MERCK & CO., INC. - DEF 14A

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

Exchange Act of 1934 (Amendment No.    )

 

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MERCK & CO., INC.

 

(Name of Registrant as Specified In Its Charter)

 

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

 

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

2017 Notice of Annual Meeting
and Proxy Statement

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

 


 

Kenneth C. Frazier

 

Chairman,

President and Chief

Executive Officer

 

 

 

April 10, 2017

 

Dear Shareholders:

 

It is my pleasure to invite you to the 2017 Annual Meeting of Shareholders of Merck & Co., Inc. (“Merck”, known as “MSD” outside the United States and Canada), which will be held on Tuesday, May 23, 2017, 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.

 

Merck’s mission, which we’ve delivered on for more than 125 years, is to save and improve lives. And in 2016, the impact of our mission was underscored again by KEYTRUDA, Merck’s foundational immuno-oncology medicine.

 

It’s clear to us that our innovation strategy is working, and Merck scientists continue to pursue novel therapeutic approaches to the most pressing global health challenges, such as cancer, Alzheimer’s disease, HIV, Ebola, antibiotic resistance and more. We maintain significant investments in research and development – year over year – because we know that is the key to Merck’s long-term growth and patients and societies need our latest inventions.

 

This past year, we drove growth across several areas of our business, including oncology, vaccines, diabetes, hospital acute care, and animal health. We delivered operational excellence with a focus on key markets and customers. We remain confident in the ongoing performance of our key in-line franchises and core products, as well as the growing momentum of our pipeline and most important new product launches.

 

What we saw in 2016 was KEYTRUDA changing the landscape of treatment for certain cancers, representing a new option beyond surgery, radiation therapy and traditional chemotherapy that provides new hope for further progress in the treatment of malignant disease. We’ve only just begun – our scientists are looking to extend further our immuno-oncology leadership as we increase our understanding of the long-term potential of KEYTRUDA in more than 30 tumor types.

 

Importantly, we have other strong products – for humans and animals – contributing to Merck’s overall performance. Our diabetes franchise continues to show volume growth despite increased competition and pricing pressures; animal health is growing largely through companion animal products, notably BRAVECTO for flea and tick protection; and the ongoing launches for GARDASIL 9, our HPV vaccine; ZEPATIER, for hepatitis C; and BRIDION, the neuromuscular blockade reversal medicine, are demonstrating that our customers recognize the value of our medicines and vaccines even with the realities of constrained healthcare budgets.

 

2017 Proxy Statement     3

 
   

Another reality is that we are operating in a period of significant volatility and uncertainty worldwide, including the current political and policy environment in the United States. It is important to note that we believe our broad and balanced portfolio will enable us to weather these uncertainties and positions us well to deliver long-term value to shareholders. We intend to drive the business forward in 2017 despite the loss of exclusivity for ZETIA and VYTORIN and other significant challenges, reaffirming confidence in our strategy.

 

Recognizing that Merck’s future depends on the flow of new, medically important products, our commitment to research remains strong. We will invest in internal R&D to discover and develop transformational medicines and vaccines that will create both therapeutic and shareholder value. We will also continue to seek the right external scientific opportunities for Merck at the right financial valuation for our shareholders.

 

To succeed in 2017, we must stay focused on driving the performance of our core business; advancing our late-stage R&D pipeline, including expanding the use of KEYTRUDA; and executing on our key product launches to maximize and sustain growth over time.

 

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 distributing its Notice of Internet Availability of Proxy Materials, proxy statement and the 2016 Annual Report on Form 10-K, and proxy card/voting instruction form, as applicable, to shareholders and to employee benefit and stock purchase plans participants on April 10, 2017. Your vote is important. We urge you to exercise your right to do so.

     
    Sincerely,
     
   

 

2017 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
2017 Nominees for Director   27
     
Director Compensation   35
     
Proposal 2. Non-Binding Advisory Vote to Approve the Compensation of our Named Executive Officers   37
     
Proposal 3. Non-Binding Advisory Vote on the Frequency of Future Votes to Approve the Compensation of our Named Executive Officers   38
     
Compensation Discussion and Analysis   39
Executive Summary   39
Results of 2016 Shareholder Advisory Vote on Executive Compensation   40
Executive Compensation Program Objectives and Strategy   40
Pay for Performance Alignment   41
Compensation Policies and Practices   42
Detailed Discussion and Analysis   42
The Elements of 2016 Compensation   43
Key 2017 Compensation Actions   49
Compensation Risk Assessment   52
Compensation and Benefits Committee Report   52
     
Summary Compensation Table   53
     
Grants of Plan-Based Awards   55
     
Outstanding Equity Awards   57
     
Option Exercises and Stock Vested   59
     
Pension Benefits   60
     
Nonqualified Deferred Compensation   63
     
Potential Payments Upon Termination or a Change in Control   64
     
Proposal 4. Ratification of Appointment of Independent Registered Public Accounting Firm for 2017   69
Audit Committee’s Report   69
Pre-Approval Policy for Services of Independent Registered Public Accounting Firm   70
Fees for Services Provided by the Independent Registered Public Accounting Firm   70
     
Shareholder Proposals   71
     
Proposal 5. Shareholder Proposal Concerning Independent Board Chairman   71
     
Proposal 6. Shareholder Proposal Concerning Employee Practices in Israel/Palestine   73
     
Proposal 7. Shareholder Proposal Requesting a Report on Conducting Business in Conflict-Affected Areas   75
     
Proposal 8. Shareholder Proposal Requesting a Report on Board Oversight of Product Safety and Quality   77
     
Questions and Answers About the Annual Meeting and Voting   79
     
Shareholder Proposals and Director Nominations for the 2018 Annual Meeting of Shareholders   81
Deadline for Receipt of Shareholder Proposals for Inclusion in the Proxy Materials for the 2018 Annual Meeting of Shareholders   81
Director Nominees for Inclusion in the Proxy Materials for the 2018 Annual Meeting of Shareholders (Proxy Access)   81
Shareholder Proposals and Business to be Brought Before the 2018 Annual Meeting of Shareholders   82
Shareholder Nomination of Directors to Be Brought Before the 2018 Annual Meeting of Shareholders   82
     
Forward Looking Statements   82
     
Other Matters   82

 

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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 of Shareholders (“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 (except on ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2017), 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 Annual 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?
  Votes required
for approval
  Abstentions
and Broker
Non-Votes
PROPOSAL 1   Election of Directors   Page 26   FOR
each Nominee
  No   Majority of votes cast    
PROPOSAL 2   Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay)   Page 37   FOR   No   Majority of votes cast    
PROPOSAL 3   Non-binding Advisory Vote on the Frequency of Future Votes to Approve the Compensation of our Named Executive Officers   Page 38   EVERY YEAR   No   Not Applicable (shareholder preference only)   Do not count for all eight proposals (no effect)
PROPOSAL 4   Ratification of Appointment of Independent Registered Public Accounting Firm for 2017   Page 69   FOR   Yes   Majority of votes cast    
PROPOSALS 5 - 8   Shareholder Proposals   Pages 71-78   AGAINST
each proposal
  No   Majority of votes cast    

 

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 if you are a shareholder of record. 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
SMARTPHONE
  BY MAILING YOUR PROXY CARD
             
     
             
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

 

You will need the 16-digit number included in your proxy card, voting instruction form or Notice of Internet Availability of Proxy Materials.  

 

The telephone and internet voting facilities will close at 11:59 p.m. Eastern Time on May 22, 2017.

 

If your shares are held in a stock brokerage account or by a bank or other nominee, your 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.

 

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Voting at the Meeting

 

All shareholders of record as of the Record Date indicated below, may vote in person at the 2017 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 79 under the “Questions and Answers About the Annual Meeting and Voting” section.

 

Merck & Co., Inc. 2017 Annual Meeting of Shareholders Details

 

Date and Time:   Tuesday, May 23, 2017, at 9:00 a.m., local time
     
Location:   Bridgewater Marriott
700 Commons Way
Bridgewater, New Jersey 08807
     
Record Date:   March 27, 2017

 

Admission

 

All shareholders as of the record date may attend the Annual Meeting but must have an admission ticket and a valid, government-issued photo identification. Your request for an admission ticket must be received on or before May 15, 2017.

 

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 908-740-0244, or by calling 908-740-4000.

 

If you own MERCK shares   How to request your ticket
in your name,
you are a REGISTERED shareholder
  Contact the Office of the Secretary by mail, fax or phone as described above and
      provide your name and address as it appears on your ownership records at Wells Fargo Bank, N.A.
through a BROKER, BANK, OR NOMINEE,
you are a BENEFICIAL OWNER
  Contact the Office of the Secretary by mail, fax or phone as described above and
      provide current evidence of ownership of Merck shares as of the record date

 

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://investors.merck.com/events-and-presentations.

 

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 79 for answers to common questions on the rules and procedures surrounding the proxy and Annual Meeting process.

 

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PROXY SUMMARY

 

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Page references (“XX”) are supplied to help you find further information in this proxy statement.

 

Governance Highlights

 

The Company believes good governance is integral to achieving long-term shareholder value. We are committed to governance policies and practices that serve the interests of the Company and its shareholders. The Board of Directors monitors developments in governance best practices to assure that it continues to meet its commitment to thoughtful and independent representation of shareholder interests. The following table summarizes certain corporate governance practices and facts:

 

12 of our 13 Director Nominees are Independent Risk Oversight by Full Board and Committees
Annual Election of Directors Strong Governance and Disclosure of Corporate Political Spending
Strong Independent Lead Director Active Board Participation in CEO Succession Planning
Annual Board and Committee Evaluation Process Board Oversight of Company Strategy
Active Shareholder Engagement Diverse Board in Terms of Gender, Ethnicity, Experience and Skills
3%, 3-year ownership for Proxy Access Holders of 15% of Shares May Call a Special Shareholder Meeting
Majority Voting for All Directors Transparent Public Policy Engagement
No Shareholder Rights Plan (“Poison Pill”) Longstanding Commitment to Corporate Responsibility
No Supermajority Voting Provisions Policy Providing for Return of Incentive Compensation (“Clawback Policy”)
Annual “Say on Pay” Advisory Votes Share Ownership Requirements for Executives and Directors and Share Retention Policy for Executives
Board and Committee Authority to Retain Independent Advisors Policies Prohibiting Hedging, Short Sales and Pledging of Company Stock
Robust Code of Ethics Strong Alignment Between Pay and Performance for Incentive Plans
Regular Executive Sessions of Independent Directors    

 

Voting Matters

 

The following table summarizes the proposals to be considered at the Annual Meeting and the Board’s voting recommendation with respect to each proposal.

 

    Board vote See page number
    recommendation for more detail
Management Proposals    
PROPOSAL 1 Election of Directors FOR each Nominee 26
PROPOSAL 2 Non-binding Advisory Vote to Approve the Compensation of our Named Executive Officers (Say on Pay) FOR 37
PROPOSAL 3 Non-binding Advisory Vote on the Frequency of Future Votes to Approve the Compensation of our Named Executive Officers EVERY YEAR 38
PROPOSAL 4 Ratification of Appointment of Independent Registered Public Accounting Firm for 2017 FOR 69
Shareholder Proposals    
PROPOSAL 5 Shareholder Proposal Concerning Independent Board Chairman AGAINST 71
PROPOSAL 6 Shareholder Proposal Concerning Employee Practices in Israel/Palestine AGAINST 73
PROPOSAL 7 Shareholder Proposal Requesting a Report on Conducting Business in Conflict-Affected Areas AGAINST 75
PROPOSAL 8 Shareholder Proposal Requesting a Report on Board Oversight of Product Safety and Quality AGAINST 77

 

 

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Nominees for Director (page 28)

 

The following table provides summary information about each Director nominee. Each Director and Director nominee stands for election annually. Detailed information about each individuals’ background, skill set and areas of experience can be found beginning on page 28.

 

In light of the retirement of Mr. C. Robert Kidder, effective as of the 2017 Annual Meeting of Shareholders and with a focus on Board refreshment that prioritizes skills that the Board considers important and desirable based on the Company’s current needs and business priorities, along with the other current Directors, the Board is nominating for election at the Annual Meeting Dr. John H. Noseworthy, President and Chief Executive Officer, Mayo Clinic and Professor, Neurology, Mayo Clinic College of Medicine & Science.

 

    Director Occupation and   Committee Other Public
Name Age since Experience Independent Memberships Company Boards
Leslie A. Brun 64 2008 Chairman and Chief Executive Officer, Sarr Group, LLC

•   Audit

•   Governance (Chair)

 

•   Broadridge Financial Solutions, Inc.

•   CDK Global, Inc.

•   Hewlett Packard Enterprise Company

Thomas R. Cech, Ph.D. 69 2009 Distinguished Professor, University of Colorado

•   Audit

•   Research

 
Pamela J. Craig 60 2015 Former Chief Financial Officer, Accenture plc

•   Audit (Chair)

•   Governance

•   Akamai Technologies, Inc.

•   Wal-Mart Stores, Inc.

Kenneth C. Frazier 62 2011 Chairman, President and Chief Executive Officer, Merck & Co., Inc.     •   Exxon Mobil Corporation
Thomas H. Glocer 57 2007 Retired Chief Executive Officer, Thomson Reuters Corporation

•   Compensation and Benefits (Chair)

•   Governance

•   Morgan Stanley

•   Publicis Groupe

Rochelle B. Lazarus 69 2004 Chairman Emeritus, Ogilvy & Mather

•   Compensation and Benefits

•   Governance

•   The Blackstone Group L.P.

•   General Electric

John H. Noseworthy, M.D. 65 – – President and Chief Executive Officer, Mayo Clinic    
Carlos E. Represas 71 2009 Retired Executive Vice President and Head of the Americas, Nestlé, S.A.

•   Compensation and Benefits

•   Governance

•   Bombardier Inc.

•   Swiss Re Group

Paul B. Rothman, M.D. 59 2015 Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, and CEO, Johns Hopkins Medicine •   Research  
Patricia F. Russo 64 1995 Non-executive Chairman, Hewlett Packard Enterprise Company, and Former Chief Executive Officer and Director, Alcatel-Lucent

•   Compensation and Benefits

•   Governance

 

•   Arconic, Inc.

•   General Motors Company

•   Hewlett Packard Enterprise Company

•   KKR Management LLC (the managing partner of KKR & Co., L.P.)

Craig B.Thompson, M.D. 64 2008 President and Chief Executive Officer, Memorial Sloan-Kettering Cancer Center •   Research (Chair) •   Charles River Laboratories International, Inc.
Wendell P. Weeks 57 2004 Chairman, Chief Executive Officer and President, Corning Incorporated •   Research

•   Amazon.com, Inc.

•   Corning Incorporated

Peter C. Wendell 66 2003 Managing Director, Sierra Ventures

•   Compensation and Benefits

•   Research

 

 

 

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Select Performance and Compensation Highlights for 2016 (page 39)

 

(For more complete information about these topics, please review the Company’s Annual Report on Form 10-K and the complete proxy statement.)

 

Business Highlights.

 

Exceeded our Non-GAAP EPS goal, with year-over-year growth of 5%
   
Increased worldwide sales by 1%, including a 2% negative impact from foreign exchange, attributable to growth in oncology, vaccines, hospital acute care, diabetes and animal health
   
Increased investment in research and development by 3% on a Non-GAAP basis from $6.6 billion in 2015 to $6.8 billion in 2016

 

Research & Development.

 

Continued to further expand the labeling and clinical development for KEYTRUDA including:
   
  Received regulatory approval in the U.S., Japan and EU (January 2017) for first-line treatment of patients with advanced Non-Small Cell Lung Cancer (“NSCLC”)
     
  Broadened clinical development with over 400 studies for more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, Non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple negative breast
     
  In 2016, KEYTRUDA was granted U.S. Breakthrough Therapy Designation for four indications for the treatment of patients with relapsed or refractory classical Hodgkin lymphoma, previously untreated stage IV NSCLC whose tumors express PD-L1, unresectable or metastatic MSI-H non-colorectal cancer and locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy
     
Continued to execute and advance diverse late-stage pipeline for Alzheimer’s disease, HIV infection, atherosclerosis, bacterial infection, diabetes, heart failure and Ebola
   
Received U.S., EU and Japan approval for ZEPATIER for the treatment of chronic hepatitis C virus genotype 1 or 4 in adults
   
Received U.S. and EU (January 2017) approval for ZINPLAVA for the prevention of Clostridium difficile infection ("CDI") recurrence in adults who are receiving antibacterial drug treatment of CDI and are at high risk for CDI recurrence
   
Initiated several novel programs and testing for multiple drug candidates in humans across multiple modalities

 

Shareholder Value Creation.

