BDO Says That Biotech Has Seen a Significant Increase in Compensation

As a sponsor for the third annual OneMedForum New York to be held July 11-12, BDO Life Sciences will host a special workshop to discuss compensation practices at life sciences companies.

Structuring executive and board member compensation programs for life sciences companies is a critical part of the evolving business model. This session will address design issues associated with each compensation component including base salary, annual incentives, long-term pay, and equity opportunities, and how they change as life sciences companies move from startup phase to its end phase. This session will also provide an overview of Dodd-Frank and its impact on compensation, trends in compensation, best practices, and a case study which will also touch upon some of the tax, accounting, and legal issues of designing a compensation program.

For more than 100 years, BDO has been providing responsive guidance to pharmaceutical, biotech and medical device manufacturers of all sizes and at every stage of development. From understanding the complexities of collaborative R&D and licensing agreements and R&D tax credits to transaction advisory, and merger and acquisition due diligence, BDO’s services encompass more than traditional audit, tax, risk advisory, or consulting.

Randy Ramirez, the company’s regional practice leader will head up the workshop.  Mr. Ramirez has almost 20 years of Human Capital experience, assisting companies in areas such as employee communications, human capital strategy, organizational design, mergers and acquisitions, and compensation for Board members, executives, key employees, broad-based employees, and sales force incentives.

Click below the hear his full audio interview with OneMedRadio and see the transcript that follows.

Matthew Margolis:    Greetings from OneMedRadio, I’m Matt Margolis. Today, I’m with Randy Ramirez, regional practice leader at BDO, a global accounting, tax, financial advisory, and consulting organization. BDO serves a wide range of public and private companies and its network operates in more than 130 countries. Thank you for joining us, Mr. Ramirez.

Randy Ramirez:    A pleasure to be here, Matt.

MM:    Great. So thank you for joining us, Mr. Ramirez. Today, we’re discussing the state of biotech in the United States, but first I think we should learn a little bit more about BDO. So who are you and what is unique about BDO?

RR:   Well for BDO, we are a global accounting, tax and advisory and consulting firm and the unique thing about BDO is that, you know, yes, our history. It was founded on tax and accounting, but we also pride ourselves on being very adept business advisors. In my practice, where we specialize in compensation and benefits, one of the things that we like to do is that we take a look at a number of issues related to a company’s compensation and benefits practices and then loop in all of our other practices like tax, accounting, and so forth. So that when we do deliver our product, when we do deliver our recommendations, it’s very sound on the tax and accounting front as well as on the consulting front and that makes us unique.

MM:     Now at the height of the recession, you had noted that midmarket companies were in survival mode, which attributed to only a modest increase in compensation at that level. So what has changed since 2010?

RR:    That’s an excellent question. I think companies still are in survival mode, but what has changed is that companies that have come out of the recession have emerged stronger. They’ve emerged leaner and they’ve learned to do business differently. So you’re seeing much more efficient operations. They’re doing much more with less. I’m not saying that people are doing more or they’re stretched more, but companies have just found a way to really hone in on their key operations and really focus on what their key operations are, and that’s where they’re making money.

MM:  And so how does compensation in the biotech sector match up to other industries?

RR:    This is actually one of the industries where we have seen a significant change increase in compensation over the past few years, and a lot of that is attributed to the increased regulation in this area. So I mean if we were just talking about just the past three years alone, there’s been about double-digit increase in compensation across the board not only in executive compensation but also in board member compensation. A lot has been happening. So this is something that we will continue to see over the next few years as there has been more interest, more focus on the regulatory side and there’s certainly been more interest on the investor side as well.

MM:  Now I’m curious how social movements and the culture of sort of the Wall Street backlash have affected compensation levels in this industry. You know, has biotech been spared compared to other industries?

RR:   Well I think biotech, you know, to some extent has been spared, but I’m just going to back up for a moment and let me just talk about the broader sense first and then let me go into biotech. The interesting thing here is that with biotechs like other industries, they always seem to have a niche. There has always been something special and biotechs that’s not an exception. But what’s happened with Wall Street and the onset of regulation governing compensation is that in effect there has been a backlash. So it did start with Wall Street, that has mushroomed into other areas, and naturally you’ll see that covered in other industries. Biotech to some extent has not been spared.

