THE EXECUTIVE WHITE PAPER SERIES | 2013
EXECUTIVE COMPENSATION TRENDS Across the Biotechnology & Pharmaceutical Industry | 2009- Present
PRESENTED BY|
THE EXECUTIVE WHITE PAPER SERIES | 2013
ABOUT THE AUTHOR | STEVE CORNACCHIA Steve Cornacchia is a Partner in the Life Sciences
and retaining visionary leaders spans a broad spectrum
practice of ON Search Partners with over a decade of
of roles, including CEOs, Chief Medical Officers and
experience in international retained executive search. He
Chief Scientific Officers, as well as functional Vice
specializes in assisting emerging life sciences companies,
Presidents in commercial, discovery, clinical
as well as multinational biotechnology, pharmaceutical
development, regulatory, and business development.
and medical device companies, address global development and commercial challenges. Steve’s broad experience within the biopharmaceutical and medical device industry has given him the insight and the ability to quickly assess
Steve’s recruitment experience over the years has given him global access to key commercial and scientific talent across both industry and academia. Steve can be reached at steve@onpartners.com.
and attract top leadership talent for his clients. His demonstrated track record of successfully identifying
THE EXECUTIVE WHITE PAPER SERIES | 2013 The Executive White Paper Series is a cooperative effort by leading experts to provide meaningful leadership insights to today’s executives. To view more topics in the series, please visit www.onpartners.com.
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BIOPHARMA EXECUTIVE COMPENSATION
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THE EXECUTIVE WHITE PAPER SERIES | 2013
EXECUTIVE COMPENSATION TRENDS ACROSS THE BIOTECHNOLOGY & PHARMACEUTICAL INDUSTRY
As one of the top twenty retained executive search firms operating in the United States*, ON Search Partners locates and retains significant senior talent for companies in the Life Sciences industries globally. During the last several years, through numerous negotiations with clients and candidates, we identified several trends developing in executive compensation. We were interested in seeing if these trends were indeed visible at a macro-level within our industry, so we analyzed publically disclosed compensation plans of key executives within leading US-based public biotechnology and pharmaceutical companies over the past three years. Our intent was to see how these companies were addressing the challenges of rewarding and retaining their top leadership talent in a difficult global economic climate. A task complicated by operating in an industry grappling with inherent R&D and regulatory challenges in the development of new therapeutics. We found that, indeed, the structure of executive compensation plans are
2009-Present
Methodology ON Search Partners analyzed the most recent publically disclosed compensation plans of 157 executives within 50 public biotech and pharmaceutical companies over the last three years – 2009 to 2011. Four executive profiles were targeted: • Chief Executive Officer • Chief Financial Officer • the most senior R&D leadership function, i.e. CSO, CMO, EVP R&D, etc. • the top commercial/business function, usually Chief Commercial Officer or Chief Business Officer. Companies were selected evenly between large-cap (>$10 billion market capitalization), mid-cap ($2 to $10 billion), small-cap ($250 million to $2 billion) and micro-cap (< $250 million).
changing broadly in our industry, and that companies need to take note should they want to remain competitive in recruiting and retaining their most talented leaders. The macro-analysis aligned with our own personal experiences recruiting executives for our clients over these last several years.
*
“An Executive Briefing - High Quality Talent Acquisition: Summarized Review of Retained Executive Search Landscape,” Sept. 2012. National Strategic
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THE EXECUTIVE WHITE PAPER SERIES | 2013
TREND 1: OVERALL EXECUTIVE COMPENSATION GROWING BY DOUBLE DIGITS
Reviewing overall compensation packages of executives from 2009 through
2009-Present
Figure 1:
2011, we found a healthy increase in the median overall compensation, including an 11% increase from 2009 to 2010, and a 16% increase year over year from 2010 to 2011. Taking inflation into account, these executives saw a 13% increase in total compensation in the last reported year - 2011. (See Figure 1.) Healthy gains in compensation were primarily driven by increases in variable compensation, including non-equity based incentives as well as stock and option awards. Base compensation increased by 9% and 6% in 2010 and 2011 respectively. It is interesting to note the decline in the percentage increase from 2010 to 2011. This may have been spurred on by more aggressive equity and bonus awards these executives received in 2011 as compared to 2010. Indeed, if we look at the overall trends, much of the year over year double digit growth was due to stronger equity and cash bonus awards, rather than base salary increases. These executives in 2011 saw their equity awards increase by 30% over 2010 figures. Bonuses dropped in 2010, likely due to the economic challenges experienced in 2008 and 2009, but bounced back quite markedly in 2011 in line with a healthier economic climate.