 

Delivered value to shareholders through 2016 total shareholder return (“TSR”) of 15.1% which exceeded the Peer Group median of 0.5%
   
Returned $8.6 billion to shareholders through dividends and share repurchases
   
Increased dividends paid by over 2%, representing the sixth consecutive year of dividend increases
   
Strengthened pipeline through the acquisitions of Afferent Pharmaceuticals (respiratory and immunology) and IOmet (immuno-oncology) and a strategic collaboration with Moderna Therapeutics to develop personalized cancer vaccines

 

 

* Total does not add due to rounding.

 

 

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Pay is Aligned to 2016 Company Performance (page 41)

 

Merck’s compensation programs are designed to align the interests of our executives with the interests of our shareholders. For this reason, a significant portion of the pay of our Named Executive Officers (“NEO”) is variable and at risk, subject to company and individual performance measured against financial, operating and strategic objectives, as well as relative TSR. The Company’s variable incentives demonstrate a strong linkage between pay and performance. In 2016, the Company missed its financial goal for revenue but exceeded its Non-GAAP EPS and pipeline goals, making significant progress across various stages of the pipeline, which we believe will yield longer-term returns as new products are approved and launched. The manner in which our compensation plans operate relative to performance is described in detail beginning on page 41.

 

Annual Incentive – The Company Scorecard, which focuses on our most critical business drivers—revenue, EPS and pipeline—is described in more detail beginning on page 44. Our performance during 2016 resulted in above-target achievement (104 points vs. a target of 100 points) of our financial and research-based objectives. These results, combined with individual performance, determine annual incentive payouts to the majority of our employees, including the NEOs. The Company Scorecard result of 104%, coupled with NEO individual performance that ranged from 100% to 112.5%, resulted in average annual incentive payouts for the NEOs of 109% of target in 2016.

 

Long-Term Incentive (“LTI”) – The Performance Share Units (“PSUs”) granted for the 2014-2016 performance period provided senior executives the opportunity to earn share awards based on cumulative, three-year Operating Cash Flow (“OCF”) and relative TSR performance versus our Peer Group, each weighted at 50%. The overall payout for the three-year period ending December 31, 2016 was 158%, reflecting a score of nearly 190% of target based on OCF results and 127% of target based on relative TSR results versus Peers. Additional details about our PSU program and the 2014-2016 PSU award cycle are provided beginning on page 48.

 

Continued our strong pay-for-performance alignment of incentive plans

 

2016 Executive Total Compensation Mix (page 43)

 

Under our executive compensation program, a significant portion (90% and 82%, respectively) of the CEO’s and other Named Executive Officers’ target annual direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

 

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“Say on Pay” Advisory Vote (page 40)

 

In 2016, shareholders continued their support of our executive compensation programs with over 94% of the votes cast for approval of the “say on pay” proposal. Consistent with the Company’s strong interest in shareholder engagement and our pay-for-performance approach, the Compensation and Benefits Committee has continued to examine our executive compensation program to ensure alignment between the interests of our executives and shareholders.

 

We ask that our shareholders approve, on an advisory basis, the compensation of our Named Executive Officers.

 

In addition, this year we are asking shareholders to cast a non-binding, advisory vote on the frequency of future votes to approve the compensation of our Named Executive Officers. Shareholders will be able to specify one of four choices for this proposal on the proxy card; one year, two years, three years or abstain. The Board of Directors believes that it is appropriate and in the best interest for our shareholders to continue to cast a non-binding, advisory vote on executive compensation on an annual basis.

 

For additional information, see the Compensation Discussion and Analysis in this proxy statement.

 

Shareholder Engagement and Feedback (page 22)

 

Beyond consideration of the annual “say on pay” vote, Merck regularly communicates with its shareholders to better understand their perspectives and has established a shareholder engagement program that is proactive and cross-functional. During 2016, we held discussions with a number of our largest shareholders on topics such as management and shareholder proposals, including independent Chairman; Board-related matters, including Board composition; executive compensation; proxy access and other governance matters. These discussions provided valuable insights into shareholder views.

 

Proxy Access. In 2015, our Board made a decision to proactively adopt proxy access. This decision grew out of an open and constructive dialogue with our shareholders and our commitment to maintaining strong governance practices. The “Proxy Access for Director Nominations” By-Law permits eligible shareholders, meeting certain eligibility requirements, to nominate candidates for election to the Merck Board. We believe that this proxy access framework strikes the right balance for the Company and its shareholders by ensuring that Board nominees are supported by long-term shareholders representing a significant, but attainable, proportion of outstanding shares.

 

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

 

Auditors (page 69)

 

We ask that our shareholders ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2017. Below is summary information about PricewaterhouseCoopers LLP’s fees for 2016 and 2015.

 

Type of Fees (in Millions)  2016    2015  
Audit Fees  $28.2   $27.3 
Audit-Related Fees   5.2    3.5 
Tax Fees   6.5    6.8 
All Other Fees   1.8    1.7 
TOTAL FEES  $41.7   $39.3 

 

 

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

 

NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS

May 23, 2017

To the Shareholders:

 

The shareholders of Merck & Co., Inc. will hold their Annual Meeting on Tuesday, May 23, 2017, at 9:00 a.m., at the Bridgewater Marriott, located at 700 Commons Way, Bridgewater, New Jersey 08807. The purposes of the meeting are to:

 

elect the 13 Director nominees named in the proxy statement;
   
consider and act upon a proposal to approve, by non-binding advisory vote, the compensation of our Named Executive Officers;
   
consider and act upon a proposal to approve, by non-binding advisory vote, the frequency of future non-binding advisory votes to approve 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 2017;
   
consider and act upon a shareholder proposal concerning independent board chairman, if properly presented at the meeting;
   
consider and act upon a shareholder proposal concerning employee practices in Israel/Palestine, if properly presented at the meeting;
   
consider and act upon a shareholder proposal requesting a report on conducting business in conflict-affected areas, if properly presented at the meeting;
   
consider and act upon a shareholder proposal requesting a report on board oversight of product safety and quality, if properly presented at the meeting; and
   
transact such other business as may properly come before the meeting.

 

Only shareholders listed on the Company’s records at the close of business on March 27, 2017, are entitled to vote.

 

Merck began distributing its Notice of Internet Availability of Proxy Materials, proxy statement, the 2016 Annual Report on Form 10-K, and proxy card/voting instruction form, as applicable, to shareholders and to employee benefit and stock purchase plans participants on April 10, 2017.

 

April 10, 2017

 

  By order of the Board of Directors,
   
  Michael J. Holston
  Executive Vice President and General Counsel

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS

FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 23, 2017:

 

The Notice of Annual Meeting of Shareholders, proxy statement and the 2016 Annual Report on Form 10-K are available free of charge at: www.proxyvote.com.

 

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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 the independent Lead Director responsibilities, categorical independence standards, 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.

 

Governance Materials

 

The following materials relating to corporate governance at Merck are available via our website at
www.merck.com/about/leadership

 

   Restated Certificate of Incorporation of Merck & Co., Inc.

 

   By-Laws of Merck & Co., Inc.

 

   Policies of the Board—a statement of Merck’s corporate governance principles

 Merck Board Committee Charters

 

 Shareholder Communications with the Board

 

 Merck Code of Conduct—Our Values and Standards

 

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 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

 

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(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 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 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 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 and Director nominee (Leslie A. Brun, Thomas R. Cech, Pamela J. Craig, Thomas H. Glocer, Rochelle B. Lazarus, Carlos E. Represas, Paul B. Rothman, Patricia F. Russo, Craig B. Thompson, Wendell P. Weeks, Peter C. Wendell, C. Robert Kidder, who will retire from the Board at the Annual Meeting, and John H. Noseworthy, who is being first nominated at the Annual Meeting) 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 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 Director or Director nominee serves or served in the past, and that in the ordinary course of business, transactions may occur between the Company, or one of our subsidiaries, and such organizations. The Board also evaluated whether there were any other facts or circumstances that might impair a Director’s independence.

 

As previously disclosed, the Company and Corning Incorporated (“Corning”), for which Mr. Weeks serves as Chairman, Chief Executive Officer and President, are parties to a Joint Research and Development Agreement (“R&D Agreement”) aimed at developing new glass materials. In 2011, the R&D Agreement was first reviewed and approved by the Board’s Corporate Governance Committee (“Governance Committee”) and reviewed by the Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to this agreement, to confirm Mr. Weeks’ continued independence. The Governance Committee has conducted regular oversight of the R&D Agreement. In 2014, Merck and Corning entered into two follow-on agreements: a multi-year component supply agreement (“Supply Agreement”) with minimum volume commitments and a royalty agreement (“Royalty Agreement”), which Royalty Agreement also amended the R&D Agreement. Both agreements were reviewed and approved by the Governance Committee and the entire Board, other than Mr. Weeks who recused himself from the Board’s deliberations and vote with respect to these agreements. As previously disclosed, prior to 2016, Merck reimbursed Corning for an aggregate of $23 million for development costs incurred under the R&D Agreement. An additional $7 million of reimbursable costs remain to be paid upon the achievement of final milestones set forth in the R&D Agreement. In 2016, Merck reimbursed Corning for approximately $500,000 for intellectual property filing costs incurred by Corning in 2015. Merck is presently reviewing the intellectual property filing costs incurred by Corning in 2016 and expects to reimburse

 

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Corning for approximately $400,000 in additional costs in 2017. Merck also expects to reimburse Corning for additional intellectual property filing costs in the future. Commencing in 2019, the Company expects to receive royalties under the Royalty Agreement. In addition, in 2016 the Company made purchases from Corning in the ordinary course of business unrelated to the Supply Agreement. Finally, the Company anticipates making a milestone payment of $15 million to Corning under the Supply Agreement upon the approval by the FDA of vials developed under the R&D Agreement as a packaging material for GARDASIL and Corning’s delivery to Merck of 30 million vials which is expected in late 2020 or early 2021.

 

Drs. Cech, Noseworthy, Rothman and Thompson are employed at medical or academic institutions with which the Company engages in the ordinary course of business transactions in the form of purchases and sales.

 

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

 

Board Leadership Structure

 

The Board of Directors is currently led by Kenneth C. Frazier, who serves as the Chairman of the Board, and by Leslie A. Brun, an independent Director, who serves as the Board’s Lead Director 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.

 

The Board meets in executive session without the CEO and Chairman at each in-person Board meeting lead by the independent Lead Director. During these sessions, the Directors discuss topics such as CEO succession planning.

 

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 Executive Sessions  

•   The authority to call meetings of the independent members of the Board.

  Presiding at all meetings of the Board at which the Chairman 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 the information sent to the Board, including supporting material for meetings.
Meeting Schedules   •   Approving meeting schedules to ensure that there is sufficient time for discussion of all agenda items.
Communicating with Shareholders and Stakeholders  

•   Being available for consultation and direct communication with major shareholders, as appropriate.

  Serving as a liaison between the Board and shareholders on investor matters.

Board Performance Evaluation     Leading the annual performance evaluation of the Board.
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. The independent Lead Director is appointed by the Board of Directors to a three year term. 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.

 

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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 Committee and the Board take into account, among other things, the needs of the Board and the Company in light of the overall composition of the Board with a view 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 Committee to provide feedback on the effectiveness of the Board, the Committees, as well as each individual Director’s own contributions. The independent Lead Director, who serves as the Chair of the Governance 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 Governance Committee and to the full Board for discussion and action.

 

Each year, the independent 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 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 of the Company 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.The Governance Committee then reviews the output of the ERM process.

 

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 Company’s 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, 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.

 

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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 Committee and is contained in the Policies of the Board.

 

The following process and guidelines are followed by the Governance 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 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 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 Committee review the material facts of related person transactions, and the disinterested members of the Governance Committee shall either approve or disapprove the transactions. The Governance Committee only approves the transaction(s) if it determines that such transaction(s) is fair and reasonable. If advance approval by the Governance Committee is not feasible, then the related person transaction is considered and, if the Governance Committee determines it to be appropriate, ratified by the disinterested members of the Governance Committee. If after considering the relevant facts and circumstances in connection with such transaction, the Governance Committee determines that it cannot ratify the related person transaction, then the Governance Committee takes such course of action as it deems appropriate under the circumstances.
   
As necessary, the Governance 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 Governance 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 transactions, along with payables and receivables, are compiled for each person and affiliation. Management submits a report of the affiliations, relationships, transactions and appropriate supplemental information to the Governance Committee, which is comprised of independent Directors, for its review.

 

Upon review by the Governance Committee of the report of related person transactions, no transactions require disclosure under Item 404(a).

 

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Board Meetings and Committees

 

In 2016, 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.

 

The independent Directors of the Board met in eight executive sessions in 2016. Mr. William B. Harrison, Jr., former Lead Director, presided over the executive sessions between January 1, 2016 and May 24, 2016 when he retired from the Board. Mr. Brun, Lead Director of the Board effective May 24, 2016, presided over the executive sessions for the remainder of the year. All thirteen Directors then serving on the Board attended the 2016 Annual Meeting of Shareholders.

 

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

 

All Directors attended at least 75% of the meetings of the Board and of the committees on which they served in 2016.

 

Members of the individual standing committees, as of April 1, 2017, are named below:

 

 

 

    Compensation    
Board Member Audit and Benefits Governance Research
Leslie A. Brun(1)(2)     Chair  
Thomas R. Cech, Ph.D.        
Pamela J. Craig(1) Chair      
Thomas H. Glocer   Chair    
C. Robert Kidder(3)        
Rochelle B. Lazarus        
Carlos E. Represas        
Paul B. Rothman, M.D.        
Patricia F. Russo        
Craig B. Thompson, M.D.       Chair
Wendell P. Weeks        
Peter C. Wendell        
Number of meetings in 2016 9 4 3 4

 

(1) Audit Committee Financial Expert
(2) Lead Director of the Board
(3) Will retire at the 2017 Annual Meeting of Shareholders

 

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

 

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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 report 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 70 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 69 of this proxy statement and the Audit Committee Charter is available on our website www.merck.com/about/leadership/board-of-directors.

 

Financial Experts on Audit Committee

 

The Board has determined that Mr. Brun and Ms. Craig are “audit committee financial experts” as defined by the SEC and that each has accounting or related financial management expertise as required by NYSE Corporate Governance Listing Standards.

 

Governance 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;
   
review the Company’s Good Manufacturing Practice compliance, including internal and external audits, its Environmental, Health and Safety practices, its supply chain manufacturing strategy and governance, as well as its third party sourcing program and its ERM process, its business continuity plans and its privacy policies and practices; 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 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.

 

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, non-equity and equity incentive plan compensation—of the Chairman and

 

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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 39. 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.

 

The C&B Committee Report is included on page 52 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 FW Cook as its compensation consultant.

 

Independence of Compensation Consultant

 

The C&B Committee annually reviews the services provided by FW Cook and has concluded that FW Cook is independent in providing executive compensation consulting services. The C&B Committee conducted a specific review of its relationship with FW Cook in 2016, and, consistent with the guidance provided under the Dodd-Frank Act, and by the SEC and the NYSE, determined that FW Cook’s work for the C&B Committee did not raise any conflicts of interest. In making this determination, the C&B Committee reviewed information provided by FW Cook on the following factors:

 

The provision of other services to Merck by FW Cook;
   
The amount of fees received from Merck by FW Cook as a percentage of the total revenue of FW Cook;
   
The policies and procedures of FW Cook that are designed to prevent conflicts of interest;
   
Any business or personal relationship 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 FW Cook with an executive officer of Merck.

 

In particular, the C&B Committee noted that (i) FW Cook provided no other services to Merck, other than occasional non-material assistance to the Human Resources staff related to FW Cook’s C&B committee-related duties; and (ii) FW 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 2016

 

During 2016, FW Cook supported the C&B Committee by:

 

Reviewing our competitive market data with respect to the CEO’s and other senior executives’ compensation;
   
Providing guidance and analysis on executive compensation plan design, market trends and best practices;
   
Assisting with design and setting of performance goals in the variable incentive plans;
   
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.

 

In addition, at the direction of the Governance Committee, FW Cook performed a review of the Directors’ compensation program.

 

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 in 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., Ms. Rochelle B. Lazarus, Mr. Carlos E. Represas, Ms. Patricia F. Russo, and Mr. Peter C. Wendell served on the C&B Committee during 2016. There were no C&B Committee interlocks or insider (employee) participation during 2016.

 

Research Committee

 

The primary functions of this Committee are to:

 

assist the Board in its oversight of matters pertaining to our strategies and operations for the research and development of pharmaceutical 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.

 

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Shareholder Engagement

 

Merck regularly communicates with its shareholders to better understand their perspectives and has established a shareholder engagement program that is proactive 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 2016, we held discussions with a number of our shareholders in the spring before the 2016 Annual Meeting of Shareholders and once again in late fall. 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% of our ownership. In 2016, among the specific matters we discussed were:

 

management and shareholder proposals, including with respect to an independent chairman;
   
Board-related matters, including Board composition, leadership and succession planning;
   
executive compensation, including alignment between compensation and 2015 performance and review of continued impact of the new plan design; and
   
other governance matters including proxy access and any policy changes recently adopted or under consideration by our institutional 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 programs or practices. The feedback received was summarized and presented to the Governance Committee, the C&B Committee and the full Board. We have also incorporated certain suggestions to enhance or clarify our disclosures into this proxy statement.

