Top Schering Execs Could Get $132 Million in Merck Deal Jackpot

Schering-Plough CEO Fred Hassan took a massive compensation cut in 2008 but he will more than make up for that with an even larger potential $51 million change-of-control jackpot triggered by Merck's acquisition of his company.

All the top execs at Schering took huge compensation hits in 2008 as SGP stock tanked during the year, according to a filing with the SEC. (However, sales were up by 46 percent to $18.5 billion and net income was $1.7 billion following a loss in 2007 of $1.6 billion.)

Much of the pay reduction came in the form of clawbacks of stock awarded in previous years as punishment for underperformance. Schering called these "transformational incentive" stock awards that were "forfeited because performance targets were not met."

But as Hassan et al engineered a deal with Merck, that will probably trigger change-of-control provisions in the top five executives' contracts. Those execs -- Hassan, CFO Robert Bertolini, president/global pharma Carrie Cox, president/R&D Thomas Koestler, and general counsel Thomas Sabatino Jr. -- will reap a staggering $132 million in cash and stock if they are replaced by Merck execs and their job losses are classified as "termination occuring after change of control."

Here's the summary of total compensation for 2008:

Name, 2008 pay, 2007 pay
CEO Fred Hassan, $12.9 million, $30.2 million
CFO Robert Bertolini, $3.4 million, $8.2 million
President/global pharma Carrie Cox, $5 million, $9.8 million
President/R&D Thomas Koestler, $6.1 million, $5.4 million
General counsel Thomas Sabatino Jr., $2.7 million, $6.5 million Numbers are rounded, includes stock and options whose value changes over time.

Here's what they lost in stock clawbacks:

"Transformational incentive" stock awards in "amounts that were forfeited because performance targets were not met."
Hassan lost $8.6 million
Bertolini lost $2.9 million
Cox lost $2.9 million
Koestler: no losses
Sabatino lost $2.7 million

Here's what the execs could potentially get for signing the Merck deal:

Estimated Payments for "Termination Occuring After Change of Control"
Hassan: $51.4 million
Bertolini: $28.5 million
Cox: $23.4 million
Koestler: $16.6 million
Sabatino: $12.2 million

The numbers raise an interesting question: Knowing that SGP stock was declining through 2008, and probably guessing that this would impact their compensation, did Hassan et al have a $132 million incentive to sell the company?

Note, Hassan's of control package is actually a reduction in value from 2008 when it was valued at $59 million if the triggering event was merely a "change of control." Compare the agreement last year (on page 47) with the current agreement (on page 51). You'll note that last year, Hassan's payout was roughly the same regardless of whether there was a "change of control" or a "termination following a change of control." But this year, Hassan only gets the 50 big ones if he's terminated after a change of control. I'm going to take a wild guess that this reverse merger -- in which Schering is technically buying Merck -- will be classified according to the larger payout when it's time for Hassan to pick up his gold watch.

In addition to cash and stock, the execs also got the following perks: Personal and family use of the corporate-owned aircraft. The company said, "Schering-Plough permits 'ride alongs' on corporate aircraft in limited situations, where a spouse or other family member of an executive, traveling for business, is permitted to accompany the executive if the seat would otherwise be unoccupied." Schering says the jets are "98 percent" used for business.

They all got a corporate car and driver, and financial and tax planning. Hassan got "personal" security services. The others made do with mere "home" security services. (Perhaps Hassan believes he may be attacked by the other four?)

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