A Message from the CEO

 

 

 

Dear Fellow Shareholders,

 

The transformational journey of our company since we began our Action Agenda six years ago has been a remarkable one. We have overcome great challenges to build a company that today has strength and diversity on many fronts.

 

Of all the many accomplishments by our people, I would like to highlight the strong R&D engine that we have built, and our rich late stage pipeline. In 2003 we had five late-stage entities. At the end of 2008, we had eight new entities in Phase III, with four more in pre-registration, for a total of 12 in late-stage development.

 

This impressive achievement, and all the other strengths that we have built, resulted from the talent and commitment of our people. Through their winning spirit, we have created our successes, and powered through many challenges.

 

On March 9, 2009, we announced our planned merger with Merck & Co., Inc. We look forward to a combined future in a science-centered company that will have great opportunities to do good things for health and wellness.

 

Meantime, our focus at Schering-Plough will be to keep executing against our goals until the merger closes.

 

We thank our people for their dedication.

 

We are grateful to our Board for their strong and independent oversight.

 

And we are grateful to you, our shareholders. We have learned much from our on-going, active engagement with shareholders as we worked to transform Schering-Plough. We thank our shareholders for your continuing trust.

 

Sincerely,

 

 

 

Kenilworth, New Jersey

April 24, 2009

 

 

 

Notice of Annual Meeting of Shareholders

May 18, 2009

 

 

 

The Annual Meeting of Shareholders of Schering-Plough Corporation will be held at the Field Museum, 1400 S. Lake Shore Drive, Chicago, Illinois 60605, on Monday, May 18, 2009, at 7:30 a.m. local time. Directions to the Field Museum are available at www.fieldmuseum.org/plan_visit/get_here.htm. The purposes of the meeting are to vote on the following matters and to transact such other business that may properly come before the meeting:

 

 

Only holders of record of common shares at the close of business on April 6, 2009 will be entitled to vote at the meeting or any adjournments or postponements thereof.

 

For the security of everyone attending the meeting, a shareholder must present both an admission ticket and photo identification to be admitted to the Annual Meeting of Shareholders. The process for shareholders to obtain an admission ticket from Schering-Plough’s transfer agent, BNY Mellon, is described in the proxy statement on page 61.

 

Your vote is important. Whether or not you plan to attend the meeting, please vote in advance by proxy in whichever way is most convenient — in writing, by telephone or by the Internet.

 

We appreciate your investment in Schering-Plough. We encourage you to participate in Schering-Plough’s governance by voting.

 

Susan Ellen Wolf
Corporate Secretary and
Vice President – Governance

 

Kenilworth, New Jersey

April 24, 2009

 

Table of Contents

 

 

 

Proxy Statement

 

2009 Annual Meeting of Shareholders

 

The Field Museum

1400 S. Lake Shore Drive

Chicago, IL 60605

 

Monday, May 18, 2009
7:30 a.m.

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Schering-Plough Corporation to be voted at its Annual Meeting of Shareholders on May 18, 2009, and any adjournments or postponements of the Annual Meeting of Shareholders. At the 2009 Annual Meeting of Shareholders, holders of common shares will vote on the following matters:

 

 

The Board of Directors has designated Fred Hassan, Robert J. Bertolini and Susan Ellen Wolf as proxies in connection with the 2009 Annual Meeting of Shareholders. With respect to any other matter that properly comes before the Annual Meeting of Shareholders, these proxies will vote as recommended by the Board of Directors or, if no recommendation is given, in their own discretion.

 

This proxy statement and the accompanying proxy and voting instruction card, together with the 2008 financial report to shareholders and company overview are being mailed beginning on or about April 24, 2009, to all holders of record of common shares as of the close of business on April 6, 2009. There were 1,632,070,533 common shares outstanding on April 6, 2009.

 

The address of Schering-Plough’s principal executive offices is 2000 Galloping Hill Road, Kenilworth, New Jersey 07033, and its Web site is www.schering-plough.com.

 

The Board has nominated eleven nominees for election as Directors for a one-year term expiring at the 2010 Annual Meeting of Shareholders. Directors are elected to serve for a one-year term and until their successors have been elected and qualified.⁽¹⁾

 

In the event one or more of the named nominees is unable or unwilling to serve, the persons designated as proxies may cast votes for other persons as substitute nominees. The Board of Directors has no reason to believe that any of the nominees named below will be unavailable, or if elected, will decline to serve.

 

Biographical information is given below for each nominee for Director. All nominees are presently serving as Directors.

 

Hans W. Becherer and Carl E. Mundy Jr. will each retire as a Director at the 2009 Annual Meeting of Shareholders. Schering-Plough appreciates Mr. Becherer’s twenty years of service as a Director and his significant contributions as the Chair of the Compensation Committee and his membership on the Audit and Nominating and Corporate Governance Committees. Schering-Plough appreciates General Mundy’s fourteen years of service as a Director and his significant contributions as a member on the Business Practices Oversight, Finance and Nominating and Corporate Governance Committees.

 

Vote required. A plurality of the votes cast is required for the election of Directors. The Board has adopted a majority vote resignation By-Law. Under that By-Law, should a Director receive withhold votes from a majority of the votes cast for the election of Directors, he or she would promptly offer to resign from the Board; the Board’s Nominating and Corporate Governance Committee (excluding the nominee in question) would recommend that the Board accept the resignation absent a compelling reason otherwise; the Board (excluding the nominee in question) would act on the Nominating and Corporate Governance Committee’s recommendation within 30 days or at its next regularly scheduled meeting, whichever is earlier; and the Board’s decision would be disclosed in a Form 8-K filed with the Securities and Exchange Commission. The majority vote resignation By-Law applies to the election of Directors at the 2009 Annual Meeting of Shareholders and all uncontested elections (where the number of nominees equals the number of Directors to be elected). This By-Law would not apply in a contested election (where the number of nominees exceeds the number of vacancies).

 

The Board recommends a vote FOR each of the nominees in proposal one.

 

All nominees are currently serving as Directors

 

 

 

 ⁽¹⁾ The proposed combination of Schering-Plough with Merck & Co., Inc. pursuant to the Agreement and Plan of Merger dated March 8, 2009, will be submitted to shareholders for approval at a special meeting expected to be scheduled later in 2009. Section 1.4 of that Agreement provides that at closing of the merger, all but three of the Schering-Plough Directors will resign and the Merck Directors will be elected to the Schering-Plough Board. The timing of the merger is dependent on the receipt of antitrust approvals and the satisfaction of other contingencies.

Director Independence

 

Schering-Plough is subject to the New York Stock Exchange independence requirements for Directors and has adopted the more restrictive Schering-Plough Board Independence Standard, which is included in the Corporate Governance Guidelines. The Guidelines are available on Schering-Plough’s Web site at www.schering-plough.com. The Standard requires that:

 

 

The Nominating and Corporate Governance Committee assists the Board with the assessment of Director independence. For more information about the procedures used to assess independence, see “Procedures for Related Party Transactions and Director Independence Assessments” on page 14.

 

The Nominating and Corporate Governance Committee and the Board have determined that (1) Hassan is not independent because as Chairman of the Board and CEO of Schering-Plough, he is an officer and employee of Schering-Plough; (2) all other Director nominees are independent under the New York Stock Exchange listing standards and the more restrictive Schering-Plough Board Independence Standard; and (3) each independent Director has no material relationship with Schering-Plough.

 

The Nominating and Corporate Governance Committee and the Board have determined that all members of the Audit Committee—Directors Colligan, McGrath and van Oordt and former Director Becherer—also are independent pursuant to the requirements of Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended (the Exchange Act).

 

Board Meetings and Attendance of Directors

 

The Board of Directors held 13 meetings in 2008, including a two-day strategic planning meeting. All Directors attended more than 75% of the aggregate of (1) the total number of meetings of the Board, and (2) the total number of meetings held by all Committees of the Board on which they served.

 

Director Attendance at Annual Meetings of Shareholders

 

Directors are expected to attend Annual Meetings of Shareholders unless an emergency or illness makes such attendance impossible or imprudent. Since 1990, only one Director has missed an Annual Meeting of Shareholders (due to illness), and all other Directors have attended all Annual Meetings of Shareholders, including the 2008 Annual Meeting of Shareholders.