 

Our Board also previously 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.

 

Proxy Access

 

After carefully observing proxy access developments, particularly the rapid developments in 2015, and engaging with a number of our largest shareholders, our Board of Directors proactively amended our By-Laws on July 22, 2015, to give shareholders a right to proxy access for Director nominations. Our amended By-Laws allow a shareholder or a group of no more than 20 shareholders, who has maintained continuous qualifying ownership of at least 3% of the Company’s outstanding common stock for at least three years and has complied with the other requirements set forth in the By-Laws, to include director nominees constituting up to 20% of the Board in the Company’s proxy materials for an annual meeting of shareholders. The amended By-Laws are available on our website at www.merck.com/about/leadership.

 

In considering whether to adopt proxy access for Director nominations, our Board reviewed the potential impact of proxy access on Merck, as well as current standards for proxy access terms. We also took into consideration the various views of our investors concerning this issue. We evaluated our investors’ publicly stated positions on this issue and inquired about the views of a number of our largest shareholders on the topic during our regular outreach. Our investors generally support proxy access and those investors with whom we spoke generally indicated support for the core terms of our By-Laws.

 

Our Board concluded that the best course of action for Merck and our shareholders was to adopt a proxy access By-Law provision with terms based on our particular circumstances and consistent with current standards in proxy access By-Laws for publicly traded U.S. companies.

 

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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 the Board, the independent Lead Director, the non-management or independent Directors as a group, or other members of the Board by writing to the following address:

 

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

 

In order to manage efficiently the volume of correspondence received, communications will be reviewed by the Corporate Secretary for the purpose of determining whether the contents are appropriate for submission to the entire Board, the Chairman, the independent Lead Director or 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 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 at www.merck.com/about/leadership.

 

Information on communications to the Board may also be found on our website at www.merck.com/about/leadership.

 

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 Governance Committee. The Company’s political contributions are made in accordance with Company policies and procedures also overseen by senior management. The Governance Committee monitors all such contributions.

 

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

 

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

 

Corporate responsibility is integral to the fabric of our Company and reflected in every aspect of our business.
-- Ken Frazier

 

The Company has robust corporate governance and oversight processes related to our corporate responsibility approach and our philanthropic giving. The Governance 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 www.msdresponsibility.com/ethics-transparency/transparency-disclosures.

 

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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 35 and ownership requirements for executive officers are discussed in the Compensation Discussion and Analysis section on page 51.

 

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 and Director nominee; (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, 2017, and the beneficial owners exercise sole voting and/or investment power over their shares.

 

   Company Common Stock   
      Right to Acquire Beneficial      
      Ownership Under      
   Shares  Options/Stock Units     Phantom
   Beneficially  Exercisable/Distributable  Percent  Stock
Name of Beneficial Owner  Owned(a)  Within 60 Days(b)   of Class  Units(c) 
Kenneth C. Frazier  604,085  2,741,094  * 
Leslie A. Brun  100  10,000  *  31,419
Thomas R. Cech  100    *  26,529
Pamela J. Craig  1,715    *  4,828
Thomas H. Glocer  5,100  15,000  *  49,291
C. Robert Kidder  10,339(d)  5,000  *  24,969
Rochelle B. Lazarus  6,351(d)    *  67,384
John H. Noseworthy(e)       * 
Carlos E. Represas  11,500(d)    *  30,906
Paul B. Rothman  100    *  4,828
Patricia F. Russo  13,148    *  24,969
Craig B. Thompson  3,352  5,000  *  24,969
Wendell P. Weeks  100  15,000  *  71,862
Peter C. Wendell  1,000    *  72,853
Robert M. Davis  31,913  200,619  * 
Michael J. Holston  62,439    * 
Roger M. Perlmutter  101,601  436,382  * 
Adam H. Schechter  170,185(d)  991,455  * 
All Directors, Director Nominee and Executive Officers as a Group (24 individuals)  1,285,423  5,453,641  *  434,830

* 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 9, 2017, for the accounts of individuals as follows: Mr. Frazier—3,781 shares and all Directors and executive officers as a group—4,787 shares.
(b) This column reflects the number of shares that could be acquired within 60 days of February 28, 2017, 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; and 130,215 shares held in a trust for the benefit of Mr. Schechter’s family.
(e) Dr. Noseworthy is being nominated for election for the first time at the Annual Meeting.

 

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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, 2016:

 

Name and Address of
Beneficial Owner
Amount and Nature of
Beneficial Ownership
   Percent of Class  
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055
 183,718,408 (a)   6.70%
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355
 184,729,642 (b)   6.70%  
Capital World Investors
333 South Hope Street
Los Angeles, CA 90071
 141,332,476 (c)   5.10%  

 

(a) As reported on Amendment No. 7 to Schedule 13G (the “BlackRock filing”) filed with the SEC on January 24, 2017. According to the BlackRock filing, of the 183,718,408 shares of Merck common stock beneficially owned by BlackRock, Inc. (“BlackRock”), as of December 31, 2016, BlackRock has the sole power to vote or direct the vote with respect to 157,314,162 shares, sole power to dispose or to direct the disposition of 183,686,842 shares, and shared voting and shared dispositive power with respect to 31,566 shares.
(b) As reported on Amendment No. 2 to Schedule 13G (the “Vanguard filing”) filed with the SEC on February 9, 2017. According to the Vanguard filing, of the 184,729,642 shares of Merck common stock beneficially owned by The Vanguard Group (“Vanguard”), as of December 31, 2016, Vanguard has the sole power to vote or direct the vote with respect to 4,356,924 shares, shared power to vote or direct the vote with respect to 517,108 shares, sole power to dispose or to direct the disposition of 179,895,529 shares, and shared power to dispose or to direct the disposition of 4,834,113 shares.
(c) As reported on Schedule 13G (the “Capital World filing”) filed with the SEC on February 10, 2017. According to the Capital World filing, as of December 31, 2016, Capital World Investors (“Capital World”), a division of Capital Research and Management Company (“CRMC”), may be deemed to have been beneficial ownership of 141,332,476 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.

 

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 2016, 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 2016 fiscal year; except for a late Form 4 that was filed in January 2017 for Mr. Weeks to report the inadvertent omission of a Form 4 that should have been filed in 2011 in connection with a sale of 100 shares of Merck Common Stock held in the trust account under the name of his minor child.

 

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PROPOSAL 1.
ELECTION OF DIRECTORS

 

Criteria and Director Nomination Process

 

The Governance 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 www.merck.com/about/leadership.

 

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 Committee works with the Board to determine the appropriate mix of professional experience, areas of expertise, educational background and other qualifications that are particularly desirable for our directors to possess in light of our current and future business strategies. The input gathered is then used by the Governance 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 experience, 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 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 2016, the Committee has retained independent search firms to assist in identifying candidates that reflect these diversity objectives. The search firm retained by the Governance Committee during 2016 was asked to identify possible candidates who meet the qualifications being sought in candidates, to interview and screen such candidates (including conducting reference checks), and assist in scheduling candidate interviews with Board members.

 

Shareholder Recommendations of Director Candidates

 

The Governance Committee will consider recommendations for director candidates made by shareholders and evaluate them using the same criteria as for other candidates. Any such shareholder recommendation must be sent to the Secretary of the Company, Merck & Co., Inc., 2000 Galloping Hill Road, K1-3049, Kenilworth, New Jersey 07033 U.S.A., and must include detailed background information regarding the recommended candidate that demonstrates how the individual meets the Board membership criteria.

 

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 Committee, additional information about her/him is obtained through inquiries to various sources and, if warranted, interviews.

 

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2017 Nominees for Director

 

The Board has recommended thirteen nominees for election as Directors at this Annual Meeting, Mr. Leslie A. Brun, Dr. Thomas R. Cech, Ms. Pamela J. Craig, Mr. Kenneth C. Frazier, Mr. Thomas H. Glocer, Ms. Rochelle B. Lazarus, Dr. John H. Noseworthy, Mr. Carlos E. Represas, Dr. Paul B. Rothman, 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. Mr. C. Robert Kidder will retire from the Board at the Annual Meeting in accordance with the retirement policy for the Board of Directors.

 

John H. Noseworthy, M.D. is a new candidate to stand for election by shareholders at the 2017 Annual Meeting. All other nominees currently serve on the Board and were elected by the shareholders at the 2016 Annual Meeting. Dr. Noseworthy was first identified as a possible director candidate by an independent search firm and then recommended to the Board by the Governance Committee. All the Director nominees named in this proxy statement meet the Board’s criteria for membership and were recommended by the Governance Committee for election by shareholders at this Annual Meeting. The Governance 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 multi-national corporations, medical or academic 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 a Director. Their roles in these organizations also permit them to offer quality advice and counsel to the Company’s management. If elected, each nominee will hold a term expiring at the 2018 Annual Meeting of Shareholders or until his or her successor has been duly elected and qualified.

 

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 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 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.

 

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LESLIE A. BRUN
Independent Lead Director
Age: 64

 

  Director since: 2008
Committees:  •  Audit
    Governance (Chair)
Other Current Public Directorships: Broadridge Financial Solutions, Inc. (2007), Non-executive Chairman (2011); CDK Global, Inc. (2014), Non-executive Chairman (2014); Hewlett Packard Enterprise Company (2015)
Former Directorships Held During the Past 5 Years: Automatic Data Processing, Inc. (2003-2015)

 

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, CEO 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 the Non-executive Chairman of two public boards and Chair of the HR and Compensation Committee at Hewlett Packard Enterprise Company, provide him with extensive experience on corporate governance issues.

 

           

THOMAS R. CECH, PH.D.
Independent Director
Age: 69

 

  Director since: 2009
Committees: 
• 
Audit
Research
Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: 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.

 

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PAMELA J. CRAIG
Independent Director
Age: 60

 

  Director since: 2015
Committees: 
• 

Audit (Chair)

Governance

Other Current Public Directorships: Akamai Technologies, Inc. (2011), Wal-Mart Stores, Inc. (2013)
Former Directorships Held During the Past 5 Years: VMware, Inc. (2013-2015)
 

 

Career Highlights:

 

Accenture plc, global management consulting, technology services and outsourcing company 

 

Chief Financial Officer (2006-2013)
   
Senior Vice President, Finance (2004-2006)
   
Group Director, Business Operations and Services (2003-2004)
   
Managing Partner, Global Business Operations (2001-2003)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Ms. Craig, the Board considered her extensive finance, management, operational, technology and international business expertise, and her history of accomplishment and executive ability as Chief Financial Officer of Accenture plc. Ms. Craig’s financial expertise is also demonstrated throughout her tenure at Accenture. In addition, her directorships at other public companies, including her service as the Chair of the Audit Committee at Akamai and her service on the Audit Committee at Wal-Mart Stores, Inc., provide her with valuable experience on governance issues facing public companies.

 

           

KENNETH C. FRAZIER
Management
Age: 62

 

  Director since: 2011
Other Current Public Directorships: Exxon Mobil Corporation (2009)
Former Directorships Held During the Past 5 Years: None
 
 
 
 

 

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.

 

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THOMAS H. GLOCER
Independent Director
Age: 57

 

  Director since: 2007
Committees:  • 
Compensation and Benefits (Chair)
Governance
Other Current Public Directorships: Morgan Stanley (2013), Publicis Groupe (2016)
Former Directorships Held During the Past 5 Years: None
 
 

 

Career Highlights:

 

Angelic Ventures LP, a family office investing in early-stage technology and data companies
   
Founder and Managing Partner (2012-present)
   
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, including his service as Chair of the Operations and Technology Committee at Morgan Stanley and Compensation Committee at Publicis Groupe, provide him with valuable experience on governance issues facing public companies.

 

           

ROCHELLE B. LAZARUS
Independent Director
Age: 69

 

Director since: 2004
Committees: 
 
Compensation and Benefits
Governance
Other Current Public Directorships: The Blackstone Group L.P. (2013), General Electric (2000)
Former Directorships Held During the Past 5 Years: None
 
 
 

 

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, and 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.

 

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JOHN H. NOSEWORTHY, M.D.
Independent Director Nominee
Age: 65
  Director Nominee

 

Other Current Public Directorships: None

 

Former Directorships Held During the Past 5 Years: None
 
 

 

Career Highlights:

 

Mayo Clinic, non-profit organization committed to clinical practice, education and research

 

President and Chief Executive Officer (2009-present)
  
Medical Director of Development (2006-2009)
  
Vice Chairman, Mayo Clinic Rochester Executive Board (2006-2009)
  
Chair, Department of Neurology (1997-2006) and consultant (1992-present)
  
Professor of Neurology, Mayo Clinic College of Medicine & Science (1992-present)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Noseworthy, 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 Mayo Clinic and Professor of Neurology, Mayo Clinic College of Medicine & Science. In addition, his past experiences leading controlled clinical trials, as well as his extensive operational and management experience of a large-scale medical organization provide him with a deep understanding of the complexities of U.S. healthcare delivery system and policy environment.

 

           

CARLOS E. REPRESAS
Independent Director
Age: 71

 

  Director since: 2009
Committees: 
 
Compensation and Benefits
Governance
Other Current Public Directorships: Bombardier Inc. (2004), Swiss Re Group (2010)
Former Directorships Held During the Past 5 Years: None
 
 

 

Career Highlights:

 

Bombardier Inc., aerospace and transportation company

 

Non-Executive Chairman, Bombardier Latin America (2011-present)
   
Chairman, Advisory Board, Bombardier Mexico (2007-present)
   
Director, Bombardier Inc. (2004-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 and 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.

 

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PAUL B. ROTHMAN, M.D. 
Independent Director
Age: 59
  Director since:  2015
Committees: Research
Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: Cancer Genetics, Incorporated (2014)
 
 
 

 

Career Highlights:

 

The Johns Hopkins University

 

Dean of the Medical Faculty and Vice President for Medicine (2012-present)
   
Johns Hopkins Medicine
   
Chief Executive Officer (2012-present)
   
Carver College of Medicine at the University of Iowa
   
Dean (2008-2012)
   
Head of Internal Medicine (2004-2008)

 

Experience and Qualifications of Particular Relevance to Merck:

 

In deciding to nominate Dr. Rothman, the Board considered his extensive scientific and medical expertise relevant to the pharmaceutical industry and the Company’s research focus, including his positions as the CEO of Johns Hopkins Medicine and the Dean of Medical Faculty and Vice President for Medicine, The Johns Hopkins University, as well as his past experience as Dean and Head of Internal Medicine at Carver College of Medicine at the University of Iowa. In addition, his extensive operational and management experience of a large-scale medical organization provide him with a deep understanding of the complexities of U.S. healthcare delivery system and policy environment.

 

           

PATRICIA F. RUSSO
Independent Director
Age: 64

  Director since: 1995
Committees:  • 
Compensation and Benefits
Governance
Other Current Public Directorships: Arconic, Inc. (2016) formerly Alcoa, Inc. (2008-2016); General Motors Company (2009); Hewlett Packard Enterprise Company (2015), Non-executive Chairman (2015); KKR Management LLC (the managing partner of KKR & Co., L.P.) (2011)
Former Directorships Held During the Past 5 Years: Hewlett-Packard Company (2011-2015)

 

Career Highlights:

 

Hewlett Packard Enterprise Company, technology company

 

 – Non-executive Chairman (2015-present)
   
Alcatel-Lucent, global telecommunications equipment company
   
 – Chief Executive Officer and Director (2006-2008)
   
Chairman, Lucent Technologies Inc. (2003-2006)
   
President and Chief Executive Officer, Lucent Technologies Inc. (2002-2006)

 

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 roles as the Non-executive Chairman of Hewlett Packard Enterprise Company, Chair of the Governance and Corporate Responsibility Committee of General Motors and the Lead Director and Chair of the Governance and Nominating Committee of Arconic Inc., provide her with deep experience on governance issues facing large public companies.

 

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CRAIG B. THOMPSON, M.D.
Independent Director
Age: 64

 

  Director since: 2008
Committees: Research (Chair)
Other Current Public Directorships: Charles River Laboratories International, Inc. (2013)
Former Directorships Held During the Past 5 Years: None
 
 
 

 

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. In addition, his directorships at other public companies provide him with valuable experience in governance issues facing public companies.

 

           
WENDELL P. WEEKS
Independent Director
Age: 57
  Director since: 2004

 

Committees: Research

 

Other Current Public Directorships: Amazon.com, Inc. (2016), Corning Incorporated (2000)

 

Former Directorships Held During the Past 5 Years: None
 
 

 

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)

 

Chairman and Chief Executive Officer (2007-2010)

 

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.

 

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PETER C. WENDELL
Independent Director
Age: 66

 

  Director since: 2003
Committees:  • 
Compensation and Benefits
Research
Other Current Public Directorships: None
Former Directorships Held During the Past 5 Years: 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 Princeton University endowment.