So if you look at compensation as it relates to executives and board members, biotechs like Wall Street and like other industries are under the microscope, but are they as scrutinized or are they being criticized as highly as Wall Street? The answer to that is no because the business model is different. It’s not the perceived let’s try to run this business up or let’s just try to get in as much as we can for the year. Instead with biotech, it is a longer drawn out process where R&D cost maybe higher, the commitment is higher and it’s just the nature of the business. It’s just a much longer term view in terms of being able to see something come to fruition and ultimately a return to investors. So yes, biotechs to some extent has been spared and it’s just the way that it’s been over the years. It’s just a longer term view and so that lends itself to a lot of possible creative ways in terms of running the business and also compensating executives.

MM:    So in that light, what is the model that directors of non-revenue producing biotechs can use to justify compensation?

RR:   Well something that has been used and there’s a number of different models, but let’s just take some of the more traditional models for biotechs. On the top of the list are typically milestone type performance plans where if there is a delivery of a certain product or if a specific event has occurred for example like FDA approval of a certain kind of drug for example then it can trigger a certain performance clause and hence an executive payout. So those are typically something where if a company goes into business or starts its business with a very specific goal in mind then you can tie milestones, major milestones and then pivotal milestones up to the major milestone where it can’t have very specific performance target.

The nice thing about milestones is that it’s not necessarily time related so if a company can achieve a milestone in 12 months as opposed to 18 months, then it will trigger a payout at 12 months. Then of course it works conversely, if there are delays where something should have been achieved in 18 months but now we’re looking at a 24 or 36-month time to achieve that payout, then certainly it can have an effect on morale and it can have effect on executive retention. Some of the arguments we hear there is that some of those things may be out of their control.

Another kind of model that companies use where they might not have accurate tie-ins to revenue would simply be to have discretionary bonus that’s governed at the board level. Typically, what that’ll do is that a board will simply lay out goals tied to not only company performance on a more general scale but also to executive performance on an individual scale. So the thought there is if the executive and the executive team are doing the right things then that will ultimately lead to the success of the business. The board of directors can accurately engage or have some sort of scorecard or some sort of performance rating on the executive or the executive team that can easily translate into an executive compensation payout related to that scored performance.

MM:   Now to what extent do directors in this industry have personal liability and is this more extreme in biotech compared to others?

RR:   Directors in general have some personal liability so in that sense that actually has attributed to the increase in board member compensation over the years and especially if you take a look at not-for-profit that the not-for-profit industry as well. Now for biotechs, what we’re seeing is that there can potentially be increased liability for board members just because of the nature of the business. So when we counsel board of directors, we always stress that the process of the board be well defined, that meetings, that meeting minutes be well documented and well-kept and that everything that the board undertakes whether it be calls with executives with the company, the formal meetings, or informal meetings is somehow documented. That’s something that we always stress to our clients.

MM: So to wrap up, I want to circle back to your company practices and so what projects are you working on now? You know, what can we expect to see from your team this year?

RR:     That’s a great question and so what we’re seeing right now are mainly two key things. In the biotech area, what we’re focusing on are developing compensation programs that have some specific performance tie-in. So whether that be a short term type incentive plan, midterm, or long term plans, there’s always some focus of where the performance should be and what is the appropriate level of compensation.

The other thing that we’re focusing on is the exit of a company and how does that translate into compensation for executives, for employees, and for board members. Now just to give you an example, when we speak with clients and they ask us how do you begin to develop a compensation structure for our company knowing that we could increase our workforce by three times, five times or even ten times over the next few years, who should get what and when? Well one of the things that we ask when we first meet with executives and their board is what is your exit strategy. Now, we don’t mean when do you plan to leave but really what is a big corporate triggering event for your company? Is it a going to be an IPO? Is it a joint venture? Is it an acquisition? All of these different events have a different effect on the company and they certainly have different effect on the executives and the employees and the board on how they view that.

So the key thing here is identify what is the most likely exit event and then plan backwards and that’s how we’ve developed our compensation programs. You’ll be surprised at how many different variations there could possibly be and can you build in for increased valuation or an increased uptick in the sale of their transaction? Absolutely, but it all begins with what’s really the desired end state of your company and that’s how we do it at BDO.

MM:   That was Randy Ramirez, regional practice leader at BDO, discussing the outlook of compensation in the biotech industry. With OneMed Radio, this is Matt Margolis signing off.

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