 

Lead Director

 

On the recommendation of the Nominating and Corporate Governance Committee, the Board has established a practice for appointing a Lead Director with the following duties:

 

The Lead Director service period is a calendar year. The Lead Director is designated from the independent Directors who chair Board Committees. Patricia F. Russo has been designated as the Lead Director for 2009.

 

Executive Sessions of the Board of Directors

 

As required by the Corporate Governance Guidelines, the Board periodically meets in executive session without any Director present who is also a member of management. During 2008, the Board held seven such sessions.

 

Executive sessions are chaired by the Lead Director, or in his or her absence, by another independent Director who chairs a Committee of the Board.

 

Board Turnover

 

In light of routine inquiries about Board turnover, the following information is provided:

 

Between 2002 (the year in which the Board announced the intention to replace R.J. Kogan as Chairman and CEO) and the date of the 2009 Annual Meeting of Shareholders, seven Directors have joined the Board and ten Directors will have left the Board.

 

Specifically, the following Directors left the Board: Herzlinger, Morley and Wood in 2002; Kogan in 2003; Komansky and Miller in 2004; Osborne in 2006; Dr. Philip Leder in 2008; and Becherer and Mundy are leaving the Board as of the date of the 2009 Annual Meeting of Shareholders.

 

Specifically, the following Directors joined the Board: Hassan and Leder in 2003; Colligan and Kidder in 2005; Perez and Stahl in 2007; and Thompson in 2008.

 

Director Education

 

During 2008, all Directors participated in three customized Director Education modules described below. Each Director earned at least 15 education credit hours by participating in these activities. All Directors attended:

 

During 2008, Directors also toured Schering-Plough’s Memphis, Tennessee distribution and research facilities, which included a presentation about Schering-Plough’s Consumer Health Care business.

 

Additional education is provided throughout the year, as needed, on matters pertinent to Committee work and Board deliberations. Subjects covered for the full Board or certain Board Committees during education sessions in 2008 included:

 

Several Directors also attended general Director education programs offered by third parties during 2008 and to date in 2009.

 

Director Compensation

 

Hassan receives no compensation for his service as a Director.

 

All other Directors receive compensation pursuant to the Directors Compensation Plan as described in more detail below. These Directors receive no compensation, directly or indirectly, from Schering-Plough other than pursuant to the Directors Compensation Plan.

 

The Process for Reviewing and Determining Director Compensation. The Nominating and Corporate Governance Committee, pursuant to its charter, is responsible for conducting an annual assessment of non-employee Director compensation and benefits. The Committee members are all independent as defined in the New York Stock

Exchange listing standards and the more restrictive Schering-Plough Board Independence Standard described in “Director Independence” on page 5.

 

As part of the assessment, the Committee considers the amount of Director compensation and the mix of compensation instruments. The Committee uses independent benchmarking data relating to Director compensation compiled by the National Association of Corporate Directors for similar-sized companies in both the pharmaceutical and health care industries. The Committee also considers feedback from shareholders about Director compensation.

 

Director Compensation Philosophy. The Nominating and Corporate Governance Committee targets Director compensation at the median of total compensation paid at the pharmaceutical and health care companies discussed above (the “Formula”). The Committee believes Directors at companies in these global industries face oversight and analytical issues similar to those faced by Schering-Plough Directors. The Committee believes the current compensation paid to Directors is reasonable in light of the service they provide to Schering-Plough.

 

As part of our active Shareholder Engagement Program, we are asking for shareholder views on our Director compensation program in a survey provided to shareholders with this proxy statement.

 

Directors Compensation Plan. In 2006, at the recommendation of the Committee and the Board, shareholders approved a new, more transparent Directors Compensation Plan. The Committee drew from the Non-Employee Director Compensation Policy published by the Council of Institutional Investors and outside counsel for plan design. The new Plan became effective June 1, 2006.

 

Under the Plan, non-employee Directors receive a set amount for service on the Board. The amount is paid in a mix of two-thirds in cash and one-third in common shares. Pursuant to the Formula, this base Director fee was raised from $200,000 to $229,500 in 2008. This fee was last increased in 2006.

 

Directors who serve either on the Audit Committee or as the Chair of any other Board Committee receive an additional service fee paid in cash. The additional service fee has not been increased since the Plan was adopted.

 

Directors may elect to defer receipt of their Director fees. Directors may elect to defer the cash component of their compensation in either an account that grows/diminishes in value as if invested in Schering-Plough common shares (with dividend equivalents reinvested) or in an account that earns interest at a market rate. Directors may also elect to defer the share component of their compensation in an account that grows/diminishes in value as if invested in Schering-Plough common shares (with dividend equivalents reinvested).

 

Director Stock Ownership. Director stock ownership is considered in conjunction with Director compensation. Director stock ownership is also a valuable tool to align Directors’ interests with those of Schering-Plough shareholders. The Nominating and Corporate Governance Committee considers Director ownership of
Schering-Plough equity and recommends ownership requirements to the Board. In 2005, the Board established stock ownership requirements for all Directors and included the requirements in the Corporate Governance Guidelines. The current requirement is 5,000 common shares (including deferred stock units) within three years of joining the Board, and all Directors have achieved this stock ownership requirement, except for Thompson, who joined the Schering-Plough Board of Directors in 2008.

 

2008 Director Compensation. For 2008 service, Directors received (1) a base Director fee of $229,500, two-thirds of which was paid in cash and one-third of which was paid in Schering-Plough common shares; and (2) an additional service fee of $15,000 for each eligible Director who served either on the Audit Committee or as the Chair of any other Board Committee. Committee Chairs who were also members of the Audit Committee were only paid one additional service fee.

 

No Personal Benefits. Director compensation did not include personal benefits in 2008. Director compensation will not include personal benefits in 2009. Directors occasionally receive complimentary Schering-Plough consumer products, like Dr. Scholl’s and Coppertone products, and spouses are invited to travel with Directors to meetings every few years, the last time being in 2007. At these meetings, the spouses typically attend certain portions of the business activities, such as touring Schering-Plough operations and Director education modules. In 2008, the total cost to Schering-Plough for all such items was under $10,000 per Director.

2008 Director Compensation Table

 

The following table includes all compensation to outside Directors during 2008.

 

 

 

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The Audit Committee selected Deloitte & Touche LLP (Deloitte) to audit Schering-Plough’s books and accounts for the year ending December 31, 2009 and will offer a resolution at the Annual Meeting of Shareholders to ratify the designation. Although shareholder ratification is not required, the designation of Deloitte is being submitted for ratification at the 2009 Annual Meeting of Shareholders because Schering-Plough believes it is a matter of good corporate governance practice.

 

Representatives of Deloitte will be present at the meeting to respond to appropriate questions. They will have an opportunity, if they desire, to make a statement at the meeting.

 

Vote required. The affirmative vote of a majority of the votes cast is needed to ratify the designation of Deloitte.

 

The Board of Directors recommends a vote FOR proposal two.

 

Information About Deloitte’s Fees

 

Aggregate fees for 2008 and 2007 services provided by Deloitte and its affiliates to Schering-Plough and its subsidiaries are as follows:

 

 

 

Pre-Approval Process for Work Performed by Deloitte and Related Fees

 

The Audit Committee has a policy to pre-approve all services provided by Deloitte or its affiliates and the related fees. They did so for all 2008 and 2007 services and will continue the pre-approval process in the future. The pre-approval process includes the following steps:

 

Information About the Audit Committee of the Board of Directors and its Practices

 

Membership and Independence. The Audit Committee of the Board of Directors has four members. Each member is an independent Director, as independence is defined by the New York Stock Exchange listing standards, the more restrictive Schering-Plough Board Independence Standard and the requirements of Rule 10A-3(b)(1) under the Exchange Act.

 

Functions and Process. The Audit Committee operates under a written charter adopted by the Board. The charter is available on Schering-Plough’s Web site at www.schering-plough.com.

 

The Audit Committee selects, evaluates and oversees the work of the independent registered public accountants and holds regular private sessions with them. The Audit Committee also oversees the work of the global internal auditors and holds regular private sessions with the senior internal audit executive and other executives as considered appropriate by the Committee.

 

The Board has determined that the Committee Chairman, Thomas J. Colligan, meets the SEC requirements for, and has designated him as, the Audit Committee Financial Expert.

