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1994 Service Optimas Award Profile Merck & Co.

May 1, 1994
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Merck saves people's lives. That's one thing that can be said about the Whitehouse Station, New Jersey-based maker of prescription drugs. But that's not all. Merck & Company Inc. is a company well respected for more than its service to the world. In fact, Fortune magazine has rated Merck number one in "America's Most Admired Corporations" for seven years in a row. In 1993, Merck scored within the top three in seven of the eight key attributes that the publication credits as forming reputation. These were: quality of management; financial soundness; quality of products or services; ability to attract, develop and keep talented people; value as long-term investment; innovativeness; and community and environmental responsibility.

In 1993, Merck also was rated one of the 100 best companies to work for in America in the book by the same name written by Robert Levering and Milton Moskowitz. On top of that, Merck makes money. Lots of it. According to Levering and Moskowitz, only three companies in the world made more money than Merck in 1991. Last year, the corporation grossed more than $10 billion.

Despite all of this that it has going for it, Merck uses the resources of other companies to help it grow and diversify. Since 1991, Merck has formed joint ventures, both nationally and internationally, with four prominent companies that have various businesses within the pharmaceuticals industry, and with several smaller enterprises. Says Eric Marquardt, director of executive compensation at Merck: "Although each of the ventures has a different strategy and purpose, usually the reason [for forming it] is to do something more rapidly and presumably at less cost than we could do on our own."

As separate entities, the joint ventures that Merck forms with partners have their own HR staffs. However, from the time Merck begins conversations with another company on the possibility of creating a strategic alliance, the HR staff at Merck must get involved. Merck's HR department helps to determine staffing solutions and types of policies and procedures needed to fit best with the joint venture, as well as facilitates smooth conversations between the baby company and its parents. "It isn't a management or administrative role," says Marquardt. "There are legal reasons that prevent HR at the parent companies from controlling what goes on in the joint venture." So instead, he says that Merck's HR function serves the company's joint ventures by being consultants.

HR turns its understanding of Merck's goals into HR solutions.
Merck's largest joint venture to date was the result of a pairing with Wilmington, Delaware-based E.I. DuPont De Nemours & Company Inc. At the time, DuPont had a $700 million pharmaceutical business that employed 300 scientists involved predominately in basic research. The company had some experimental compounds in which Merck could benefit. In exchange, Merck had an excellent track record in developmental research to offer: DuPont could use Merck's expertise to bring its products through the development phase and into the marketplace. In creating Wilmington, Delaware-based The DuPont Merck Pharmaceutical Co., these two giants were able to merge their resources. Today, the entity to which they gave birth is a Fortune 500 business worth more than a billion dollars.

For HR at Merck, knowing the reasons why such joint ventures as the DuPont Merck endeavor are formed is imperative. To properly do its job in consulting the new enterprises, the HR staff at Merck has to understand the perspective of both partners, as well as the goals of each new company formed. They then must turn that understanding into HR solutions that make sense for the new business. "You can't just give the people rote answers," Marquardt says. "You have to start by understanding what the business is and then going back and saying what are the right answers for that particular business."

This process starts with staffing. Usually, the initial staffing decisions are made during the formation of the joint venture. As the two partners decide what form the venture will take, they're also deciding from where most of the initial employees will come. Says Jack Hayes, senior director of human resources at DuPont Merck: "There had been a series of negotiations prior to forming the joint venture in which the HR functions of the two parent companies were involved."

In the case of DuPont Merck, because DuPont's pharmaceutical business with its 300 scientists basically became the new company, the logical choice was to staff the joint venture with primarily DuPont employees. According to Hayes, of a starting work force of 3,500 people at DuPont Merck, 3,498 came from DuPont.

Although continual hiring decisions beyond the initial staffing process are made as they are in any business, by the company's managers, HR at the parent companies consistently play a role. Some senior executive placements, for example, often are determined by the partners. If the candidate the parties choose is a Merck employee, HR's role becomes one of career management.

Here's why. Because the joint ventures are separate entities—companies in and of themselves—leaving Merck to join them isn't a transfer but a termination. That means losing possibly 20 years of service and all of the benefits—retirement pay, stock options and so on—that go along with it. Very few people would make this move without some sort of incentive. So, HR at Merck must work with the joint ventures in creating packages that will attract the talent needed to the new businesses.

Recently, for example, the best candidate that the two partners identified for a senior executive division at one of Merck's joint ventures was a Merck employee. The executive had nearly 10 years' service with Merck. "In all likelihood, he wouldn't have accepted the job with the joint venture if we had to terminate him from the Merck payroll and send him over there as a new employee," Marquardt says. "So we had to work through the whole reward system and help HR at the joint venture manage his transition."

