370
Chairman, President			2013				1,500,000				0				5,105,338			3,999,998			1,620,000			917,774			232,825			13,375,935
and Chief Executive Officer			2012				1,500,000				0				3,284,997			3,799,998			2,500,000			4,316,762			57,850			15,459,607
Robert M. Davis,			2014				650,384				2,500,000	(8)			7,294,765			1,163,135			812,250			35,771			306,213			12,762,518
Executive Vice President			2013	(9)			—				—				—			—			—			—			—			—
and Chief Financial Officer			2012	(10)			—				—				—			—			—			—			—			—
Bruce N. Kuhlik,			2014				807,492				0				2,798,568			764,344			1,035,608			695,678			71,192			6,172,882
Executive Vice President			2013				804,281				0				1,049,879			919,999			552,325			206,277			86,477			3,619,238
and General Counsel			2012				791,664				0				1,236,796			919,999			898,270			732,748			21,250			4,600,727
Roger M. Perlmutter, M.D., Ph.D.,			2014				1,000,000				500,000	(8)			3,538,245			1,163,135			1,771,875			178,536			91,663			8,243,454
Executive Vice President and			2013				711,538				500,000	(8)			2,699,987			1,400,001			623,700			34,439			16,459			5,986,124
President, Merck Research
Laboratories			2012	(10)			—				—				—			—			—			—			—			—
Adam H. Schechter,			2014				962,388				0				4,623,673			1,262,831			1,432,934			1,941,516			103,994			10,327,336
Executive Vice President			2013				957,306				0				1,813,702			1,520,003			691,187			0			160,359			5,142,557
and President,
Global Human Health			2012				938,886				0				1,858,845			1,519,998			1,254,248			2,115,949			42,977			7,730,903
Peter N. Kellogg,			2014			$	381,858			$	0			$	3,893,645		$	1,063,439		$	0		$	0		$	54,608		$	5,393,550
Former Executive			2013				988,881				0				1,565,331			1,279,999			611,187			352,575			100,401			4,898,374
Vice President and
Chief Financial Officer(1)			2012				973,362				0				1,818,176			1,280,002			1,056,416			598,085			19,282			5,745,323

(1)	Mr. Kellogg served as Executive Vice President and Chief Financial Officer of the Company until April 23, 2014 and ended his employment on May 16, 2014.
(2)	Amounts shown reflect actual base salary earnings and are not reduced to reflect the Named Executive Officers’ elections, if any, to defer receipt of salary into the Merck Deferral Program, an unfunded savings plan.
	During 2014, Mr. Frazier deferred $675,000 into the Merck Deferral Program. For more information about deferred amounts, see the Nonqualified Deferred Compensation table and related footnotes on page 62.
(3)	The amounts shown in this column represent the full grant date fair value of RSUs and PSUs granted to each of the Named Executive Officers during 2014, 2013 and 2012, respectively, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during the respective year; please refer to page 39 for more information on the PSU award disclosures. For discussion of the assumptions used in these valuations, see Note 12 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2014.
	The maximum value of the PSU awards granted to the Named Executive Officers during 2014 and the 2014 performance period tranches from the 2013 and 2012 grants, assuming achievement of the highest level of performance (200% of target for 2014 awards and 240% of target for 2013 and 2012 awards), was:

 

	Maximum Value
NEO	of PSU Awards
K.C. Frazier	$ 28,337,365
R.M. Davis	4,589,547
B.N. Kuhlik	6,044,177
R.M. Perlmutter	7,468,618
A.H. Schechter	9,985,935
P.N. Kellogg	8,409,259

 

For more information on the awards granted during 2014, see the Grants of Plan-Based Awards table and related narrative and footnotes.