 

Audit Committee Report

 

The Audit Committee is appointed by the Board to assist the Board in its oversight function by monitoring, among other things, the integrity of Schering-Plough’s consolidated financial statements, the financial reporting process, the independence and performance of the independent registered public accountants, and the performance of the internal auditors. It is the responsibility of Schering-Plough’s management to prepare financial statements in accordance with generally accepted accounting principles and of the independent registered public accountants to audit those financial statements. The Audit Committee has the sole authority and responsibility to select, appoint, evaluate and, where appropriate, replace the independent registered public accountants.

 

In this context, the Audit Committee has met and held discussions with management, the independent registered public accountants and the internal auditors. Management represented to the Audit Committee that Schering-Plough’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the audited consolidated financial statements with management, the independent registered public accountants and the internal auditors. The Audit Committee discussed with the independent registered public accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

 

In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accountants required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accountants’ communications with the Audit Committee concerning independence, and has discussed with the independent registered public accountants their independence from Schering-Plough and its management.

 

Based on the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and set forth in the charter, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in Schering-Plough’s 2008 10-K for filing with the SEC.

 

AUDIT COMMITTEE

 

Thomas J. Colligan, Chairman

Hans W. Becherer

Eugene R. McGrath

Robert F. W. van Oordt

 

Stock Ownership of Certain Beneficial Owners

 

Set forth below is certain information with respect to those persons who are known to Schering-Plough to own beneficially more than 5% of the outstanding Schering-Plough common shares.

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Directors, officers and beneficial owners of more than 10% of Schering-Plough’s outstanding common shares are required by Section 16(a) of the Exchange Act and related regulations to file ownership reports on Forms 3, 4 and 5 with the SEC and the New York Stock Exchange and to furnish Schering-Plough with copies of these reports.

 

Schering-Plough believes that all required Section 16(a) reports were timely filed in 2008. Schering-Plough’s belief is based solely upon a review of:

Common Share and Common Share Equivalents Ownership of Directors and Officers

 

Set forth below in the column titled “Number of Common Shares” is information with respect to beneficial ownership of Schering-Plough common shares as of April 6, 2009, by each Director, the executive officers named in the Summary Compensation Table and by all Schering-Plough Directors and executive officers as a group. Set forth below in the column titled “Number of Common Share Equivalents” is the number of common share equivalents (which grow/diminish like common shares) credited as of April 6, 2009, to the deferred compensation accounts of Schering-Plough’s non-employee Directors and to certain executive officers’ accounts in Schering-Plough’s unfunded savings plan.

 

 

Procedures for Related Party Transactions and Director Independence Assessments

 

The New York Stock Exchange has long recommended that independent Directors review related party transactions. At Schering-Plough, the Nominating and Corporate Governance Committee oversees Schering-Plough’s written procedure for identifying, analyzing and approving related party transactions. The Nominating and Corporate Governance Committee also reviews information about Director independence and recommends independence standards and determinations to the Board.

 

The procedure for related party transactions applies to any transaction between Schering-Plough or its affiliated companies on the one hand, and a Director, executive officer or his/her family members on the other hand. The procedure requires prior review by counsel of any related party transaction regardless of size. The prior review allows the Board and management to ensure that any related party transaction is consistent with the best interest of Schering-Plough and its shareholders and, where a Director is involved, to assess the impact on Director independence.

 

The prior review of a proposed related party transaction includes a determination as to whether the transaction has been made on an arm’s length basis (that is, on terms comparable to those provided to unrelated third parties). The review also includes information about other, unrelated alternatives to a proposed related party transaction. For example, if a purchase of supplies were proposed, then the review would identify competing vendors/terms, or if a relative were considered for a job opening then the review would include a description of other applicants and their qualifications.

 

If a related party transaction is proposed, the results of the prior review are presented to the Nominating and Corporate Governance Committee. If the Committee is comfortable with the proposed related party transaction, the transaction is tracked to assure that as the transaction occurs, it remains within the approved scope and amount. If a related party transaction or series of transactions spans multiple years, it is reconsidered once a year by the Committee.

 

Schering-Plough maintains a list of related parties for each Director and executive officer which is updated as Schering-Plough learns of changes (for example, upon marriage or change of employment) and is confirmed in writing once a year by the Director or executive officer. To help assure no related party transaction has been inadvertently overlooked, Schering-Plough checks accounts receivable and sales and accounts payable and disbursements against the list of related parties quarterly. Also, annually Schering-Plough asks for written confirmation from each Director and executive officer as to all related party transactions that exceed the thresholds in the New York Stock Exchange listing standards, the more restrictive Schering-Plough Director Independence Standard, and for Audit Committee members, the additional independence standards specified in Rule 10A-3(b)(1) under the Exchange Act, and various disclosure thresholds and materiality standards as determined by Schering-Plough’s counsel and accountants to be prudent for ensuring compliance with applicable laws and regulations.

 

Corporate Governance Guidelines

 

Schering-Plough believes that good corporate governance practices create a solid foundation for achieving its business goals and keeping the interests of its shareholders and other stakeholders in perspective. Under Hassan’s leadership, in 2003, Schering-Plough adopted a new Vision— to earn trust, every day— and new Leader Behaviors: shared accountability and transparency, cross-functional teamwork and collaboration, listening and learning, benchmarking and continuously improving, coaching and developing others, and business integrity.

 

Schering-Plough has long recognized the importance of good corporate governance, first adopting its Statement of Corporate Director Policies in 1971, which, among other things, required that a majority of the Board be independent. In 2004, the Board adopted Corporate Governance Guidelines, consistent with the new Vision and Leader Behaviors. The Board, with oversight by the Nominating and Corporate Governance Committee, reviews and enhances the governance practices, including the Corporate Governance Guidelines and the charters of the Board Committees, on a regular basis. The Guidelines and Committee charters are available on Schering-Plough’s Web site at www.schering-plough.com.

 

Under Hassan’s leadership, the Board has initiated a number of governance and compensation enhancements since 2003. The most significant of these enhancements are listed on page 19.

Committees of the Board of Directors

 

The Board of Directors has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Each of the members of those Committees are independent Directors, as independence is defined in the New York Stock Exchange listing standards and the more restrictive Schering-Plough Board Independence Standard. Members of the Audit Committee all meet the independence requirements set forth in Rule 10A-3(b)(1) under the Exchange Act.

 

The Board of Directors also has a standing Business Practices Oversight Committee, a Finance Committee and a Science and Technology Committee.

 

The charters of all standing Committees have been adopted by the Board and are available on Schering-Plough’s Web site at www.schering-plough.com.

 

Table of Committee Membership and Meetings

 

The following table names the Directors who chair and serve as members on each Committee.

 

 

 

 

In early 2008, the Board established a special committee to consider a derivative demand from a shareholder. That special committee is chaired by Stahl and its other members are Turner and McGrath. The Committee held eight meetings in 2008.

 

Schering-Plough also has an Executive Committee which meets as needed in the interim between Board meetings. It did not meet in 2008.

 

Committee Functions. Audit Committee functions include: selecting the independent registered public accountants, subject to shareholder ratification; providing oversight of the independent registered public accountants’ independence, qualifications and performance; assisting the Board in its oversight function by monitoring the integrity of Schering-Plough’s financial statements; the performance of the internal audit function; and compliance by Schering-Plough with legal and regulatory requirements. For additional information, see “Information About the Audit Committee of the Board of Directors and its Practices” and the “Audit Committee Report” on page 11.

 

Business Practices Oversight Committee functions include: assisting the Board with oversight of non-financial compliance systems and practices and related management activities, including regulatory requirements prescribed

by the U.S. Food and Drug Administration and the European Medicines Agency; and assisting the Board with oversight of systems for compliance with Schering-Plough’s Standards of Global Business Practices.

 

Compensation Committee functions include: discharging the Board’s responsibilities relating to the compensation of executive officers; approving, evaluating and administering executive compensation plans, policies and programs; and making recommendations to the Board regarding equity compensation and incentive plans. For additional information, see “Information About the Compensation Committee of the Board of Directors and its Practices” beginning on page 34.

 

Finance Committee functions include: assisting the Board with oversight of strategic financial matters and capital structure, and recommending the dividend policy to the Board.

 

Nominating and Corporate Governance Committee functions include: assisting the Board with Board and Committee structure; identifying nominees (and considering shareholder nominees in accordance with provisions of the By-Laws described on page 63); Director independence; Board and Committee performance assessments; shareholder relations and outside Director compensation. More information about the Committee is provided below.

 

Science and Technology Committee functions include: assisting the Board in the general oversight of science and technology matters that impact Schering-Plough’s business and products.