The solution in this case was for him to remain on the Merck payroll so as to manage his retirement benefits, his equity interest and so on. "That isn't the only solution by any stretch of the imagination," Marquardt says. With staffing the start-up joint ventures, for example, the HR departments may develop supplemental retirement benefits or similar options for employees joining the new company to help them get over the impact of termination and rehiring. It all depends on the circumstances, however. "If your job goes to the joint venture, it may well be that you're simply told to go," Marquardt says.

He stresses that the most important thing to be cognizant of is that it may be difficult to recruit people from the parent company to go to the joint venture. "Because that becomes a termination, you're not talking just about new opportunities but about impacting someone's career earnings." If the partners have a keen interest in getting a skill that's in short supply into the joint venture, they may have to make some additional concessions or provide some additional benefits to overcome that problem of terminating from the parent company's plans.

Employees who leave a parent company to work for a joint venture often also are concerned about having the opportunity to return to the parent company if the joint venture doesn't work out, or they reach their full potential in the new organization. Marquardt says the company must take a stand on these issues, making it clear to employees whether the door swings both ways or whether their future is with the joint venture.

Joint ventures can't just adopt their parents' benefits and policies.
Similarly to how Merck and its partners determine staffing needs for their joint ventures, they make determinations on benefits and other HR programs and policies. "You have to start and ask the question, 'What is it that the business is trying to accomplish?' " Marquardt says. "Then you have to ask, 'How can I structure the various reward systems and other programs that are consistent with that?' "

Hayes, who came to DuPont Merck from DuPont's HR staff, says that the two parents begin discussing these issues before the formation of the joint venture is completed. Often, the two parties learn that the solutions that make sense for the joint venture aren't the same ones that work for either of the parents. For example, because the joint venture may be in a different business than the parents, it won't be able to pay the employees in the same methods as they do.

This was an issue when Merck formed Johnson & Johnson¥Merck Consumer Pharmaceuticals Co. in Europe with New Brunswick, New Jersey-based Johnson & Johnson Co. in 1989. Several factors made the joint venture—which is an over-the-counter drug business—unique from Merck. For one, the Merck corporation is organized by functional divisions. Its joint venture with Johnson & Johnson, on the other hand, is a fully integrated business, having its own manufacturing, its own research, its own sales force and so on. Also, being a start-up business that probably wouldn't generate profits for a number of years, the joint venture's objectives were different from those at Merck. Most fundamentally, the baby company differed from its parent because it was primarily a consumer business.

These characteristics of the business dictated what type of programs the new company could and couldn't have. For example, because it was a start-up business, it wouldn't have made sense to set up an incentive plan based on operating profits. In the short term, that just wasn't pragmatic. Instead, the HR crews at Merck, Johnson & Johnson and the joint venture had to look at performance measures that would attract people who were more entrepreneurial in nature and weren't that concerned with security.

Programs to meet these objectives weren't characteristic of either of the parents, says Marquardt. Johnson & Johnson's incentive plans, for example, aren't very leveraged: They don't offer much of an upside for going beyond objectives, nor much of a downside for falling short. Merck's programs, on the other hand, are more highly leveraged. Although this system was closer to what an entrepreneurial environment would need, Merck also uses incentive plans that are tied to growth, operating income and revenues. These weren't the right kinds of measures for a start-up business. So, HR's role was to get the two partners and the people in the joint venture to agree on performance objectives and plan designs that made sense for the business, recognizing that it was different from what either of the partners usually did in their own organizations.

These types of issues didn't surface for the DuPont Merck business. Hayes says that because the bulk of employees came from DuPont, the partners kept as many of the parent's plans as possible. "We wanted people to feel comfortable, to have a sense of security," says Hayes. "Some of these people had been with the company for 15 or 20 years. It seemed foreign for them not to be working for DuPont."

The DuPont Merck company transferred workers from DuPont with their service records intact. If they had four weeks' vacation earned, they still received it. They also kept their pension plan earnings, although the new company has its own trust fund for a very similar pension program.

DuPont Merck also stayed with Dupont's compensation plan. Within the first year, however, the company had made revisions on how it looked at compensation and communicated it to employees. DuPont, from which most of the workers had come, is a multifunctional, multidivisional business and uses a variety of companies in various industries as comparison points for salary ranges. Although the new company retained DuPont's compensation system administratively, it had to change its point of reference to the pharmaceutical industry. With Merck's help in identifying companies with which to align, it now compares its salary ranges only to companies within that industry and lets its workers know how their pay rates in comparison.