 

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DIRECTOR COMPENSATION

During 2016, Directors who were not Merck employees were compensated for their service as a director as shown in the chart below:

 

2016 Schedule of Director Fees
Compensation Element*   Director Compensation Program
Annual Retainer $ 110,000, which may be deferred, at the Director’s option
Annual Mandatory Deferral $ 170,000 in credit to Director’s Merck common stock account under the Plan for Deferred Payment of Directors’ Compensation
Committee Chair Retainer $ 30,000 for the Audit Committee**
  $ 20,000 for the Governance Committee***
  $ 20,000 for the Compensation and Benefits Committee
  $ 20,000 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 having a value 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.
** The Audit Committee Chair retainer includes the Audit Committee Member retainer fee in the amount of $10,000.
*** Pursuant to the Governance Committee charter, the independent Lead Director shall be the Chairperson of this Committee. As a result of the combined responsibility, the Lead Director retainer totals $50,000 in the aggregate.
**** Ten of our twelve non-employee Directors met this guideline as of December 31, 2016. Ms. Craig and Dr. Rothman joined the Board effective September 1, 2015, and have not yet met the stock ownership guideline.

 

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 $170,000. 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 an active Director participant in the Program is $30,000 in any calendar year.

 

Director Stock Ownership Guidelines. Upon joining the Board, each Director must own at least one share of 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 Committee will consider whether modification of the target ownership level is appropriate in view of such Director’s personal circumstances.

 

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2016 Director Compensation

 

As described more fully below, this table summarizes the annual compensation for our non-employee Directors during 2016.

 

Director Compensation for Fiscal Year Ended December 31, 2016
Name  Fees Earned or
Paid in Cash
($)
   Option
Awards
($)(2)
   All Other
Compensation
($)(3)
   Total
($)
 
Leslie A. Brun   $157,500        $185,000    $342,500 
Thomas R. Cech   120,000        184,498    304,498 
Pamela J. Craig   131,667        197,000    328,667 
Thomas H. Glocer   130,000        175,000    305,000 
William B. Harrison, Jr.(1)   66,666        25,000    91,666 
C. Robert Kidder   120,000        170,000    290,000 
Rochelle B. Lazarus   110,000        200,000    310,000 
Carlos E. Represas   110,000        170,000    280,000 
Paul B. Rothman   110,000        196,000    306,000 
Patricia F. Russo   110,000        195,000    305,000 
Craig B. Thompson   130,000        170,000    300,000 
Wendell P. Weeks   114,167        200,000    314,167 
Peter C. Wendell   110,000        170,000    280,000 

 

(1) Retired from the Board effective May 24, 2016.
   
(2) 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 became exercisable in substantially equal installments on the first, second and third anniversaries of the grant date. All stock options previously issued to Directors are fully vested and exercisable. All options expire on the day before the tenth anniversary of their grant. The exercise price of the options is the closing price of our common stock on the grant date as quoted on the New York Stock Exchange.
   
  On December 31, 2016, the aggregate number of option awards outstanding for Directors who served during 2016 was:

 

Director Name  Outstanding Option
Awards at 12/31/16
L.A. Brun  10,000
T.R. Cech  5,000
P.J. Craig  0
T.H. Glocer  15,000
W.B. Harrison, Jr.  20,000
C.R. Kidder  5,000
R.B. Lazarus  0
C.E. Represas  0
P.B. Rothman  0
P.F. Russo  5,000
C.B. Thompson  5,000
W.P. Weeks  20,000
P.C. Wendell  15,000

 

(3) Represents Company credits (in the form of deferred stock units) to the Plan for Deferred Payment of Directors’ Compensation. Mr. Harrison did not receive a Company credit to the Plan for Deferred Payment of Directors’ Compensation because he retired from the Board at the 2016 Annual Meeting of Shareholders which occurred prior to the award date.
   
  Also includes charitable contributions made by the Merck Foundation under its matching gift program on behalf of the following Directors:

 

Director Name  Matched Charitable
Contribution
($)
L.A. Brun  $15,000
T.R. Cech  14,498
P.J. Craig  27,000
T.H. Glocer  5,000
W.B. Harrison, Jr.  25,000
R.B. Lazarus  30,000
P.B. Rothman  26,000
P.F. Russo  25,000
W.P. Weeks  30,000

 

  For Mr. Brun, Dr. Cech, Ms. Craig, Mr. Harrison, Ms. Lazarus, Dr. Rothman, Ms. Russo and Mr. Weeks, matching contributions include 2015 contributions that were paid in calendar year 2016.

 

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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 page 39.

 

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 2016, 90% 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 2016 annual incentive plan due to strong performance (104%) against our financial and research-based objectives. 2016 is the first payout under the revised long-term incentive PSU program design, which became effective in 2014. As described in our 2015 Proxy Statement, the change was made to create a stronger linkage to operational excellence and shareholder value over the long term. Performance is measured over a cumulative three-year period using equal components of relative TSR and Operating Cash Flow. The overall payout for this plan for the three-year performance period ending December 31, 2016 was 158%, reflecting achievement of nearly 190% of Operating Cash Flow targets and relative TSR results of 127% versus our Peer Group.

 

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 42 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 2017 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 39 to 68 of this proxy statement, is hereby APPROVED on an advisory basis.”

 

The shareholder vote on this resolution will not be binding on management or the Board of Directors and will not be construed as overruling any decision by management or the Board. However, the Board of Directors and the C&B Committee value the opinions of our shareholders as expressed through their votes and other communications. For example, in 2016, shareholders continued their support of our executive compensation programs with over 94% of the votes cast for approval of a similar proposal. We will continue to give careful consideration to the outcome of the advisory vote on executive compensation and to the opinions of our shareholders when making compensation decisions.

 

At our 2011 Annual Meeting of Shareholders, our shareholders voted in support of annual advisory votes on future executive compensation proposals. In Proposal 3, we are asking our shareholders to recommend, on an advisory basis, how frequently we should provide future advisory “say on pay” votes.The Board of Directors has adopted a policy providing for annual “say on pay” advisory votes. The Board expects that the next “say on pay” vote will occur in 2018.

 

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

 

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PROPOSAL 3.  NON-BINDING ADVISORY VOTE ON THE FREQUENCY OF FUTURE VOTES TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

Pursuant to Rule 14A of the Securities and Exchange Act of 1934, we are providing our shareholders the opportunity to cast a non-binding, advisory vote on the frequency of future votes to approve the compensation of our Named Executive Officers as described in the Compensation Discussion and Analysis and compensation tables. Shareholders will be able to specify one of four choices for this proposal on the proxy card; one year, two years, three years or abstain. Shareholders are not voting to approve or disapprove the Board’s recommendation.

 

Our prior say on frequency vote occurred in 2011. At that year’s meeting, shareholders voted in support of annual advisory votes on future executive compensation proposals.

 

After careful consideration, the Board of Directors believes that it is appropriate and in the best interest for our shareholders to continue to cast a non-binding, advisory vote on executive compensation on an annual basis. The Board of Directors strongly believes in continuous, proactive engagement with its shareholders. Annual votes will facilitate this important goal by allowing management, the Board, and our shareholders to engage in a timely, open and meaningful dialogue and to receive input regarding the compensation of our Named Executive Officers, our corporate governance practices as well as our executive compensation philosophy, policies and practices.

 

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. Notwithstanding the Board’s recommendation and the outcome of the shareholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with shareholders and the adoption of material changes to our executive compensation program.

 

The Board of Directors recommends that Shareholders vote to conduct future advisory votes on executive compensation annually by selection of ONE YEAR on the proxy card.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

 

2016 marked the 125th anniversary of our company’s contributions to human and animal health. In this historic year, we made meaningful progress towards our goal of translating breakthrough research into solutions that matter for patients. Our business development strategy to pursue the best external scientific opportunities to augment our internal research efforts will help position Merck as an industry leader with a sustainable platform for growth.

 

Because we recognize that research and development (“R&D”) is the primary source of long-term, intrinsic value and our best competitive advantage, we sharpened our focus in 2016 on becoming the world’s premier research-intensive biopharmaceutical company by establishing two new discovery science centers in Cambridge, Massachusetts and San Francisco, California to attract the brightest minds from academia and research to Merck’s early discovery efforts.

 

Our commitment to scientific innovation requires that we balance the need to deliver top line and earnings growth across our portfolio with the required investments in research and development to achieve optimal operational performance. During 2016, we successfully balanced these objectives, exceeding our Non-GAAP Earnings Per Share (“EPS”) and product pipeline commitments and delivering revenue results at the upper end of our original guidance. These results were indicative of the strides we have made toward becoming a more customer-focused, collaborative and efficient organization and further led to above-target achievement (104%) under our annual incentive plan.

 

While we entered 2017 with some challenges, most notably the December 2016 loss of exclusivity for ZETIA and upcoming loss of exclusivity for VYTORIN, we have many reasons to be confident about our future given our unwavering commitment to R&D. We are optimistic about our near- and long-term pipeline. The progress of KEYTRUDA indicates that it has the potential to become a foundational treatment for a range of cancers with more than 400 clinical trials underway for over 30 different tumor types. We also have a number of significant programs in Phase 1 and Phase 2 clinical development in a variety of disease areas.

 

Along with our promising R&D efforts, we continue to achieve strong commercial execution in our key focus areas of oncology, diabetes, vaccines, hospital acute care, and animal health. Below are some key highlights from 2016.

 

Select Business Highlights for 2016

 

TOP LINE / BOTTOM LINE RESULTS:
Exceeded our Non-GAAP EPS goal, with year-over-year growth of 5%
Increased worldwide sales by 1%, including a 2% negative impact from foreign exchange, attributable to growth in oncology, vaccines, hospital acute care, diabetes and animal health
Increased investment in research and development by 3% on a Non-GAAP basis from $6.6 billion in 2015 to $6.8 billion in 2016

 

SHAREHOLDER VALUE CREATION:
Delivered value to shareholders through 2016 TSR of 15.1% which exceeded the Peer Group median of 0.5%
Returned $8.6 billion to shareholders through dividends and share repurchases
Increased dividends paid by over 2%, representing the sixth consecutive year of dividend increases
Strengthened pipeline through the acquisitions of Afferent Pharmaceuticals (respiratory and immunology) and IOmet (immuno-oncology) and a strategic collaboration with Moderna Therapeutics to develop personalized cancer vaccines
Bolstered our global vaccines business through the year-end dissolution of the European joint venture with Sanofi Pasteur; we believe that reintegrating our vaccine portfolio into our operations will better position us to drive growth, execute more efficiently, optimize vaccine coverage and bring new vaccines to market more quickly

 

RESEARCH & DEVELOPMENT:
Continued to further expand the labeling and clinical development for KEYTRUDA including:
  Received regulatory approval in the U.S., Japan and EU (January 2017) for first-line treatment of patients with advanced Non-Small Cell Lung Cancer (“NSCLC”)
  Broadened clinical development with over 400 studies for more than 30 cancer types including: bladder, colorectal, esophageal, gastric, head and neck, hepatocellular, Hodgkin lymphoma, Non-Hodgkin lymphoma, melanoma, multiple myeloma, nasopharyngeal, NSCLC, ovarian, prostate, renal and triple negative breast
  In 2016, KEYTRUDA was granted U.S. Breakthrough Therapy Designation for four indications for the treatment of patients with relapsed or refractory classical Hodgkin lymphoma, previously untreated stage IV NSCLC whose tumors express PD-L1, unresectable or metastatic MSI-H non-colorectal cancer and locally advanced or metastatic urothelial cancer with disease progression on or after platinum-containing chemotherapy
Continued to execute and advance diverse late-stage pipeline for Alzheimer’s disease, HIV infection, atherosclerosis, bacterial infection, diabetes, heart failure and Ebola
Received U.S., EU and Japan approval for ZEPATIER for the treatment of chronic hepatitis C virus genotype 1 or 4 in adults
Received U.S. and EU (January 2017) approval for ZINPLAVA for the prevention of Clostridium difficile infection (“CDI”) recurrence in adults who are receiving antibacterial drug treatment of CDI and are at high risk for CDI recurrence
Initiated several novel programs and testing for multiple drug candidates in humans across multiple modalities
   

 

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Results of 2016 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 2016, shareholders continued their support of our executive compensation programs with over 94% 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 they understand the manner in which our policies support our long-term strategic objectives. Through our proactive shareholder engagement process, we held discussions with a number of our largest shareholders during the spring and fall of 2016 about various corporate governance and executive compensation-related issues.

 

How Our Business Environment Impacts Our Executive Compensation Objectives and Strategy:
 
The pharmaceutical industry is science-focused requiring experimentation to foster innovation and therefore:
 
The work we do has the potential to have an enormous impact on global health and well-being. The drugs we discover, develop and bring to market will improve the quality of human and animal life;
   
Because of the inherent complexity and dynamic science of human and animal health, even with flawless execution we risk failure;
   
We must constantly achieve balance between the benefits and risks for every drug we develop. Society’s increasing demand for innovation to treat and cure illness is offset by society’s increasing awareness of, and aversion to, risk;
   
We operate in a highly regulated industry environment, including uncertainties in the political environment that impact the regulatory framework;
   
It takes 5 to 15 years to discover, develop and bring a new drug to market;
   
The costs associated with drug discovery and development can be significant and unpredictable; and
   
The dynamics of the industry environment, which include intellectual property laws that evolve as governments change, competitive pricing and reimbursement pressures and regulatory/science developments, often limit the effective commercial life of a drug and put pressure on replenishing the product portfolio through successful research and development.

 

As a result of these challenges and complexities, our executive compensation program must support our ability to attract and retain some of the brightest minds in business, research and academia, in a highly competitive industry environment. We strive to balance the need to deliver market-competitive pay within a framework that provides the appropriate mix of fixed and variable compensation that aligns with our pay-for-performance objectives.

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.

 

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Strategy

 

Our mission is to discover and provide innovative medicines and vaccines 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 below.

 

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 research-based 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 with saving and preparing financially for retirement; and
Help ensure that we have a productive and focused workforce.
Perquisites Minimize distractions and support the financial well-being, safety and security of our executives.
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.

Pay for Performance Alignment

 

Merck’s compensation programs are designed to align the interests of our executives with the interests of our shareholders. For this reason, a significant portion of our NEOs’ pay is variable and at risk, subject to company and individual performance measured against financial, operating and strategic objectives, as well as relative total shareholder return (“TSR”). The Company’s variable incentives demonstrate a strong linkage between pay and performance. In 2016, the Company missed its financial goal for revenue but exceeded its Non-GAAP EPS and pipeline goals, making significant progress across various stages of the pipeline, which we believe will yield longer-term returns as new products are approved and launched. The manner in which our compensation plans operate relative to performance is described in detail below.

 

Annual Incentive – The Company Scorecard, which focuses on our most critical business drivers—revenue, EPS and pipeline—is described in more detail beginning on page 44. Our performance during 2016 resulted in above-target achievement (104 points vs. a target of 100 points) of our financial and research-based objectives. These results, combined with individual performance, determine annual incentive payouts to the majority of our employees, including the NEOs. The Company Scorecard result of 104% coupled with NEO individual performance that ranged from 100% to 112.5% resulted in average annual incentive payouts for the NEOs of 109% of target in 2016.

 

Long-Term Incentive (“LTI”) – The Performance Share Units (“PSUs”) granted for the 2014-2016 performance period provided senior executives the opportunity to earn share awards based on cumulative, three-year Operating Cash Flow (“OCF”) and relative TSR performance versus our Peer Group, each weighted at 50%. The overall payout for the three-year period ending December 31, 2016 was 158%, reflecting a score of nearly 190% of target based on OCF results and 127% of target based on relative TSR results versus Peers. Additional details about our PSU program and the 2014-2016 PSU award cycle are provided beginning on page 48.

 

Continued our strong pay-for-performance alignment of incentive plans

 

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Compensation Policies and Practices

 

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

 

We do…   We do not…
  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)     Allow engagement in short sales, publicly traded options, hedging or pledging of Company stock
  Utilize a total shareholder return metric in the PSU program to align with long-term stock performance and shareholder experience     Grant time-vested restricted stock units (“RSUs”) for NEOs as part of the annual LTI program
  Provide dividend equivalents only on earned RSUs or PSUs    

Grant stock options with an exercise price less than fair market value

  Monitor LTI program share utilization regularly relative to both historic standards and versus our pharmaceutical and supplemental Peer Groups     Re-price underwater stock options without shareholder approval
  Conduct competitive benchmarking to ensure executive officer compensation is aligned to market     Pay tax gross ups on benefits and perquisites in the event of a change in control
  Offer limited perquisites supported by business interests      
  Include caps on annual cash incentive and PSU program payouts      
  Retain an independent compensation consultant that reports directly to the C&B Committee       
  Maintain robust stock ownership requirements and share retention policies      
  Maintain an incentive recoupment policy      
  Conduct assessments to identify and mitigate risk in compensation programs      
  Avoid employment agreements      

 

 

Detailed Discussion and Analysis

 

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

 

Kenneth C. Frazier Chairman, President and Chief Executive Officer
Robert M. Davis Executive Vice President, Global Services and Chief Financial Officer
Michael J. Holston 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

 

The C&B Committee makes all decisions relative to the total direct compensation (base salary, annual cash incentive and long-term incentives) 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 full Board of Directors (not including Mr. Frazier). Additional details regarding the roles and responsibilities of the C&B Committee are provided beginning on page 20.

