Biotech exec salaries rising

But as industry changes from research to manufacturing and sales, R and D salaries drop

Nov 4, 2004
Beth Piskora(beth_piskora@standardandpoors.com)

Even as the biotech industry fights for profitability, top biotech execs are taking home supersized paychecks—loaded up with above-average salary increases, fat bonuses, and extremely generous stock option grants, according to three recent surveys.

But as the industry transforms itself from one focused on scientific research to one more concerned with manufacturing and sales, executive pay packages are changing. Meanwhile, shareholder backlash and accounting rule changes are getting more biotechs to reconsider the use of excessive stock options.

Many chief executive officers (CEOs)—of both profitable and not-yet-profitable companies—have multimillion-dollar pay packages, the surveys found. The average total annual salary and bonus paid to biotech CEOs in 2003 was $567,000, up from $538,000 in 2002, according to a survey conducted by BioWorld magazine. Of course, many execs at the best-known companies are making far more: The survey identified a 15-member "Multimillionaire's Club," made up of those biotech execs whose total compensation—salary, bonus, stock options, and other pay—topped $2 million in 2003.

Genentech's Arthur Levinson topped the list, with total compensation of $23 million. In 2003, he received a salary of $860,000, a bonus of $1.2 million, and stock options worth $21 million. Genzyme's Henri Termeer was a close second. On salary alone, Termeer got top ranking, with a base pay of $1.2 million. However, Termeer also received a bonus of $1.6 million and options worth $16.2 million, bringing his total package to $19.1 million.

The findings of the BioWorld survey are consistent with studies undertaken by Aon Consulting and Mellon's Human Resources and Investor Solutions consulting practice. According to Aon's Radford Biotech Survey, the average biotech exec gets a bonus equal to the base salary. That's low compared to other industries, said John Radford, senior vice president at Aon. In technology, he said, the bonus can make up 75% of total cash compensation, compared to only 50% in the biotech business.

The BioWorld survey suggests, however, that as biotechnology continues as the darling of Wall Street and the venture capital community, salaries for CEOs and CFOs are rising, while top research and development (R&D) officers and scientists are actually making less than in the past. The average salary for R&D execs in 2003 was $299,000, 3% less than in 2002.

"That's to be expected as the industry moves from its research phase to the actual selling of products," said Brady Huggett, managing editor of BioWorld.

Ed Speidel, the national practice leader for executive compensation consulting at Mellon's Human Resources and Investor Solutions unit, agreed. "A lot of these companies were started by scientists, but they weren't necessarily the best business people," Speidel told The Scientist. "As biotech companies mature, they are looking for a different skill set when they go out to hire top executives. They are looking for someone who has business development skills and a background in marketing, distribution, and manufacturing."

Many biotech firms are hiring top execs from large pharmaceutical companies, and these execs are demanding salaries close to those that are paid to CEOs in the Fortune 500, said Speidel.

And while stock option grants are not about to disappear from the biotech industry, they are getting smaller. Compensation committees are increasingly turning to other forms of pay, which do not dilute the number of shares outstanding, as stock options do, and may not have to be counted as an expense under the new accounting rules. For example, companies are making grants of restricted stock, which generally cannot be sold while the executive is at the company. Two biotech companies that have not yet achieved profitability and have suffered some investor backlash over use of options—Sepracor and Vertex —have recently turned to restricted stock.

"It's all about aligning goals and rewards," said Speidel. "You set a performance metric, a goal, and if the executive achieves that goal, he gets the reward."