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Cloud Call Center Community Featured Article

TMCNet: Market Woes Reshaping Exec Pay from Both Sides

[November 14, 2008]

Market Woes Reshaping Exec Pay from Both Sides

(BioWorld Today Via Acquire Media NewsEdge) Executive compensation did not escape the harsh glare of the public spotlight during the recent implosion of the financial service industry.

In fact, the government bailout bill included limits on top executive pay, golden parachutes and bonuses derived from grossly misstated earnings or excessive risk-taking.

The impact of the market meltdown is starting to affect biotech executive compensation as well, according to Christos Richards, CEO of executive search firm Levin and Co.

"Is the desire there to bring salaries down? Yes. Will it actually happen? We haven't seen it happen yet," Richards told BioWorld Today.

For now, biotech CEOs continue to bring home the genetically modified bacon, but other types of compensation are feeling the pinch.

Richards said biotechs have become more conservative with relocation packages in an effort to save cash, and some companies are "driving recruitment specifically around local talent."

Additionally, some biotechs have started to tie top executive bonuses to specific value inflection points, such as a partnership or financing, rather than to the general performance of the company.

The broader market changes also have affected what biotech executives look for in an employer. Richards noted that many job-hunting CEOs want to find a company with plenty of operating capital.

Gabrielle Lajoie, managing director with executive search firm Russell Reynolds Associates, added that the compensation packages preferred by biotech executives are leaning toward cash rather than equity, a trend compounded by the influx of risk-averse, cash-biased big pharma executives.


The Challenges of Pay for Performance

Today's "cash is king" mentality may pose a challenge for biotechs hoping to use equity incentives to keep their CEOs focused on the end game.

"Alignment of pay with performance is always the biggest concern," said Bob More, general partner at Frazier Healthcare Ventures - and it can be particularly tricky in biotech.

As the housing, credit and consumer spending crises began to unfold last year, biotech stocks held up better than many other sectors of the economy. Accordingly, biotech CEOs and other top-level executives saw their salaries and bonuses climb, according to BioWorld Executive Compensation Report 2009, which analyzed 2007 fiscal year salary data.

Average total compensation for CEOs - including salary, bonus, equity and other incentives - reached $1.18 million in 2007, up from $1.04 million in 2006. Average cash compensation rose to $597,000 in 2007 from $555,000 in 2006.

There were, of course, a few notable exceptions. Amgen Inc.'s CEO Kevin Sharer saw his 2006 bonus package of $4.5 million dwindle to $1.5 million in 2007, reflective of Amgen's 32 percent decrease in stock price during the year. And Genentech Inc.'s CEO Arthur Levinson did not take a pay increase in 2007 while his company struggled.

Other biotech CEOs didn't fare as well on the pay-for-performance scale. In fact, an executive compensation report from financial research firm Glass Lewis and Co. included six biotechs on its list of the 25 most overpaid CEOs of Russell 3000 index companies in 2007.

Yet of the six companies - Theravance Inc., Idenix Pharmaceuticals Inc., Neurocrine Biosciences Inc., Nektar Therapeutics Inc., Ligand Pharmaceuticals Inc. and Arena Pharmaceuticals Inc. - most had major, unanticipated clinical or regulatory setbacks during 2007.

"No matter how good we get in biotech, there are still going to be projects that fail," More said, adding that there is "a lot of luck involved."

The Grass is Always Greener . . .

When luck is in your corner, being a CEO isn't half bad.

More noted that while everyone begrudges the former CEOs of Pfizer Inc. and Home Depot for their bloated severance packages, no one begrudges Bill Gates his wealth. "If you're involved in value creation, you get to participate in the upside," More said.

But given the failure rates in biotech, most CEOs face a stressful road ahead - and with added pressure to obtain financing in the current inhospitable markets, the job has become less appealing.

More said finding a good CEO is the hardest thing most boards of directors have to do and the most important factor for a company's success. But he added that "the only people I know who want to be CEO of a public company are people who've never been CEO of a public company."

Lajoie added that a lot of experienced CEOs are moving into venture capital, as former Anadys Pharmaceuticals Inc. CEO Kleanthis Xanthopoulos did by joining Enterprise Partners (although he later moved back to industry to take the reins at Regulus Therapeutics LLC).

More cautioned that a CEO's job is very different from VC's job.

"I'm not going to say it's easier or harder," More said, noting that CEOs face greater volatility and pressure from personnel responsibility, while VCs have an added level of stress because they are not in control of the company.

He advised any biotech CEOs considering the VC route to "be cognizant that it is a different position - when you're a VC, you're part of a partnership. You're not the one in charge." n

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Copyright ? 2008 Thomson BioWorld, All Rights Reserved.

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