 

Information About the Nominating and Corporate Governance Committee of the Board of Directors and its Practices

 

Membership and Independence. The Nominating and Corporate Governance Committee currently has six members. Each member is an independent Director, as independence is defined in the New York Stock Exchange listing standards and the more restrictive Schering-Plough Board Independence Standard.

 

Functions and Process. The Nominating and Corporate Governance Committee operates under a written charter adopted by the Board. The charter is available on the Schering-Plough Web site at www.schering-plough.com.

 

The Nominating and Corporate Governance Committee identifies Director nominees, and is responsible for the independence standards and assessments. The Nominating and Corporate Governance Committee assesses and recommends outside Director compensation. The Nominating and Corporate Governance Committee recommends the structure of the Board and Committees. It also recommends committee function and membership. The Nominating and Corporate Governance Committee determines the process for the annual Board and committee performance assessments, the content of committee charters and the Corporate Governance Guidelines.

 

Director Nominees

 

One of the Nominating and Corporate Governance Committee’s most important functions is the identification of Director nominees. The Committee considers nominees from all sources, including shareholders, nominees submitted by other outside parties and candidates known to current Directors. The Committee also has from time to time retained an expert search firm (that is paid a fee) to help identify candidates possessing the minimum criteria and other qualifications identified by the Committee as being desired in connection with a vacancy on the Board. All candidates must meet the minimum criteria for Directors established by the Committee. These criteria help ensure that the Schering-Plough Board has an optimal mix of skills, expertise and experience to function effectively even when unexpected challenges arise. These criteria, listed in Schering-Plough’s Corporate Governance Guidelines, are:

 

 

The Nominating and Corporate Governance Committee considers shareholder nominees for Director and bona fide candidates for nominations that are submitted by other third parties.

 

Candidates are evaluated in the same manner regardless of who first suggests they be nominated. The candidate’s credentials are provided to the Nominating and Corporate Governance Committee by the Corporate Secretary with the advance materials for the next Committee meeting. If any member of the Committee believes the candidate may be qualified to be nominated, the Committee discusses the matter at the meeting. For each candidate who is discussed at a meeting, the Committee decides whether to further evaluate the candidate. Evaluation includes a thorough background check, interaction and interviews with Committee members and other Directors and discussion about the candidate’s availability and commitment. When there is a vacancy on the Board, the best candidate from all evaluated sources is recommended by the Committee to the full Board to consider for nomination.

 

Communications with Directors

 

The Board of Directors has adopted a process for shareholders and others to send communications to the Board or any Director. This includes communications to a Committee, the independent Directors as a group, the current Lead Director or other specified individual Director(s). All communications are to be sent by mail or by fax, care of the Corporate Secretary, at Schering-Plough headquarters, addressed as follows:

 

[Board or Name of Individual Director(s)]

c/o Corporate Secretary

Schering-Plough Corporation

2000 Galloping Hill Road

Mail Stop: K-1-4-4525

Kenilworth, New Jersey 07033

Fax: 908-298-7303

 

The independent Directors have directed the Corporate Secretary to screen the communications. First, communications sent by mail are subject to the same security measures as other mail coming to Schering-Plough, which may include x-ray, scanning and testing for hazardous substances. Next, the Board has directed the Corporate Secretary and her staff to read all communications and to discard communications unrelated to Schering-Plough or the Board. All other communications are to be promptly passed along to the addressee(s). Further, the Corporate Secretary’s staff is to retain a copy in the corporate files and to provide a copy to other Directors, members of management and third parties, as appropriate. For example, if a communication were about auditing or accounting matters, the policy established by the Audit Committee provides that Audit Committee members also would receive a copy, as would the senior Global Internal Audits executive, and in certain cases, the independent registered public accountants.

 

Anyone who wishes to contact the Audit Committee to report complaints or concerns about accounting, internal accounting controls or auditing matters may do so anonymously by using the above procedure.

 

Corporate Governance Materials

 

Schering-Plough has adopted a code of business conduct and ethics, the Standards of Global Business Practices, applicable to all employees, including the chief executive officer, chief financial officer and controller. The Board has adopted the Code of Business Conduct and Ethics applicable to the Board. Schering-Plough’s Corporate Governance Guidelines, Standards of Global Business Practices, Board of Directors Code of Business Conduct and Ethics, and Committee charters are available in the Investor Relations section of Schering-Plough’s Web site at www.schering-plough.com. In addition, a written copy of the materials will be provided at no charge by writing to: Office of the Corporate Secretary, Schering-Plough Corporation, 2000 Galloping Hill Road, Mail Stop: K-1-4-4525, Kenilworth, New Jersey 07033.

 

Listening to, learning from and communicating with shareholders is the heart of the Shareholder Engagement Program established by Hassan soon after joining Schering-Plough. The Shareholder Engagement Program is pro-active and cross-functional, led by the senior investor relations and governance officers. The Shareholder Engagement Program is strategic and fully integrated with the Action Agenda.

 

Feedback from the Shareholder Engagement Program has provided Hassan with information to lead the Board in making a series of governance and compensation program enhancements to strengthen the accountability of management and the Board to shareholders and increase the process integrity for electing Directors and awarding compensation. Many of these enhancements are listed in the table on the next page.

 

The Shareholder Engagement Program at Schering-Plough is shared between Investor Relations, which covers issues regarding Schering-Plough’s business, financial matters and stock performance, and Corporate Governance, which covers issues regarding Schering-Plough’s corporate governance and social issues and leads Schering-Plough’s corporate social responsibility program, called the “Shared Social Engagement Program.” Corporate officers serve as liaisons between shareholders, members of senior management and the Board. Shareholders are asked to use the contacts noted below to ensure that information is conveyed to senior management and the Board. These corporate officers also arrange direct interaction of senior management members and the Board with shareholders as appropriate.

 

 

More detail about the Shareholder Engagement Program is provided below.

 

Since establishment of the Shareholder Engagement Program in 2003, Schering-Plough’s investor relations activities have become robust. These include presentations to shareholders by senior management and other key employees, as well as dialogue between shareholders and senior management and the investor relations professionals.

 

In addition, since establishment of the Shareholder Engagement Program in 2003, a governance outreach to shareholders was established. As part of the governance function, Directors and members of the new management team have participated regularly in transparent and interactive dialogue with investors about many issues including:

 

 

Since the Shareholder Engagement Program was established in 2003, Schering-Plough has also conducted shareholder surveys to obtain feedback on issues of interest. For example, an earlier survey on majority voting for Directors was used to help the Board in decision making on Schering-Plough’s majority vote By-Law provision. In October 2008, the Board announced a compensation survey (being mailed with this proxy statement), to give shareholders another way to provide shareholder views about compensation to the Board.

 

TABLE SUMMARIZING GOVERNANCE AND COMPENSATION ENHANCEMENTS

Governance Enhancements			Compensation Enhancements
• Annual election of directors (eliminated classified board) • Eliminated poison pill • Committed that any new poison pill would be submitted to shareholders for a vote • Eliminated supermajority voting • Added a majority voting policy for election of directors to the By-Laws • Added a lead director role and published the duties • Held non-management executive sessions at each regular Board meeting; and also at many meetings of key Board Committees, including the Compensation Committee • Established a strategic Shareholder Engagement Program • Elected a governance officer and provided both governance and investor relations contact information in the proxy statement			• Moved to a more difficult standard (a double-trigger) for acceleration of equity following a change of control • Added rigorous stock ownership guidelines for management and the Board • Added performance-vested stock options for executives as a part of the long-term incentive program • Added a two-year holding period requirement for shares received on exercise of stock options by executives • Eliminated time-vested restricted stock for executives • For new executives, eliminated executive life insurance coverage and prior service credit for supplemental pension plans • Eliminated cash long-term incentives and replaced them with equity-based incentives, to increase the percentage of equity in the pay mix • Added performance-based stock units as part of the long-term incentive program • Eliminated payment of dividend equivalents on unvested performance-based awards • Compensation Committee retained an independent compensation consultant, Ira Kay of Watson Wyatt, and recently tightened its strong independence policy for the consultant

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Executive Summary

 

A cornerstone of Schering-Plough’s executive compensation program is the strong tie of pay to performance, in order to link the interests of executive officers to the interests of shareholders and incent the creation of long-term shareholder value.

