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Salary and Compensation Trends
in the Medical Device Industry
Ed Speidel, Partner
Rob Surdel, Associate Partner
October 12, 2012
1
> State of the Market
> Labor Trends
> Pay Frameworks
> Pay Mix
> Private vs. Public – Cash
> Private vs. Public – Equity
> Key Takeaways
Topics
State of the Market
3
Economic Forecasts
*Q2 2012
**October 2012
Sources: United States Bureau Economic Analysis,
Congressional Budget Office and Bureau of Labor Statistics
> Overall economic growth remains sluggish
> However, the overall unemployment rate has dropped ~1.8% since its peak in 2010 (9.6%)
Category 2008 2009 2010 2011 2012
GDP Year-Over-Year -0.3% -3.5% 3.0% 1.7% 1.7%*
Unemployment % 5.8% 9.3% 9.6% 8.9% 7.8%**
4
Unemployment Rate
Source: United States Bureau of Labor Statistics
> Massachusetts unemployment rates continue to be lower than the regional and national average
> Unemployment levels in the Northeast have historically been lower than the national average until recently
8.3%
6.3%
8.8%
8.2%7.4%
9.1%8.8%
8.5%
9.9%9.6%
9.1%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
July
August
2009 2010 2011 2012
Northeast Massachusetts U.S.A.
7.8%
Stock Price Recovery
5 Stock price performance relative to 8/1/2009
Source: Yahoo! Finance
> The Dow Jones (DJI), NASDAQ (IXIC) and NASDAQ Health Care Index (IXHC) have been steadily increasing, despite the dip in 2011
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
Dow Jones NASDAQ NASDAQ Healthcare Index
2012 News Headlines
6
> “Medtronic is acquiring Chinese medical devices maker China Kanghui
Holdings in a move that could strengthen its foothold in the rapidly growing
Chinese device market. Medtronic will shell out approximately $800 million
for the deal.” - www.money.msn.com (Oct. 4, 2012)
> “Medical device and biotech startup companies experienced a surge of
investments from venture capital firms over the past few years, with a large
majority of these funds being ‘Big Exits’.” - www.kahnlitwin.com (July 31, 2012)
> “Over the past year or two, the competition for talent has hit a fever pitch in
the Boston area and across the country, with companies of all stripes pulling
out all the stops to land their top prospects.” – www.xconomy.com (Aug. 8, 2012)
> “Bausch & Lomb Inc. could be ready to go public as early as the end of this
year, people familiar with the company's thinking said, a move that would
come amid renewed health for the eye-products maker.” - www.wsj.com (July 5,
2012)
Labor Trends
8
Profile
Company Profile
Median
Private Small Public Large Public
Employee Size 47 397 2,593
Revenue ($M) N/A $118M $728M
Number of Companies 40 34 29
> The Medical Device and Diagnostic market was segmented into three groupings from Radford’s Global Life Sciences Survey database:
Source: 2012 Radford Global Life Sciences Survey –
Public Medical Device Companies
Labor Trends: Current Hiring Environment
9 Source: Radford Trends Report – Life Sciences Edition – Q3 2012
> Private and large public companies are more aggressively hiring than smaller public companies…
31%
46%
23%
54%
31%
15%
6%
19%
56%
19%
0%
10%
20%
30%
40%
50%
60%
Hiring Freeze Very SelectiveHiring
Normal Hiring Aggressive Hiring
Perc
en
t o
f C
om
pan
ies
Hiring Practices
Private Small Public Large Public
5.3%
8.9%7.1%
4.2%
8.4%
5.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Private Small Public Large Public
Perc
en
t o
f E
mp
loyees
US Turnover
Voluntary Turnover Involuntary Turnover
Labor Trends: Turnover
10 Source: Radford Trends Report - Life Sciences Edition – Q3 2012
> …which translates into higher voluntary turnover among smaller public companies where employees are looking for the next career step or are concerned about the viability of the company
9.5%
17.3%
12.6%
Labor Trends: Salary Increases
11 Source: Radford Trends Report – Life Sciences Edition – Q3 2012
> Private companies experienced higher actual and budgeted1 overall salary increases in 2012
> Median actual and budgeted merit salary increases were 3% for reporting companies
3.5% 3.5%
3.0% 3.0% 3.0%3.0% 3.0%
3.5%
2.7%
2.8%
2.9%
3.0%
3.1%
3.2%
3.3%
3.4%
3.5%
3.6%
2012 Budget 2012 Actual 2013 Budget
Perc
en
t o
f P
ayro
ll
Overall Salary Increases
Private Small Public Large Public
1Note: There was insufficient data to report 2013 budget for private companies
Pay Frameworks
Defining a Pay Philosophy
13
Overall Objectives
> It is all the same - attract, retain and motivate top talent
Comparative Framework
> What is our labor market? For what population?
