executive compensation trends across the biotechnology & pharmaceutical industry 2009-present

EXECUTIVE COMPENSATION TRENDS

THE EXECUTIVE WHITE PAPER SERIES | 2013

PRESENTED BY|

Across the Biotechnology & Pharmaceutical Industry | 2009- Present


ABOUT THE AUTHOR | STEVE CORNACCHIA

Steve Cornacchia is a Partner in the Life Sciencespractice of ON Search Partners with over a decade ofexperience in international retained executive search. Hespecializes in assisting emerging life sciences companies,as well as multinational biotechnology, pharmaceuticaland medical device companies, address globaldevelopment and commercial challenges.

Steve’s broad experience within thebiopharmaceutical and medical device industry hasgiven him the insight and the ability to quickly assessand attract top leadership talent for his clients. Hisdemonstrated track record of successfully identifying


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and retaining visionary leaders spans a broad spectrumof roles, including CEOs, Chief Medical Officers andChief Scientific Officers, as well as functional VicePresidents in commercial, discovery, clinicaldevelopment, regulatory, and business development.

Steve’s recruitment experience over the yearshas given him global access to key commercial andscientific talent across both industry and academia.

Steve can be reached at [email protected].

PAGE 1BIOPHARMA EXECUTIVE COMPENSATION


EXECUTIVE COMPENSATION TRENDS ACROSS THE BIOTECHNOLOGY & PHARMACEUTICAL INDUSTRY

As one of the top twenty retained executivesearch firms operating in the United States*, ONSearch Partners locates and retains significantsenior talent for companies in the Life Sciencesindustries globally. During the last several years,through numerous negotiations with clients andcandidates, we identified several trends developingin executive compensation. We were interested inseeing if these trends were indeed visible at amacro-level within our industry, so we analyzedpublically disclosed compensation plans of keyexecutives within leading US-based public biotech-nology and pharmaceutical companies over thepast three years.

Our intent was to see how these companieswere addressing the challenges of rewarding andretaining their top leadership talent in a difficultglobal economic climate. A task complicated byoperating in an industry grappling with inherentR&D and regulatory challenges in the developmentof new therapeutics. We found that, indeed, thestructure of executive compensation plans arechanging broadly in our industry, and thatcompanies need to take note should they want toremain competitive in recruiting and retaining theirmost talented leaders.

The macro-analysis aligned with our ownpersonal experiences recruiting executives for ourclients over these last several years.

2009-Present


Methodology

ON Search Partners analyzed the most recentpublically disclosed compensation plans of 157executives within 50 public biotech andpharmaceutical companies over the last threeyears – 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 ChiefBusiness Officer.

Companies were selected evenly betweenlarge-cap (>$10 billion market capitalization),mid-cap ($2 to $10 billion), small-cap ($250million to $2 billion) and micro-cap (< $250million).

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


TREND 1: OVERALL EXECUTIVE COMPENSATION GROWING BY DOUBLE DIGITS 2009-Present


Reviewing overall compensationpackages of executives from 2009 through2011, we found a healthy increase in themedian overall compensation, including an11% increase from 2009 to 2010, and a 16%increase year over year from 2010 to 2011.Taking inflation into account, these executivessaw a 13% increase in total compensation in thelast reported year - 2011. (See Figure 1.)

Healthy gains in compensation wereprimarily driven by increases in variablecompensation, including non-equity basedincentives as well as stock and option awards.

Base compensation increased by 9% and6% in 2010 and 2011 respectively. It isinteresting to note the decline in the percentageincrease from 2010 to 2011. This may havebeen spurred on by more aggressive equity andbonus awards these executives received in 2011as compared to 2010.

Indeed, if we look at the overall trends,much of the year over year double digit growthwas due to stronger equity and cash bonusawards, rather than base salary increases.These executives in 2011 saw their equityawards increase by 30% over 2010 figures.Bonuses dropped in 2010, likely due to theeconomic challenges experienced in 2008 and2009, but bounced back quite markedly in2011 in line with a healthier economic climate.

