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It's Good to Be CEO

Compensation at the top rises at publicly traded companies

Ronald Rosenberg
<figcaption> Credit: © COMSTOCK</figcaption>
Credit: © COMSTOCK

If you are under tremendous pressure to succeed, you might as well also receive tremendous compensation. CEOs at publicly held biotech companies get their share of both, and these leaders' salaries are on the rise. But there are some wrinkles: Overall compensation is being restructured as boards of directors, feeling the heat from big investors such as mutual funds and shareholder groups, struggle to rein in long-term compensation such as stock options in order to reduce stock dilution. The pressure is further exacerbated by recent accounting rule changes on expensing stock options, along with stronger financial reporting requirements under the Sarbanes-Oxley Act.

Average cash compensation (both annual salary and bonus) paid to biotech CEOs rose nearly 5% to $596,000 in 2004, from $567,000 in the previous year, according to BioWorld magazine's 2006 Executive Compensation Report. (see CEO Pay for Performance chart).

The largest and most successful biotech...

Rewarding R&D Executives

Finding solid metrics by which to measure annual job performance of R&D executives can be difficult: After all, the measurable timeline for developing drugs, testing, and gaining regulatory approval is most often seven to 12 years. "You can't really measure R&D executives on an annual basis the same way you evaluate a vice president of sales," says Brandon Cherry, a principal and consultant with Presidio Pay Advisors in San Francisco.

One approach, however, is to link R&D executives' salaries both to their own and their teams' performances as well as that of the overall company, says John Radford, executive vice president of Radford Surveys in San Francisco. "A top R&D executive will earn 50% of his bonus and 50% of his long-term incentives on his own and his department's performance, with other halves coming from how well the company does," says Radford.

The BioWorld survey showed the average base salary for R&D executives was $276,000, up 6.1% from $260,000 in 2003. The average bonus was $90,000, with 118 of the 146 people surveyed receiving the additional compensation. (The survey measured only the 146 R&D executives who worked during all 12 months of 2004.)

The highest paid R&D executive was Amgen's Roger M. Perlmutter who received $794,000 in salary and a record $1,460,000 bonus, or $2,254,000 total in 2004. He also received stock options worth $1.8 million. Charles Randal Mills of Regeneration Technologies was the lowest paid R&D executive, according to the survey. He earned $86,000 in 2004 with no bonus but $309,000 in long-term compensation for a total of $394,000, plus options worth $126,000.

Another club member, Fredric D. Price of BioMarin Pharmaceutical, received $423,000 in base salary in 2004 plus a $400,000 bonus paid in January based on his performance the previous year. In August, 2004 he left the company with a $2.9 million severance package, which was accounted for as "other compensation," according to the BioWorld report.

In addition to CEOs, the biggest compensation gainers were the top R&D executives whose combined salaries and bonuses averaged $366,000, a 12.2% jump from $326,000 in 2002 (see Rewarding R&D Executives). Other positions that saw significant jumps were the business/corporate development officer whose compensation rose an average of 25.2% to $298,000, and the chief financial officer's position that climbed 7.7% to $335,000.

The big money paid to CEOs and R&D leaders reflects the paucity of talented and experienced executives, particularly for companies entering the commercialization phase, says Matthew Stinner, managing partner at Pearl Meyers & Partners, a New York-based compensation consulting firm. As the industry model evolves from scientific research and early drug development (sustained through financial lifelines with big pharmaceutical companies) to a more independent model (involving manufacturing, marketing, and sales), biotech companies are looking to find new leaders, says Stinner. (See Making the Most) "Salaries for executives within the life sciences industry climb between three and five percent annually, but when outsiders come in, salaries are ratcheted up, along with stock options, as companies bring in new leaders," he says.

Some of these rising stars have a list of accomplishments that appeal to biotech companies. One typical example is Avant Immunotherapeutics, a Needham, Mass.-based vaccine maker, which recently added an operating officer and an R&D executive as the company launched three products and expanded its vaccine development programs.

"Five years ago, if you just had energy, brilliance, and creativity you could muddle your way through, but with late-stage commercialization, where you need people who have launched products and know the regulatory process, you are essentially buying their experience that other vaccine companies have paid for," says Una S. Ryan, Avant's CEO. "You simply cannot grow this high level of talent and experience within your company." Ryan herself received $426,000 in total cash compensation and is one of only 10 women biotech CEOs on the BioWorld list.

Indeed, many biotech firms are hiring executives from large pharmaceutical companies, and often these leaders are expecting a combination of cash compensation and stock options that are close to what they are leaving behind. Compensation consultants note, however, that these executives are facing increasingly tough negotiations, as companies seek to reduce the number of stock options and large bonuses. CEOs own an average of 4.56% of their companies' stock, according to the BioWorld report. This includes 12 CEOs with between 15% and 69% of their companies' shares. In 2004, CEOs owned an average of 1.7 million shares, up from 891,000 in 2003, according to the survey.

"Biotech CEOs hold their stock longer because of the long-term horizon of the business, and their ownership, which is often larger than in other industries, is similar to what we see in the technology market," notes Linda Amuso, senior vice president of consulting at Radford Surveys in San Francisco, a division of Aon Consulting.

Moreover, their stock is tied to how well the company performs and has always been a key long-term incentive. Pay for performance has always been more prevalent in the biotech industry, still a young industry with relatively few profitable companies, as boards of directors seek to retain CEOs who create and deliver value with products and services that take much longer to develop than in more mature industries. "That is why base salaries and stock options are generally higher as a percentage of global compensation compared to the telecommunications industry, which has a lower performance component and tilts toward more direct compensation," says Brandon Cherry, a principal and consultant with Presidio Pay Advisors in San Francisco.

Prospective biotech leaders are finding that their stock options are increasingly being linked to a series of performance metrics, other than just being time-based as bonuses are. For the CEO, who is measured more by what the company does overall because of the cross-functional nature of the position, this means achieving a series of goals or milestone objectives such as the timely completion of a clinical trial, forging a marketing alliance with a pharmaceutical alliance, and patent filings. Some CEOs, such as Michael S. Weiss of Keryx Biopharmaceuticals, are rewarded handsomely with bonuses based on a single accomplishment often listed in their employment agreements. Although he received a $275,000 salary in 2004, Weiss received a $1 million bonus when the New York-based company's stock climbed to the point that its market capitalization reached $500 million. The stock, which was $4.65 a share at the beginning of 2004, soared 220% by year's end, surpassing the market cap goal. Sometimes, it is very good to be CEO.

rrosenberg@the-scientist.com

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