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November 30, 2004

Merck is parachuting

Merck's board has approved golden parachutes from 230 of its top executives.

On the heels of the problems noted in earlier posts here and here, my sense is that Merck's board did not have particularly good timing in approving these parachutes.

Posted by Tom at November 30, 2004 6:29 AM |


I dunno. Merck is probably vulnerable to a takeover on account of its depressed stock price. Indeed, it may be flirting with a sale of the company as we write. Given that, it has to be worried that key people are going to jump ship to competitors out of career insecurity. The parachutes seem well-timed to give the core of the management a reason to ride out the rough times. The board is saying, in effect, "don't worry about losing your job after a sale of the company, because if that happens you'll get a wad of money which will buy you time to get another job. In the meantime, stick around and rebuild the value here."

I think the timing is good.

Posted by: Jack at November 30, 2004 8:48 PM

That's certainly the best justification for it by Merck's board. However, my experience is that such parachutes are much better timed to be approved during good times rather than during the instability of an impending takeover battle. If a board waits until the latter situation, then the 'chutes are subject to the criticism that management -- which probably needs to be changed anyway -- is attempting to secure their positions rather than protect shareholder value. Stated another way, it's a sympton of what happens when corporation boards allow assets to be locked up in the hands of powerful managers. It will be interesting to see if Merck faces litigation over the 'chutes on that basis.

Posted by: Tom K. at December 1, 2004 5:04 AM

Oh, I don't doubt that somebody will sue Merck, or that one of the multitude of current plaintiffs will not add this to their complaint. But it really ought to hold up under the business judgment rule. These kinds of agreements are a good idea, and (I might add) do nothing but confer the severance required by statute in virtually every other OECD country (not that I'm advocating such a policy here).

Posted by: Jack at December 1, 2004 9:27 AM

Inasmuch as the parachutes only apply in the event of a change in control, employees still have an incentive to leave a company in turmoil for a more stable environment. The main beneficiaries of the parachutes are those who are squeezed out by the market for control. That market is playing on Merck at least in large part because of management's questionable management decisions.

On the other hand, lower-ranked employees are not protected even though they are much less likely to be responsible for the questionable management decisions that gave rise to the parachutes in the first place.

There is no question that there is business justification for golden parachutes in certain situations. In situations such as the one in which Merck's were granted, however, my sense is that the motivation for them is much more open to question than had they been put into place during a time in which management's decisions were not as open to criticism.

Posted by: Tom K. at December 2, 2004 7:38 AM

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