Schering CEO Hassan Has $59 Million Buyout Agreement in Merck Merger

Schering-Plough CEO Fred Hassan stands to receive a potential $59 million payout in his company’s merger with Merck, according to a filing with the SEC. The golden parachute comes as the new Merck-Schering entity prepares for $3.5 billion in job cuts and other efficiencies.

In Schering’s 2008 proxy statement, the company described its agreement with Hassan should control of the company change hands. Under such an event, Hassan would receive a package valued at the time at $59 million, according to a summary table of estimated payments in the document.

About $35 million of that package was in stock or options. As the stock market has fallen since April 23, 2008, when the agreement was filed with the SEC, that package is probably valued differently at this point.

The agreement also gives Hassan a $15 million “tax gross-up” cash payment. Hassan’s compensation in 2007 (the last year for which the numbers are available) was $30 million, and he had $41 million in a 401(k) account. That account has likely declined in value over the last 18 months.

Here’s a summary of Hassan’s jackpot merger payout (see page 47 of the proxy; no direct link available):

• Total: 59,975,849
• $7 million in accelerated option vesting
• $38 million in accelerated stock vesting
• $15 million in a “tax gross-up”
• Source: Schering-Plough proxy statement. Numbers have been rounded.

The package is calculated this way, according to the document:

• A lump sum cash severance payment equal to three times the sum of (a) his annual base salary in effect at the time of termination and (b) the greater of his highest annual bonus paid in the three most recent fiscal years or his target annual incentive opportunity then in effect;
• A pro-rata annual incentive for the year of termination;
• Continued medical and other welfare benefits for three years following termination;
• A minimum benefit under Schering-Plough’s supplemental executive retirement plan equal to 32% of his average final earnings and without reduction for early payment; and
• Three years of additional service credit for purposes of determining retiree medical eligibility.

Schering has yet to file a proxy statement in 2009, which will update Hassan’s 2008 compensation package and possibly change this agreement. But, as BNET Pharma noted a few days ago in relation to Merck CEO Richard Clark’s $19.9 million compensation package, Hassan is unlikely to suffer. His 2007 agreement calls for:

… automatic extension for additional successive one-year periods until December 31, 2010 … Hassan’s agreement also provides for a three-year extension of his employment period in the event of a change of control.

Hassan’s lucky day comes as the two companies promised their combined 106,000 workforce that thousands would lose their jobs:

In an interview, Mr. Clark said the integration is expected to result in a work-force reduction of about 15%, with a high percentage of the job eliminations happening outside the U.S.

In the companies’ joint statement:

Substantial Cost Savings: Merck expects to achieve substantial cost savings of approximately$3.5 billion annually beyond 2011. These cost savings are expected to come from all areas across the combined company and from the full integration of the Merck/Schering-Plough Pharmaceuticals cholesterol joint venture. These cost savings are in addition to the previously announced ongoing cost reduction initiatives at both companies.

Hassan, of course, is also a major holder of Schering stock. He bought $6.68 million in SGP stock over the last few years in two buys, when it traded at $15.42 and $18.26, respectively. SGP is currently trading at $21, which means that Hassan’s stake is now worth about $8.7 million.

• See BNET’s previous coverage of Hassan’s compensation:
• Schering-Plough’s Hassan Made Stock Gains as Price Tumbled and Layoffs Grew
• Schering-Plough’s Fred Hassan Finally Loses Money on SGP Stock