Merck Compensation

The author of this report is asked to analyze and summarize the compensation plan of Merck Corporation, how it can be better, what they are doing right and what they are doing wrong. Inclusive in that will be an overall evaluation of their current plan, the beneficial ratio of internally consistent and market-consistent compensation systems, an evaluation of the current pay structure, two overall recommendations that the author of this report feels that Merck can and should undertake and the types of employer-sponsored retirement plans and/or health insurance plans that Merck makes use of as compared to that of competitors like Johnson & Johnson and others. While Merck, like most other companies, should always work to fine-tune and perfect their compensation plan, Merck is actually going quite well as made possible by their market and internal research as well as its wealth of resources and options that they can use to compensate and satisfy their employees.

Analysis

As briefly but greatly summarized on the Merck website, and in keeping with the standards and norms of a firm of its size and power, Merck has a compensation committee that handles and administers the benefits of the employees of all levels and power-structures including regular employees all the way up to executives. The executive compensation structure covers things like the incentive stock program, which updates every three years, as well as how successor stock plans will be covered, how it will be handled if/when a company is acquired by Merck, the overall deferral program, the overall executive incentive plan and so forth. As for regular employees, there are retirement plans specific to the hourly employee as well as the salary employees. In addition, there is a supplemental retirement plan, a United States savings program and an employee stock purchase and savings plan. Obviously, a lot of these plans are elective to the employee but Merck is clearly making sure that employees have the option and power to leverage the resources and performance of Merck in a way that allows the employees to save for retirement and thus be prepared when their careers come to an end (Merck, 2014).

As far as regular pay and benefits beyond those dedicated toward long-term objectives and goals of the company as well as the employees, Merck has several dimensions to its overall pay and benefits structure. They clearly state that their objectives vis-a-vis compensation are to reflect and maintain Merck’s position in the industry, to attract, retain and engage their workforce so as to ensure future success, to motivate and inspire employee behavior in a way that encourages and allows for high-performance employees and outcomes and an overall alignment between senior executives and the long-term goals of the company and the outcomes for the less senior employees in the firm (Merck, 2014).

For any level of employee with Merck, there are up to four portions of the compensation strategy that apply to each employee. The first is the base salary and the benefits, which would be the normal pay structure as well as the benefits made available to the employee such as health/medical, retirement savings, employee discounts and so forth. There are also cash awards for team and individual performance, long-term incentives for long-term performance and goals and severance/change-in-control plans in case there is a major change in Merck as a whole or in a particular business unit of Merck, such as a spin-off, a shut-down or something similar (Merck, 2014).

If there is one thing that has set Merck apart from its competitors like Johnson and so forth, it is has been its habits and tactics as far as executive compensation go. There is little scuttlebutt on the internet about the compensation at Merck being out of whack although there are some outliers, albeit not research or scholarly, on employee review/feedback sites like Glassdoor.com and similar which list reviews of how it is to work for the company and how well they think of their pay and their CEO’s. However, it is worth noting that Merck paid their outgoing CEO 65% more than the prior year immediately prior to his leaving the firm and this is despite the perception that Merck is getting battered by generic versions of their drugs as allowed for under current patent laws as well as a general lagging behind its competitors in terms of money returned to shareholders, stock appreciation and overall dividends. As of May 2013, Merck had not had a single drug reach annual sales of $1 billion since 2007. The overall number of new drugs has also been fleeting as Merck trailed most of its competitors in terms of the overall number of new drugs. Merck was ahead of Roche, Amgen, Bayer and Genzyme but trailed Johnson and Johnson, GlaxoSmithKline, Novartis, Pfizer and was tied with Bristol-Meyers Squibb (Herper, 2013). This speaks, perhaps, to a compensation structure not tuned into spurring innovation and growth and this includes the executives all the way down to the proverbial worker bees in the trenches.

As far as recommendations and analysis, there are a few things that can and should be said. As far as how much to look internally and how much to look externally as far as compensation structure and strategy goes, Merck should not pay too much attention to what their competitors are doing but they would also be wise to see what is working with firms that are out-performing them. While Merck is an unquestioned giant, the aforementioned metrics regarding their CEO pay vs. their overall performance are troubling in some aspects. This could be because of an overall poor strategy by Merck executives but it could also be because of the other companies paying their executive sand other employees, in terms of pay and benefits, in a way that spurs more innovation and performance from all levels of employees. In short, it would seem that the other firms, while maybe not as revenue-rich as Merck, are getting more “bang for the buck” than Merck. If Merck could mimic that given their own level of resources and overall market position, they could capitalize on innovation even more than the others and keep pace with market leaders like Johnson & Johnson.