 

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The Elements of 2016 Compensation

 

This section describes the elements of our NEOs’ 2016 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 (90% and 82%, respectively) of the CEO’s and other NEOs’ target annual direct compensation is variable based on our operating performance and/or our stock price, as shown below:

 

 

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 50); and
   
Comparison of Non-CEO executive officers’ base salaries to ensure reasonable internal equity.

 

For 2016, the Board increased Mr. Frazier’s base salary by 2.5%, the first increase since he became CEO in 2011. A substantial majority of his compensation remains variable (90%) and tied to longer-term operating and stock price performance measured on both an absolute and relative basis.

 

In addition, as part of the annual compensation management process applicable to all Merck salaried employees for 2016, Mr. Frazier recommended and the C&B Committee reviewed and approved, base salary increases ranging from 2.3% to 3.2% for NEOs and a 4.5% market adjustment for Mr. Holston. Merit increases were in line with the annual merit budget for all other U.S. salaried employees for 2016. The C&B Committee also approved a target annual incentive increase from 95% to 105% of base salary for Mr. Davis and target long-term incentive increases for Mr. Davis and Mr. Holston of $200,000 each.

 

Framework for Incentive Programs

 

Funding for each of our annual cash incentive and PSU programs is based upon company performance versus pre-established performance targets. For our annual cash incentive program, the Company Scorecard is developed at the beginning of each year and is used to establish the expected company performance based on three critical components, Revenue, EPS and Pipeline, each weighted as a portion of the overall Scorecard. Revenue and EPS are equally weighted at 40% each and targets are established based on our annual operating plan which reflects management’s expectations for our performance. Pipeline milestones are the final component of the Scorecard and are weighted at 20%. Pipeline milestones are established by the head of Merck Research Labs, reviewed by the Research Committee of the Board at the beginning of each year and designed to ensure that we are focused on internal and external early discovery opportunities, late-stage clinical development progression, filings and approvals and the continued growth and expansion of in-line products.

 

After the final Scorecard results are determined, the CEO considers each NEO’s individual performance and contributions throughout the year when recommending his final award, which is then approved by the C&B Committee. The full Board of Directors (not including Mr. Frazier) evaluates the CEO’s performance when determining his final award.

 

Similarly, under our PSU program, at the beginning of each year, we establish three-year performance targets for Operating Cash Flow (“OCF”) and validate the Peer Group for relative Total Shareholder Return. Payouts under the PSU program are formulaic and no individual performance or discretion is exercised when determining final awards.

 

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OCF targets are established based on our three-year financial plan which considers a variety of factors including management, Board and external expectations of and aspirations for our longer-term performance. Relative TSR performance versus our Peer Group is measured at the end of the three-year performance period using an out or underperformance model which compares Merck’s average annual TSR to the median TSR of our Peer Group. Each percentage point of outperformance or underperformance versus the median modifies the earned award by +/- 5%. In the event of underperformance by more than 10 percentage points of the median Peer Group TSR, there is no payout on the relative TSR portion of the award and negative relative TSR performance results in a cap of 100% on the relative TSR portion of the award. In no event will the relative TSR performance payout exceed 200%.

 

To accurately reflect the operating performance of our business, the C&B Committee has approved a framework of adjustments to our reported financial results for incentive program purposes as outlined in the table below. For further explanation of our GAAP versus Non-GAAP results, please see page 47 of our Annual Report on Form 10-K for the year-ended December 31, 2016.

 

Incentive
Program
Financial
Metric
Weighting of
Component
Definition Adjustments
  Pipeline   The Company’s Research and Development goals for the incentive program No Adjustments
Revenue   The Company’s revenue Excludes charges or items from the measurement of performance relating to (1) fluctuations in foreign exchange rates versus plan rates; (2) the impact of significant unplanned acquisitions and/or divestitures, extraordinary items and other unusual or non-recurring charges and/or events; and (3) the effects of significant accounting changes in accordance with U.S. generally accepted accounting principles (“GAAP”), or other significant legislative changes
Earnings Per Share   The Company’s net income divided by the weighted average of the number of shares of Company common stock on a fully diluted basis All of the above; and (4) an event either not directly related to Company operations or not reasonably within the control of Company management; and (5) the impact of share repurchases above or below plan levels
  Operating Cash Flow   The sum of the Company’s after-tax Non- GAAP net income (attributable to the Company) less the change in working capital (working capital includes Trade Accounts Receivable and Inventory – including Trade Accounts Receivables and Inventory included in Other Assets – net of Accounts Payable) plus Non-GAAP depreciation and amortization for each of calendar year of the Award Period All of the above, except (5), which does not apply to OCF
Relative TSR   The comparison of the Company’s annualized total shareholder return (inclusive of reinvested dividends) to the median total shareholder return for the Peer Group No Adjustments

 

Annual Cash Incentive

 

The NEOs participate in the shareholder-approved Executive Incentive Plan (the “EIP”). 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 (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 2016, the absolute maximum awards for the CEO and each of the other NEOs under the EIP were $26.4 and $21.6 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. The EIP award amounts for NEOs are limited to 250% of target, and the maximum award for each NEO is listed in the Grants of Plan-Based Awards table on page 55.

 

2016 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.The Scorecard focuses on our most important business drivers: (1) revenue,

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(2) earnings per share and (3) pipeline, all of which are evaluated within the context of compliance, health and safety outcomes. 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. 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.

 

 

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 Scorecard structure and results supporting the final 2016 Company score of 104 points are summarized below.

 

2016 Merck Company Scorecard Results

 

Measure Results Target
Points
  Final
Score
Top Line   40   37
Revenue vs. Plan For purposes of the Scorecard, reported revenue of $39.8 billion was adjusted to $39.4 billion to remove the positive impact of foreign exchange rates (vs. foreign exchange rates budgeted in the annual operating plan), falling short of our internal revenue target of $39.7 billion.      
Bottom Line   40   41
EPS vs. Plan For purposes of the Scorecard, reported Non-GAAP EPS of $3.78 was adjusted to $3.73 to remove the positive impact of foreign exchange rates (vs. foreign exchange budgeted in the annual operating plan), exceeding our Non-GAAP EPS goal of $3.72.      
Pipeline Milestones   20   25
ZEPATIER/KEYTRUDA Approval Milestones U.S. filing and approval of KEYTRUDA as first and only anti-PD-1 therapy for first-line treatment of patients with advanced NSCLC whose tumors express high levels of PD-L1. 5   10
Additional Filings and Approvals Multiple filings and approvals achieved for cancer, vaccine, infectious disease and diabetes products. 5   5
Global Development Progressed late-stage drugs through various stages of development, including cancer, Alzheimer’s disease, vaccines and infectious disease. 4   5
Early Development/ Discovery Research and Business Development

Implemented two new discovery sites and advanced early and discovery pipeline.

Augmented pipeline through acquisition of Afferent Pharmaceuticals, adding a new candidate for chronic cough.

6   5
    100   104*

* Total does not add due to rounding.

 

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2016 Named Executive Officer Performance

 

All of the NEOs’ 2016 annual incentive awards reflect the achievement of the Company Scorecard result at 104% of target, coupled with an assessment of individual performance versus objectives, including leadership.

 

Mr. Frazier’s award reflects Mr. Frazier’s contribution to the progress made in advancing our 10-year strategy to enable sustainable value creation for the Company and its shareholders. Under Mr. Frazier’s guidance, we continued reshaping the portfolio through a selective combination of acquisition and divestiture activities. Merck’s overall financial performance for 2016 resulted in a balanced achievement, exceeding our earnings and pipeline commitments, despite falling slightly short on revenue. With his leadership, management made decisions that enabled higher than planned R&D investments in support of our product pipeline, while maintaining our ability to exceed our Non-GAAP EPS goal. Mr. Frazier continued to demonstrate his ability to advance Merck’s talent and people goals, improving diversity representation and people manager capabilities, while strengthening the succession pipeline for critical roles. The Board considered Mr. Frazier’s accomplishments along with his strong leadership in continuing to transform Merck into a more competitive and innovative company with a sustainable platform for growth.

 

Mr. Davis’ award reflects Mr. Davis’ contribution to Merck’s solid financial performance, disciplined capital allocation and overall business development strategy and execution. Mr. Davis’ strong operational focus was instrumental in the development and execution of a strategy to divest non-core, non-strategically aligned assets to focus Merck’s resources in areas that will drive long-term value creation. Under Mr. Davis’ leadership, Merck executed more than 55 business development transactions including the acquisitions of Afferent Pharmaceuticals and IOmet, as well as, the dissolution of the Sanofi Pasteur MSD joint venture. His focus on expense discipline resulted in flat operating expenses vs. 2015 despite a 3% increase in investment in R&D to support KEYTRUDA, delivering a leveraged P&L and returning $8.6 billion to shareholders through dividends and share repurchases and a greater than 2% increase in our annual dividend payment. Mr. Davis’ role was expanded during 2016 to include leadership of Global Services, including IT and Global Supplier Management in recognition of the significant contributions and strong operational rigor and discipline he has brought to the business since joining in 2014.

 

Mr. Holston’s award reflects Mr. Holston’s broad contributions to the business on global business development transactions and litigation matters that served to strengthen our pipeline and address litigation risks to protect the Company’s intellectual property.This included the successful $2.5 billion ruling for Merck in the trial vs. Gilead Sciences Inc. which resulted in the largest patent infringement verdict in U.S. history. Mr. Holston also successfully resolved multiple international regulatory matters. In addition, he partnered across the business to support the strengthening of the manufacturing organization and supported the re-design of Merck’s global medical affairs organization.

 

Dr. Perlmutter’s award reflects Dr. Perlmutter’s contribution to the continued advancement of Merck’s pipeline including a number of approvals and regulatory milestones achieved in 2016 across multiple therapeutic areas.Two of the most notable achievements were the approval of KEYTRUDA in the U.S. and Japan for the first-line treatment of Non-Small Cell Lung Cancer (“NSCLC”) and ZEPATIER for the treatment of chronic hepatitis C. Recognizing the importance of business development and enhancing our early to mid-stage pipeline with external innovations, Dr. Perlmutter also played a critical role in adding new candidates for cancer and chronic cough through the acquisitions of IOmet and Afferent Pharmaceuticals, in addition to a strategic collaboration with Moderna Therapeutics to develop personalized cancer vaccines. Dr. Perlmutter was also instrumental in the launch of two new discovery science centers in Cambridge, Massachusetts and San Francisco, California to attract and retain the best scientific minds in academia and biopharmaceuticals to Merck. Through these actions, Dr. Perlmutter increased the strength of Merck’s research team enabling a stronger long-term succession plan for Merck Research Laboratories.

 

Mr. Schechter’s award reflects Mr. Schechter’s contribution to Global Human Health’s solid performance during 2016, achieving sales growth of 2% over 2015, excluding the impact of foreign exchange. On an excluding exchange basis, the business delivered sales growth across core therapeutic areas including diabetes (+2%), vaccines (+10%), hospital acute care (+6%) and oncology (+45%). The ongoing launches of KEYTRUDA, ZEPATIER and BRIDION each remain very strong and are achieving significant success in the market place. This performance was realized despite global economic challenges including market access and pricing pressures, increased competition and early generic competition. Mr. Schechter also played a major role in the reintegration of our vaccine portfolio through the dissolution of the Sanofi Pasteur MSD joint venture and several commercial product divestitures to drive growth, execute more efficiently, optimize vaccine coverage and bring new vaccines to market more quickly. Mr. Schechter continued his momentum in advancing his talent development strategy with several new appointments across his Operating Committee leadership team.

 

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2016 Annual Incentive Payouts

 

The table below shows the 2016 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 2016 Annual Incentive Payments
       Target   Actual
        Target  Target                  Final
Named Executive  Annual Base Salary   Annual  Annual Cash   Company  Individual  Final   Award as %
Officer  (as of 12/31/16) $   Incentive %  Incentive $   Performance %  Performance %  Award $   of Target
K.C. Frazier                $1,537,500          150%    $2,306,250               104%              105%   $2,518,425           109%
R.M. Davis   1,000,000    105    1,050,000    104    100    1,092,000    104 
M.J. Holston   775,000    95    736,250    104    105    803,985    109 
R.M. Perlmutter   1,060,500    105    1,113,525    104    112.5   1,302,824    117 
A.H. Schechter   1,011,000    105    1,061,550    104    100    1,104,012    104 

 

Long-Term Equity Incentives

 

2016 Award Mix

 

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. The earned award varies based on results versus pre-determined performance goals, as well as long-term returns to shareholders as measured by relative stock price performance and dividend yield.
   
Stock options 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 2016 LTI award mix for the NEOs is shown in the following chart:

 

 

 

2016 LTI Grants

 

The C&B Committee and, in the case of Mr. Frazier, the full Board (not including Mr. Frazier), determined the value of 2016 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 pharmaceutical and supplemental Peer Groups and other executives of a comparable level. The C&B Committee increased Mr. Davis’ and Mr. Holston’s annual target LTI from $3.5 million to $3.7 million and $2 million to $2.2 million, respectively, to increase the market competiveness of their total pay compared to the Peer Group and to reflect their experience and contributions as they progress in their roles.

 

The 2016 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 55.

 

Named Executive Officer 2016 Annual LTI Grant Values
Named
Executive Officer
  PSUs
($)(1)
   Stock
Options
($)(2)
   Total LTI
Value
($)
 
K.C. Frazier  $7,200,000   $4,800,000   $12,000,000 
R.M. Davis   2,220,000    1,480,000    3,700,000 
M.J. Holston   1,320,000    880,000    2,200,000 
R.M. Perlmutter   2,400,000    1,600,000    4,000,000 
A.H. Schechter   2,280,000    1,520,000    3,800,000 
(1) PSU dollar values were converted to a number of units using the fair market value on the grant date, March 31, 2016, which was $52.91. The 2016 PSU values shown in the Summary Compensation Table, beginning on page 53, and Grants of Plan-Based Awards table, on page 55, will be different from what is shown above as the amounts in those tables are calculated based on fair value on grant date in accordance with FASB ASC Topic 718 and SEC disclosure rules.
(2) Stock option dollar values were converted to a number of shares using the Black-Scholes value as of May 10, 2016 of $5.89 per share.

 

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PSU Program

 

In 2014, the PSU program was re-designed to create a stronger linkage to operational performance and long-term shareholder value. Performance was measured using equal components of Operating Cash Flow (“OCF”) and relative TSR (“rTSR”) versus our Peer Group, both over a cumulative three-year period. Sixty percent of each Named Executive Officer’s annual target LTI was converted to units based on the closing price of Merck stock on the date of grant. The number of units ultimately earned was based on our performance against the pre-established OCF target and rTSR performance for the 2014-2016 performance period.

 

Payouts under the 2014-2016 PSU Award Cycle

 

For the 2014-2016 award cycle, our performance against three-year cumulative OCF and rTSR versus our Peer Group, each weighted at 50%, resulted in an actual payout of 158% as illustrated in the table below.

 

OCF Goals $ Billions Percent of Goal Payout (%)(1) Stretch $ 39.6 110 % 200 % Actual 39.1 109 190 Target 36.0 100 100 Threshold 30.6 85 25 Less Than Threshold <30.6 NA 0 rTSR Annualized TSR(2) Eli Lilly 15.2 % Amgen 11.2 % Merck 10.6 % Johnson & Johnson 10.3 % AbbVie 9.5 % Bristol-Myers Squibb 5.9 % Pfizer (Peer Median) 5.2 % AstraZeneca 1.9 % Novartis -0.3 % Roche -3.5 % Sanofi -4.7 % GlaxoSmithKline -4.7 % 100% 10.6% Merck TSR 5.2% Peer Meidan TSR 5 127% 190% Result 50% Weighting 95% 127% Result 50% Weighting 63% 158%(1) Final Payout

 

(1) Rounded to the nearest whole percentage.
(2) TSR as reported by Bloomberg and calculated using the average closing price of Merck and Peer company common stock for December 2013 and December 2016, assuming reinvestment of dividends.

 

The 158% payout was based on our strong OCF performance (190%) due to higher than expected After-Tax Net Income and Working Capital improvement. As discussed on page 44, OCF was adjusted for the Merck Consumer Care divestiture and Cubist acquisition and to exclude the impact of foreign exchange rates vs. plan rates. We also outperformed the median TSR of our Peer Group by 5.4%, which provided +5% for each percentage point of outperformance, resulting in an rTSR payout of 127%.