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THE EXECUTIVE WHITE PAPER SERIES | 2013
TREND 2: STOCK AWARDS ARE A MORE SIGNIFICANT COMPONENT OF TOTAL COMPENSATION
As we dig deeper into the numbers, it becomes evident that there is an emerging trend whereby companies are moving away from incentivizing executives with cash compensation
2009-Present
Figure 2:
Total Cash vs. Total Equity Compensation
and are gravitating much more aggressively towards equity incentive awards. If we look at the percentage mix of total cash compensation vs. total equity compensation within these executive packages, the trend is quite striking as we see them move closer to a 50/50 mix. (See Figure 2.) We also found an important trend developing when we analyzed the make-up of the equity portion of incentive plans. There is a definite movement of companies shifting away
award elements of these plans which include
from option grants and enhancing the stock
restricted stock units, performance share units and other non-option grants. This corresponds to
Figure 3:
% Mix of Stock vs. Option Awards
the majority of compensation plans we have personally negotiated across the board in our own practices. (See Figure 3.) Over time, we can see that stock awards are being adopted more aggressively by micro-, small- and mid-cap companies. This trend likely reflects the last several years of stagnant stock performance that hasnâ&#x20AC;&#x2122;t rewarded executives the way their stock grants originally intended. As a retained executive search firm, our own experiences are that client companies are offering stock awards with much more frequency than ever before and is a significant contributing factor in attracting and retaining talent.
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THE EXECUTIVE WHITE PAPER SERIES | 2013
TREND 2: STOCK AWARDS ARE A MORE SIGNIFICANT COMPONENT OF TOTAL COMPENSATION
2009-Present
As we look further into the equity component of executive compensation plans, we can observe this trend across all segments of the industry. Companies are moving towards stock awards and away from option awards. This is especially true within micro-, small-, and most significantly, mid-cap companies ($2 billion to $10 billion in market capitalization). Figure 4:
Total Cash vs. Total Equity Compensation Comparison of Equity Components by Stock vs. Option % by Size of Company
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THE EXECUTIVE WHITE PAPER SERIES | 2013
TREND 3: MICRO-CAP COMPANIES ARE FOLLOWING IN LARGE-CAPâ&#x20AC;&#x2122;S FOOTSTEPS
Historically, micro-cap stocks (defined
2009-Present
Indeed, if we look at 2009 compensation
here as companies with market capitalization under $250 million) have tended to compensate
for executives within these micro-cap companies, the value of their packages deriving from cash
executives with a heavier emphasis on the future potential value of the company, offering
(base and bonus) was 34% as compared to 65% equity compensation. Jumping forward to today,
significant option awards. With most of these companies yet to successfully commercialize a
these micro-cap companies are compensating their executives with an even mix of cash and
product or show real success in their development pipeline, offering executives
equity awards. And within that equity mix, the share of stock awards versus option awards has
significant option awards has been the norm.
grown significantly as well.
Figure 5:
Micro-Cap Compensation Award Mix
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THE EXECUTIVE WHITE PAPER SERIES | 2013
EXECUTIVE COMPENSATION TRENDS ACROSS THE BIOTECHNOLOGY & PHARMACEUTICAL INDUSTRY
2009-Present
CONCLUSION | At a macro level, we are seeing companies
Our own experiences align with the data
continue to pressure cash and equity compensation upwards, driving executive
trends presented. Base compensation will always be the important foundational component of a strong
compensation packages up at double-digit annual growth rates. Furthermore, companies are
and competitive offer, but how a company crafts its equity offering can be the deciding factor around
bolstering executive compensation primarily through equity.
whether or not our clients will land top talent in a very competitive market.
Most significantly, stock awards are
Likely due to candidates’ own experiences
becoming a primary driver for rewarding executives. Likely this is due to both the on-going
of holding options with little or no value, they are choosing awards over options, and the market is
challenges faced by the biotechnology and pharmaceutical industry as a whole in commercializing new therapies, as well as the
giving it to them. We have seen firsthand how clients that still rely on a heavy stock option based package,
overall global economic climate. The reality is many of these companies’ stocks have not
are losing talent to their competitors who have adopted stock awards as their primary equity driver.
performed well over these past several years.
With this in mind, our recommendations to clients are to be aware of this market trend and
Executives are seeing that traditional option awards are likely not going to pay-off in
understand that it creates expectations within prospective candidates’ minds. These expectations
the long term as many once thought. This seems to be a reflection of the overall long-term
need to be addressed in order to successfully craft an offer that will close a candidate. Companies that
uncertainties of the sector. Until the industry can reinvigorate pipelines and opportunities for
still rely on purely stock option grants to compensate senior leaders should monitor these trends and bear
significant commercial growth with healthy returns, this trend will likely continue.
them in mind as they assess their on-going corporate compensation strategies.
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