 

In 2008, Schering-Plough achieved strong sales and earnings performance. However, total shareholder return declined in 2008. Accordingly, compensation reported in the 2008 Summary Compensation Table declined over 2007 compensation:

 

The Compensation Committee, the Board and the management of Schering-Plough take pride in the performance-based compensation system, and they remain committed to maintaining the integrity of the system in good times and bad.

 

Further, at the request of the CEO and other named executives, the Compensation Committee agreed there will be no merit increases to salaries for the named executives and other members of the Operations Management Team (the top 40 executives) for 2009.

 

An emphasis on equity ownership by executives, to align executives with shareholders, also continued in 2008. This emphasis is demonstrated by:

 

Further, Hassan leads by example with significant equity ownership. On the record date for the annual meeting, Hassan held 15 times salary in Schering-Plough common shares. The shares Hassan owns include shares purchased with personal funds ($4.6 million in 2003 and $2 million in 2008). Also, since joining Schering-Plough in 2003, Hassan has sold no shares — he continues to hold the shares purchased with personal funds, as well as the shares he has received through Schering-Plough compensation plans (aside from shares withheld by Schering-Plough for taxes).

 

Management and the Board remain in close touch with shareholders throughout the year as part of the Shareholder Engagement Program. The table on page 19 demonstrates the Board’s commitment to enhancing governance and compensation practices based on all relevant facts and circumstances at a given time, including shareholder views.

Key Performance Metrics for 2008 Pay

 

Performance Metrics for Incentive Compensation — Used by the Compensation Committee to determine performance-based pay components earned in 2008 (Note that 2008 is the first full calendar year where the acquired OBS businesses are included)

 

2008 Adjusted Sales Growth.*  Increased by $5.6 billion in 2008.

 

 

A metric for the 2008 annual incentive.

 

2008 Operating Earnings Per Share.  GAAP earnings adjusted to include and exclude the following non-operating items designated by the Compensation Committee at the start of the performance period.

 

 

A metric for the 2008 annual incentive and the performance-based stock options.

 

Five-Year Actual Total Shareholder Return.†

 

 

A metric fo r the Five-Year Transformational Incentive.

 

Five-Year Relative Total Shareholder Return.†

 

 

A metric for the Five-Year Transformational Incentive.

 

 

 

General Performance Metrics

 

General Performance Metrics — Used by the Compensation Committee in considering total compensation levels of the named executives.

 

Five-Year Adjusted Sales Growth.*  Increased
by $12.2 billion or 142% from January 1, 2004
to December 31, 2008.

 

 

Five-Year Growth in Free Cash Flow.**  Increased by $3 billion; from ($940 million) as of December 31, 2003 to $2.0 billion as of December 31, 2008.

 

 

 

Five-Year Operating Earnings Per Share Progression.††

 

 

 

R&D Pipeline Strengthens in Five Years.

 

Phase-three pipeline and projects in registration (new entities and major combination projects).

 

 

 

 

Chart on At-Risk Pay

 

At-Risk, Performance-Based Pay Has Increased. As discussed throughout the Executive Compensation disclosures in this proxy statement, a significant portion of executive compensation is tied to performance, including significant long-term incentive pay components. The bar charts below show how the concentration of performance-based compensation increased for the named executives since the new performance-based compensation program began in January 2004.

 

 

 

 

Total Compensation

 

Total Compensation Philosophy. As discussed in the “Executive Summary” above, the executive compensation program is designed to provide superior pay if there is superior performance that is consistent with the goal to build long-term value for shareholders. The total compensation program design supports the Compensation Committee’s objectives, which are as follows:

 

Target Total Direct Compensation Opportunity. As a general matter, Schering-Plough targets its total executive compensation opportunity at the median of its selected Peer Group of global U.S.-based pharmaceutical companies. However, for certain of the named executives, and selected other executives, Schering-Plough has set total compensation opportunity at the 75th (or higher) percentile compared to the Peer Group. This is due to the factors described in this “Compensation Discussion and Analysis” and the “Compensation Committee Report” including:

 

 

Under the current executive compensation program, target total compensation is allocated among base salary, annual incentive, equity long-term incentives and employee benefits as follows:

 

 

As described in detail below, a large percentage of pay is tied to both short and long-term financial objectives believed to be tied to increasing shareholder value over the long term. As a result, actual future pay could be significantly higher or lower than the 75th percentile of the Peer Group’s realizable pay. In addition to the specific performance metrics utilized under Schering-Plough’s incentive plans, the Compensation Committee also looks at other relevant performance indicators as described in “Key Performance Metrics for 2008 Pay” on page 22 and “The Analytical Process Used by the Compensation Committee” below, in setting the target total compensation levels and opportunity.

 

The Analytical Process Used by the Compensation Committee

 

In making compensation decisions, the Compensation Committee of the Board considers a wide variety of information including:

 

 

The Compensation Committee also considers information relevant to the specific situation including the executive’s marketability and the scarcity of other qualified candidates, inside and outside the company, that could replace the executive should he or she leave Schering-Plough.

In determining grant levels of equity compensation, the Compensation Committee considers levels of sustained past performance, performance potential, retention risk and the value of the particular compensation element needed to keep the total compensation opportunity level competitive and consistent with the compensation philosophy.

 

Hassan’s compensation level is significantly higher than the other named executives. The Compensation Committee believes this is appropriate given:

 

 

In making every compensation decision, such as setting total compensation levels and the mix of individual elements of compensation paid to each named executive, the Compensation Committee applies its collective judgment to choose the alternative that it believes is most likely to have a long-term positive impact on Schering-Plough, including building optimal long-term shareholder value and producing the best outcome for the patients who rely upon Schering-Plough drugs.

 

Once the Compensation Committee has established a compensation opportunity and set performance metrics and goals for a performance-based element of compensation, actual performance (both individual and corporate) is the determinative factor of the ultimate payout, not where the payout falls within a particular Peer Group benchmark. The Compensation Committee does not typically consider an executive’s wealth accumulation (or the lack thereof), or amounts earned/forfeited under other performance-based compensation elements, when determining actual payout amounts.

 

Total 2008 Actual Compensation. Total actual compensation for the named executives as a group was generally at the median of the Peer Group in 2008. Sales, earnings and operating performance were strong, both in 2008 and during the first five years of work under the Action Agenda. Performance by these metrics was strong compared to the Peer Group, as well as compared to Schering-Plough’s performance in prior periods, as Schering-Plough continued its transformation from a seriously challenged company in 2003 to a strong, high-performing company today that is on its way to the aspiration of sustained long-term high performance. As described under “Key Performance Metrics for 2008 Pay” on page 22, major accomplishments include:

 

 

In addition, significant achievements during 2008 included:

 

 

However, total shareholder return declined and this significantly reduced payouts under the transformational incentive awards and total 2008 actual compensation.

 

The Elements of 2008 Compensation

 

At its December 2007 meeting, the Compensation Committee approved base salary and annual incentive targets for 2008. Grants of three-year performance-based share awards, which are part of the long-term performance opportunity, were approved by the Compensation Committee at its regularly scheduled Committee meeting in

February 2008, consistent with the Internal Revenue Code requirements governing the deductibility of performance-based pay. Grants of performance-based and traditional stock options were approved by the Compensation Committee effective May 1, 2008, at the same time annual grants to Schering-Plough employees occur. These actions are described further below.

 

In addition, the Compensation Committee during 2008 approved actions with respect to the compensation of Koestler and Sabatino, in recognition of their strong performance and critical role within Schering-Plough.

 

Specifically, for Koestler, the Compensation Committee took the following actions in recognition of his strong performance in a key role that is critical to Schering-Plough’s future success, and in light of the strong competition for executives with his expertise and stature:

 

Specifically, for Sabatino, the Compensation Committee took the following actions in recognition of his sustained strong performance as Executive Vice President and General Counsel and the increased responsibility he assumed for Global Administrative Services in October of 2008:

 

 

Amounts shown in the Summary Compensation Table include values for awards which have not yet been earned, such as the three-year performance-based share awards, which may be higher or lower than their eventual actual payouts. Those amounts shown in the Summary Compensation Table are determined in accordance with the SEC’s proxy disclosure requirement that the table reflect the accounting value of these awards as of year-end.