 

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Based on the final payout of 158%, the NEOs received the following number of shares of Merck common stock:

 

Named Executive Officer PSU Distribution
Named Executive Officer Target Award (# of shares)   Final Award (# of shares)
K.C. Frazier 105,690   166,990
R.M. Davis 36,070   56,991
M.J. Holston 10,569   16,699
R.M. Perlmutter 36,991   58,446
A.H. Schechter 40,162   63,456

 

Additional information regarding the payouts under the 2014-2016 PSU award cycle is provided in the Option Exercises and Stock Vested table on page 59.

 

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

 

Reimbursement for financial counseling and tax preparation. The value is taxable to executives and is limited to $10,000 per year. This benefit is intended to encourage executives to engage knowledgeable experts to assist with financial and tax planning. 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, which is generally taxable to the NEOs. 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.

 

Key 2017 Compensation Actions

 

As part of our ongoing effort to improve the alignment of our incentive plans with Peer Group practices and our evolving business strategy, the C&B Committee approved a series of changes to our annual and long-term incentive plans effective January 1, 2017, each of which is described in more detail in the table below.

 

Element of Pay   Program   Description of Change and Rationale
Annual Incentive   Company Scorecard  

  Replace EPS metric with Pre-tax income (maintaining 40% weighting) to avoid redundancy in metrics between our PSU program and our annual incentive program.

  Revenue and Pipeline Milestones will continue to be weighted at 40% and 20%, respectively.

    Executive Incentive Plan     Reduce the maximum payout from 250% to 200% of target for all Section 16 Officers, including NEOs, to better align with the practices of our Peer Group.
Long-Term Incentives   PSU Program  

  Add EPS metric to augment the OCF metric, at a weighting of 25% each to drive focus on long-term growth while ensuring we maintain our emphasis on operating efficiency.

  Maintain rTSR versus Peer metric at a weighting of 50%.

    Award Mix     Increase the allocation of PSUs from 60% of annual grant value to 70% of annual grant value by decreasing the allocation of annual grant value of Stock Options from 40% to 30% to reinforce Merck’s pay-for-performance alignment.

 

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2017 CEO Compensation - Based on the Board’s assessment of Mr. Frazier’s strong business results and leadership, experience and relative position of his annual target compensation versus that of industry Peers, the Board approved a 3% increase to his base salary, effective in April 2017. This is the second increase to Mr. Frazier’s base salary since he became CEO in 2011 (in aggregate, his base salary has increased 5.7% over this six-year period). Mr. Frazier’s target annual incentive will remain unchanged from 2016 and his long-term incentive target will increase by $500,000 to $12.5 million.
   
2017 Named Executive Officer Compensation - Mr. Frazier recommended, and the C&B Committee approved, the compensation adjustments noted in the table below. The increase to base salary for Mr. Holston and the increase to long-term incentive target for Mr. Davis were intended to align the respective NEO’s overall total compensation to the external market for such roles, respectively.
   
Pay Component 2017 C&B Committee Actions
Base Salary – Annual Merit Increase   Increases for NEOs ranged from 2.5% to 3%, aligned to increases for the broader U.S. salaried employee population
Base Salary – Market Adjustment Increase for Mr. Holston of 3.9%
Target Annual Incentive There were no changes to target annual incentives
Target Long-Term Incentive Increase for Mr. Frazier of $500,000 and for Mr. Davis of $100,000

 

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 Willis Towers Watson, an independent consulting firm. In setting compensation levels for 2016, the C&B Committee reviewed the survey, which consisted of the following Peer companies (which remain unchanged from 2015) 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 equity incentive) at the 50th percentile, on average, with variability by individual executive based on scope of responsibility, market availability of proven talent, the critical need to retain the executive, sustained performance over time, potential for advancement as part of key succession planning processes, and other unique factors that may exist from time to time. This median target compensation philosophy ensures that actual realized compensation varies above or below market levels based on attainment of longer-term goals and changes in shareholder value, and that overall costs and share dilution are reasonable and sustainable relative to market practices.

 

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). Merck is a member of the Dow Jones Industrial Average and we believe this group provides insight into practices among companies of similar complexity.

 

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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 PSU grants are generally made on the last business day in March and annual stock option grants are made on the third business day following announcement of our first quarter earnings. We may also selectively grant stock options and RSUs to executive officers on the third business day following the announcement of quarterly earnings generally as part of a new hire sign-on or for retention purposes. These dates were chosen to ensure that grants are made shortly after we have released information about our financial performance to the public. However, the C&B Committee reserves the right to change the date when grants are made, in view of its responsibility to take into account all facts and circumstances to ensure that grants are consistent with our compensation philosophy and objectives.

 

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

 

Stock Ownership Requirements

 

The C&B Committee recognizes the critical role that executive stock ownership has in aligning the interests of management with those of shareholders. As such, we maintain a formal stock ownership policy, under which the CEO and other senior executives are required to acquire and hold Merck common stock in an amount representing a multiple of base salary. Until the designated multiple of base salary is reached, executives are required to retain in stock a percentage of the after-tax net proceeds associated with stock option exercises and/ or PSU and RSU distributions (100% for the CEO and 75% for the other NEOs). The following table sets forth the stock ownership requirements and current stock ownership status as a percentage of the requirement for the CEO and other NEOs as of February 28, 2017.

 

 

 

Return of Incentive Compensation (“Clawback Policy”)

 

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

 

Hedging and Pledging

 

As part of our insider trading policy, Merck prohibits engagement in short sales, publicly traded options, hedging transactions and pledging of Company stock.

 

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.

 

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Compensation Risk Assessment

 

Our executive compensation program and policies are driven by our business environment and designed to enable us to achieve our mission and adhere to our values. The C&B Committee and senior management continually evaluate the relationship between risk and reward as it relates to our executive compensation program and have adopted policies and practices that mitigate undue risk while preserving the incentive/variable nature of the compensation. These policies and practices are described in more detail in the chart on page 42.

 

In 2016, Merck engaged Pay Governance, an independent compensation consultant to management to perform a formal assessment of our executive compensation program, policies and practices based on generally accepted compensation practices. The results of the assessment were reviewed and discussed with the C&B Committee in November 2016. 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
  (Chair)
  Rochelle B. Lazarus Patricia F. Russo
  Carlos E. Represas Peter C. Wendell

 

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SUMMARY COMPENSATION TABLE

 

The following table summarizes the total compensation that was paid or accrued for the Named Executive Officers for the fiscal years ended December 31, 2016, 2015 and 2014. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer, and the three next most highly compensated executive officers as of December 31, 2016.

 

Name and Principal Position  Year   Salary
($)(1)
   Bonus
($)
   Stock
Awards
($)(2)
   Option
Awards
($)(3)
   Non-Equity
Incentive
Plan
Compensa-
tion
($)(4)
   Change in
Pension
Value and
Nonquali-
fied Deferred
Compen-
sation
Earnings
($)(5)
   All Other
Compen-
sation
($)(6)
   Total
($)
 
Kenneth C. Frazier,   2016   $1,527,404   $0   $7,875,521   $4,800,002   $2,518,425   $4,757,350   $302,468   $21,781,170 
Chairman, President   2015    1,500,000    0    9,912,966    4,800,000    3,402,000    4,309,645    283,472    24,208,083 
and Chief Executive Officer   2014    1,500,000    0    13,025,313    3,323,244    3,341,250    3,642,161    197,402    25,029,370 
Robert M. Davis,   2016    991,654    1,250,000 (8)    2,428,286    1,479,998    1,092,000    160,276    117,259    7,519,473 
Executive Vice President,   2015    963,884    1,250,000(8)    2,103,993    1,399,998    1,391,872    116,994    92,257    7,318,998 
Global Services and                                             
Chief Financial Officer   2014    650,384    2,500,000(8)    7,294,765    1,163,135    812,250    35,771    306,213    12,762,518 
Michael J. Holston,   2016    761,538    0    1,443,846    880,001    803,985    354,216    88,900    4,332,486 
Executive Vice President   2015    691,346    0    1,472,234    800,000    991,800    168,667    69,827    4,193,874 
and General Counsel   2014(7)                                 
Roger M. Perlmutter, M.D., Ph.D.   2016    1,052,288    0    2,625,174    1,600,001    1,302,824    359,602    160,256    7,100,145 
Executive Vice President and   2015    1,021,926    0    3,335,960    1,600,000    1,946,700    256,255    140,416    8,301,257 
President, Merck Research                                             
Laboratories   2014    1,000,000    500,000(8)    3,538,245    1,163,135    1,771,875    178,536    91,663    8,243,454 
Adam H. Schechter,   2016    1,003,094    0    2,493,915    1,520,003    1,104,012    2,020,625 (9)    126,358    8,268,007 
Executive Vice President   2015    976,453    0    3,310,050    1,519,999    1,558,446    0(10)    144,183    7,509,131 
and President,                                             
Global Human Health   2014    962,388    0    4,623,673    1,262,831    1,432,934    1,941,516    103,994    10,327,336 
(1) 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 2016, Mr. Frazier deferred $534,591 into the Merck Deferral Program. For more information about deferred amounts, see the Nonqualified Deferred Compensation table and related footnotes on page 63.
(2) 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 2016, 2015 and 2014, 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 48 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, 2016.
  The maximum value of the PSU awards granted to the Named Executive Officers during 2016 assuming achievement of the highest level of performance (200%), was:
   
NEO Maximum Value
of PSU Awards
($)
K.C. Frazier $ 15,751,042
R.M. Davis 4,856,571
M.J. Holston 2,887,691
R.M. Perlmutter 5,250,348
A.H. Schechter 4,987,830
  For more information on the awards granted during 2016, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(3) 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 2016, 2015 and 2014, respectively, as calculated in accordance with FASB ASC Topic 718. The stock option values were calculated using the Black-Scholes option pricing model and may not represent the actual value realized by the Named Executive Officers during the respective year. For example, in 2014 the annual grant date for our senior executives was delayed for one week due to the imminent announcement of the sale of the Merck Consumer Care division. Stock options were granted based on the higher Merck stock price (and resulting Black-Scholes value) for the originally scheduled grant date. This resulted in a decreased number of stock options granted and reduced the disclosed stock option value for 2014. 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, 2016.
  For more information on stock options granted during 2016, see the Grants of Plan-Based Awards table and related narrative and footnotes.
(4) Represents amounts paid under the EIP. For more information, see the Grants of Plan-Based Awards table and related narrative and footnotes.
  Amounts shown are not reduced to reflect the Named Executive Officers’ elections, if any, to defer receipt of awards into the Merck Deferral Program. For more information, see the Nonqualified Deferred Compensation table and related notes and narrative on page 63.

 

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(5) Amounts shown are solely an estimate of the change in actuarial present value of the Named Executive Officers’ accrued benefits under the Company’s pension plans from December 31, 2015 to December 31, 2016. These plans are the Merck US Pension Plan (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 60.
  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 63.
(6) 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.
(7) Was not a Named Executive Officer during 2014.
(8) Sign-on bonus.
(9) Change in 2016 Pension Value for Mr. Schechter is mainly attributable to increases in five-year average pay, an additional year of age and service and lower discount rates. In addition, there was a small decrease due to revised actuarial mortality rates.
(10) Change in 2015 Pension Value for Mr. Schechter is mainly attributable to the higher discount rates used to determine the present value of his benefits. This was offset by an increase due to higher five-year average pay and one additional year of age and service.

 

All Other Compensation

 

Named Executive Officer  Year   Financial/Tax
Counseling &
Tax Preparation
Services
($)(2)
   Company
Aircraft
($)(3)
   Company
Car and
Driver
($)(4)
   Installation,
Maintenance and
Remote Access
of Home Security
($)(2)
   Relocation
Expense
($)
   Savings Plan
Company
Match and
Credits
($)(5)
   Total
($)
 
K.C. Frazier   2016   $10,000   $10,822   $55,783   $5,096   $0   $220,767   $302,468 
    2015    10,000    8,476    42,565    4,575    0    217,856    283,472 
    2014    10,000    0    39,816    7,186    0    140,400    197,402 
R.M. Davis   2016     10,000(6)    0    0    0    0    107,259    117,259 
    2015    10,000    0    0    0    2,331    79,926    92,257 
    2014    0    0    0    0    298,569    7,644    306,213 
M.J. Holston   2016    10,000    0    0    0    0    78,900    88,900 
    2015    10,000    0    1,379    0    0    58,448    69,827 
    2014(1)                             
R.M. Perlmutter   2016    0    0    25,302    0    0    134,954    160,256 
    2015    0    0    14,695    0    0    125,721    140,416 
    2014    0    0    18,596    0    0    73,067    91,663 
A.H. Schechter   2016    10,000    0    0    1,089    0    115,269    126,358 
    2015    10,000    0    6,972    18,813    0    108,398    144,183 
    2014    10,000    0    15,803    3,780    0    74,411    103,994 
(1) Was not a Named Executive Officer during 2014.
(2) Financial planning, tax preparation, and installation, maintenance and remote access of home security are valued at actual costs billed by outside vendors.
(3) 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.
(4) 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.
(5) 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 compensation in excess of the IRS limit to the NEOs’ accounts under the Merck Deferral Program.
(6) Includes fees for financial planning services received in 2016 but paid in 2017.

 

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GRANTS OF PLAN-BASED AWARDS

 

The following table provides information concerning each award made in 2016 to the Named Executive Officers under any plan.

 

Grants of Plan-Based Awards for Fiscal Year Ended December 31, 2016
                Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
  Estimated Future Payouts
Under Equity Incentive
Plan Awards
  All Other
Stock
Awards:
Number
of Shares
  All Other
Option Awards:
Number of
Securities
  Exercise
or Base
Price of
  Grant Date
Fair Value
of Stock
Name   Grant
Date
  Board
Approval
Date
  Award
Type
  Thres-
hold
($)(1)
  Target
($)(1)
  Maximum
($)(1)
  Thres-
hold
(#)(2)
  Target
(#)(2)
  Maximum
(#)(2)
  of Stock
or Units
(#)
  Underlying
Options
(#)(3)
  Option
Awards
($ / Sh)(3)
  and Option
Awards
($)(4)
K.C. Frazier   03/31/2016   02/22/2016   PSUs                0   136,080   272,160               $ 7,875,521(2)
    05/10/2016   02/22/2016   Options                               814,941   $ 54.68    4,800,002(3)
            EIP   $ 0   $ 2,306,250   $ 5,765,625                            
R.M. Davis   03/31/2016   02/22/2016   PSUs                0   41,958   83,916                2,428,286(2)
    05/10/2016   02/22/2016   Options                               251,273    54.68    1,479,998(3)
            EIP    0   1,050,000   2,625,000                            
M.J. Holston   03/31/2016   02/22/2016   PSUs                0   24,948   49,896                1,443,846(2)
    05/10/2016   02/22/2016   Options                               149,406    54.68    880,001(3)
            EIP    0    736,250   1,840,625                            
R.M. Perlmutter   03/31/2016   02/22/2016   PSUs                0   45,360   90,720                2,625,174(2)
    05/10/2016   02/22/2016   Options                               271,647    54.68    1,600,001(3)
            EIP    0    1,113,525   2,783,812                            
A.H. Schechter   03/31/2016   02/22/2016   PSUs                0   43,092   86,184                2,493,915(2)
    05/10/2016   02/22/2016   Options                               258,065    54.68    1,520,003(3)
            EIP    0    1,061,550   2,653,875                            
(1) Amounts represent awards under the EIP, which equal a specified percentage of base salary as in effect on December 31, 2016. 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, depending on the level of achievement of the applicable performance goals. For more information on PSUs, see the “PSU Program” section on page 48 and the Narrative to the Grants of Plan Based Awards table on the following page.
(3) 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 2016 is the closing price of Merck common stock, as traded on the New York Stock Exchange on May 10, 2016. For more information on stock options granted to the Named Executive Officers in 2016, please see “Current LTI Grant Practices” on page 51.
(4) This column represents the full grant date fair value of PSUs 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 2016.

 

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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 Company performance component (as reflected by the Company Scorecard) is multiplied by the target award opportunity. 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, and is limited to 250% of target.

 

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. 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.

 

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

 

50% of the award will be determined by the Company’s Operating Cash Flow performance vs. target for the three-year performance period.
   
50% of the award will be determined by the Company’s average annual TSR relative to the median TSR of our Peer Group for the three-year performance period.
   
Payouts can range from zero at threshold to a maximum of 200% of target.
   
Dividend equivalents are accrued and paid in shares if and when the PSUs vest and are only applied to the portion of the award that is earned.

 

Payouts were made for the 2014-2016 performance period in February of 2017.

 

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OUTSTANDING EQUITY AWARDS

 

The following table provides details about each outstanding equity award held by the Named Executive Officers as of December 31, 2016.