 

2015 Proxy Statement    52

(4)	The amounts shown in this column represent the full grant date fair value of stock options granted to each of the Named Executive Officers during 2014, 2013 and 2012, respectively, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during the respective year. The stock option values were calculated using the Black-Scholes option pricing model. For discussion of the assumptions used in these valuations, see Note 12 to Company’s Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2014.
	For more information on stock options granted during 2014, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(5)	Represents amounts paid under the EIP. For more information, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(6)	Amounts shown are solely an estimate of the change in actuarial present value of the Named Executive Officer’s accrued benefit under the Company’s pension plans from December 31, 2013 to December 31, 2014. These plans are the Retirement Plan for the Salaried Employees of MSD (the “Qualified Plan”) and the MSD Supplemental Retirement Plan (the “SRP”). For more information about those plans, see the Pension Benefits table and accompanying narrative beginning on page 59.
	The Merck Deferral Program, an unfunded savings plan, does not provide for above market or preferential earnings. For more information, see the Nonqualified Deferred Compensation table and related notes and narrative on page 62.
(7)	See the All Other Compensation table below for additional details on amounts. In accordance with SEC disclosure rules, we calculated the cost of personal benefits provided to the Named Executive Officers as the incremental cost of providing those benefits. We believe that there is a business purpose for the few personal benefits provided only to executives.
(8)	Sign-on bonus.
(9)	Was not a Named Executive Officer during 2013.
(10)	Was not a Named Executive Officer during 2012.

 

All Other Compensation

 

							Financial/Tax										Installation,						Savings Plan
							Counseling &							Company			Maintenance and						Company
							Tax Preparation				Company			Car and			Remote Access			Relocation			Match and
Named Executive Officer			Year				Services(3)				Aircraft(4)			Driver(5)			of Home Security(3)			Expense			Credits(6)			TOTAL
K.C. Frazier			2014				$  10,000				$  0			$  39,816			$  7,186			$  0			$  140,400		$	197,402
			2013				10,000				0			37,955			5,130			0			179,740			232,825
			2012				10,000				0			30,253			6,347			0			11,250			57,850
R.M. Davis			2014				0				0			0			0			298,569			7,644			306,213
			2013	(1)			—				—			—			—			—			—			—
			2012	(2)			—				—			—			—			—			—			—
B.N. Kuhlik			2014				10,000				0			0			0			0			61,192			71,192
			2013				10,000				0			0			0			0			76,477			86,477
			2012				10,000				0			0			0			0			11,250			21,250
R.M. Perlmutter			2014				0				0			18,596			0			0			73,067			91,663
			2013				0				0			14,728			0			0			1,731			16,459
			2012	(2)			—				—			—			—			—			—			—
A.H. Schechter			2014				10,000				0			15,803			3,780			0			74,411			103,994
			2013				10,000				0			27,857			23,145			0			99,357			160,359
			2012				10,000				0			21,067			660			0			11,250			42,977
P.N. Kellogg			2014				$  9,921				$  0			$  0			$  0			$  0			$  44,687		$	54,608
			2013				8,532				0			0			0			0			91,869			100,401
			2012				8,032				0			0			0			0			11,250			19,282

(1)	Was not a Named Executive Officer during 2013.
(2)	Was not a Named Executive Officer during 2012.
(3)	Financial planning, tax preparation, and installation, maintenance and remote access of home security are valued at actual costs billed by outside vendors.
(4)	The value of any personal use of Company aircraft by the Named Executive Officers is based on the aggregate incremental per-hour cost based on the flight time flown from origination to destination and a return to point of origination without passengers, when applicable. This benefit generally is taxable to the Named Executive Officers.
(5)	The value of any personal use of Company car and driver by the Named Executive Officers is based on the recipient’s cost if equivalent assets were used independent of the Company. This benefit generally is taxable to the Named Executive Officers.
	The incremental cost calculation for personal use of the car and driver by the Named Executive Officers included driver overtime, meals and travel pay, maintenance and fuel costs. Company cars also provided business transportation to other executives and non-executive Company personnel. Since the cars were used primarily for business travel, the calculation excludes the fixed costs that do not change based on personal usage, such as drivers’ salaries and the purchase costs of the cars.
(6)	The Named Executive Officers received Company matching contributions equal to 75% of the first 6% of eligible compensation contributed (up to the IRS limit for qualified savings plans) to the Merck U.S. Savings Plan and 4.5% credit of eligible pay in excess of the IRS limit to the NEO’s accounts under the Merck Deferral Program.