Figure 1:


TREND 2: STOCK AWARDS ARE A MORE SIGNIFICANT COMPONENT OF TOTAL COMPENSATION 2009-Present


As we dig deeper into the numbers, itbecomes evident that there is an emerging trendwhereby companies are moving away fromincentivizing executives with cash compensationand are gravitating much more aggressivelytowards equity incentive awards.

If we look at the percentage mix of totalcash compensation vs. total equity compensationwithin these executive packages, the trend is quitestriking as we see them move closer to a 50/50mix. (See Figure 2.)

We also found an important trenddeveloping when we analyzed the make-up of theequity portion of incentive plans. There is adefinite movement of companies shifting awayfrom 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 includerestricted stock units, performance share unitsand other non-option grants. This corresponds tothe majority of compensation plans we havepersonally negotiated across the board in our ownpractices. (See Figure 3.)

Over time, we can see that stock awardsare being adopted more aggressively by micro-,small- and mid-cap companies. This trend likelyreflects the last several years of stagnant stockperformance that hasn’t rewarded executives theway their stock grants originally intended. As aretained executive search firm, our ownexperiences are that client companies are offeringstock awards with much more frequency thanever before and is a significant contributing factorin attracting and retaining talent.


TREND 2: STOCK AWARDS ARE A MORE SIGNIFICANT COMPONENT OF TOTAL COMPENSATION 2009-Present


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 thistrend across all segments of the industry. Companies are moving towards stock awards and away fromoption awards. This is especially true within micro-, small-, and most significantly, mid-cap companies($2 billion to $10 billion in market capitalization).

Figure 4:


TREND 3: MICRO-CAP COMPANIES ARE FOLLOWING IN LARGE-CAP’S FOOTSTEPS 2009-Present


Historically, micro-cap stocks (definedhere as companies with market capitalizationunder $250 million) have tended to compensateexecutives with a heavier emphasis on the futurepotential value of the company, offeringsignificant option awards. With most of thesecompanies yet to successfully commercialize aproduct or show real success in theirdevelopment pipeline, offering executivessignificant option awards has been the norm.

Indeed, if we look at 2009 compensationfor 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 compensatingtheir executives with an even mix of cash andequity awards. And within that equity mix, theshare of stock awards versus option awards hasgrown significantly as well.

Micro-Cap Compensation Award Mix

Figure 5:


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


CONCLUSION |

At a macro level, we are seeing companiescontinue to pressure cash and equitycompensation upwards, driving executivecompensation packages up at double-digit annualgrowth rates. Furthermore, companies arebolstering executive compensation primarilythrough equity.

Most significantly, stock awards arebecoming a primary driver for rewardingexecutives. Likely this is due to both the on-goingchallenges faced by the biotechnology andpharmaceutical industry as a whole incommercializing new therapies, as well as theoverall global economic climate. The reality ismany of these companies’ stocks have notperformed well over these past several years.

Executives are seeing that traditionaloption awards are likely not going to pay-off inthe long term as many once thought. This seemsto be a reflection of the overall long-termuncertainties of the sector. Until the industry canreinvigorate pipelines and opportunities forsignificant commercial growth with healthyreturns, this trend will likely continue.

Our own experiences align with the datatrends presented. Base compensation will always bethe important foundational component of a strongand competitive offer, but how a company crafts itsequity offering can be the deciding factor aroundwhether or not our clients will land top talent in avery competitive market.

Likely due to candidates’ own experiencesof holding options with little or no value, they arechoosing awards over options, and the market isgiving it to them. We have seen firsthand how clientsthat still rely on a heavy stock option based package,are losing talent to their competitors who haveadopted stock awards as their primary equity driver.

With this in mind, our recommendations toclients are to be aware of this market trend andunderstand that it creates expectations withinprospective candidates’ minds. These expectationsneed to be addressed in order to successfully craftan offer that will close a candidate. Companies thatstill rely on purely stock option grants to compensatesenior leaders should monitor these trends and bearthem in mind as they assess their on-going corporatecompensation strategies.

executive compensation trends across the biotechnology & pharmaceutical industry 2009-present

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