> To whom do we compare practices?
Pay Vehicles > What forms of compensation are available?
> What works for us? (salary, bonus, equity)
Competitive Positioning
> Where do we target each pay element? (25th, 50th, 75th percentiles)
Allocation Strategy
> Are we egalitarian, or do we differentiate pay based on performance?
14
Overall Objectives
> Attract, retain and motivate qualified executives to support growth expectations
> Provide total direct compensation, consisting of salary and short-term and long-term incentives, that are competitive with the market
> Ensure executive compensation program and actual payouts are aligned with financial performance and strategic business goals
> Ensure a substantial portion of each executives’ total compensation is at risk and varies based on both overall company and individual performance
> Align the executive compensation program with both short-term and long-term shareholder interests
Comparative Framework
> Comparative framework is used to define specific peer companies and data sources to be used in the assessment
Compensation Positioning
> The actual targeted total direct compensation for each executive may be above or below the 75th percentile reflecting the executive’s tenure with the organization, overall individual contribution, scope of responsibilities and level of experience
Employee Group Base Salary Target Total Cash
Long-Term Incentives
(within dilution constraints)
Target Total Direct
Compensation
Executives 50th Percentile 60th Percentile 50th to 75th Percentiles 75th Percentile
Research and Development
60th Percentile 60th Percentile 75th Percentile 75th Percentile
Business Functions
50th Percentile 50th Percentile 50th Percentile 50th Percentile
Sales 50th Percentile 75th Percentile 50th Percentile 50th to 75th Percentiles
Employee Group Primary Industry Geography
Executives Medical device companies with less than $300M in annual revenues
National scope
Employees Medical device or broader tech/biotech companies
New England
Example of Compensation Philosophy
Philosophy Comparison
15
Element Typical Private Philosophy Typical Public Philosophy
Peer Group
> Typically, no specific identified peer group
> Focus on comparative companies that
have similar invested capital levels
> Key metrics may include industry and
invested capital
> Specific group of 15 to 20 identified public peer
companies
> Key Metrics: revenue, market cap, headcount,
product phase/stage, profit measures
Cash Approach > Base salary must be “in the ballpark”
> Annual bonuses a “definite maybe” these
days
> Base salary: 50th percentile
> Annual bonus: 50th percentile or above,
emphasizing at-risk nature of compensation
Equity Approach
> Aggressive award sizes, especially to
those risking early entry
> Vehicle: Stock options predominantly
> Metric: Ownership percentage
> 50th percentile and higher based on
performance
> Vehicle: Options, RSUs, performance shares
> Metric: Value
Pay for
Performance > Egalitarian, “all in this together” > Targeted to key roles and high performers
Private vs. Public Peer Group
16
Private Peer Group Public Peer Group
> A public company can be more selective about peers than a private
company
Peer Name Industry
Invested
Capital ($M) Peer Name Industry Employees
Revenue
($M)
Market
Value
($M)
Company A Medical Device $25.0 Company H Medical Device 75 $70.0 $100.0
Company B Medical Device $40.0 Company I Medical Device 100 $200.0 $600.0
Company C Medical Device $30.0 Company J Medical Device 60 $75.0 $450.0
Company D Medical Device $15.0 Company K Medical Device 120 $150.0 $200.0
Company E Medical Device $50.0 Company L Medical Device 80 $200.0 $800.0
Company F Diagnostic $60.0 Company M Medical Device 90 $100.0 $250.0
Company G Diagnostic $45.0 Company N Medical Device 65 $60.0 $300.0
75th Percentile $47.5 75th Percentile 95 $175.0 $525.0
50th Percentile $40.0 50th Percentile 80 $100.0 $300.0
Average $37.9 Average 84 $122.1 $385.7
25th Percentile $27.5 25th Percentile 70 $72.5 $225.0
Client Medical Device $40.0 Client Medical Device 80 $100.0 $300.0
Private vs. Public Compensation Equity Practices Comparison
17
Element Typical Private Philosophy Typical Public Philosophy
Setting Award > Established based on a target ownership
percentage
> Equity grants are established based on a
target value
> Converted to a number of options/shares
based on the current stock price
New-Hire vs.