 

Base Salary. The Compensation Committee generally assessed a number of factors in determining base salary adjustments for the named executives for 2008 including:

 

 

Based on its collective judgment of these factors, the Compensation Committee approved the following base salary adjustments for 2008:

 

Named Executive		Percentage Increase
Hassan			4.0%
Bertolini			6.0%
Cox			5.0%
Koestler*			17.6%
Sabatino*			13.4%

 

 

 

At the request of the CEO and other named executives, the Compensation Committee has agreed there will be no merit increases to salaries for the named executives and other members of the Operations Management Team (the top 40 executives) in 2009.

 

Annual Incentive. Each named executive’s target annual incentive, expressed as a percentage of base salary, is reviewed by the Compensation Committee annually. The named executives’ target awards are set at around the median of the Peer Group. The target award, expressed as a percentage of base salary, for each named executive was as follows: Hassan – 150%; Bertolini – 80%; Cox – 80%; Koestler – 70%; and Sabatino – 80%.

For 2008, the performance metrics selected by the Compensation Committee for the Operations Management Team Incentive Plan, in which each of the named executives participates, were “adjusted sales” and “operating earnings per share.” Each metric was equally weighted for purposes of calculating the actual payout amounts. For each measure, the Compensation Committee set the specific target goal based on Schering-Plough’s annual strategic operating plan.

 

Adjusted Sales Performance Metric:

 

 

“Adjusted sales” is measured using the sales figures included in Schering-Plough’s earnings releases, which are GAAP sales adjusted to include 50% of the sales from the Merck/Schering-Plough cholesterol joint venture.

 

Operating Earnings Per Share Performance Metric:

 

 

As described in the calculation of operating earnings per share in “Key Performance Metrics for 2008 Pay” on page 22, earnings from operations are GAAP earnings as adjusted to include and exclude pre-specified non-operating items designated by the Compensation Committee at the start of the performance period.

 

As shown above, Schering-Plough exceeded the targeted level of performance for both corporate goals which determine the overall funding for the annual incentive. As a result, payments to the named executives were made at 130% of target.

 

No annual incentive would have been earned by the named executives if the performance threshold had not been achieved, and would have been earned at lower levels had the performance target not been exceeded.

 

The annual incentive paid to each named executive is reflected in the “Non-Equity Incentive Compensation” column of the Summary Compensation Table below.

 

For more general information on the mechanics of the Operations Management Team Incentive Plan, see the “Narrative Information Relating to the Summary Compensation Table and Grants of Plan-Based Awards Table” starting on page 43 of this proxy statement.

 

Equity and Other Long-Term Elements of Compensation.

 

Performance-Based Stock Options. Since 2005, 20% of the stock options granted to senior executives, including the named executives, are subject to performance vesting. To earn 100% (which is the maximum) of the performance-based options granted in 2008, operating earnings per share of at least $1.30 had to be achieved. Operating earnings per share in 2008 were $1.75 and, as a result, the named executives earned 100% of their performance-based stock options. No performance-based stock options would have been earned by the named executives if the performance threshold had not been achieved, and would have been earned at lower levels had the performance target not been exceeded.

 

Traditional Stock Options. Schering-Plough continues to believe that traditional stock options are an important component of a competitive pay package necessary to attract and retain top executive talent. Schering-Plough also believes that traditional stock options are inherently performance based, since the options have no value unless the stock price appreciates (Schering-Plough’s stock incentive plan does not permit discounted options; therefore, the closing market price on the date of grant is always the stock option exercise price). In addition and consistent with the Schering-Plough compensation philosophy, stock options further link compensation to the interests of shareholders by providing the named executives with the opportunity to purchase common shares, thereby increasing their equity in Schering-Plough and sharing in the appreciation in the value of the shares.

 

The number of stock options (both traditional and performance-based) granted to each named executive in 2008 is set forth in the Grants of Plan-Based Awards Table on page 42.

Performance-Based Share Awards. Each named executive received an opportunity to earn performance-based shares which will vest only if specified levels of actual and relative total shareholder return, earnings per share and sales targets are achieved by the end of the three-year (2008 - 2010) performance period. This element of compensation focuses on Schering-Plough’s long-term performance by driving the achievement of specific business objectives and the creation of shareholder wealth. If earned, these awards are paid out in shares, further aligning the executives’ interests with those of shareholders.

 

Five-Year Transformational Incentive. In early 2004, the Compensation Committee granted the one-time opportunity to earn transformational awards to eight senior executives, including each named executive other than Koestler, in order to induce them to join and/or remain with Schering-Plough when the serious challenges facing Schering-Plough were still being analyzed and solutions were being developed. There are two performance measures applicable to the transformational awards, both of which are related to total shareholder return over the period January 1, 2004 to December 31, 2008:

 

 

 

As shown above, Schering-Plough failed to reach its targeted level of actual TSR but did achieve its targeted level of relative TSR. As a result, only 25% of each named executive’s target award was earned as shown below.

 

 

 

 

The program includes a mandatory “hold until retirement/termination” provision such that the amounts earned by the named executives will not be payable to them until they retire or their service with Schering-Plough otherwise ends. Following the Compensation Committee’s certification of performance and determination of each participant’s award, the value of the units earned by each named executive was credited to his or her account in the unfunded savings plan based on the closing price of Schering-Plough common shares on that day. The dollar value of each named executive’s award is provided in the table above for illustrative purposes only as these amounts will continue to grow/diminish in value as if they had been invested in Schering-Plough common shares until the named executive’s employment with Schering-Plough ends. Dividends accrue on the fund shares and are reinvested on behalf of the named executive as additional stock units.

 

In accordance with FAS 123R, Schering-Plough reversed in 2008 a substantial portion of the previously recorded accounting expense associated with these awards because the applicable performance goals were achieved at less than target. In accordance with SEC disclosure rules, the amount reported in the Summary Compensation Table for 2008 as a reversal of this expense is limited to the amounts previously reported on the Summary Compensation Table for 2006 and 2007.

 

Employee Benefits. In addition to the typical health and welfare and retirement benefits generally made available to all regular workers of Schering-Plough, the named executives are also eligible to participate in certain unfunded plans that provide the same company contributions and benefit formula as Schering-Plough’s tax qualified retirement plans for earnings above the Internal Revenue Code’s annual compensation limits. These equalization plans are in place to give employees, including the named executives, the full benefit intended under the qualified plans by making them whole for benefits otherwise lost as a result of such compensation limitations. For a more detailed discussion on these plans, see the Nonqualified Deferred Compensation Table and accompanying narrative beginning on page 48.

 

In order to provide executives with competitive aggregate retirement benefits, Schering-Plough also maintains a supplemental executive retirement plan for the benefit of approximately 60 key employees, including the named

executives. For a more detailed discussion on this plan, see the Pension Benefits Table and accompanying narrative beginning on page 46.

 

Other than these retirement and other savings plans made available to senior executives, the following types of benefits, where there is a Schering-Plough business interest as discussed below, are the only personal benefits Schering-Plough provides to the named executives (and where appropriate to other elected corporate officers) but not to employees generally. Schering-Plough does not pay tax gross-up reimbursements to named executives on these personal benefits:

 

Security. Schering-Plough provides home security systems to each named executive and provides personal security (bodyguards) to Hassan. In 2008, and prior years, the named executives have received threats of personal harm from animal rights activists and others based upon Schering-Plough’s business. As a result, Schering-Plough believes this protection is necessary.

 

Transportation. Hassan has been directed by the Board to use the corporate-owned aircraft for all air travel including personal travel. This provides several business benefits to Schering-Plough. First, the policy is intended to ensure the personal safety of Hassan, who maintains a significant public role as the leader of Schering-Plough. Second, the policy is intended to ensure his availability and to maximize the time available for Schering-Plough business. Certain of the other named executives (and other key executives) use the corporate-owned aircraft for business travel, and on occasion for personal travel. Since Hassan joined Schering-Plough in April 2003, 95% of flying hours were for business use.

 

In addition, for the same reasons described above, Schering-Plough makes one car and driver available to Hassan. The driver assigned to Hassan is also a trained security professional. The other named executives occasionally use cars and drivers from a pool. All executives use the cars primarily for business purposes, and the cars and drivers (including the car and driver assigned to Hassan) are also used by other Schering-Plough personnel for business purposes. Since Hassan joined Schering-Plough in April 2003, 94% of car and driver usage has been for business use.

 

Financial Matters. Schering-Plough provides executive life, financial and tax planning coverage to the named executives. Schering-Plough believes these benefits promote diligence in matters of financial prudency and guard against damage from inadvertent lack of attention to personal business.

 

For additional information on these personal benefits to the named executives, including Schering-Plough policies and incremental cost valuations, see Note 8 to the Summary Compensation Table.

