Executive Compensation Trends Across Biotechnology & Pharmaceutical Industry | 2009-Present

7/29/2019 Executive Compensation Trends Across Biotechnology & Pharmaceutical Industry | 2009-Present

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EXECUTIVE COMPENSATION TRENDS

THE EXECUTIVE WHITE PAPER SERIES | 201

PRESENTED B

Across the Biotechnology & Pharmaceutical Industry | 2009- Present


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ABOUT THE AUTHOR | STEVE CORNACCHIA

Steve Cornacchia is a Partner in the Life Sciences

practice of ON Search Partners with over a decade of

experience in international retained executive search. He

specializes in assisting emerging life sciences companies,

as well as multinational biotechnology, pharmaceutical

and medical device companies, address global

development and commercial challenges.

Steves broad experience within the

biopharmaceutical and medical device industry has

given him the insight and the ability to quickly assess

and attract top leadership talent for his clients. His

demonstrated track record of successfully identifying


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As a leading retained executive search firm, ON SearchPartners locates and lands the best CEO, Board and VicePresident talent for both public and private companiesKnown for a highly-personalized consultative approach, our

partners are distinguished by their professionalism and atenacious entrepreneurial spirit. Our goal is to provide clientthe insight and context necessary to make smart leadershipdecisions.

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and retaining visionary leaders spans a broad spectrum

of roles, including CEOs, Chief Medical Officers and

Chief Scientific Officers, as well as functional Vice

Presidents in commercial, discovery, clinical

development, regulatory, and business development.

Steves 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 [email protected].

PBIOPHARMAEXECUTIVE COMPENSATION


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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 amacro-level within our industry, so we analyzed

publicly disclosed compensation plans of key

executives within leading US-based public biotech-

nology 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 byoperating 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

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 ownpersonal experiences recruiting executives for our

clients over these last several years.

2009-Presen


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).

* An Executive Briefing - High Quality Talent Acquisition: Summa-rized Review of Retained Executive Search Landscape, Sept. 2012.National Strategic


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TREND 1: OVERALL EXECUTIVE COMPENSATION GROWINGBYDOUBLE DIGITS 2009-Presen


Reviewing overall compensation

packages of executives from 2009 through

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 havebeen 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.

Figure 1:


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TREND 2: STOCKAWARDSAREA MORE SIGNIFICANT COMPONENTOF TOTAL COMPENSATION 2009-Presen

PABIOPHARMAEXECUTIVE 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

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

from option grants and enhancing the stock

Total Cash vs. Total Equity Compensation

% Mix of Stock vs. Option Awards

Figure 2:

Figure 3:

award elements of these plans which include

restricted stock units, performance share units

and other non-option grants. This corresponds to

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 hasnt rewarded executives the

way their stock grants originally intended. As aretained 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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TREND 2: STOCKAWARDSAREA MORE SIGNIFICANT COMPONENTOF TOTAL COMPENSATION 2009-Presen


Total Cash vs. Total Equity CompensationComparison of Equity Components by Stock vs. Option % by Size of Company

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:


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TREND 3: MICRO-CAP COMPANIESARE FOLLOWINGIN LARGE-CAPS FOOTSTEPS 2009-Presen


Historically, micro-cap stocks (defined

here as companies with market capitalization

under $250 million) have tended to compensate

executives with a heavier emphasis on the future

potential value of the company, offering

significant option awards. With most of these

companies yet to successfully commercialize a

product or show real success in their

development pipeline, offering executivessignificant option awards has been the norm.

Indeed, if we look at 2009 compensation

for executives within these micro-cap companies,

the value of their packages deriving from cash

(base and bonus) was 34% as compared to 65%

equity compensation. Jumping forward to today,

these micro-cap companies are compensating

their executives with an even mix of cash and

equity awards. And within that equity mix, the

share of stock awards versus option awards hasgrown significantly as well.

Micro-Cap Compensation Award Mix

Figure 5:


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EXECUTIVE COMPENSATION TRENDS ACROSS THE BIOTECHNOLOGY& PHARMACEUTICAL INDUSTRY 2009-Presen


CONCLUSION |

At a macro level, we are seeing companies

continue to pressure cash and equity

compensation upwards, driving executive

compensation packages up at double-digit annual

growth rates. Furthermore, companies are

bolstering executive compensation primarily

through equity.

Most significantly, stock awards are

becoming a primary driver for rewarding

executives. Likely this is due to both the on-going

challenges faced by the biotechnology and

pharmaceutical industry as a whole in

commercializing new therapies, as well as the

overall global economic climate. The reality is

many of these companies stocks have not

performed well over these past several years.

Executives are seeing that traditional

option awards are likely not going to pay-off in

the long term as many once thought. This seems

to be a reflection of the overall long-term

uncertainties of the sector. Until the industry can

reinvigorate pipelines and opportunities for

significant commercial growth with healthy

returns, this trend will likely continue.

Our own experiences align with the data

trends presented. Base compensation will always be

the important foundational component of a strong

and competitive offer, but how a company crafts its

equity offering can be the deciding factor around

whether or not our clients will land top talent in a

very competitive market.

Likely due to candidates own experiences

of holding options with little or no value, they are

choosing awards over options, and the market is

giving it to them. We have seen firsthand how clients

that still rely on a heavy stock option based package

are losing talent to their competitors who have

adopted stock awards as their primary equity driver

With this in mind, our recommendations toclients are to be aware of this market trend and

understand that it creates expectations within

prospective candidates minds. These expectations

need to be addressed in order to successfully craft

an offer that will close a candidate. Companies that

still rely on purely stock option grants to compensate

senior leaders should monitor these trends and bear

them in mind as they assess their on-going corporate

compensation strategies.

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Executive Compensation Trends Across Biotechnology & Pharmaceutical Industry | 2009-Present