The overall compensation structure mentioned on the Merck website seems to be pretty good overall but there has to be a very strong link between performance and pay for an incentive-based compensation structure to work. The lack of drugs eclipsing the $1 billion mark is concerning and it is presumably a priority of Merck to market drugs that perform strongly. While pushing drugs that are unsafe and/or ineffectual is a bad idea, it is certainly preferable and possible for Merck to strongly incentivize new drugs that are effective and have mass market appeal. In particular, pushing for new and effective drugs for health conditions such as diabetes and heart problems as well as cancer would be a boon for Merck if they could make strides in those fields. Chronic conditions such as HIV / AIDS, as an example, are not “cured” yet but the use of drugs to manage, rather than just slow down, those conditions has lead to a greatly increased life span and even though a cure is best, being able to keep the disease at bay extends life and would be a huge monetary boon to firms like Merck but things that could immunize or even cure the disease would be a world-wide game-changer for the people that suffer from the disease as well as the firm that first patents such a cure. Merck could give out the drugs doing this for free or at a discount to vulnerable/poor populations and still make billions from such a cure.

As for two general recommendations vis-a-vis compensation at Merck, the author of this report would offer two major ones. First, the compensation of the Chief Executive Officer and other executives at Merck should be directly and constantly linked to the performance of the executives of the firm. If the fortunes of Merck take a dive, so should the pay levels of the executives unless they were provably not at fault. However, even when times are good for Merck, the pay structures should be market-based and should not be out of line with similar companies or performance levels. There will always be people that bemoan and condemn the pay of Merck executives (or executives in general) and many of those voices are not reasonable, such as the $15 an hour for fast food employee crowd (McIntyre, 2013). Even so, being ambivalent or confronting is not a good idea either.

The other recommendation for Merck would be to focus on the performance of the team and not the individual whenever possible. However, if some people are busting their hump and others are “phoning it in,” the reward for the team should not necessarily be the same…at least overall. For example, if a team of four has two average performers and two strong performers and the team wins a productivity or revenue award, the award should generally be divided equally among them but the individuals that perform strongly should be recognized when individual metrics and pay structures are looked at such as personal performance bonuses as well as overall base pay. Going 100% towards group and individual rewards are both wrong, so neither should be used exclusively. Rather, a blend that gets the best of both words should be undertaken.

As for the health and retirement benefits as offered by Merck as compared to competitors, Merck is in a good place as they offer retirement savings plans, general savings plans, stock purchase plans and medical/insurance plans that are on par with competitors such as Novartis, Bayer, Johnson & Johnson and so forth. They are on par or better than firms bigger than them (basically just Johnson and Johnson) and they easily surpass most firms below them. A firm that has billions of dollars in revenue that short-changes the employees in terms of pay and benefits would be a black eye for the firm and the media (as well as union advocates) would assail and condemn them to no end (Merck, 2014).

However, throwing good money after bad and/or capitulating to public pressure is also not a good idea. Indeed, there will be sometimes where Merck perhaps cannot do anything to quell the negative feedback. For example, if Merck hired more part time employees to avoid higher benefit and compensation costs, Merck would be accused of trying to get around the Patient Protection and Affordable Care Act provisions regarding the handling of employees who work less than thirty hours a week. However, Merck could absolutely justify what they are doing and should have a good reason for undertaking such a move such as avoidance of excessive overtime and/or maintaining flexibility during peak times. However, positions of power and strategic importance should be staffed with the best and the brightest and this means progressive to aggressive pay structures and strong incentives for products and performance that put Merck up to speed or in excess of the performance of competitors. However, Merck should be careful to avoid payment of too much salary, mostly in the form of employees that are truly not needed, full time employees with full benefits in particular, as Merck should be staffed enough to get their job done and innovate but not to the point where payroll and benefit dollars are wasted on tactics and habits that do not get the firm to where they need to be.

Conclusion

In the end, Merck is doing a lot of things right but they have a long way to go. They are in a position where their market position and amount of resources is not in question but the level and quality of growth they are experiencing relative to the associated performance and other metrics is not nearly where it could or should be and this really needs to change. Employees should be paid fairly and sufficiently when they do things right but they should not be punished for the missteps and missed steps of the firm at large and/or due to market conditions and problems outside of the control of the company. The public media and advocacy spheres from people such as organized labor and politicians are full of demagoguery and unfair accusations and silly standards that Merck is held to. There is an ignorance to the idea that executives mean much more dollar-wise to the firm than regular employees but the latter should not be disregarded or treated like second-class citizens.

References

Herper, M. (2013, April 17). Merck Could Return To Greatness If CEO Can Leave His Own Past Behind. Forbes. Retrieved February 28, 2014, from http://www.forbes.com/sites/matthewherper/2013/04/17/merck-could-return-to-greatness-if-ceo-can-leave-his-own-past-behind/

McIntyre, D. (2013, December 5). Can Walmart and McDonald’s Afford a $15 Minimum Wage?. Yahoo Finance. Retrieved February 28, 2014, from http://finance.yahoo.com/news/walmart-mcdonald-afford-15-minimum-111559234.html

Merck. (2014, February 28). Merck.com. Merck.com. Retrieved February 28, 2014, from http://www.merck.com

Thurm, S. (2013, March 20). ‘Pay for Performance’ No Longer a Punchline. The Wall Street Journal. Retrieved February 28, 2014, from http://online.wsj.com/news/articles/SB10001424127887324373204578372444079319544