 

Potential Payments at Change of Control and Termination of Employment. Change of control provisions benefit Schering-Plough and shareholders by assisting with the recruitment and retention of key personnel during rumored and actual change of control activity. During this time, continuity is critical to preserving the value of the business. Other termination benefits are provided based on a number of factors, including:

 

 

Given the serious business, legal and regulatory challenges that Schering-Plough faced earlier this decade, and the relative size of Schering-Plough compared to the other U.S. research-based pharmaceutical companies, it would not have been possible to attract a top executive team if Schering-Plough had not provided competitive compensation contracts, including change of control and severance benefits. Senior management has overcome these challenges from the past and produced growth in sales and earnings as is more fully discussed throughout this “Compensation Discussion and Analysis,” beginning on page 21 and the section “Historical Information About Management and Compensation” beginning on page 33.

 

The levels of change of control and severance benefits for each named executive were intensely negotiated in their employment contracts. All relevant information is taken into account when negotiating these levels of potential payments, including the following factors:

 

 

The decisions regarding change of control and severance benefits are primarily driven by the objectives to attract and retain a management team that will continue to deliver excellent performance. For additional information, see “Potential Payments Upon Termination and Change of Control and Other Contract Provisions” and the accompanying narrative beginning on page 49.

Information on Other Compensation-Related Topics

 

The following additional information may also be useful in understanding Schering-Plough’s executive compensation program:

 

Annual Performance Assessments. The Board assesses all aspects of the CEO’s performance annually, and the results are applied by the Compensation Committee in determining his compensation. The CEO assesses the performance of the other named executives and reviews his assessment with the Compensation Committee. The results of the performance assessments are applied by the Compensation Committee in determining compensation of the other named executives.

 

Assessments of 2008 performance for 2008 compensation decisions are described in the “Compensation Committee Report” under the heading “Basis for 2008 Compensation Decisions” and that section is incorporated here by reference.

 

Achievement of Financial Performance Metrics

 

In furtherance of the objective to reward superior individual performance, the attainment of all financial performance metrics relating to compensation is certified for the Compensation Committee. These certified financial metrics are a key component of the assessment of CEO and named executive performance.

 

Leader Behaviors

 

 

The Leader Behaviors are also key fundamentals for the Schering-Plough Shareholder Engagement Program.

 

Stock Ownership Guidelines. Schering-Plough’s aggressive stock ownership guidelines are an integral part of the total compensation program. Adopted in 2004, the guidelines are applicable to the top 40 key employees, including the named executives. The Compensation Committee established these guidelines to drive significant retention of equity compensation by executives in order to strengthen their focus on the creation of long-term shareholder value. Each executive must meet his or her ownership goal, defined as a multiple of base salary, within five years. If the executive does not meet the goal by the deadline, the Compensation Committee will reduce future stock option grants until the executive satisfies the goal. Compliance is re-calculated annually, so that any rise in base salary will cause the goal to rise. If the stock price declines, an executive who had achieved the goal prior to the decline would need to buy additional common shares, even if his or her base salary stays the same. Schering-Plough policy prohibits anyone subject to the ownership guidelines from entering into hedging arrangements including, among other things, collars, puts/calls and loan pools. The specific goal for the named executives and their progress toward their goals are as follows:

 

Grant Practices For Stock Options and Other Equity Awards. Schering-Plough’s usual practice for stock options and other equity awards is to make one annual grant. The annual grant is awarded on the same date to all eligible employees, including the named executives. The Compensation Committee makes the annual grant on the first business day of May. This date was chosen by the Compensation Committee because:

 

Performance-based share awards, which are part of the long-term performance opportunity, are granted by the Compensation Committee at a regularly scheduled Committee meeting during the first 90 days of each year, consistent with the Internal Revenue Code requirements governing the deductibility of performance-based pay. These meeting dates are set at least a year in advance. Unlike stock options, where an exercise price is dependent on the grant date, the grant date does not impact the award terms.

 

Other equity grants are typically made during the year to new hires, for retention and in connection with promotions. Such interim grants to the named executives and other members of senior management are approved by the Compensation Committee. The Compensation Committee has delegated to the CEO the authority to approve such interim grants for other key employees. In each case, the grant date for an interim grant is the first business day of the month following the month in which the new hire begins work, the promotion becomes effective or the retention need becomes known. This timing was chosen to prevent any appearance that the recipient could manipulate the grant date. Also, Schering-Plough’s grant date timing reduces the administrative burden for Schering-Plough personnel that would be created by multiple grant dates.

 

The stock incentive plans under which all outstanding options were granted and under which options may be granted in the future specify that the option exercise price is always the fair market value of Schering-Plough common shares on the date of grant. The plans define “fair market value” as the New York Stock Exchange closing price on the grant date. Schering-Plough determines the New York Stock Exchange closing price by reference to the New York Stock Exchange web reporting system.

 

No Stock Option Re-Pricings. Schering-Plough stock options have not been re-priced in the past. Under Schering-Plough’s Corporate Governance Guidelines and 2006 Stock Incentive Plan, re-pricing is prohibited without shareholder approval.

 

Peer Group. As discussed above, one factor the Compensation Committee takes into consideration on an annual basis in setting total compensation levels and making other compensation decisions is the relationship of the compensation of the CEO and other named executives relative to the compensation paid to similarly situated named executives from a comparator group of companies, called the “Peer Group” in this proxy statement. The Compensation Committee believes that the use of comparative compensation data is beneficial in providing a perspective for measurement of relative pay among the Peer Group. However, it is not the determinative factor used by the Compensation Committee in setting the compensation of the named executives, as discussed above under “The Analytical Process Used by the Compensation Committee.”

 

The Peer Group is comprised of the seven major U.S.-based global pharmaceutical companies: Abbott Laboratories, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Pfizer, and Wyeth. The Peer Group is the same group that management uses to evaluate operational and financial performance for non-compensatory purposes.

 

The Compensation Committee reconsiders from time to time whether the Peer Group is the correct comparator group. The Compensation Committee considered this matter, in a discussion led by the Committee’s Compensation Consultant, Kay, in 2008. The Compensation Committee concluded that the Peer Group remains the best comparator for the following reasons:

 

The Current Environment of the Pharmaceutical Industry and Executive Recruitment. The pharmaceutical industry is science-focused and driven by innovation. Other characteristics of the pharmaceutical industry include:

 

As a result, Schering-Plough believes executives with specific industry experience are most likely to excel. At the same time, there is a small pool of superior executives with pharmaceutical industry experience. These factors can make it difficult to recruit a top-performing management team, which makes retention very important for Schering-Plough.

 

Historical Information. The Compensation Committee and Schering-Plough believe that knowledge of unique circumstances that impacted Schering-Plough is helpful in understanding the current compensation program. Accordingly, details of these circumstances are set out below.

 

Background on the Recruitment of New Management in 2003. Earlier this decade, Schering-Plough faced a number of very serious business, legal and regulatory challenges. These challenges included:

 

As a result of these challenges, there was a critical need to rebuild employee engagement and morale as well as to build trust with the external stakeholders — including Schering-Plough’s customers, regulators and investors. Details of many of these challenges can be found in Schering-Plough’s 10-K, 10-Q and 8-K filings.

 

In 2002, the Board determined that new management was needed to solve the challenges and transform Schering-Plough into a high-performing company that could provide value to shareholders over the long term. In November 2002, the Board elected an independent Director to assume the position of Chairman of the Board and decided to recruit a new CEO. The Board embarked on a search to locate a proven CEO who could deal with Schering-Plough’s accelerating challenges. The search was complex due to a number of factors, including:

 

The Board was fortunate in attracting Hassan in April 2003. He had been Chairman and CEO of Pharmacia before it was acquired by Pfizer. He had received a contract to serve as Vice Chairman of Pfizer and was also being aggressively pursued to lead another global pharmaceutical company at the time he decided to join Schering-Plough. He had led turnarounds and transformations in research-based global pharmaceutical companies similar to Schering-Plough. Hassan also brought to Schering-Plough a long record of business integrity. The Board believed that tone at the top was especially important for a company going through a difficult period.

 

Hassan’s personal reputation allowed Schering-Plough to attract very strong executives who together formed the new team at the top — the Executive Management Team. Many of the new executives had previously distinguished themselves in companies equivalent to, or larger than, Schering-Plough. For example:

 

Re-design of the Compensation Program in 2003-2004. In 2003, the Compensation Committee determined that the executive compensation program should be re-designed with the goal of avoiding behaviors that had led to Schering-Plough’s challenges and to better support the objectives described above.

