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Biotech's Comp Conundrum Reveals Challenges for Evolving Firms
With say-on-pay, companies must demonstrate how executive pay will drive long-term results

By Stephen Miller, CEBS  8/22/2012

 

The “best practice” standards used in most proxy-related assessments of executive pay programs are not well-suited to the business and mission of many evolving companies, including biotech firms, a compensation consultancy contends.

“Biotech companies must take action to avoid being unfairly criticized by proxy advisory firms for the relationship between executive rewards and changes in shareholder value,” said Susan Stemper, a managing director at the San Francisco office of pay consultants Pearl Meyer & Partners. “Because of the complexity of the biotech industry, there are significant differences in pay program design that may require more careful explanation. However, these differences are essential to achieve critical business objectives that drive long-term value for a biotech."

In an August 2012 white paper, Top 10 Biotechnology Compensation Committee Agenda Items, Stemper discussed how firms in this rapidly changing industry can address issues related to pay and governance needs, including recommendations to:

  • Create a pay philosophy and programs that reinforce the company’s mission and support the risk-taking needed to achieve the company’s goals.
  • Identify peer companies that will remain relevant throughout the progression of mergers and acquisitions within the sector.
  • Understand how different business and performance outcomes will affect executive compensation levels.

Convincing Shareholders

“Biotech companies often face a greater challenge in setting long-term performance goals that effectively address their needs,” said Stemper. “These challenges create a greater burden to clearly and convincingly discuss why their pay programs operate in the best long-term interests of the organization and its shareholders.”

For example, even the multiyear time frame used by proxy ratings firms to measure performance is far shorter than the typical biotech time frame from research through commercialization. When executives are rewarded for progress before the stock price reflects the company’s potential, proxy advisory firms may penalize the company by recommending a “No” vote on its executive pay.

Companies must proactively demonstrate to shareholders how the investment in that executive pay program will drive the long-term results that are in the interest of all stakeholders, Stemper advised.

Similarly, while value creation is most closely related to research and development (R&D) expenditures and future return on invested capital (ROIC), the most appropriate compensation goals for a biotech firm may be related to pipeline progress, joint ventures, operational efficiency or other indirect metrics.

In such cases, Stemper recommended that companies strike a balance between financial and nonfinancial metrics in their compensation plans to avoid overweighting on nonfinancial metrics.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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