Ongoing/
Refresh
> Large new-hire grant
> Refresh grants delayed until IPO
approaches, or 3-4 years after hire
> Refresh guidelines set anywhere from
25% to 33% of new-hire awards
> New-hire award typically 1.5x – 2x ongoing
award size
> Most employees eligible for ongoing award
after one year of service
Vehicle Mix
> Stock options predominantly
(A few notable exceptions have used
RSUs pre-IPO recently, however,
requires cash reserves to address
employee taxes)
> Mix of stock options and RSUs
> Emphasis towards RSUs with maturity over
time
> Prevalent use of performance shares for
executives
Participation
> New hires: nearly 100%
> Refresh awards: targeted at key
performers and those employees greater
than 50% vested (25% to 30% of
population receives)
> New hires: participation decreases as
company increases in size (may eliminate
eligibility altogether below certain level)
> Ongoing awards: Broad eligibility is
maintained, although awards targeted at top
performers (40% to 60% of population
receiving annually)
Pay Mix
The Employee Value Proposition Has Changed!
19
Salary Equity
All Employees
> Everyone got equity
> Employees were bullish on IPO likelihood
> Annual bonuses were non-existent
> Lower cash vis-à-vis public companies was an acceptable tradeoff for equity wealth opportunity
> Pre-IPO employee proposition from the dot-com bubble days…
20
Pay Mix – Private Company
Equity
Executives
Salary Bonus
Salary
Non-Executives
Equity Bonus
> Equity is concentrated at the top, and for key contributors only
> Annual bonuses are much more prevalent
> Lower cash vis-à-vis public companies is no longer an acceptable tradeoff for all employees!
> Today’s private company employee pay mix…
Pay Mix – Public Company
21
> As organizational level increases, so too does at-risk pay
– Note: the charts below do not consider the overall “size of the pie”
Source: 2012 Radford Global Life Sciences Survey
83%88%
8%7%
9%5%
0%
20%
40%
60%
80%
100%
Small Public Large Public
Scientist
Base Bonus LTI
78%83%
9%9%
13%8%
0%
20%
40%
60%
80%
100%
Small Public Large Public
Manager
Base Bonus LTI
50% 50%
14% 17%
35% 33%
0%
20%
40%
60%
80%
100%
Small Public Large Public
Executive
Base Bonus LTI
Percent of Total Direct Pay
Private vs. Public – Cash
23
Dispelling Myths About Private Cash
Category
Medical Device
Base Target Total
Cash
Executive 90% 88%
Management 103% 104%
Professional 103% 103%
Support 112% 113%
Pre-IPO/Venture-Backed Cash Compensation as a Percent of
Global Life Sciences Surveys Totals
Global Life Sciences Survey - Oct. 2012;
Radford Pre-IPO/Venture-Backed Survey - April 2012
Executive Compensation
24
> Unlike broad-based employees, executives are still willing to take a
discount on cash for higher ownership
Position: CEO
Base Salary (50th)
Target Total Cash (50th)
Ownership (50th)
All
Founder
Non-Founder
Medical Device
Private Small Public Large Public
$350,000 $478,950 $825,200
$467,750 $733,815 $1,390,461
4.65% 2.54% 1.86%
5.86% 5.90% 4.82%
4.19% 2.32% 1.67%
Radford Pre-IPO/Venture-Backed Survey - April 2012;
Global Life Sciences Survey – October 2012
25
Annual Bonuses
Category
Medical Device
Private Small Public Large Public
% of EE’s Eligible 68% 72% 84%
% EE’s receiving bonus
60% 45% 73%
Avg. cost as a % of payroll
7.2% 8.9% 8.4%
Avg. cost as a % of revenue
3.7% 1.5% 0.7%
> There is no doubt – bonuses are officially in the mix
Radford Pre-IPO/Venture-Backed Survey - April. 2012;
Global Life Sciences Survey - Oct. 2012
26
> Salary differences disappear below the executive level
- Scientists and managers appear to be fair game, regardless of size
> Bonus targets become more formalized and richer as a company evolves, particularly at the manager level and above
Source: 2012 Radford Global Life Sciences Survey
Evolution of Pay Practices – Cash Compensation
$203 $213 $234
$106 $103 $101 $92 $89 $88
$56 $60
$78
$14 $11 $11 $9 $8 $7
$-
$50
$100
$150
$200
$250
$300
$350
Private Small Public Large Public Private Small Public Large Public Private Small Public Large Public
Executive Manager Scientist
To
tal
Cash
Co
mp
en
sati
on
Cash Compensation ($000)
Base Bonus
27
Evolution of Pay Practices – Cash Incentives
Bonus Metric
Prevalence
Private Small Public Large Public
New Product Introduction 65% 45% 5%
Other Non-Financial 73% 85% 57%
Sales 62% 80% 81%
Profit 42% 80% 95%
Quality 35% 15% 10%
Customer Satisfaction 23% 10% 5%
> Bonus metrics have a very different “look and feel” as a company grows in size
Source: 2012 Radford Global Life Sciences Survey -
Practices Report
Private vs. Public – Equity
Equity Considerations
