By Lisa Piercey
Special To BioWorld Financial Watch

In 1997, the average chief executive officer of a biotechnology company took home $596,000 in cash compensation, according to a new BioWorld report on CEO compensation in the industry. This included a $283,000 base salary, $69,000 in bonuses and $244,000 from the exercise of stock options.

Of course, not all biotech CEOs got bonuses or exercised options in 1997. In fact, of the hundreds of CEOs whose annual pay packages were included in the survey, only 65 percent got bonuses and only 25 percent realized gains on stock options. But for those fortunate individuals, the average bonus jumped to $106,000 and the average gain on the exercise of options soared to $988,000.

CEOs also got paid higher salaries in 1997 than they did the previous year. The average base salary of $283,000 in 1997 represents an 8 percent gain over the 1996 average of $262,000. And, looking back a full five years, annual compensation (defined as base salary plus bonus) rose from an average of $260,000 in 1993 to an average of $352,000 in 1997, a healthy 35 percent gain. The new data reflect trends that experts say have been in place for several years now. "The cash packages have gone up in my experience, and I think it is driven by several factors," said Tony Price, managing director of Russell Reynolds Associates, an executive search firm based in San Francisco. "One is that equity appreciation has been so disappointing at many of these companies in recent years."

No doubt these compensation trends may rankle many biotech stockholders, especially those who own shares that have suffered severe price erosion over the last year or two. Indeed, the average share price of companies in BioWorld's CEO compensation survey posted a measly 0.4 percent gain in 1997. In 1998, the average stock price of this same group of companies dropped 11 percent. Few would suggest that CEO compensation should be linked to stock price fluctuations, especially in the volatile world of biotechnology stocks. However, while CEOs demand more and more cash as a respite from the cruelty of equity, stockholders can seek no such comfort.

BioWorld's 1997 data are based on a recently completed survey of proxy statements from 223 public biotechnology companies to be published soon. As a point of comparison, BioWorld has used 1993 data taken from the 213-company BioWorld CEO Compensation Report published in 1995. Although some of the companies included in the first report are absent from the second and vice-versa the vast majority are present in both, making the data comparable. Unlike compensation surveys that rely upon self-reporting or mail-in questionnaires, BioWorld's works directly from proxy statements filed with the Securities and Exchange Commission (SEC). The 1997 report provides detailed compensation data on each of 223 biotech CEOs, as well as data on research and development executives and chief financial officers.

Linking Pay To Performance

In the quirky biotechnology industry, where companies may exist for decades without products or profits, almost all the normal metrics for determining CEO pay (i.e., P/E ratios, sales growth, profit margins) are irrelevant. Although compensation committees (composed of two to four members of the board of directors) write lengthy paragraphs explaining their philosophies in proxy statements, few of these treatises are illuminating. Most boards justify CEO salaries by referring to unspecified "goals" and internal "performance criteria." And almost every single compensation committee also relies on "industry surveys," which board members say give them an idea of competitive salaries in peer-group companies. The rub, of course, is that peers as measured by the age of a company, for example can perform quite differently over the years.

Cumulative total return (CTR) provides one measure of how well a company has performed during a given CEO's tenure. All companies are required by the SEC to report a CTR in their proxy statements, a change which was introduced several years ago to make it easier for shareholders to judge corporate performance. CTR tracks the value of $100.00 invested in a company over a five-year period and consists of a line chart or data table which is published near the end of proxy statements. In the case of BioWorld's most recent survey, CTRs reported cover the period from Dec. 31, 1992, to Dec. 31, 1997. For companies that have not been public for a full five years, CTR tracks the return since the date of the initial public offering. Of the 188 companies (out of our report total of 223) that reported a CTR in 1997, the average cumulative return was $146.00. That same $100 would have returned $339.53 if invested in the Standard & Poor's Drug Index, $251.58 if invested in the Standard & Poor's 500 Index and $236.20 if invested in the Nasdaq Total Return Index.

A preliminary analysis of BioWorld's 1997 compensation data suggests that CTR may have an indirect influence on CEO compensation. When we ranked companies by CTR as of Dec. 31, 1997, we found that most of the top five performers Incyte Pharmaceuticals Inc., of Palo Alto, Calif. (CTR of $1,125), Quintiles Transnational Corp., of Durham, N.C. (CTR of $780), Dura Pharmaceuticals Inc., of San Diego (CTR of $725), Agouron Pharmaceuticals Inc., of La Jolla, Calif. (CTR of $606), and Organogenesis Inc., of Canton, Mass. (CTR of $583) awarded their CEOs above-average annual compensation (base salary plus bonus) increases over the last five years.

For example, Dura Pharmaceuticals' CEO Cam L. Garner was paid a base salary of $233,000 and a bonus of $50,000 (for a total of $283,000) in 1993. By 1997, his base salary had grown to $397,000 and his bonus to $475,000 (for a total of $872,000), raising his annual compensation a hefty 208 percent. But how could shareholders who enjoyed a CTR of $725 for the same period complain? Things did not go as well in 1998, during which Dura's stock price fell 67 percent from its 1997 close of $45.88 to $15.19 per share. While Garner's bonus may be affected by a bad year, his base salary is likely to remain steady.