 

Outstanding Equity Awards at Fiscal Year Ended December 31, 2016
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   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                   
    694,698(1)            05/02/12   39.29   05/02/13  05/01/22                   
    644,122(1)            05/06/13   44.98   05/06/14  05/05/23                   
    366,804(1)    183,402(1)      05/09/14   58.22   05/09/15  05/08/24                   
    247,678(1)    495,356(1)      05/01/15   59.86   05/01/16  04/30/25                   
          814,941(1)      05/10/16   54.68   05/10/17  05/09/26                   
                                         250,522(3)   $14,748,230 
                                         272,160(4)    16,022,059 
R.M. Davis   128,380(1)    64,192(1)      05/09/14  $58.22   05/09/15  05/08/24                   
    72,239(1)    144,479(1)      05/01/15   59.86   05/01/16  04/30/25                   
          251,273(1)      05/10/16   54.68   05/10/17  05/09/26                   
                                85,881(2)  $5,055,815            
                                         73,068(3)   $4,301,513 
                                         83,916(4)    4,940,135 
M.J. Holston   36,680(1)    18,341(1)      05/09/14  $58.22   05/09/15  05/08/24                   
    41,279(1)    82,560(1)      05/01/15   59.86   05/01/16  04/30/25                   
          149,406(1)      05/10/16   54.68   05/10/17  05/09/26                   
                                         41,754(3)   $2,458,058 
                                         49,896(4)    2,937,378 
R.M. Perlmutter   225,443(1)            05/06/13  $44.98   05/06/14  05/05/23                   
    128,380(1)    64,192(1)      05/09/14   58.22   05/09/15  05/08/24                   
    82,559(1)    165,119(1)      05/01/15   59.86   05/01/16  04/30/25                   
          271,647(1)      05/10/16   54.68   05/10/17  05/09/26                   
                                         83,508(3)   $4,916,116 
                                         90,720(4)    5,340,686 

 

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Outstanding Equity Awards at Fiscal Year Ended December 31, 2016
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)
 
A.H. Schechter   26,135(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                 
    277,879(1)            05/02/12   39.29   05/02/13  05/01/22                 
    244,767(1)            05/06/13   44.98   05/06/14  05/05/23                 
    139,384(1)    69,694(1)      05/09/14   58.22   05/09/15  05/08/24                 
    78,431(1)    146,863(1)      05/01/15   59.86   05/01/16  04/30/25                 
          258,065(1)      05/10/16   54.68   05/10/17  05/09/26                 
                                       79,332(3)   $4,670,275 
                                       86,184(4)    5,073,652 

(1) Stock options generally vest and become exercisable in equal installments on the first, second and third anniversary of grant, and expire on the day before the tenth anniversary of grant. Stock options also vest upon attainment of eligibility to retire, in which case they become exercisable in equal installments on the first, second and third anniversary of grant. Since 2013, unvested options for retirees that otherwise would have vested within 12 months following retirement become exercisable in accordance with their original schedule.
(2) RSUs generally vest and become payable in shares of Merck common stock on the third anniversary of grant.
(3) Maximum (200% of target) of PSUs granted during 2015 that may be earned based on Merck’s performance, as determined by the C&B Committee, following the completion of the three-year performance period ending December 31, 2017.
(4) Maximum (200% of target) of PSUs granted during 2016 that may be earned based on Merck’s performance, as determined by the C&B Committee, following the completion of the three-year performance period ending December 31, 2018.
(5) The market value of the units reported in this column was computed by multiplying the number of such units by $58.87, the closing price of Merck common stock on December 30, 2016.

 

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OPTION EXERCISES AND STOCK VESTED

 

The following table provides information about stock options that were exercised and stock units that vested during 2016.

 

 Option Exercises and Stock Vested for Fiscal Year Ended December 31, 2016
   Option Awards   Stock Awards   
   Number of Shares   Value Realized   Number of Shares    Value Realized 
   Acquired on Exercise   on Exercise   Acquired on Vesting    on Vesting 
Name  (#)   ($)(1)   (#)(2)    ($)(3) 
K.C. Frazier   723,040   $17,557,157    180,684(a)   $11,898,041 
R.M. Davis           61,665(a)    4,060,640 
M.J. Holston   100,021    988,026    18,069(a)    1,189,844 
R.M. Perlmutter           63,238(a)    4,164,222 
              44,464(b)    2,405,058 
A.H. Schechter   89,200    1,807,221    68,659(a)    4,521,195 
(1) This column represents the values realized upon stock option exercises during 2016 which were calculated based on the difference between the market price of Merck common stock at the time of exercise and the exercise price of the option.
(2) This column represents the vesting during 2016 of the following:
  (a) PSUs granted in 2014 that were paid on February 27, 2017 including dividends accrued and paid in shares; and
  (b) RSUs granted in 2013.
(3) The value realized for PSUs was determined by multiplying the number of units that vested by the market price of Merck common stock on February 27, 2017. The value realized for RSUs was determined by multiplying the number of units that vested by the market price of Merck common stock on May 6, 2016.

 

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PENSION BENEFITS

 

The table below sets forth information concerning the present value of benefits accumulated by the Named Executive Officers from two defined benefit pension plans—the Retirement Plan for the Salaried Employees of MSD (the “Qualified Plan”) and the MSD Supplemental Retirement Plan (the “SRP”). The terms of the plans are described below.

 

Pension Benefits for Fiscal Year Ended December 31, 2016
      Number of Years   Number of Years         
      Credited   Cash Balance   Present Value of   Payments During 
      Service   Service   Accumulated Benefit   Last Fiscal Year 
Name  Plan Name  (#)(2)   (#)(3)   ($)(4)   ($) 
K.C. Frazier(1)  Qualified Plan   24.50    24.58   $1,454,075   $0 
   SRP   24.50    24.58    25,139,186    0 
R.M. Davis  Qualified Plan   —      2.67    50,493    0 
   SRP   —      2.67    262,548    0 
M.J. Holston  Qualified Plan   4.50    4.50    174,362    0 
   SRP   4.50    4.50    656,449    0 
R.M. Perlmutter  Qualified Plan   3.50    7.58    205,037    0 
   SRP   3.50    7.58    953,995    0 
A.H. Schechter  Qualified Plan   28.50    28.50    1,103,060    0 
   SRP   28.50    28.50    9,267,808    0 
(1) As of December 31, 2016, Mr. Frazier was eligible for early retirement subsidies under the Qualified Plan and SRP.
(2) This column shows the number of years of Credited Service that is used for benefit accrual purposes and eligibility purposes under the Final Average Pay formula of the Qualified Plan and SRP.
  Credited Service begins with the January 1 or July 1 coincident with or following a participant’s hire date and ends with his last full month of employment for employees actively employed on December 31, 2012, and eligible for prior formula transition provisions of the Qualified Plan and SRP. A maximum of 35 years of Credited Service may be earned. For rehires after December 31, 2012 (Dr. Perlmutter), Credited Service for benefit accrual purposes ends at the prior date of termination and for eligibility purposes at the full last month of employment. Mr. Davis does not have Credited Service since he entered the Plans after December 31, 2012.
(3) This column shows the number of years of Cash Balance Service that is used for benefit accrual purposes under the Cash Balance Formula of the Qualified Plan and SRP.
  Cash Balance Service begins on a participant’s first day of employment and includes all years and completed months of service and ends on the participant’s date of termination of employment. Cash Balance Service is projected to December 31 to determine benefit accrual under the Cash Balance Formula of the Qualified Plan and SRP.
(4) For the Qualified Plan and SRP, the actuarial present value is calculated using the same assumptions used for financial statement reporting purposes as set forth in the footnotes to our financial statements, except that commencement is assumed at the earliest unreduced retirement age (with no pre-retirement mortality). For all of the Named Executive Officers the earliest unreduced retirement age is age 62 and 10 years of eligibility service, except for Dr. Perlmutter for whom it is age 65. Some key assumptions include:
  Discount rate equals 4.3% for the Qualified Plan and 4.1% for the SRP;
  Mortality based on the sex distinct RP-2014 White Collar Adjusted Mortality Table with projection based on modified MP-2016 Projection Scale using a 0.75% ultimate rate at most ages;
  Future lump sum conversion factors calculated by the implied forward rates embedded in the 12/31/2016 Willis Towers Watson RATE:Link 60th to 90th percentile yield and mortality based on RP-2014/MP-2016 estimated for purposes of Sec 417(c)(3)(A)(ii)(l) of the Internal Revenue Code for lump sums; and
  Assumes that 80% of retirees elect a lump sum and the remaining 20% elect an annuity.

 

The Named Executive Officers participate in two defined benefit plans as do other U.S.-based Merck Sharp & Dohme Corp. salaried employees. Benefits payable under the Qualified Plan and the SRP (collectively, the “Retirement Plans”) are based on several formulas.

 

Benefit Formulas. Beginning in 2013, a Cash Balance Formula was added to replace the Final Average Pay Formula. Employees eligible for U.S. benefits on December 31, 2012, receive transition benefits, which provide the greater of the benefit under the Cash Balance and Final Average Pay Formula through December 31, 2019, or the date the participant terminates employment or loses Retirement Plan eligibility, if earlier. All Named Executive Officers except Dr. Perlmutter and Mr. Davis are eligible for transition benefits.

 

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Final Average Pay Formula: For service prior to January 1, 2013, benefits are calculated under the Final Average Pay Formula, which shows Retirement Plan benefits as a single life annuity normally payable on the first of the month coincident with or following age 65 (normal retirement date or “NRD”). The amount equals:

 

 

* Limited to 31.25

 

Cash Balance Formula: For service starting January 1, 2013, benefits are calculated under the Cash Balance Formula, which shows Retirement Plan benefits as an account that grows with annual pay credits and annual interest credits from Merck according to the following schedule:
   
Age + Cash Balance Service at 12/31  Percent of Total Pay credited to Account Balance
At Least  Less Than   
   40  4.5%
40  50  5.5%
50  60  6.5%
60  70  8.0%
70    10.0%

 

The account balance also earns interest credits every year at the annual rate of the change in the Consumer Price Index plus 3% (and not less than 3.3%). The account balance is the sum of annual pay credits and interest credits.

 

Final Average Pay (“FAP”). Under the FAP Formula, for participants who initially terminated employment before January 1, 2013, FAP is the average of a participant’s highest five consecutive calendar years of pay for the 10 calendar years before he or she initially terminated employment. For participants who were actively employed on December 31, 2012, FAP is a participant’s highest five consecutive calendar years of pay for the 10 years before January 1, 2013, or as of the earlier of December 31, 2019, or the date the participant terminates employment, if eligible for the prior formula transition provisions. For this purpose FAP means the greater of (a) and (b):

 

(a) Annual base pay for all full years of service completed. This annual base pay is determined as of December 31 of the current year (before any pre-tax contribution deductions for the savings plan or elective deferrals to our flexible spending accounts). Commissions, overtime pay, bonuses, other supplemental pay and all other amounts are excluded from this calculation.
   
(b) Actual cash earnings. Cash earnings are determined before any pre-tax deductions for the savings plan or elective deferrals to our flexible spending accounts. Also included are overtime pay, bonuses, commissions, special awards (prior to 2013 only), shift differential, cost of living adjustments, pre-tax transportation fringe benefits, as well as incentive pay. The following amounts are excluded: grants under the ISP, any distribution of a previously deferred award under any of our incentive plans, and any other form of compensation.

 

Total Pay. For the Cash Balance Formula, Total Pay for NEOs generally means base pay and Executive Incentive Plan amounts but excludes other amounts, such as LTI and other bonuses.

 

Vesting. A participant generally vests in his or her benefit—that is, the benefit that is accrued will not be forfeited back to the plans—when he or she has at least three years of vesting service. All NEOs are vested except for Mr. Davis, who will be vested in April 2017.

 

A participant who is vested but terminates employment before being eligible for early retirement subsidies under the Final Average Pay Formula is referred to as a “terminated vested” participant and can commence receiving benefits from the Retirement Plans on the first day of any month between the month after attaining age 55 and the month after attaining age 65. However, with respect to benefits that accrued after 2004 under the SRP, payment will be made as of the first day of the month after the later of (a) the month in which the participant attains age 55 or (b) separates from service (as defined by the Internal Revenue Service). The amount of the benefit is reduced from the age 65 benefit on an actuarial basis, which takes into account the participant’s life expectancy and expected plan returns and is substantial—for example, a participant’s $100 accrued benefit (at age 65) would be reduced to about $34 if it began at age 55.

 

Early Retirement Subsidies (under the Final Average Pay Formula). If a participant terminates employment at or after age 55 when he or she has at least 10 years of eligibility service, then he or she is entitled to “early retirement subsidies”—that is, a reduction for commencing before age 65 that is smaller than the actuarial reduction for terminated vested participants. For an early retiree, benefits are reduced by 3% per year that benefits begin before age 62. For example, an early retiree’s $100 accrued benefit would be unreduced if he or she waited until age 62, or would be reduced to $79 if he or she commenced at age 55.

 

However, under the “Rule of 85,” a participant who retired from active service when his or her age plus years of Credited Service totaled at least 85 (e.g., age 55 with 30 years of eligibility service) could receive an unreduced immediate benefit. In addition,

 

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a Social Security Bridge Benefit represented an additional benefit for eligible early retirees by providing a temporary monthly supplement prior to age 62 to avoid the Social Security offset described above in the benefit formula, so the offset would not apply until a participant attained age 62. Both of these benefits were eliminated from the Retirement Plans on July 1, 1995. However, transition benefits were added to replace all or part of the benefit for participants who were participating in the Retirement Plans on July 1, 1995, and were then at least age 40. Mr. Frazier’s transition percentage is 5.39—that is, 5.39% of the enhancement continues to apply. Other Named Executive Officers do not have these transition benefits.

 

In addition, a participant who terminates employment due to a disability that can reasonably be expected to permanently disable him or her from any job anywhere may be approved for a disability retirement. In such a case, the participant’s benefit which has then accrued is not reduced for early commencement.

 

SRP Benefits. The Qualified Plan benefits are limited by the Internal Revenue Code (“IRC”). The SRP is an unfunded plan maintained to provide benefits to highly compensated employees impacted by the IRC limits and provides benefits according to the formula described above which exceed those limits, as well as benefits that are payable because compensation deferred into the Merck Deferral Program prior to 2013 is excluded from the definition of final average compensation in the Qualified Plan (and so are payable solely from the SRP).

 

In addition, for employees who were, prior to January 1, 1995, subject to the Company’s mandatory age 65 retirement policy due to their exemption from the Age Discrimination in Employment Act, an additional benefit is payable upon retirement from active service at age 65. The additional benefit is an amount calculated under the benefit formula in the Qualified Plan using one additional month of credited service for each month of credited service accrued prior to January 1, 1995, during, or prior to attainment of, the designated position (up to the 35-year total) minus: (i) the minimum benefit, where applicable, or the supplemental benefit; (ii) the Qualified Plan benefit; and (iii) any retirement benefit payable from a plan not sponsored by the Company.

 

The SRP was amended as of January 1, 1995, to prospectively eliminate this additional benefit. Further, in 2009, the Company revised its mandatory retirement policy to cover only the CEO. As a result of his appointment to CEO, Mr. Frazier is eligible to receive this benefit provided that he remains subject to the mandatory retirement policy at least until age 64 (i.e., until December 17, 2018) and retires from the Company once he reaches age 65. If those requirements are met, Mr. Frazier will have 30 years of credited service (as compared to 27.5, without benefit of this provision). The provision does not affect any other Named Executive Officer.

 

Forms of Benefit. Participants in the Qualified Plan generally can choose among single, joint and term certain annuities and a lump sum. All forms of benefit are actuarially equivalent to the single life annuity. All forms use a 9% interest rate except for the lump sum which uses interest rates based on a yield curve of corporate debt instruments, as provided by the IRC. The interest rate used to determine the lump sum changes quarterly: during 2016, the blended 3-tiered interest rates ranged between 1.43% and 5.05%.

 

SRP Payments. Payments under the SRP of benefits accrued and vested prior to 2005 generally follow the timing and form of benefit that applies to the Qualified Plan. However, a participant who elects a lump sum under the Qualified Plan, or one who cannot satisfy the spousal consent requirements applicable to the Qualified Plan, may choose any other form of benefit described above for his or her pre-2005 SRP benefit. Post-2004 SRP balances are payable as a lump sum. A participant may elect this benefit to be paid in 5 or 10 annual installments. This election must be made at least 12 months prior to the later of termination or age 55 and payment generally is subject to a five year delay. For the top-50 compensated employees of the Company, payments of the post-2004 SRP benefit generally are made at the later of age 55 or 6 months after separation from service.

 

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NONQUALIFIED DEFERRED COMPENSATION

 

The following table shows the executive contributions, earnings and account balances for the Named Executive Officers in the Merck Deferral Program, an unfunded, unsecured deferred compensation plan. The Deferral Program allows participants who are executive officers to defer the following:

 

All or a portion of their annual bonuses (but not less than $3,000); and/or
   
Up to 50% of base salary, subject to certain limitations.
   
