Saturday, July 25, 2015

Merck's Retiring EVP & GC Gets Enhanced Departure Vesting -- Purportedly To Enter Public Sector(?!)

In general, I've held the opinion that Merck has greatly reformed the company's executive perks and pay practices -- especially those that used to prevail at legacy Schering-Plough. [Afterall, this Merck IS the Schering-Plough legacy Delaware holding company, just renamed -- with Merck's legacy assets folded in. In fact, Merck installed double triggers, for all its executive payouts, back when legacy S-P barely had a meaningful "single trigger". Remember, by 2006, Merck was pulling EARNINGS that regularly TRIPLED S-P's, despite carrying a much bigger base. For all of this, then CEO Clark earned less than a third (per year) of what that shine-ola salesman Hassan took from legacy Schering-Plough. But I digress.]

Having said all of that, this acceleration of Mr. Kuhlik's equity awards -- and that is what this is -- an acceleration, and fixing in cash, the certainty of those awards. . . strikes me as over the top.

I am unconvinced that -- as he retires, in normal fashion, from Kenilworth -- Merck will receive any meaningful benefit from his entering a government job. And any ordinary person in his role, would simply accept that his choices are. . . his choices -- ones that may have real pecuniary consequences, under his previously agreed retirement packages. I'll wait to see where he turns up, but if he's to become any judicial or regulatory office holder, getting a "bump" as he departs Merck would seem inappropriate. I am sure he was a very capable GC -- but tearing up his retirement agreement, especially where (as here) he is not really retiring at all. . . seems a lil' like a Fast Fred Hassan move, truthfully. Here's the bulk of the late Friday evening (i.e., buried) SEC Form 8-K:

. . . .Bruce Kuhlik, who completed his tenure as General Counsel for Merck & Co., Inc. (the "Company") on June 30, 2015, is entitled to payment of certain compensation following his retirement from the Company (which is effective August 1, 2015) under the Company’s compensation programs, the terms and conditions of which have been previously disclosed. Mr. Kuhlik has advised the Company that following his retirement, he intends to accept a position in the public sector which would require him, as a condition of his employment, to divest himself of any interests in the Company that are subject to variability based on Company performance. The Compensation & Benefits Committee (the “Committee”) of the Company’s Board of Directors determined that it was reasonable and appropriate to allow Mr. Kuhlik to realize a certain amount of income that he would otherwise have had the opportunity to be paid under the Company’s compensation plans and programs had he not been required to divest his interests at this time. Therefore, on July 21, 2015 the Committee authorized and Mr. Kuhlik has accepted changes to certain incentive compensation arrangements previously granted to Mr. Kuhlik, as follows:

1. Accelerate the vesting of that portion of the Stock Option granted to Mr. Kuhlik in 2013 (consisting of 1/3 of the original number of shares), that would have otherwise vested in connection with his retirement so that the final portion of the option is fully exercisable beginning on August 3, 2015, the first business day following Mr. Kuhlik’s retirement, rather than in May 2016. This change does not directly provide a payment to Mr. Kuhlik, but allows him to fully exercise the option in the short term.

2. Accept Mr. Kuhlik’s forfeiture of the portion of each of the stock options granted to Mr. Kuhlik in 2014 and 2015 (consisting of 1/3 of the original number of shares) that would have vested in May 2016 in light of his retirement. The forfeiture will be effective as of his August 1, 2015 retirement date. In addition, the remainder of the options granted in 2014 and 2015 (consisting of the remaining 1/3 and 2/3 of the original number of shares, respectively) will be forfeited in the normal course, also effective as of August 1, 2015.

3. Restructure the Performance Share Units awarded to Mr. Kuhlik in 2013 in respect of the performance period January 1, 2013 – December 31, 2015 (the “2013 PSUs”), in 2014 in respect of the performance period January 1, 2014 – December 31, 2016 (the “2014 PSUs”) and in 2015 in respect of the performance period January 1, 2015 – December 31, 2017 (the “2015 PSUs”) such that Mr. Kuhlik would receive a fixed payment in cash (as opposed to settlement in shares based on achievement of company performance goals) in an amount equal to the product of (x) a pro-rated number of units represented by each of the 2013 PSUs, 2014 PSUs and 2015 PSUs based on his retirement date of August 1, 2015 assuming target performance had been achieved and (y) $58.98, which is the average 60-day closing price of a share of Company common stock for the period of April 24, 2015 – July 20, 2015, the 60-trading days immediately preceding July 21, 2015. The cash payment will occur at the same time as the original distribution of shares would have occurred following the end of the applicable performance period. Payments in respect of these amendments will equal $1,828,498 in 2016, $756,654 in 2017 and $275,319 in 2018.

4. Accept Mr. Kuhlik’s forfeiture of the pro-rated bonus that would have otherwise been paid to him in March 2016 under the terms of the Company’s Executive Incentive Plan. . . .

Great work -- if one can get it. [I should point out that the above is only a fraction of his overall retirement benefit.] If he ends up as an Ambassador, weighing in on trade matters, then I can understand this move. Otherwise, not so much. Onward, on a sunny Saturday afternoon.

1 comment:

Anonymous said...

Agree - This is troubling. No knock on Kuhlik but these sorts of special deals are unseemly at best. Also, doesn't the Board have (far) more important issues to consider?