Merck & Co., Inc. Stock Compensation Guide

Vesting schedule

Annual RSU awards vest one-third on each of the first, second and third anniversaries of the grant date (graded, 1/3 per year over 3 years) - not a single cliff. Structure has been stable for over a decade. RSUs accrue dividend equivalents during the restricted period, paid in cash at settlement.

Refresh grants

Refresh (or "refresher") grants are common here -- employees often receive additional RSU awards over time on top of their initial grant. New grants start their own vesting schedule, so a long-tenured employee can have several overlapping grants vesting at once.

Tax treatment at vesting

RSUs are generally taxed as ordinary income when they vest, not when they are granted. On each vest date, the fair market value of the shares that vest is treated as supplemental wages and appears on your W-2. From that point, the shares are yours; any later change in price is a capital gain or loss measured from the vest-date value, and how long you hold afterward determines whether that gain is short- or long-term. This is general educational information, not tax advice.

Sell-to-cover mechanics

Because tax is due at vesting, most plans use a "sell-to-cover" arrangement: on the vest date a portion of the newly vested shares is automatically sold to cover withholding, and you keep the rest. It is worth knowing that the default withholding on this supplemental income is often a flat federal rate that can be lower than a high earner's actual marginal rate, which can leave a gap at tax time -- a point covered further in the tax section below.

Additional notes

FLAG CONFIRMATIONS: (1) RSU vesting is GRADED 1/3 per year over 3 years (not cliff). (2) Eligibility is committee-designated under the Incentive Stock Plan; in practice equity (options/RSUs) concentrates at manager-and-above, with managers sometimes able to take a portion of pay in RSUs - directionally matches the 'manager-and-above' flag but is not a hard stated grade threshold. (3) Grant timing: primary annual cycle is February (post-Q4 earnings), but the mechanism is quarterly grant dates ('shortly after the release of Company earnings each quarter'), so February is the main cycle, not the only one. PSUs (executive/NEO long-term vehicle, not broad rank-and-file): two equally weighted (50/50) metrics over a 3-year period = 3-year cumulative EPS and 3-year Relative TSR vs a healthcare peer group (AbbVie, Amgen, Eli Lilly, GSK, Novartis, Pfizer, etc.); payout 0-200%; if annualized TSR beats peer median, payout = 100% + 5x the percentage-point difference (capped 200%); if absolute TSR negative, TSR payout capped at 100%. Recent results: 2022 program paid 169%, 2023 program paid 94%. Executive LTI mix is PSUs + stock options. Post-termination (RSUs): death/disability continue and distribute as if employed; retirement vests a pro-rata portion on the next vesting date; change-in-control double-trigger (continues vesting if assumed and terminated without cause before 2nd anniversary of closing; immediate full vesting if not assumed/converted).

Is a winning stock a reason to keep holding?

Strong past performance is often cited as a reason to diversify rather than concentrate further. Many of the largest single-stock fortunes in market history are also the ones that disappeared. Selling shares to fund a diversified portfolio is a common way investors protect what they've already earned.

How much of a portfolio in one stock is typically considered concentrated?

Many financial planners point to a guideline of keeping any single stock under 10 to 20 percent of total investable assets. Above that level, concentration risk often outweighs the upside, particularly when a paycheck and a portfolio both depend on the same company.

What's the risk of holding company stock long-term?

Employer stock and employment income are correlated. A difficult quarter for the company can affect a portfolio, a bonus, job security, and future equity grants at the same time. Diversification is the standard protection against that kind of compounding downside.

Why do equity-heavy employees often owe taxes at year-end?

Employers typically withhold 22 percent on supplemental income like RSU vests and ESPP purchases. For employees in higher brackets, actual federal-plus-state tax rates can reach 35 to 40 percent, and the gap shows up as a balance due at filing time.

Are there ways to reduce the tax bill on equity compensation?

Common approaches include spreading large vesting events across calendar years, harvesting capital losses against capital gains, and meeting the qualifying holding period on ESPP shares. The effectiveness of any approach depends on individual income, goals, and the specifics of the equity plan.

What's a common order of operations for excess cash?

A widely cited framework is: capture the full 401(k) match, build an emergency fund, fund an HSA if eligible, pay down high-interest debt, max the 401(k), then move to backdoor Roth IRAs and taxable brokerage. The right order varies by situation, but the framework helps avoid leaving employer benefits unused.

How do short-term and long-term goals fit together?

A common principle is to match the account type to the time horizon. Short-term goals under five years are often held in high-yield savings or short-duration Treasuries. Long-term goals are typically held in diversified equity portfolios. Mismatches in either direction tend to create unnecessary risk or unnecessary drag.

What does diversification typically look like alongside employer stock?

A diversified portfolio usually includes a mix of US stocks, international stocks, and bonds, sometimes with smaller allocations to alternatives. The general principle is that no single position should be large enough to materially change the retirement plan if that position underperforms.