Constant communication between HR staffs is vital for the joint ventures' success.
Hayes says that the ultimate goal of both parent companies in regard to the joint ventures is to help make them successful. To achieve this goal, the HR functions at both Merck and DuPont have constant contact with the HR staffs at the joint ventures. "Both parent companies work with us on an advisory basis," Hayes says. "We deal with HR as we move ahead in formulating."

It's important as well for the HR functions at the parent companies to communicate with each other consistently. They must have the same understanding of the procedures and policies for the joint ventures, and they must communicate these issues to their own firms. It wouldn't be appropriate, for example, for Merck's HR staff to go into Johnson & Johnson and sell an incentive program for the joint venture. That needs to be the responsibility of the HR group in the partnership.

In the case of DuPont Merck, the joint venture has a partnership board made up of three senior executives from each parent company. This board must approve such measures as long-term incentive programs and pension-plan changes. Hayes and the DuPont Merck staff work closely with HR at DuPont and Merck not only in designing these measures, but also in selling them to the board. The HR staffs at the parent companies help board members understand the costs, implications and employee-relations issues of the policies for the joint venture.

The HR professionals at the joint ventures don't necessarily go to both parents for every issue, but rather draw on the staff functions where the strength exists. "It isn't much different from the business itself," says Marquardt. "The businesses are formed because each of the partners have unique strengths that, when you bring them together, create a strong business. The same can be said for the HR functions. The HR staffs at the two partners may have different strengths. If help is needed in the joint venture, it will come from the partner who has a particular strength in that area."

For example, for its joint venture in France with Connaught Laboratories Inc., Merck's HR staff was called on for its experience with global issues. Pasteur Meriex, Serums, et Vaccins, the company the two enterprises formed, is a vaccine business serving all of Europe. Its French parent—from which the bulk of employees came, including the human resources staff—was strictly national. The French HR staff needed guidance in managing human resources programs in a multinational environment.

Several human resources staff members from Merck's headquarters traveled to Lyon, France, and met with the HR function at the joint venture. "Through demonstrations and discussions, we showed them how Merck manages some of its HR programs on a global basis and what we do differently in different countries," says Marquardt. "The people in the joint venture could then design some of their own programs and learn through what we already have done. That was a case in which the service part of this was simply that the HR functions in the parent companies became a resource to the HR function in the joint venture."

Because the role of the HR people in the parent companies is different for each joint venture, Marquardt says Merck's HR function doesn't have any set guidelines for handling them. It does follow certain procedures, however. There's usually a senior person, sometimes two, who manages the relationship with the joint venture. He or she then brings in additional HR members when needed. For example, when the joint venture reaches the point at which it's dealing with compensation issues, the senior HR person who's managing the relationship comes to Marquardt for assistance. At no time, however, would the entire Merck HR staff's attention be dedicated to a joint venture.

Understanding corporate cultures facilitates communications.
Because the partners have a business and financial interest in the joint ventures, there's ongoing reporting requirements and various management reviews between the partners and the joint ventures. Therefore, it's important that the joint ventures understand the cultures of the two partners.

The HR people in the partner organizations can speed up this understanding by helping to educate the managers in the new organization on the characteristics of the cultures. This, in turn, helps the joint ventures better interface with the parent companies.

For example, one cultural issue to which Hayes has had to adapt is differences in decision making. In a small company such as DuPont Merck, decisions are made by one or two people who quickly move things along. At the two giant parents, however, the process is more time consuming as decisions must filter through a hierarchical structure for approval. Hayes says that because he and the others at DuPont Merck understand these differences, they've been able to learn how to work with them.

Fortunately, Hayes says that cultures pertaining to human resources are similar for both parents as well as the baby. "DuPont values people, as does Merck," he says. "It's surprising how similar the cultures of the two parents are."

The parents don't dictate culture to the new companies: Marquardt says that experience has shown that it's best to let the joint ventures create their own cultures independent of the two parents.

Obviously, there will be times when the cultures of all three entities clash. Merck's partners overseas, for example, often have very different cultures from the U.S.based company, and the resulting joint ventures can have a hybrid of the two. Through communication and education, however, the partners, both nationally and internationally, not only learn to understand each other but also learn from each other. And, they teach their offsprings their combined knowledge. "We really benefit from the knowledge of the human resources departments of the parent companies," says Hayes. "They have experience and resources in the HR arena, they know what's current, and they can predict trends. It's a nice position to be in."

Merck's HR understands the company's business. Just as the company's products save lives, its HR department makes life a little easier for its joint-venture counterparts.

Personnel Journal , May 1994, Vol.73, No. 5, p. 64-71.

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