Compensation Trends in the Medical Device Industry

Compensation Trends in the

Medical Device Industry

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Today’s Presentation



US Market and Employment Outlook



Labor Trends



Pay Frameworks



Pay Mix



Public vs. Private Cash

US Market and Employment Outlook

US Unemployment in a Recovering Economy

 The unemployment rate in Massachusetts has tracked primarily below the national average, and currently stands at 5.5%

Source: Economic Data, Federal Reserve Bank of St. Louis.

5.5% 6.1% 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Northeast Massachusetts US

US Market and Employment Outlook

US Markets

 The US stock market continues to appreciate and stocks are at five-year highs despite sluggish post-recession GDP growth

 Recovery is especially strong in the biotech industry: more life sciences firms have joined the market in the first half of 2014 than in all of 2013, with their shares surging and well outpacing the general market

Behind Today’s Data

 Ranging from multi-national pharmaceuticals to small, pre-commercial start-ups, Radford’s Global Life Sciences Survey houses global

compensation intelligence spanning 54 countries across 674

biotechnology, pharmaceutical, medical device, diagnostic and CRO companies

 To create the data groupings for this presentation, we grouped Medical Device and Diagnostic companies from the July refresh of Radford’s Global Life Sciences Survey database into the following three segments

Company Profile

Median

Private Small Public Large Public

Revenue ($M) N/A $175.5M $2,142.4M

Labor Trends

Current Hiring Environment

 Medical device companies have resumed normal hiring across all stages of development

 These levels mark a significant uptick from the more selective environment we saw in 2012-13

Source: Radford Custom Trends Reports, Q2 2014 and Radford Medical Device Trends Report, Q2 2014.

Industry Freeze Selective Normal Aggressive

Private 8.3% 25.0% 50.0% 16.7%

Small Public 0.0% 12.5% 87.5% 0.0%

Large Public 6.3% 25.0% 62.5% 6.3%

Labor Trends

Turnover

 Across all market segments, voluntary turnover is up substantially from previous years, especially at private companies (up from 5.3% in 2012)

 This rise in voluntary turnover coincides with more aggressive hiring rates and highlighting an increasingly competitive market

12.9% 9.9% _8.9% 5.2% 4.5% _5.7% 0.0% 5.0% 10.0% 15.0% 20.0%

Private Small Public Large Public

Voluntary Involuntary

18.1%

Source: Radford Custom Trends Reports, Q2 2014.

Labor Trends

US Salary Increases

 Salary budgets are generally flat from 2013 to 2014, however, we

expect to see upticks in 2015 (as the data trends about 0.2% year over year) Industry 2013 Overall Average Actual (Diluted) 2014 Overall Average Budget (Diluted) 2014 Overall Average Actual (Diluted)

Merit Overall Merit Overall Merit Overall Private 2.7% 3.3% 3.0% 3.3% 2.6% 3.0%

Small Public 2.6% 3.0% 3.1% 3.3% 3.0% 3.5%

Large Public 2.6% 3.0% 2.8% 3.1% 2.7% 3.1%

Source: Radford Custom Trends Reports, Q2 2014. Diluted data includes zeros.

Pay Frameworks

Private vs. Public Pay Philosophies at a Glance

Typical Private Firm Typical Public Firm

Peer Group Development

 Usually, no specific identified peer list

 Focus is placed on comparative

companies similar in size and stage of development

 Key metrics include industry, invested capital, revenue, stage of

development and employee count

 Usually, a specific group of 15 to 20 identified public peer companies

 Life sciences: focus is often on market cap, R&D spend, product phase/stage

Cash Approach

 Base salary must be competitive (no longer getting away with low cash)

 Annual bonuses are becoming more prevalent these days

 Base salary: 50th percentile

 Annual bonus: 50th percentile or above, emphasizing the at-risk nature of compensation

Equity Approach

 Aggressive award sizes, especially to those risking early entry

 Vehicles: Stock options dominate

 Award sizing metric: Ownership percentage

 50th _{percentile and up to 75}th_based

on performance

 Vehicles: Options, RSUs, performance shares

 Award sizing metric: Value

Pay-for-Performance  Egalitarian: “we’re all in this together”

 Pay is targeted to key roles and high performers

Pay Mix

Private and Public Company Pay Mix

 Overall, cash isn’t that different between the scientist and manager levels, but it changes substantially at the executive level, with LTI comprising a significant part of the pay package

 Bonus targets become more formalized and richer as a company evolves, particularly at the manager level and above

77% 84% 88% 75% 80% 84% 45% 47% 51% 12% 7% 8% 10% 9% 9% 13% 16% 18% 11% 9% 4% _15% 11% 7% 42% 37% 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Private Small Public Large Public Private Small Public Large Public Private Small Public Large Public

Percent of Total Direct Pay

Base Bonus LTI

Executive Manager

Engineer

Private vs. Public Cash

Dispelling Myths About Private Cash

 Pre-IPO/Venture-Backed Cash Compensation as a Percent of Global Life Sciences Totals

Level At Median Base Target Total Cash Executive 92% 87% Management 103% 104% Professional 103% 103% Support 103% 103%