 

2015 Proxy Statement    53

GRANTS OF PLAN-BASED AWARDS

 

The following table provides information concerning each grant of an award made in 2014 to the Named Executive Officers under any plan.

 

Grants of Plan-Based Awards for Fiscal Year Ended December 31, 2014
																				All Other		All Other
																				Stock		Option
								Estimated Future Payouts						Estimated Future Payouts						Awards:		Awards:		Exercise		Grant Date
								Under Non-Equity Incentive						Under Equity Incentive						Number		Number of		or Base		Fair Value
								Plan Awards						Plan Awards						of Shares		Securities		Price of		of Stock
				Board				Thres-						Thres-						of Stock		Underlying		Option		and Option
		Grant		Approval		Award		hold		Target		Maximum		hold		Target		Maximum		or Units		Options		Awards		Awards
Name		Date		Date		Type		($)(1)		($)(1)		($)(1)		(#)(2)		(#)(2)		(#)(2)		(#)(3)		(#)(4)		($ / Sh)(4)		($)(5)
K.C. Frazier		03/31/2014		02/24/2014		PSUs								0		105,690		211,380								$13,025,313	(2)
		05/09/2014		02/24/2014		Options																550,206		$58.22		3,323,244	(4)
						EIP		$0		$2,250,000		$5,625,000
R.M. Davis		05/09/2014		02/24/2014		PSUs								0		36,070		72,140								2,294,773	(2)
		05/09/2014		02/24/2014		RSUs														85,881						4,999,992	(3)
		05/09/2014		02/24/2014		Options																192,572		58.22		1,163,135	(4)
						EIP		0		601,667		1,504,167
B.N. Kuhlik		03/31/2014		02/24/2014		PSUs								0		24,309		48,618								2,798,568	(2)
		05/09/2014		02/24/2014		Options																126,547		58.22		764,344	(4)
						EIP		0		767,117		1,917,794
R.M. Perlmutter		03/31/2014		02/24/2014		PSUs								0		36,991		73,982								3,538,245	(2)
		05/09/2014		02/24/2014		Options																192,572		58.22		1,163,135	(4)
						EIP		0		1,050,000		2,625,000
A.H. Schechter		03/31/2014		02/24/2014		PSUs								0		40,162		80,324								4,623,673	(2)
		05/09/2014		02/24/2014		Options																209,078		58.22		1,262,831	(4)
						EIP		0		1,010,507		2,526,269
P.N. Kellogg		03/31/2014		02/24/2014		PSUs								0		33,821		67,642								$ 3,893,645	(2)
		05/09/2014		02/24/2014		Options																176,066		$58.22		1,063,439	(4)
						EIP		$0		$943,190		$2,357,976

(1)	Amounts represent awards under the EIP, which equal a specified percentage of base salary as in effect on December 31, 2014. The actual amounts earned by each Named Executive Officer are set forth in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(2)	The payout of PSUs can range from zero at threshold to a maximum of 200% of target (a maximum of 240% of target for grants made prior to 2014), depending on the level of achievement of the applicable performance goals. For more information on PSUs, see the “PSU Program” section on page 46 and the Narrative to the Grants of Plan Based Awards table on page 55.
(3)	RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of grant provided the individual remains continuously employed through that date. Beginning with grants made in 2010, dividend equivalents are accrued and paid on shares earned at the end of the restricted period.
(4)	Stock options generally vest and become exercisable in equal installments on the first, second and third anniversaries of the grant date.
	The exercise price of all stock options granted in 2014 is the closing price of Merck common stock, as traded on New York Stock Exchange on May 2, 2014. For more information on stock options granted to the Named Executive Officers in 2014, please see “Current LTI Grant Practices” on page 49.
(5)	This column represents the full grant date fair value of PSUs, RSUs and stock options granted to each of the Named Executive Officers, as calculated in accordance with FASB ASC Topic 718. These amounts do not represent the actual value realized by the Named Executive Officers during 2014.