 

To lead the way for all employees, Hassan voluntarily asked the Compensation Committee to forfeit his 2003 bonus of several million dollars even though he had met his 2003 performance objectives. Also, even before the Compensation Committee had instituted the “Stock Ownership Guidelines,” as soon as counsel cleared the timing of the purchase in November 2003, Hassan made an open market purchase of Schering-Plough common shares with $4.6 million of his own funds to demonstrate his confidence in the ability of the new team to turn around Schering-Plough and deliver long-term high performance.

 

In connection with the new compensation program:

 

Schering-Plough implemented the new compensation program on January 1, 2004. At the same time, Schering-Plough initiated a rigorous performance management system that included tying pay to both company and individual performance.

 

Accomplishments of the New Management Team. The new CEO was able to quickly apply his previous experience in analyzing the challenges at Schering-Plough and devising solutions. Shortly after taking charge, Hassan laid out a six-to-eight-year strategic plan, called the Action Agenda. This Action Agenda has five phases: Stabilize, Repair, Turnaround, Build the Base, and Breakout. The Board approved and has supported the Action Agenda.

 

To date, the new management team is on track with the Action Agenda schedule, having led Schering-Plough through the first three phases. The fourth phase of the Action Agenda was entered in late 2006. The Compensation Committee measures performance of the new management team from January 1, 2004 forward, because 2004 was the first full year under the new management team’s leadership and the first full year under the new performance-based compensation system. The specific performance measures that relate to particular elements of executive compensation are discussed in detail in the “Compensation Discussion and Analysis,” and the Compensation Committee believes the excellent performance over this period was driven by the performance-based compensation programs that the Committee initiated at the start of 2004, with the full support of the new CEO.

 

Membership and Independence. The Compensation Committee of the Board of Directors currently has four members. Each member is an independent Director, as independence is defined by the New York Stock Exchange listing standards and the more restrictive Schering-Plough Board Independence Standard included in the Corporate Governance Guidelines, which is available on Schering-Plough’s Web site at www.schering-plough.com.

Functions and Process. The Compensation Committee operates under a written charter adopted by the Board. The charter is available on Schering-Plough’s Web site at www.schering-plough.com.

 

Consistent with the provisions of its charter, the Compensation Committee reviews and approves the compensation of the CEO and other senior executive officers. The Compensation Committee’s review and approval of the compensation of executive officers includes:

 

In determining executive compensation, the Compensation Committee considers all relevant material factors, which may include:

 

For more information on how these factors affected the compensation paid to the named executives in 2008 (as set forth in the Summary Compensation Table and accompanying tables and narratives below), see the “Compensation Discussion and Analysis” section of this proxy statement beginning on page 21.

 

The Compensation Committee’s Consultant. Pursuant to its charter, the Compensation Committee has the sole authority to retain and terminate any compensation consultant to be used to assist in the evaluation of CEO and executive officer compensation. In determining the amount and form of executive compensation, the Compensation Committee often asks for advice from its outside compensation consultant. To add further process integrity to the system for determining compensation, the Committee has named an independent consultant, who is heavily involved in the Committee’s work and is subject to a rigorous independence policy, as described below. During 2008, Ira Kay of Watson Wyatt served as the Committee’s consultant.

 

Independence Policy for the Compensation Consultant. Kay does not now provide, and has never provided, any other services to Schering-Plough, any member of management, or any other employee of Schering-Plough. The Compensation Committee tightened the independence policy for its consultant in 2009:

 

The Compensation Committee has received the Watson Wyatt certification of independence for 2008.

Compensation Consultant’s Work During 2008. At the direction of the Compensation Committee, in 2008, Kay met with the Chairman of the Committee prior to each meeting to review the proposed agenda and also attended each meeting of the Committee. In addition, Kay reviewed the “Compensation Discussion and Analysis” section of this proxy statement as well as the other information about the Compensation Committee and executive compensation contained in this proxy statement. He discussed that review with the Compensation Committee.

 

In addition, during 2008, Kay:

 

Interaction with Management. The Compensation Committee frequently asks for input from management. Given Hassan’s experience in driving high performance in the pharmaceutical industry, as well as turning around troubled companies, the Compensation Committee often seeks his input beyond his thoughts as the CEO. Schering-Plough’s human resources executives and corporate secretary/governance officer regularly support the Compensation Committee’s work. Certain named executives attend Compensation Committee meetings from time to time as needed. During 2008, these included: Bertolini, Schering-Plough’s Chief Financial Officer, who attends along with the strategic planning executive and/or the controller to discuss financial goals and performance; and Sabatino, Schering-Plough’s General Counsel, who attends along with securities lawyers, tax lawyers and compensation lawyers to discuss legal requirements. In addition, other Schering-Plough professional employees, including human resources compensation staff, accountants and internal auditors, support the Compensation Committee as requested.

 

Interaction with Schering-Plough’s Consultant. On occasion, outside executive compensation consultants (other than Kay, the Committee’s consultant) provide market and benchmarking data to Schering-Plough’s human resources executives, which may be shared with and considered by the Compensation Committee. However, the Compensation Committee looks only to Kay, and to no other consultant, for assistance in determining and recommending the compensation for the named executives and other executive officers.

 

Outside Experts. In addition, the Compensation Committee from time to time seeks advice from outside counsel who are experts in executive compensation, disclosure and tax matters. The “Compensation Discussion and Analysis,” as well as the other information about the Compensation Committee and executive compensation contained in this proxy statement, were also reviewed by outside compensation and securities lawyers.

 

Interaction with the Board. The Compensation Committee also seeks the Board’s thoughts on compensation decisions from time to time.

 

Private Sessions. After receiving all inputs that the Compensation Committee has requested on a particular compensation matter, the Committee’s usual practice is to meet in a private session, with only Committee members in attendance, to reach its final decision. During 2008, the Compensation Committee held a private session at every Committee meeting.

 

Note: At Schering-Plough, the Nominating and Corporate Governance Committee of the Board of Directors is responsible for outside Director compensation. For details, see “Information About the Nominating and Corporate Governance Committee of the Board of Directors and its Practices” beginning on page 16 and “Director Compensation” beginning on page 6.

 

There are none.

 

Compensation Discussion and Analysis. The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” with management, its compensation consultant, compensation counsel and securities counsel. Based on the review and discussion, the Compensation Committee recommended to the Board that the “Compensation Discussion and Analysis” be included in this proxy statement and incorporated by reference into the 2008 10-K.

 

Committee’s Objectives in Designing the Compensation System. The Compensation Committee designed the current compensation program with the following objectives:

 

The Compensation Committee believes the program has achieved these objectives, as described in this report and throughout the “Compensation Discussion and Analysis.”

 

Basis for 2008 Compensation Decisions. In determining the CEO’s compensation for 2008, the Compensation Committee determined that the CEO’s performance exceeded expectations, with significant achievements including:

 

The Compensation Committee also notes the interest of other Boards to recruit the CEO to other pharmaceutical companies, as well as large companies outside the industry.

 

In determining the compensation of the other named executives, the Compensation Committee considered each named executive’s contribution to:

 

Conclusion. The Committee has included the additional details in this Report in order to help the reader understand Schering-Plough’s performance-based executive compensation system, the strong ties of compensation to performance and the Committee’s rationale for the specific 2008 compensation decisions that are explained in detail in the “Compensation Discussion and Analysis.” Shareholders’ inquiries are welcome through the shareholder contacts set out under “Shareholder Engagement Program” on page 18.

 

COMPENSATION COMMITTEE

 

Hans W. Becherer, Chairman

C. Robert Kidder

Patricia F. Russo

Jack L. Stahl

 

 

As required by SEC disclosure rules, the Summary Compensation Table sets forth information concerning compensation earned during 2006, 2007 and 2008 by the Chief Executive Officer, the Chief Financial Officer and each of the next three most highly compensated executive officers of Schering-Plough as of December 31, 2008 (collectively referred to as the “named executives”).

n  Numbers in blue are pay that is subject to forfeiture if performance conditions are not met.  n  Numbers in green are pay that is subject to forfeiture until time-based vesting conditions are met.

n  Numbers in red are previously reported amounts that were forfeited because performance targets were not met.