> The development of a sustainable equity strategy must take into consideration a host of inter-related factors:
29
Employee/ Shareholder Perception
Aggregate Equity Use
Share Pool
Funding
> Shares available in the pool
> Future share requests
> Burn rate
> Overhang
> Equity mix
> Growth
> Retention value
> Wealth creation
> Vehicle economics (leverage)
> Participation rates
> Time vs. performance triggers/vesting
Defining Total Equity Pool Size – Private Company Practice
30
> In general, earlier-stage private companies demonstrate higher total overhang levels than later-stage private or public companies due to:
- Financing rounds that dilute the pool after the equity plan is initially established;
- Employee exercises removing outstanding options from equity pool; and
- In the case of public companies, increased shareholder control over equity plan funding and pressure to reduce dilution
> Whether to include founder grants in the overhang calculation when comparing to market data is open to judgment
- Exclude if intended to recognize intellectual capital brought to the table at inception, as opposed to reward for go-forward service and contributions
> Typically only applies to one-to-three key incumbents only
> Founder awards typically have no vesting requirement (again, under the intent that these are not for future service)
- Include if “founder” award concept was used liberally for many employees
Fully-Diluted Total Overhang – Private Company Practice
31
> As invested capital increases, employee ownership as a percentage of
company decreases
Radford Pre-IPO/Venture-Backed Survey - April 2012 and
Radford proprietary database
24.8%
14.8%
12.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Private - Under $40MInvested Capital
Private - Over $40MInvested Capital
Recent IPO -Immediately Prior to IPO
Fully-Diluted Total Overhang – Life Sciences
32
The Private Grant Model
> Current Model:
- Large grant at time of hire
- Refresh grants starting in year 3 or 4 that may be 25% of new-hire levels
> Employees are very heavily vested by time of IPO
Parameter Time of Hire Year 1 Year 2 Year 3+
IPO at
$12.00
Equity Grant 400,000 - - 100,000 -
Exercise Price $0.25 - - $4.00 -
Vested Shares - 100,000 200,000 300,000 400,000
Unvested Shares 400,000 300,000 200,000 100,000 100,000
Vested Paper Value NA - no market until IPO
$4.7MM
Unvested Paper Value $800K
Should we consider layering in equity over time to provide a more balanced approach to retention?
Example data for illustrative purposes
Burn Rate and Overhang – Public Company Profile
> Larger Medical Device Companies have lower rates of annual burn rate and equity overhang.
33
4.0% 4.0%
3.0%2.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
LFY GrossEquityBurn Rate
3 -Year AverageGross Equity Burn
Rate
Small Public Large Public
12.7%
16.4%
9.6%
14.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
LFY Issued EquityOverhang
LFY Total EquityOverhang
Small Public Large Public
Radford proprietary equity database
Burn Rate Overhang
34
Position
Annual Equity Participation
Small Public Large Public
Executive Function Head 88% 90%
Director 70% 60%
Manager 60% 55%
Career Scientist 53% 45%
Beginning Scientist 35% 35%
> Companies try to hold on to broad-based ownership as long as they can while managing dilution
Equity Participation – Public Company Practice
Source: 2012 Radford Global Life Sciences - US Long-
Term Incentive Report
> Just as with cash compensation, there is little differentiation of LTI value below the executive level
> Due to competitive pressure, the value for directors and below is similar across the market
35
Position
Median Annual LTI Value ($000)
Small Public Large Public
Executive $199.0 $251.0
Director $30.7 $32.4
Manager $17.3 $17.3
Career Scientist $10.1 $11.9
Beginning Scientist $6.2 $7.0
Note: LTI Value = the sum of option Black-Scholes value, full-value share face value and any long-term cash value
Annual LTI Value – Public Company Practice
Source: 2012 Radford Global Life Sciences Survey
36
Key Takeaways
> Determine which framework is right for you based on your situation and use it as a tool to guide compensation decisions
> The value proposition to employees has changed! – It is one market below the executive level
> Variable pay increases as organizational levels increase
> Understand which LTI vehicle is right for you
> Know where your company is on the continuum and what’s to come; start planning ahead to not be reactive
> There is no “one-size fits all” approach. How is your organization “different”?
Thank You!
Questions?
Ed Speidel, [email protected], +1 (508) 628.1552
Rob Surdel, [email protected], +1 (508) 628.1551