Public vs. Private Cash

Types of Incentive Plans

 Most medical device companies, both public and private, provide annual incentives

 The medical device industry historically has stood out against other life sciences industries with higher rates of discretionary and cash profit sharing bonus plans

Bonus Metric

Metric Prevalence

Private Small Public Large Public Companies with bonus/incentive

compensation plan 82% 96% 100% Bonus Plan Combinations

Formal Bonus Only 58% 56% 57%

Discretionary Bonus Only 24% 0% 6%

Formal + Discretionary 18% 37% 28%

Formal + Cash Profit Sharing 0% 7% 9%

Private vs. Public Cash

Evolution of Pay Practices: Cash Incentives

 Incentive pay changes to focus more on financial performance (sales and profit) as companies move private to public

 Generally speaking, bonus metrics shift as a company grows in size Bonus Metric

*(more than one may apply) Private Small Public Large Public New Product Introduction 56% 33% 7%

Other Non-Financial 80% 74% 47%

Sales 76% 100% 83%

Profit 48% 81% 100%

Quality 28% 11% 17%

Customer Satisfaction 20% 4% 10%

Public vs. Private Cash

2014 Bonus Plan Funding Expectations

 Most public companies report that 2014 bonus plan funding will be the same as last year; however, private companies will fund at a

considerably higher rate than public companies

Lower 13% Lower 12% Lower 19% Similar 65% Similar 79% Similar 77% Higher 22% Higher 9% Higher 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Private Small Public Large Public

Percent of Companies

2014 Bonus Funding Compared to the Prior Year

Lower Similar Higher

Public vs. Private Cash

Incentive Plan Receipt Rates

 Bonus participation among private companies is catching up to public-company levels

 With high levels of participation across all levels of the organization

Source: Radford Custom Practices Reports, Q2 2014.

Radford Level

Annual Cash Receipt Rates

Private Small Public Large Public Executive 100% 100% 100% Director (M4-M5) 96% 100% 100% Manager (M2-M3) 88% 96% 97% Supervisor (M1) 80% 67% 90% Expert (P5-P6) 80% 85% 93% Career (P3-P4) 80% 79% 90% Entry (P1-P2) 80% 67% 77% Support (All) 68% 59% 60%

Private vs. Public Cash

Executive Compensation

 Unlike broad-based employees, executives are still willing to take a discount on cash for higher ownership

 As companies move from private to public and become more

established, CEO pay shifts: fixed pay typically gets higher, and long-term incentive values at the executive level become more meaningful as the company gains traction and as market capitalization values increase

Position: CEO

Medical Device

Private Small Public Large Public Base Salary $367,200 $515,000 $801,000

Target Total Cash $523,200 $893,000 $1,704,000

Annual LTI Value - $856,200 $2,773,800

Ownership (50th _{Percentile) 4.7% to 6.0% 1.6% to 3.6% 0.8% to 1.8%}

Private vs. Public Cash

Executive Compensation

 CFO and Top HR data reflects the same premium to cash

compensation among public companies, but the impact of cash is dwarfed by the annual equity delivery for public company executives

Source: Radford Pre-IPO Venture-Backed Survey, April 2014, Radford Global Life Sciences Survey, July 2014.

Position: CFO

Medical Device

Private Small Public Large Public Base Salary $253,707 $325,000 $424,400

Target Total Cash $325,225 $581,424 $704,000

Ownership (50th _{Percentile) 0.8% - 1.3% 0.6% to 0.9% 0.4% to 0.7%}

Annual LTI Value - $313,272 $975,000

Position: Top HR Exec.

Base Salary $225,000 $245,000 $303,300

Target Total Cash $287,500 $482,556 $440,900

Ownership (50th _{Percentile) 0.2% - 0.5% 0.1% to 0.5% 0.1% to 0.3%}

Pay Frameworks

Private vs. Public Equity Practices

Typical Private Firm Typical Public Firm Equity Award Sizing

 Primarily established by targeting specific ownership percentages; conversion into shares based on total common shares outstanding

 Primarily established by targeting specific values; conversion into shares is typically based on stock price

New-Hire vs. Ongoing Awards

 Large new-hire grants

 Ongoing grants delayed until IPO approaches, or 3-4 years after hire

 Ongoing guidelines set anywhere from 25% to 33% of new-hire awards

 New-hire awards are typically 1.25x-1.75x ongoing award sizes

 Most employees are eligible for ongoing awards after six months to one year of service

Equity Vehicle Mix

 Stock options dominate

Caveat: A few notable companies have used RSUs pre-IPO; however, large cash reserves are needed to address taxes

 Mix of stock options and RSUs, with an emphasis on RSUs as the firm matures

 Rising prevalence of performance shares for executives

Equity Program Participation

 New hire awards: nearly 100%

 Ongoing awards: targeted at key performers and those employees greater than 50% vested (usually 25% to 30% of population at any given time)

 New hire awards: participation drops as companies increase in size

 Ongoing awards: broad eligibility is maintained, although awards targeted at top performers (usually 40% - 60% of population)

Private vs. Public Equity

Focus on Individual Ownership

Employee Level

Median Individual Ownership by Level of Invested Capital

Under $40M $40M to $80M Over $80M

CEO 6.338% 4.567% 4.465%

Founder 7.781% 5.445% 5.263%

Non-Founder 4.824% 4.246% 4.043%

CFO 0.957% 0.825% 0.823%

Top HR Executive n/a 0.295% 0.267%

Vice President 0.640% 0.370% 0.301%

Director 0.278% 0.181% 0.131%

Manager 0.049% 0.050% 0.034%

Professional 0.053% 0.042% 0.025%

Support 0.004% 0.003% 0.002%

Source: Radford’s Pre-IPO/Venture-Backed Survey. Data shown are a roll-up of Radford levels taken at the median.

