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The Biotechnology Sector: Key Executive Compensation and Corporate Governance Trends

The Biotechnology Sector: Key Executive Compensation and Corporate Governance Trends

Following is an excerpt. Read the full article in the pdf at the bottom of this page.

 

The biotechnology sector has exploded in recent decades. Starting in the mid-1970s with the first biotechnology companies in the San Francisco Bay area, today’s industry landscape extends across developed “hubs” in multiple U.S. cities such as Seattle, San Diego, North Carolina’s Research Triangle Park, Boston, and Philadelphia. International biotech hubs include cities such as Berlin, Heidelberg, and Munich in Germany; Oxford and Cambridge in the U.K.; and the Medicon Valley in eastern Denmark and southern Sweden.

This important industry, which brings lifesaving drugs and treatments to the marketplace at a breakneck speed, has its own practices, rhythm and norms. When it comes to executive compensation and corporate governance, these differences manifest in a variety of ways, which are summarized as follows:

  • Staggering increase in the use of equity awards;
  • A symbiotic relationship between directors and management; and
  • Use of performance milestones for both short- and long-term incentive plans.

While the sector’s executive compensation practices are unique, they are not immune to general industry trends such as moving away from stock options (albeit slightly) and incorporating performance shares (albeit using performance milestones). In an earlier article, we pointed out that middle-market companies are “fast followers” of larger firms when it comes to executive compensation program trends. However, biotechnology firms are slower to adapt to new trends due to their singular focus on the development and delivery of new drugs and treatments.

The number of U.S. publicly traded biotechnology companies grew rapidly between 2010 and 2015, doubling from 112 to 224. There has been a leveling off over the past few years, with the number of public companies holding constant around 228.

Pay practices for executives and directors of these companies have typically fluctuated in tandem with the current economic and political environment. Understanding current and potential future industry compensation trends is very important in order for these companies’ to achieve and maintain their desired posture within the sector. This article is a summary of trends throughout the industry with regard to executive compensation and corporate governance practices.

It is important to note that good governance mandates alignment of practices with “best fit” and not just “best practice,” driven by internal and external factors.

  • Internal factors drive alignment of compensation strategy with business objectives: culture, current plans, financial objectives, organization structure, executive profile (talent management needs), and economic conditions.
  • External factors influence alignment with “best” governance practices: stakeholder perceptions, competitive practices, industry trends, legal/regulatory landscape, and media.

 

EXECUTIVE PAY LEVELS WILL INCREASE MODESTLY IN 2019

Overall executive pay levels in the field are expected to increase modestly in 2019. Salary increase budgets of 3.0% to 3.5% are common, except for a few locations such as Boston that may have to go higher to attract and retain talent, according to supply and demand.

In addition, cash bonuses continue to rise as companies become more comfortable with using performance milestones. In addition, annual incentive plans increasingly emphasize individual performance in addition to organizational results.

Overall, long-term incentive (“LTI”) levels (including stock options, time-based awards, and performance-based awards) have exploded since 2010, growing by an average of 15.4% per year.

 

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James F. Reda

James F. Reda, Managing Director with the Gallagher Human Resources & Compensation Consulting practice, works with both public and private organizations in planning, creating, and implementing incentive programs. Jim also advises companies on incentive strategy, including long- and short-term senior executive employment arrangements, change-in-control metrics, business combinations, shareholder rights, and corporate governance issues. He is a recognized expert in the area of integrating incentive and corporate strategies. Jim has more than 30 years of experience ...

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