The upward compensation trends stand in stark contrast to the economic conditions since October.



The upward compensation trends reflected in our survey data, collected between April and June, stand in stark contrast to the economic conditions since October. What a difference a year can make. For the seventh consecutive year, J. Robert Scott, Ernst & Young, WilmerHale, in conjunction with Professor Noam Wasserman of Harvard Business School, have released data on compensation trends for executives and board members at private U.S. life sciences companies.


Beyond anecdotal evidence, reliable and comparable information for these companies is exceedingly difficult to ascertain as it is not publicly available. This annual survey provides the industry with one of the very few available compensation tools for privately held life science companies. It is our hope that this data enables management teams, boards, and investors to create appropriate compensation packages necessary for attracting and retaining senior-level executives, regardless of market volatility. The 2008 Compensation and Entrepreneurship Report in Life Sciences is a result of survey data collected from more than 1,000 executives at nearly 200 private companies from across the U. S. in the following four industry segments: therapeutics, medical devices, diagnostics, instruments and tools. The report presents the correlation between executive compensation and a number of variables including financing stage, company size (both in terms of product stage and headcount), founder/nonfounder status, industry segment, and geography.


The financial press, in the beginning of 2008, made as many cases for economic weaknesses—falling housing prices, rising fuel costs, and a tightening credit market— as they did for strengths, including low inflation, strong foreign investment, and rising per capita personal income.


Our 2008 survey data would give any reader an optimistic view of the economy as compensation saw general increases across the board, although the increases for all categories were not as pronounced as we saw in 2007. However, the survey results were published two weeks before one of the worst economic months in decades, a month in which the S&P 500 dropped almost 17% in value.


To add fuel to the fire, third-quarter industry reports for 2008 indicated that overall venture capital investment fell when compared to 2007. However, investments in industries such as life sciences and clean technology, in fact, rose. Yet, despite this bit of bright news, early-stage life science companies, in particular, privately held ones will not be immune from the market forces at play.


Although it has often been said that quality companies will continue to attract funding, the recent market activity foreshadows increased pressure on both investors and executive teams to manage costs. One way they will do that is undoubtedly through compensation.


Our survey data was released earlier this month via a webcast with over 500 life science executives in the audience. When asked in an online polling question, 53% of the audience said they expect base salaries to remain flat or decrease in 2009. An additional 43% believe that compensation would increase less than 5%, certainly less optimistic response rates than the webcast last year. And, the webcast results were certainly a retrenchment from figures captured in our report in which average base salary rose 5.2% across all positions surveyed between 2007 and 2008. Not surprisingly, not one individual position in our survey experienced a decrease in base salary between 2007 and 2008.


As investors and boards seek more control over compensation this coming year, we anticipate a continued shift toward pay for performance, which both the 2008 survey and the recent webcast supported.


In addition to base salary data, the report compares target and actual bonus attainment over the years. Across the 13 executive positions surveyed, actual bonuses received in 2007 averaged 68% of target. Incentive compensation also continued to climb in our most recent survey as a component of executive pay. Target bonuses for the executive team increased from 22% of base salary in 2007 to 24% of base salary in 2008.


Equity Holdings


The survey also tracks equity holdings, though much less variation exists year over year in this category. Average equity holdings of the 13 executive positions surveyed represents 18.6% of the fully diluted company, a slight increase above 18.1% from our 2007 edition. The report also provides insight to trends not necessarily related directly to compensation. For instance, in 2008 venture investors played a more active role in sourcing talent for virtually all of the 13 positions surveyed when compared to our 2007 report. We undoubtedly expect to see a similar movement toward heightened investor-driven contributions in respect to their portfolio companies in 2009.


Of additional significant interest each year is determining what nonfounding CEOs receive in terms of equity. The survey indicates that, as a company raises additional rounds of institutional funding, a nonfounding CEO can expect to be somewhat protected from dilution in terms of their holdings.


Five percent of the fully diluted equity of the company seems to be the target, a number which has remained remarkably consistent over the last several years. Median equity holdings for the non-founder CEO at the earliest-stage companies is 5.1%; in those companies having raised four or more rounds, median equity settles at 5.0%. For founding CEOs, however, there is little equity protection; median equity drops from 10.0% for CEOs at the earliest stages of financing to 7.0% with four or more rounds raised.


Although we do not necessarily believe that equity amounts will fluctuate as much as compensation, it may not be surprising to see an increase in pay for performance as will inevitably be the case with cash bonuses over the next two years.


Founding vs. Nonfounding Executives


Compensation differences such as these for founding and nonfounding executives are of great interest to Wasserman. At his site (founderresearch.blogspot.com). he addresses some of the current key issues surrounding private company founders and other “frustrations” that arise in creating and growing an enterprise.


Our 2008 Compensation and Entrepreneurship Report in Life Sciences also looks at organizational changes across the spectrum of financing rounds. Looking at the mix of founder and nonfounder CEOs at companies, we see an increase in the number of nonfounder CEOs, from 30% at companies having raised one or fewer rounds, to nearly two-thirds in the later-stage companies.


At the board of director level there is also a trend to bring outsiders in as a company matures. With one or fewer rounds raised, outside members account for 33% of the board. With five or more rounds raised, 42% of the board consists of outsiders, largely at the expense of current and former executives of the company.


Since there have been less than a handful of life science IPOs in 2008 and only conservative views of when the market will return, one can undoubtedly expect venture capitalists staying on portfolio boards both in greater numbers and for longer periods of time. How much cash they will hold in reserve for ongoing investments at the expense of new investments in 2009 will be interesting to see unfold.


The data-gathering process for our most recent survey certainly reinforced a competitive environment for recruiting in 2008. The recent economic downturn, as supported by evidence in our recent webcast, paints a different picture for 2009. For better or for worse, as companies across all industries scale back or monitor expansion, we will certainly see a rise in supply of talent, which most search committees will view as a positive.


Bruce Rychlik is managing director and Mike DiPierro (mike.dipierro@fmr.com) is director of operations at J. Robert Scott. An abridged version of the current report and previous full editions can be found at www.compstudy.com.








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