 Private companies typically focus on employee ownership percentages as the best apples-to-apples point of comparison for delivering

Private vs. Public Equity

Manage Overall Employee Ownership

Employee Level

Median Total Ownership by Level of Invested Capital Under $40M $40M to $80M Over $80M

Total Employee Ownership 15.2% 16.2% 13.6%

Executives (VPs and above) 10.5% 10.6% 9.7%

All Other Employees 2.8% 3.6% 3.5%

Shares Available for Grant 2.9% 1.7% 1.9%

Total 18.1% 17.9% 15.5%

 Meanwhile, investors and Boards of Directors focus heavily on the total amount of employee ownership, otherwise known as overhang

 Fully diluted overhang, the most common metric used by private

companies, looks at total employee ownership plus shares available for grant divided by fully diluted shares outstanding

Private vs. Public Equity

Aligning Equity with Stage of Development

Long-Term

Incentive Vehicles

Company Profile

Objectives and Implications Startup/ Pre-IPO Mid-Cap/ Growth Market Mid-Cap/ Mature Market Large Cap/ Mature Market Stock Options Only

 Stock options help employees focus on upside potential, either stock price growth or company valuation growth

Restricted Shares/ Units Only

 Restricted shares/units de-emphasize stock price growth in favor of employee retention and ownership

Stock Options and Restricted Shares/ Units

 A mixed approach attempts to balance growth with retention, and typically involves different mixes for different employee levels

Performance Shares/ Units

 Performance shares allow companies to introduce targeted goals (beyond stock price growth) into their equity programs

Long-Term Cash

 Often used in conjunction with equity, long-term cash allows for more diversity of performance goals, but requires an ability to set goals over multiple years

Relative Total Shareholder Return

 The use of TSR metrics typically reflects alignment with the institutional investor perspective (i.e., portfolio performance) and requires a stable peer group

Emerging Practice Least Common Practice Most Common Practice

Public Equity

Equity Receipt: Public Company Practice

 Broad-based ownership remains common at small and large medical device companies, so long as companies can manage dilution;

however, we see that most large public firms don't grant to everyone, evidenced by comparatively lower receipt rates

Source: Radford Custom Global Long Term Incentive Reports.

Radford Level

Annual Equity Receipt Rates

Small Public Large Public

CEO 100% 95% CFO 98% 93% Top HR Executive 93% 97% Director (M4-M5) 85% 90% Manager (M2-M3) 45% 70% Supervisor (M1) 25% 10% Expert (P5-P6) 70% 40% Career (P3-P4) 45% 15% Entry (P1-P2) 30% 10% Support (All) 15% 5%

Public Equity

Equity Value: Public Company Practice

 Equity values are heavily concentrated at the executive level, with the distinction between executives and other employees growing more marked as companies grow in size

Source: Radford Custom Global Long Term Incentive Reports.

Radford Level

Annual Equity Value

Small Public Large Public

CEO $856.2 $2,773.8 CFO $313.3 $975.0 Top HR Executive $176.4 $380.8 Director (M4-M5) $34.8 $37.4 Manager (M2-M3) $14.0 $17.9 Supervisor (M1) $4.20 $9.60 Expert (P5-P6) $14.4 $23.0 Career (P3-P4) $6.10 $11.5 Entry (P1-P2) $2.90 $7.20 Support (All) $2.30 $10.6

Public Equity

Burn Rates and Overhang

 Post-IPO, large companies in particular come under considerable pressure to manage equity dilution

 As a result of curtailed participation and greater use of restricted stock at large companies, we see lower burn rates and issued overhang

levels at large companies vs. small companies

3.8% 3.6% 2.8% 2.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

LFY Gross Equity Burn Rate 3-Year Average Gross Equity Burn Rate

Burn Rate

Small Public Large Public

10.0% 13.6% 6.5% 13.8% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

LFY Issued Overhang LFY Total Overhang

Overhang

Small Public Large Public

Key Takeaways

 Labor markets are tightening and voluntary turnover has increased

 Companies increasingly need to act proactively and defensively to lock-in key talent which means more aggressive cash positioning and cash/equity retention programs

 Merit pools for 2015 will be ~3% and probably trending higher with adjustment pools ranging .5 to 1%

 The hot IPO marketplace has reinvigorated employees interest in equity compensation (even stock options)

 However larger public companies continue to be constrained in delivering the same broad-based equity grants that are common among Private and smaller Public Companies

Questions?