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Merck Executive Pay: $36 million, Use of Private Jet, Cash Bonuses Despite Failures
By Jim Edwards | March 6th, 2009 @ 2:57 pm

The top five executives at Merck took home $36 million in compensation last year. All received cash bonuses of between $563,767 and $2.2 million even though two of them had “below-target performance,” according to a Merck filing with the SEC. They also got to use the corporate jet, and so did their wives.

The largesse came despite the fact that Merck’s sales declined 3 percent from $6.2 billion to $6 billion, and the company’s stock fell by 50 percent, from $60.55 to $30.40. Net income was “up,” but only on paper. If you take out the $4.5 billion Vioxx settlement from 2007, then net income declined 49 percent for the year, to $1.9 million. The company also laid off 8,400 people.

Nonetheless, all four of Merck’s top execs received cash bonuses. Here’s a table of their total compensation:

CEO Richard Clark got $19.9 million, up from $19.6 million
CFO Peter Kellogg got $3.8 million, up from $1.2 million
R&D President Peter Kim got $4.2 million, down from $6.2 million
Global Health President Kenneth Frazier got $5.5 million, down from $5.6 million
General Counsel Bruce Kuhlik got $2.6 million (he was not a “named” exec last year)
Kim and Frazier’s compensation declined, but they still received cash bonuses of $875,023 and $986,155, respectively, despite what the company described as “below-target performance” from both of them.

The proxy also gives the execs the following:

Limited personal use of Company aircraft if approved by the Chief Executive Officer…An executive’s spouse may accompany the executive…

There’s an explanation for why Merck executive pay continues to go up even though the company goes down: It’s because Merck’s board uses a flawed compensation model.

Merck employs a compensation consultant, Towers Perrin HR Services, to help the company calculate executive base pay and total cash compensation. The company’s policy is to set executive pay at “the 50th percentile (median)” of comparable executive pay at “peer” companies. Those companies surveyed by Towers Perrin are: Merck, Abbott Laboratories, Amgen, Astra Zeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Hoffman-LaRoche, Johnson & Johnson, Novartis, Pfizer, Sanofi-Aventis, Schering-Plough, and Wyeth.

You’ll notice that list contains 14 companies — an even number. This means that there is no “median” on the list; it would fall between the seventh and eighth company. The way to resolve a median in an even-numbered list is to take the mid-point between the two middle items.

The problem is that the next time you look for the median among the 14 companies, it now lies at the slightly higher mid-point between the seventh company which moved itself up to the median/mid-point and the eighth company, above it. That’s exactly what happened in 2007 when Clark’s pay was below the 50th percentile, and it was moved up to compensate.

This problem is exacerbated because every company on the list is performing a similar operation: Some will have a policy of wanting to pay a premium for the “best” execs, above the 50th percentile, and some will simply want to match their peers. But with everyone either matching or beating their peers, the median compensation number — the mid-point between companies seven and eight on the ranking, only ever moves higher, no matter how badly they perform.