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How CEO compensation is shaping up in medical device and pharma organizations

RFP
Compensation Benefits: CEO compensationGrant Thornton LLP is publishing a series of surveys based on proxy filings of SEC registrants by industry, beginning with the medical device and biopharmaceutical industry. The survey will present the most recent executive compensation data reported for the organizations’ top executives and will group the organizations into these three categories:
  1. Prerevenue/startup (annual revenues to $100 million)
  2. Revenue-generating/emerging (annual revenues of $100 million to $1 billion)
  3. Large/mature (annual revenues of $500 million to $2 billion)

This article summarizes some of the survey findings for CEOs in the medical device and biopharmaceutical industry, and discusses insights other organizations can apply to their executive compensation programs.  

Background
The medical device and biopharmaceutical industry is growing and includes a diverse group of SEC registrants, ranging from publicly traded startups to large, multibillion-dollar organizations. The executive compensation programs should vary based on each organization’s growth stage, strategies and philosophy. The survey covers the top six executive positions at the organizations, focusing on the executives’ total direct compensation (salary plus annual and long-term incentives) and equity plan type prevalence (performance equity vs. options vs. stock awards).  

Survey insights

The median total direct compensation for CEOs increases significantly as start-up organizations emerge into revenue-producing organizations:

  1. Prerevenue/startup: Median total direct compensation of approximately $750,000
  2. Revenue-generating/emerging: Median of approximately $3.1 million
  3. Large/mature: Median of approximately $5.5 million

If we look at incentives, the use and value of annual incentive and equity compensation also increase progressively. Average annual incentive awards increase from 21% of salary for start-up companies to 92% of salary at large, mature organizations. Similarly, average long-term incentive awards increase from 69% of salary to 460% of salary in large organizations.  

Most industries are characterized by increases in “at risk” compensation, as organizations place more compensation at-risk to ensure a link between pay and performance. This link is critical in emerging and mature public companies, with scrutiny by shareholder advisory groups influencing the voting patterns of the organizations’ shareholders and institutional investors.  

As organizations grow, they use performance-based equity more significantly, according to the survey. Performance-based equity was offered to start-up CEOs only 8% of the time, to CEOs in organizations with $100 million to $1 billion in revenues 31% of the time, and to CEOs in the largest organizations 42% of the time.  These prevalence statistics, particularly in the larger organizations, are much lower than in general industry, as the medical device and pharma organizations have adopted performance-based equity more slowly than other industries. However, these statistics are at an all-time high.

Finally, stock options are still highly prevalent in this industry, much more so than in general industry.  Start-up organizations continue to use options as their most common equity vehicle, and 60% of the larger organizations also use them. As organizations grow, the use of stock awards (primarily restricted stock and restricted stock units) become more prevalent than stock options.  

How the survey applies to you

Every SEC registrant should annually review its compensation programs and assess the structure and type of incentive plans it uses. As the survey found, organizations should also incorporate higher at-risk compensation in their equity programs as they grow and consider using performance-based equity to support a link between pay and performance. If your equity plan hasn’t been reviewed in the past year or doesn’t use a balanced mix of grant types, have it reviewed and implement changes.   

Stay tuned
The proxy survey will be published over the next month. It will cover five additional positions and provide detail for competitive base salaries, market total cash and total direct compensation, and discuss annual and long-term incentive opportunities, and plan structure. For a free copy of the survey when it’s released, please contact Bill Hopkins or Eric Gonzaga, and watch for Grant Thornton’s second proxy survey covering small to middle-market banks and lending institutions.

Contacts
Bill Hopkins
+1 612 677 5296
bill.hopkins@us.gt.com

Eric Gonzaga
+ 1 612 677 5336
eric.gonzaga@us.gt.com

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