Loyalty pays: Merck CEO Ken Frazier scores 19% raise as he stays past retirement age

Merck CEO
Merck CEO Ken Frazier is juggling challenges ranging from an ongoing debate in Washington about high drug prices to pressure from Wall Street to diversify the company's pipeline. (PhRMA)

Merck’s board members have been so thrilled with the performance of the company’s CEO Ken Frazier that they scrapped a mandatory retirement policy to keep him in the job. After all, Frazier has overseen several years of steady revenue growth, driven largely by Merck’s hit immuno-oncology drug Keytruda.

But the board didn’t just persuade Frazier to stay on the job, they gave him a big raise, too—and part of it covers the pension he would have collected if he'd retired on time.

Frazier’s total compensation for 2018 was $20.9 million, up from $17.6 million in 2017, making him the third-highest-paid Big Pharma executive as ranked by proxy statements filed so far this year. Merck’s CEO was outranked only by AbbVie’s Richard Gonzalez ($21 million) and Gilead’s ex-chief John Milligan ($26 million), according to data compiled by FiercePharma.

Frazier’s 2018 compensation included a 2.2% increase in his base annual salary to $1.62 million and a $500,000 boost to his long-term incentive grant award. His total grant package is now worth $13 million.

The board raised Frazier’s long-term incentive award “to recognize his sustained performance and leadership,” according to the proxy (PDF).

Merck’s board didn’t stop there in rewarding Frazier for his loyalty. Because the CEO agreed to stay past age 65, he became ineligible for a pension benefit he would have received had he retired. That benefit was worth $2.5 million, so the board boosted his deferred compensation program by that amount. He can collect the money if he stays until January 2020.

No doubt Merck’s directors are hoping Frazier stays in the CEO suite at least until then, if not longer. Merck’s revenues grew 5% in 2018 to $42.29 billion, fueled by the near doubling of Keytruda’s sales to $7.17 billion. Merck piled on several additional FDA approvals for the checkpoint-inhibiting drug last year—in cervical cancer, Merkel cell carcinoma and primary mediastinal large B-cell lymphoma—and it could get green lights from the FDA in esophageal cancer and head and neck cancer this year.

RELATED: The top 15 pharma companies by 2018 revenue—Merck

Oncology isn’t Merck’s only growth engine, though. Strong demand for its vaccines helped drive sales last year. Even animal health—an industry that several of Merck’s competitors have abandoned—inched up in 2018.

But that doesn't mean Frazier won't be taking on a fair share of challenges instead of retiring. Despite Merck’s recent success, Wall Street has been pressuring Frazier to diversify the company’s pipeline beyond Keytruda. In 2018, Merck wrapped up 60 deals designed to do just that, including a partnership with Eisai and a buyout of Viralytics, both cancer-related. But analysts still tend to hound Frazier about why he isn’t pursuing much bigger deals.

Then there’s the pressure from Washington legislators on drug pricing. Frazier was among the seven Big Pharma executives who appeared at a Senate Finance Committee hearing In February, where senators blasted the pharmaceutical industry for, among other alleged abuses, promoting “freeloading” by foreign countries by selling their products at lower prices overseas. Frazier took the criticism in stride, explaining that European countries have the upper hand in negotiating drug prices.

Frazier’s board has backed him through it all, even giving him permission to quit President Donald Trump’s manufacturing council in 2017. Frazier called an emergency board meeting after Trump’s controversial comments about the events in Charlottesville, Virginia, and offered to present his decision to leave the council as a personal one. The board voted unanimously to have the message come from Merck.

RELATED: Merck CEO Frazier has learned to 'tune out' critics, thanks to early advice from his father

Ending Merck’s policy of forcing CEOs to retire at 65 was less about the board’s chemistry with Frazier and more about what was best for the company, said lead independent director Leslie Brun in a letter included in the proxy.

“The Board determined that the policy placed an artificial and arbitrary end date on a CEO’s tenure unrelated to developments in the business or the CEO transition process,” Brun said. “We are fortunate as shareholders that Ken Frazier has committed to remain in the CEO role past this date.”