Nonqualified Deferred Compensation for Fiscal Year Ended December 31, 2016
               Aggregate     
   Executive   Registrant   Aggregate   Withdrawals/   Aggregate 
   Contributions   Contributions   Earnings   Distributions   Balance at 
   in 2016   in 2016   in 2016   in 2016   12/31/16 
Name  ($)(1)   ($)(2)   ($)(3)   ($)   ($)(4) 
K.C. Frazier  $534,591   $208,842   $547,661   $0   $12,337,327 
R.M. Davis   0    95,334    11,856    0    174,191 
M.J. Holston   76,154    66,975    3,322    0    403,464 
R.M. Perlmutter   0    123,029    18,475    0    317,898 
A.H. Schechter   0    103,344    23,588    0    714,551 
(1) The amounts disclosed in this column were also reported as either “Salary” or the “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table for 2016. Those amounts, as well as amounts in the “Aggregate Balance at 12/31/16” column that represent salary or bonus that were reported in the Summary Compensation Table of prior proxy statements, are described in more detail in footnote (4) below.
  The amounts disclosed in this column consist of $534,591 of base salary deferred by Mr. Frazier and $76,154 of base salary deferred by Mr. Holston in 2016.
(2) The amounts disclosed in this column represent the Company’s annual 4.5% credit of eligible pay in excess of the IRS limit to the NEO’s accounts under the Deferral Program. These amounts are included within the amount disclosed in the “All Other Compensation” column of the Summary Compensation Table for each applicable named executive for 2016.
(3) This column represents dividends earned plus changes in account value (investment earnings or losses) for the period of January 1, 2016 to December 31, 2016.
(4) This column includes deferred compensation earned in earlier years which was disclosed as either “Salary” or “Non-Equity Incentive Plan Awards” in the Summary Compensation Table of prior proxy statements as follows: Frazier, $525,000 for 2015 and $675,000 for 2014; Holston, $121,500 for 2015.

 

Deferral Program Investments: Account balances may be invested in phantom investments selected by the executive from an array of investment options that mirrors the funds in the Merck U.S. Savings Plan. Deferrals of RSUs and PSUs were required to be made to the Merck common stock fund and may not be reallocated into any other investment alternative.

 

Distributions: When participants elect to defer amounts into the Merck Deferral Program, they also elect when the amounts ultimately will be distributed to them. Distributions may either be made in a specific year, whether or not employment has then ended, or at a time that begins at or after the executive’s employment has ended. Distributions can be made in a lump sum or up to 15 annual installments. Distributions from the Merck common stock fund are made in shares, with cash payable for any partial share.

 

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POTENTIAL PAYMENTS UPON TERMINATION OR A CHANGE IN CONTROL

 

The section below describes the payments that may be made to the Named Executive Officers upon separation, pursuant to individual agreements, or in connection with a change in control (as defined below). For payments made to a participant upon a retirement other than in connection with a separation or change in control, see Pension Benefits table and related narrative beginning on page 60.

 

Separation

 

The Company provides separation pay and benefits to all of its U.S.-based employees who are employees of Merck Sharp & Dohme Corp., including the Named Executive Officers, pursuant to the Merck & Co., Inc. U.S. Separation Benefits Plan (the “Separation Plan”). An amount related to the executive’s target annual incentive award is provided under certain circumstances. To be eligible for all of the benefits described below, a general release of claims is required, as well as non-disparagement, cooperation with litigation and, in some cases, non-competition and non-solicitation agreements in connection with, and at the time of, the separation.

 

Severance Pay. The Separation Plan provides severance pay to employees whose employment is terminated due to organizational changes including discontinuance of operations, location closings, corporate restructuring or a general reduction in work force. For eligible separations during 2016, certain management level employees, including the Named Executive Officers, were eligible to receive the following severance pay, payable in lump sum.

 

Years of Continuous Service at Separation Date  Weeks of Severance Pay
Less than 1 year  26
1 – 4 years  40
5 years or more  40 plus 2 additional weeks for each year of continuous service beyond 4 years (maximum 78 total)

 

Health and Welfare Continuation. These employees are eligible for continued participation in the medical, dental and basic life insurance plans for 26 to 78 weeks depending on their years of continuous service, by paying contributions at the same rate as paid by active employees from time to time.

 

Outplacement Assistance. Under the Separation Plan, certain management level employees, including the Named Executive Officers, are eligible for up to 12 months of Company-provided executive outplacement services from our outplacement vendor.

 

EIP Awards

 

As part of our standard practice for separated employees, we may pay an amount in lieu of a bonus payout under the EIP, depending on the date of separation.

 

If employment terminates following the end of the performance year, the executive will be considered for a bonus on the same terms and conditions as other employees with respect to the previous year’s performance.
   
If employment terminates between January 1 and June 30 of the performance year, the employee is not eligible for payment of a bonus for the year in which separated, unless the employee is retirement eligible. Retirement eligible employees may receive a special payment in lieu of any award under the EIP. The amount of the special payment is based on his or her target award and the number of months worked in the current year.
   
If employment terminates after June 30 and on or before December 31 of the performance year, a special payment is made in lieu of any award under the EIP. The amount of the special payment is based on the employee’s target award and the number of months worked in the current year. This amount is payable in a lump sum at a time that complies with Section 409A of the Internal Revenue Code.

 

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Effects Under Other Benefit Plans

 

All separated employees are entitled to certain benefits under other plans as described below. In general, the benefits are only provided in exchange for a valid release of claims and depend upon whether an employee is “retirement eligible,” “bridged,” or “other separated,” as the terms are defined below.

 

Retirement eligible employees are separated employees who, as of their separation date, are at least age 55 with at least 10 years of Cash Balance Service under the Qualified Plan or are at least age 65 without regard to years of Cash Balance Service. Under the Final Average Pay Formula, for retirement eligible employees, a transition Rule of 85 benefit is provided if the employee is within two years of attaining eligibility for the benefit on his or her separation date. This transition benefit is described under the Pension Benefits table and related narrative beginning at page 60. Payments may be made from the Qualified Plan and SRP at the time and in the form described under the Pension Benefits table and related narrative.

 

Bridged employees generally are separated employees who are not retirement eligible but who, as of December 31 of the year in which their separation occurs, are or would have been at least age 50 with at least 10 years of Cash Balance Service under the Qualified Plan. All separated bridged employees receive the following benefits:

 

Retirement Plans. Under the Final Average Pay Formula, bridged employees receive a portion of the benefit that would be payable if they were at least age 55 with at least 10 years of Credited Service, but who are younger than age 65 on their separation date. Benefits for early retirees are reduced by 0.25% for each month that benefits commence before the employee attains age 62. This reduction is substantially less than the actuarial reduction that applies for early commencement for terminated vested employees. Bridged employees receive a pro-rata portion of the enhancement provided by these early retirement subsidies. This pro-rata portion equals the percentage of the employee’s Credited Service on his/her separation date divided by the Credited Service that employee would have had if employment had continued until he/she was first eligible to be treated as an early retiree.
   
Medical, Dental and Life Insurance Plans. In 2016, all separated employees are eligible for continued participation in the medical, dental and basic life insurance plans for 26 to 78 weeks depending on their years of continuous service, by paying contributions at the same rate as paid by active employees from time to time.

 

If the separated employee is at least age 52 with 10 years of Cash Balance Service as of December 31, 2016, at the end of their benefits continuation period, the employee is treated as eligible for subsidized retiree medical benefits in accordance with the plan provisions applicable to similarly situated retired employees as they may be amended from time to time.

 

Options, RSUs and PSUs. In 2016, all separated bridged employees are eligible to be treated in accordance with plan provisions applicable to retired employees with respect to options, RSUs and PSUs granted to them before 2013. Since 2013, generally, separated bridged employees are eligible to be treated in accordance with the plan provisions applicable to retired employees only if they are also eligible for subsidized retiree medical benefits; if they are not also eligible for subsidized retiree medical benefits, separated bridged employees are eligible to be treated in accordance with the plan provisions applicable to involuntarily terminated employees.

 

Other separated employees are separated employees who are not retirement eligible or bridged employees. These employees are eligible for continued participation in the medical, dental and basic life insurance plans for 26 to 78 weeks depending on their years of continuous service, by paying contributions at the same rate as paid by active employees from time to time. In addition, these employees are also treated under the provisions applicable to involuntarily terminated employees with respect to their options, RSUs and PSUs.

 

Individual Agreements and Arrangements

 

On March 25, 2014, the Board appointed Robert M. Davis as Executive Vice President and Chief Financial Officer, effective as of April 23, 2014 making him the Company’s principal financial officer. Pursuant to the Company’s offer letter dated March 17, 2014 (the “Offer Letter”), Mr. Davis was provided with the following:

 

Annual Base Salary of $950,000, subject to annual review by the C&B Committee;
   
Eligibility to participate in the Company’s Executive Incentive Plan with a target bonus for the 2014 performance year of 95% of his Annual Base Salary;
   
Eligibility to receive an annual equity-based grant beginning in 2014 pursuant to the Company’s Long-Term Incentive Program with a target value of $3,500,000;
   
Sign-On Bonus of $5,000,000 payable in three installments, where (i) $2,500,000 was payable on the first regularly scheduled paycheck following his start date, (ii) $1,250,000 was payable on the first anniversary of his start date, and (iii) $1,250,000 was payable on the second anniversary of his start date;
   
A grant of Restricted Stock Units (“RSUs”) valued at approximately $5,000,000 on the first quarterly grant date immediately following his start date. The RSUs will fully vest on the third anniversary of his start date. The RSUs also vest on the last date of employment if Mr. Davis’ employment is involuntarily terminated by the Company other than for cause;

 

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Eligibility to receive a cash payment of $2,000,000 within 90 days after the termination of his employment at the Company other than for cause, provided that the termination occurs on or after the tenth anniversary of his employment start date and he has experienced no breaks in service with the Company. This payment is intended to compensate Mr. Davis for pension benefits he forfeited upon leaving his prior employer;
   
Reimbursement for certain expenses associated with Mr. Davis’ move of his residence in accordance with the Company’s Relocation Program; and
   
Participation in other benefit plans in accordance with the Company’s practices for other executives of a similar level, including participation in the Company’s Change in Control Plan.

 

Change in Control

 

Participants in the Change in Control Plan include the Named Executive Officers as well as certain other senior executives. With respect to the Named Executive Officers, the severance benefits described below would be provided upon qualifying terminations of employment within two years following a change in control. The C&B Committee on November 26, 2012, adopted a number of changes to the Change in Control Plan that, among other things, (1) reduce the size of the participant population; (2) reduce the cash severance multiples for participants other than the CEO; (3) eliminate additional age and service credits under the supplemental pension plan; and (4) raise certain thresholds, thereby increasing the requirements that must be met to trigger the occurrence of a change in control. Any changes to the terms described below are reflected in this discussion.

 

Cash severance paid in a lump sum within 90 days following employment termination in an amount equal to three for the CEO, two for the other Named Executive Officers, times the sum of his or her base salary plus the lesser of (a) his or her target bonus amount and (b) the average of the actual bonuses paid to the Named Executive Officer in the three years immediately preceding his or her termination while the Named Executive Officer was serving in the same position as he or she was serving immediately prior to termination, annualized for partial or incomplete years in such position.
   
Pro-rata annual cash incentive at target levels, paid in a lump sum within 90 days following employment termination.
   
Subject to the Named Executive Officer’s timely election under COBRA, continued medical, dental and life insurance benefits at active-employee rates for a period of up to three years for the CEO (but not beyond the CEO’s 65th birthday) and for up to two years for the Named Executive Officers other than the CEO. These benefits are reduced by benefits obtained from a subsequent employer.
   
If the Named Executive Officer would attain specified age and service levels within two years following the change in control, then he or she is entitled to subsidized and/or unreduced pension benefits upon commencement of pension benefits in accordance with plan terms after his or her termination of employment. In addition, if the Named Executive Officer would attain specified age and service levels within two years following the change in control, then he or she is entitled to subsidized retiree medical benefits as a retiree under our health plans commencing immediately after the expiration of the benefit continuation period at active rates described above.
   
  If the Named Executive Officer is a participant in our pension plan, he or she will become vested (if not already) in the applicable accrued benefit as of the termination date.
   
Continued financial planning benefits and outplacement assistance benefits for a limited time.

 

Terminations of employment that entitle a Named Executive Officer to receive severance benefits under the plan consist of (1) a termination without cause or (2) a resignation by the Named Executive Officer for good reason, in each case within two years following a change in control. A Named Executive Officer is not eligible for benefits under the plan if his or her termination is due to death or permanent disability.

 

A “change in control” for purposes of the plan generally consists of any of the following:

 

an acquisition of more than 30% of the Company’s voting securities (other than acquisitions directly from the Company); or
   
the current Board (and their approved successors) ceasing, over any consecutive 24-month period, to constitute a majority of the board of directors of a successor to the Company; or
   
the consummation of a merger, consolidation or reorganization, unless
   
  the shareholders of the Company prior to the transaction hold at least 50% of the voting securities of the successor;
     
  the members of the Board prior to the transaction constitute at least a majority of the board of directors of the successor; and
     
  no person owns 30% or more of the voting securities of the Company or the successor; or
     
shareholder approval of the liquidation or dissolution of the Company or the sale by the Company of all or substantially all of its assets.

 

2017 Proxy Statement    66

 
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A “termination for good reason” for the Named Executive Officers generally includes any of the following actions without the executive’s written consent following a change in control:

 

Significantly and adversely changing the executive’s authority, duties, responsibilities or position (including title, reporting level) other than:
   
  an isolated, insubstantial and inadvertent action not taken in bad faith which the Company remedies promptly after receiving notice;
     
  a change in the person to whom (but not the position to which) he or she reports;
     
  ceasing to be an executive officer subject to Section 16(b) of the Exchange Act; or
     
  transfer of employment to an affiliate of the Company, if such transfer occurs prior to a change in control;
     
Reducing annual base salary or level of bonus opportunity;
   
Changing the executive’s office location so that he or she must commute more than the greater of (a) 50 more miles or (b) 120% more miles, as compared to his or her commute immediately prior to the change;
   
Failing to pay base salary, bonus or deferred compensation under any Company deferred compensation program within seven days of its due date;
   
Failing to continue any material compensation plan or program in which the executive participates including bonus plans and the Incentive Stock Plan (or successors to those plans), or failing to continue his or her level of participation in those plans;
   
Failing to continue to provide him or her with the pension and welfare benefits substantially similar to those in which he or she participates or materially reducing any of those benefits or depriving him or her of any material fringe benefit;
   
Failing to obtain a satisfactory agreement from any successor to Merck to assume and agree to perform the obligations under the Change in Control Plan; and
   
Any purported termination of the executive’s employment by the Company or its subsidiaries, which is not properly effected pursuant to the notice provisions of the Change in Control Plan.
   
A termination by the Company for “cause” generally includes:
   
Willful and continued failure by the executive to substantially perform his or her duties for the Company (other than any failure that results from his or her incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a notice of termination for good reason) for at least 30 consecutive days after a written demand for substantial performance has been delivered to him or her;
   
Willful misconduct or gross negligence by the executive which is demonstrably and materially injurious to the Company or any of its subsidiaries; and
   
Conviction, or entry of a plea of nolo contendere to
   
  a felony or
     
  any crime (whether or not a felony) involving dishonesty, fraud, embezzlement or breach of trust.

 

To receive the severance benefits under the plan, a Named Executive Officer must execute a general release of claims against Merck (or its successor) and its affiliates, which includes certain restrictive covenants, including a commitment by the Named Executive Officer not to solicit employees for two years following the change in control. The severance benefits are in lieu of (or offset by) any other severance benefits to which a Named Executive Officer may be entitled under other arrangements. The severance benefits under the Change in Control Plan (other than the tax-qualified pension benefits) are generally subject to discontinuation in the event of breach by the Named Executive Officer of the restrictive covenants and other obligations under the release.

 

The Named Executive Officers are not entitled to any tax gross-up in the event they are subject to excise taxes payable under Section 4999 of the Internal Revenue Code of 1986, as amended, in connection with a change in control.

 

Options, RSUs and PSUs generally will vest upon an involuntary termination of employment within two years after a change in control.

 

In general, vested stock options may be exercised for five years following termination of the option holder’s employment following a change in control (but not beyond the original term of the stock option). This extended exercise period would not apply in the case of terminations by reasons of death or retirement or for gross misconduct.
   
If stock options do not remain outstanding following the change in control and are not converted into successor stock options, then option holders will be entitled to receive cash for each option in an amount equal to the difference between the exercise price and the price paid to shareholders in the change in control and the applicable exercise price.
   
Upon a change in control, a portion of PSUs generally will become vested as determined by reference to the holder’s period of employment during the performance cycle:
   
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