Other CEOs among the top five CTR companies saw similarly hefty pay increases. Incyte Pharmaceuticals CEO Roy A. Whitfield (who was paid only a partial year of salary in 1993, when he joined the company) saw his annual compensation grow from $167,000 in 1994 to $360,000 in 1997, an increase of 116 percent. Agouron CEO Peter Johnson took home $255,000 in base salary and bonus in fiscal 1994 and $625,000 in fiscal 1998, an increase of 145 percent. And two of the CEOs from the top five CTR performers actually experienced below-average pay raises from 1993 to 1997. Organogenesis CEO Herbert M. Stein was paid $306,000 in annual compensation in 1993; by 1997, that amount had grown to $410,000, an increase of 34 percent. Quintiles Transnational CEO Dennis B. Gillings was paid $379,000 in 1993 and $447,000 in 1997, an increase of only 18 percent over five years.

And what about those CEOs whose companies had the dubious distinction of appearing near the very bottom of the CTR ranking for our 188 companies as of Dec. 31, 1997? Culling the data to select only CEOs who were employed for the full five-year period, we found that most were granted decent pay raises, ranging from 3 percent to 35 percent, despite poor stock price appreciation. However, almost no CEOs at the bottom of the CTR ranking were awarded bonuses in 1997.

The Bonus Phenomenon

According to Russell Reynolds Associates' Price, the rise in prominence of variable compensation (specifically, bonuses) as a tool of reward and punishment for CEOs is an important new trend. For smaller companies, the main components of CEO pay are still base salary and equity, the traditional entrepreneurial incentives. "In the larger companies, there are now bonus programs in place that have quite a significant variable compensation portion," said Price.

He cited as a prime example the recently negotiated compensation package of Chiron Corp.'s new CEO, Sean P. Lance. Lance previously worked at Glaxo Wellcome plc, and was at one time poised to take the top spot at that company until he abruptly resigned in October 1997. Emeryville, Calif.-based Chiron, which has floundered in recent years due to a lack of focus and therapeutic products, began looking for a big-name CEO in March 1997. Lance was appointed Chiron's CEO in May 1998. Price, who was hired by Chiron to conduct the CEO search, said the variable portion of Lance's compensation represented the board's wish to link his performance to pay.

Lance's employment agreement stipulates a healthy base salary of $700,000 per year. At the board's discretion, Lance may also be awarded an annual bonus equal to 100 percent of his base salary if "the targeted level of performance is satisfied," and a maximum bonus of 200 percent of his base salary if "performance substantially exceeds the targeted level." In other words, Lance has up to $1.4 million per year in additional cash riding on how well he meets Chiron's performance criteria.

Lance's compensation package does not consist solely of cash he also was granted a stock option for 750,000 shares of Chiron common stock exercisable at fair market value on the date of grant but it does represent a typically cash-heavy arrangement. "Equity opportunity is still a major part of the package and the people going into these companies are truly optimistic, but disappointing returns have led people to want a little more cash," said Price.

Then there's the law of supply and demand. "The biotech industry has been pretty clearly divided into the 'haves' and the 'have-nots,'" Price explained. "The 'haves' that are seeking a CEO want somebody who's really outstanding, and the really outstanding people are able to command a significant compensation package of both cash and equity. Opportunities for the 'have-nots' are much more uncertain. To get someone pretty good they have to rely more on cash to offset the risk." Ironically, it is usually the troubled companies that are searching for new CEOs the base salaries of CEOs who have stayed for many years at one company don't rise nearly as quickly, even if the CEOs have done a great job.

Indeed, Price said that management changes are one of the key factors driving up compensation packages industry-wide. Compare Lance's compensation to that of Chiron's departing CEO (and co-founder), Edward E. Penhoet, who was paid a base salary of $426,000 and a bonus of $185,000 in 1997 (for a total of $611,000). Lance is costing Chiron shareholders a whole lot more and the hope is that he will be worth it. "When you have to go out and recruit a new CEO, it ratchets the salary up because that's where market forces come into play," said Price.

Two things seem certain when it comes to the biotechnology industry. One is that stock prices will fluctuate wildly and the other is that CEO compensation will continue to spiral upward. *

Holiday Notice

BioWorld Financial Watch's offices are closed today in observance of Presidents Day in the U.S.


* The Feb. 1, 1999, issue of BioWorld Financial Watch ranked underwriters of 1998's biotechnology and biotechnology-related public offerings. The criteria used to establish those rankings were quite narrow, and bear repeating. The only offerings included in the calculations were those completed on Nasdaq, Amex and LSE (London Stock Exchange). Offerings completed on the Alberta Stock Exchange, Le Nouveau Marche, Easdaq, the Stockholm Stock Exchange and the Swiss Stock Exchange were not included because it was not always possible to obtain complete data on these offerings.

Moreover, in offerings which included shares sold both by the company and by selling shareholders, only the proceeds raised by the company itself were included in the calculations.

These narrow criteria, however, did tend to undervalue the gross proceeds attributed to several of the underwriters. When the gross proceeds of all offerings are included in the calculations, a slightly different picture emerges. Now, BancBoston Robertson Stephens Inc., which led five of seven public offerings, ranks first on a full credit to all underwriters basis, with gross proceeds of $260.9M. Hambrecht & Quist LLC, which led two of six offerings, ranks second on a full credit to all underwriters basis, with $231.4M in gross proceeds. BancBoston Robertson Stephens also ranks first on a full credit to lead underwriter basis, with gross proceeds of $124.5M. Cowen & Co. (now SG Cowen Securities Corp.), which led two of three public offerings, ranks second on a full credit to lead basis, with $101.7M in gross proceeds.

* In the article "Albany Molecular Breaks The IPO Ice," which appeared in the Feb. 8, 1999, issue of BioWorld Financial Watch, it should have been made clear that ING Baring Furman Selz LLC acted as the lead underwriter for Albany Molecular Research Inc.'s initial public offering.