 

2015 Proxy Statement    54

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

 

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

 

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

 

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

 

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

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

 

General Information Regarding Long-Term Incentives

 

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

 

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

 

•

RSUs

 

Restricted Stock Units (“RSUs”), subject to their terms, generally vest and become payable in shares of Merck common stock on the third anniversary of the grant date. For RSUs granted in and after 2010, dividend equivalents are accrued and paid out in cash if and when the RSUs vest.

 

•

PSUs

 

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

 

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

 

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

 

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

 

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

 

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

 

2015 Proxy Statement    55

OUTSTANDING EQUITY AWARDS

 

The following table provides details about each outstanding equity award held by the Named Executive Officers as of December 31, 2014.

 

Outstanding Equity Awards at Fiscal Year Ended December 31, 2014
						Option Awards															Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Grant Date		Option Exercise Price ($)			Vesting Date		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)				Market Value of Shares or Units of Stock That Have Not Vested ($)(5)				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(5)
K.C. Frazier			10,623	(1)								02/25/05		$	31.84		02/25/06		02/24/15
			27,999	(1)								03/03/06			35.09		03/03/07		03/02/16
			131,040	(1)								03/02/07			44.19		03/02/08		03/01/17
			60,000	(1)								08/01/07			51.02		08/01/08		07/31/17
			252,000	(1)								02/29/08			44.30		02/28/09		02/28/18
			280,000	(1)								04/24/09			23.45		04/24/10		04/23/19
			228,091	(1)								05/07/10			33.49		05/07/11		05/06/20
			559,701	(1)								05/04/11			36.56		05/04/12		05/03/21
			463,132	(1)			231,566	(1)				05/02/12			39.29		05/02/13		05/01/22
			214,707	(1)			429,415	(1)				05/06/13			44.98		05/06/14		05/05/23
							550,206	(1)				05/09/14			58.22		05/09/15		05/08/24
																														375,684	(3)		$	21,335,094
																														211,380	(4)			12,004,270
R.M. Davis							192,572	(1)				05/09/14		$	58.22		05/09/15		05/08/24
																						85,881	(2)		$	4,877,182
																														72,140	(4)		$	4,096,831
B.N. Kuhlik			44,776	(1)								05/04/11		$	36.56		05/04/12		05/03/21
			112,126	(1)			56,064	(1)				05/02/12			39.29		05/02/13		05/01/22
			49,382	(1)			98,766	(1)				05/06/13			44.98		05/06/14		05/05/23
							126,547	(1)				05/09/14			58.22		05/09/15		05/08/24
																						11,708	(2)		$	664,897
																														86,407	(3)		$	4,907,054
																														48,618	(4)			2,761,016
R.M. Perlmutter			75,147	(1)			150,296	(1)				05/06/13		$	44.98		05/06/14		05/05/23
							192,572	(1)				05/09/14			58.22		05/09/15		05/08/24
																						44,464	(2)		$	2,525,111
																														129,629	(3)		$	7,361,631
																														73,982	(4)			4,201,438
A.H. Schechter			5,000	(1)								02/01/06		$	34.47		02/01/07		01/31/16
			19,200	(1)								03/03/06			35.09		03/03/07		03/02/16
			50,000	(1)								03/02/07			44.19		03/02/08		03/01/17
			50,000	(1)								02/29/08			44.30		02/28/09		02/28/18
			65,335	(1)								05/07/10			33.49		05/07/11		05/06/20
			261,194	(1)								05/04/11			36.56		05/04/12		05/03/21
			185,252	(1)			92,627	(1)				05/02/12			39.29		05/02/13		05/01/22
			81,589	(1)			163,178	(1)				05/06/13			44.98		05/06/14		05/05/23
							209,078	(1)				05/09/14			58.22		05/09/15		05/08/24
																						19,343	(2)		$	1,098,489
																														142,759	(3)		$	8,107,284
																														80,324	(4)			4,561,600

 

2015 Proxy Statement    56

 

Outstanding Equity Awards at Fiscal Year Ended December 31, 2014

Option Awards

Stock Awards

Name

Number of Securities Underlying Unexercised Options (#) Exercisable

Number of Securities Underlying Unexercised Options (#) Unexercisable

Equity Incentive Plan Awards: Number of Securities