THOMAS J. KELLY:
AN INDEPENDENT CANDIDATE FOR
THE BOARD OF DIRECTORS OF
MERCK & CO.
Annual Shareholders Meeting on April 26, 1994
Dear Shareholder:
In several weeks you will receive a proxy statement and
proxy card from Merck and from me. Before then I'd like to alert
you to my candidacy in opposition to the incumbent directors.
I. WHAT DO I STAND FOR?
If elected to the Board I would pursue several reforms which
I feel will benefit shareholders:
(A) CREATE A MORE INDEPENDENT COMPENSATION COMMITTEE AND
KEEP TOP EXECUTIVE COMPENSATION WITHIN DECENT BOUNDS
(B) GIVE SHAREHOLDERS THE RIGHT TO APPROVE EXECUTIVE
COMPENSATION BEYOND TAX-DEDUCTIBLE LIMITS
(C) RETURN TO ANNUAL ELECTION OF ALL DIRECTORS
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A. CREATE A MORE INDEPENDENT COMPENSATION COMMITTEE AND
KEEP TOP EXECUTIVE COMPENSATION WITHIN DECENT BOUNDS
The Board's Compensation and Benefits Committee decides how
much to pay Merck executives. In 1992, Merck's CEO P. Roy Vagelos
took home more than $2,500,000, and at least 5 other top
executives took home over $1,000,000 each (not including stock
options). While the company defends its executive compensation
by claiming the Compensation Committee is made up of
"independent" directors, how "independent" in thinking can this
Committee be when two members are CEO's of other corporations, a
third is a retired CEO, and a fourth is the Mellon Foundation
CEO?
1. A Going-Away Present For Vagelos: 500,000 Shares
I ask you not to judge the Compensation Committee by its
background, but rather by its actions: in 1992 it recommended
(and the Board approved) granting Roy Vagelos stock options for
500,000 shares -- several times larger than any previous grant of
options in Merck's history. If the stock rises 5 percent per year
over ten years, these options will be worth $16.1 million; if it
rises 10 percent, they will be worth $40.8 million.
One could better understand an award this size if it was
tied to an executive's accomplishments in pushing the stock price
up during the term of the option. However, Vagelos' options are
not exercisable until several years after he retires! (He must
retire in 1994, but the company says "no part of this special
grant will be exercisable before July 28, 1997"). In other
words, if Vagelos makes millions on his stock options, that will
probably be because of what executives do after Vagelos steps
down.
To me, that defeats the whole point of granting stock
options, which is to encourage executives to take actions during
the term of the option which increase shareholder value.
The Committee voted to grant this option one day after
Vagelos left the Compensation Committee (where he sat as a non-
voting member). The Committee justified its decision by saying
these options were in lieu of salary increases and later options.
However, where is it written that every year a CEO's salary must
increase? Where is it written that every year a CEO must receive
stock options? And even if both were legitimate expectations,
how can a CEO justify receiving options for 500,000 shares when
those below him received at most 54,000 shares in 1992?
2. The Role of Director Ruben Mettler
One member of Merck's Compensation Committee is Ruben
Mettler. Vagelos and Mettler have also sat together on the board
of TRW since at least 1984. Mettler was TRW's CEO until 1988.
After Mettler retired from his TRW executive post in 1988, the
TRW Board has approved consulting contracts for Mettler which
have paid him over $900,000. (Mr. Mettler was also entitled to a
TRW pension of several hundred thousand dollars.) Mettler's
latest 3-year consulting contract, approved while Vagelos was on
TRW's Compensation Committee, runs to April 1994.
Now, I'm not accusing Vagelos and Mettler of getting
together behind closed doors and saying "If you scratch my back,
I'll scratch yours." I simply think it's hard to say "no" to
someone who occupies a similar social and economic position as
yourself and whom you have seen at various board meetings of two
companies continuously since 1984.
Presumably Mettler will be standing for reelection to the
Merck Board this year. I humbly suggest you allow me to replace
him on the Board. You need not have the slightest doubt I will
know how to say "no" to excessive executive compensation. I
believe the average voter and taxpayer will not support Merck in
the national health care reform debate if Merck is seen as
supporting lavish executive lifestyles. I also believe the
average Merck employee, supplier and customer is turned cynical
by such enormous executive compensation: why save Merck a few
dollars here or there when its top executives are taking home
millions of dollars every year?
B. GIVE SHAREHOLDERS THE RIGHT TO APPROVE EXECUTIVE
COMPENSATION BEYOND TAX-DEDUCTIBLE LIMITS
In 1992, Congress passed a law which prohibits corporations
from deducting as a business expense any management compensation
in excess of $1 million per year which is not based on
performance goals and approved by shareholders. This went into
effect January 1, 1994. All six Merck executives whose pay was
shown in the 1993 proxy statement received more than $1 million
in 1992. Unless your Board acts to set up specific performance
targets and gets your approval, it must reach into the company's
after-tax earnings to maintain executive pay at its recent
levels. I think the Board should not burden shareholders with
having to pay taxes on executive pay: it should promptly have a
performance-based pay system approved by shareholders. If
elected, I will fight any efforts to pay executive compensation
which is not tax deductible.
C. RETURN TO ANNUAL ELECTION OF ALL DIRECTORS
If elected, I pledge to only serve one year and then stand
for reelection. I will urge all the other directors to do the
same. If shareholders want some new person or group to take over
the helm of this company, it is undemocratic to force these
shareholders to undergo three separate annual elections to
replace the Board. Over 29% of Merck shareholders voted in 1992
for a proposal to have annual election for all directors. This
is the way Merck handled director elections until 1985. I will
urge the Board to reconsider its position on this issue, and go
back to the system that served Merck so well for so many years.
II. MY BACKGROUND AND THE PARTICIPANTS IN THIS SOLICITATION
My primary expertise is in the areas of labor relations,
employee compensation and benefits, including health benefits. I
am a trustee of six employee benefit plans which are jointly-
trusteed between employers and representatives of Sheet Metal
Workers Local 19 ("SMW"), of which I am President and Business
Manager. I believe Merck's future depends on the outcome of the
health insurance debate in Congress, and I hope to bring my
experience with the health care issue to the Merck boardroom.
SMW has owned 300 shares of Merck common stock for over a year
and has no interest in the outcome of this solicitation beyond
that of any other shareholder. The participants in this proxy
solicitation will be SMW and myself.
SMW does not represent any Merck employees, nor does it seek
to represent them. I have objected to Merck building with non-
union contractors (whom we believe pose a greater risk of
inferior work).
I believe my knowledge of labor relations would be a useful
addition to the Board: Merck employed over 38,400 people as of
12/92, including about 7300 who bargain collectively. I also
know the construction business, and Merck had $763.5 million
worth of construction in progress as of 12/31/92. I am Chairman
of the Philadelphia Zoning Board of Adjustment, Vice-President of
the Philadelphia Building and Construction Trades Council and
Vice-President of the Philadelphia AFL-CIO. My business address
is 1301 S. Columbus Avenue, Philadelphia PA 19147. You can also
reach me by phone (215) 952-1999 or fax (215) 952-0250.
III. YOUR VOTE IS VERY IMPORTANT
Merck has a system of cumulative voting in the election of
directors, which means each share carries as many votes as there
are board vacancies (5 vacancies are likely this year): you can
concentrate those votes on just one candidate or spread them
among as many candidates as you like.
We are not yet requesting your proxy, but ask only that you
withhold judgment until you have received proxy statements and
proxy cards which will follow shortly, as soon as management
announces the annual meeting and reveals what issues will be on
the agenda.
Sincerely,
Thomas J. Kelly
