Prepared by Radford
Compensation and Workforce Trends in the
Medical Device Industry
Boston, MA
Ed Speidel, Partner Ram Kumar, Director
Today’s Topics
US Market and Employment Outlook Labor Trends
Short-Term Incentive Practices
Private and Public Long-Term Incentive Practices Executive Compensation and Governance Trends
US Unemployment
The unemployment rate in Massachusetts has tracked below the national average for years and stands at 4.7% as of November 2015
Buoyed by the high volume of life sciences jobs, the state emerged strongly out of the recession and experienced solid job growth in recent years
Source: Economic Data, Federal Reserve Bank of St. Louis.
5.0 4.7 4.6 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Northeast Massachusetts US
US Equity Market
High-performing life sciences stocks fell into bear territory in September 2015, and though the market has made a slight recovery, some stocks are still
stumbling
Source: Yahoo! Finance.
0% 50% 100% 150% 200% 250% 300% 350% 1/2015 2/2015 3/2015 4/2015 5/2015 6/2015 7/2015 8/2015 9/2015 10/2015 11/2015 Dow Jones NASDAQ NASDAQ Healthcare
Behind Today’s Data…
To create the data groupings for this presentation, we grouped Medical Device and Diagnostic companies from the October refresh of Radford’s Global Life Sciences Survey and Global Technology Survey databases as follows
Source: Yahoo! Finance.
Company Profile Median Public Medical Device + Diagnostics Private Medical Device + Diagnostics Massachusetts
Private + Public East Coast
Revenue ($M) $355.5 $31.1 $326.2 $326.2
Market Cap ($M) $848.6 $536.7 $918.2 $1,098.9
Headcount 951 141 2,300 2,540
The Medical Device Industry in the Spotlight
Johnson & Johnson to Slash 3000 Jobs in Medtech Biz
The healthcare giant is continuing its restructuring of its medical device business by paying off approximately 3000 workers in its medical device unit over the next two years
Why Are Investors Running Away From Medical Devices?
“Venture capital for device manufacturers has been drying up for a while…The slowdown in the rise of healthcare spending is also contributing to the drought in venture capital… [Further] the FDA is
improving its performance, but the recent history of device failures still looms large, and has energized critics of the device industry.” (December 2015)
With Early Stage Investing Stifled, Things Look Grim for the Medical Device Industry
“There’s a marked lack of investing in early stage companies – stifling tech growth in the entire medical device industry…The lack of funding in early stage investment comes from “an increasingly uncertain reimbursement climate, exacerbated by the repetitive nature of medtech innovation, and the resulting pressure for companies to find new ways to demonstrate the value of their products.”
M&A in the Medical Device Industry
86
mergers and acquisitions in the first half of 2015— total valuation of $83 billion
$100 billion
expected full-year valuation for the close of 2015
M&A in the Medical Device Industry
Just in the later months of 2015, the industry snagged the headlines below
Flextronics Expands Medical Design Capabilities With
Acquisition Of Farm Design
Medtronic Smacks Down $110 Million Cash for Aircraft Medical
Technimark Acquires Leading Medical Component Manufacturer Ci Medical Technologies
Quest Diagnostics To Acquire Clinical Laboratory Partners' Outreach Laboratory Service Business In
Connecticut
Medtronic CEO Ponders Over Sale of Some Covidien Assets Henry Schein Makes Second Purchase in Two Days
Ekso Bionics Acquires Gravity Balancing Arm Technology From
Equipois Endologix Ponies Up $211 Million for TriVascular Tech
VC-Backed Kuros Biosurgery Merges with Cytos Biotech St. Jude Medical Completes Acquisition Of Thoratec
Galil Medical Extends Tender Offer Period To Acquire Perseon
Johnson & Johnson Execs Hint at Possible M&A Drug or
Medical Device Deals Amid $10 Billion Share Buyback Move
Symmetry Medical Acquires Single-Use, Low Profile Retractor
3% 2% 26% 38% 40% 50% 33% 22% 48% 31% 60% 40% 45% 57% 26% 31% 10% 20% 19% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Public Private Massachusetts East Coast Q3 All US Med. Dev. + Diagnostics
Q2 All US Med. Dev. + Diagnostics Freeze Selective Normal Aggressive
Hiring Sentiment for the Next 12 Months
Private companies stand out with the highest rate of aggressive hiring, with many of those companies planning to ramp up their workforces over the next 12 months
Normal hiring dropped notably from Q2 2015 to Q3 2015 as selective hiring increased
Expected Workforce Changes for the Next 12 Months
Interestingly, medical device companies are hardly reporting expected decreases in headcount over the next 12 months
Private companies stand out among Massachusetts, the East Coast and the overall US industry, with 62% of companies planning to increase their
workforces over the coming year
Industries & Regions Decrease Stay The Same Size Increase by up to 10% Increase by more than 10% Unknown Public 4% 35% 35% 17% 8% Private -- 25% 31% 31% 13% Massachusetts -- 40% 40% -- 20% East Coast -- 50% 20% 20% 10%
All US Med. Dev. +
Diagnostics -- 40% 23% 22% 15%
Historical Turnover in the US Medical Device and Diagnostics Industry
Trailing 12-month voluntary turnover is rising slowly after a post-recession drop and may be stabilizing as we head into 2016
9.3% 9.8% 10.7% 5.9% 4.7% 5.9% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 2013 2014 2015
Voluntary Turnover Involuntary Turnover
15.2%
14.5%
16.6%
Turnover
Turnover among private companies is considerably lower than turnover at public companies, however voluntary turnover among the group is relatively high, as many private companies indicate plans to ramp up workforce growth this year 11.4% 9.8% 10.4% 10.7% 5.9% 4.7% 5.3% 5.9% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
Public Private Massachusetts East Coast
Voluntary Turnover Involuntary Turnover
17.3%
14.5%
16.6%
Source: Q3 2015 Radford Custom Trends Reports for medical device and diagnostics companies.
Salary Increases
Overall 2015 actual and merit budgets are slightly higher in Massachusetts compared to East Coast companies, private companies and the overall industry, but not by much
We expect these figures to increase slightly moving into 2016
US Base Salary and Merit Increases
2015 Budget 2015 Actual 2016 Budget
Merit Overall Merit Overall Merit Overall
Public 2.9% 3.4% 2.9% 3.4% 3.0% 3.5%
Private 3.1% 3.4% 2.9% 3.3% 3.1% 3.6%
Massachusetts 2.9% 3.5% 3.0% 3.5% 3.5% 4.0%
East Coast 2.9% 3.4% 2.9% 3.4% 3.1% 3.4%
All US Med. Dev. +
Diagnostics 3.1% 3.5% 2.9% 3.4% 3.1% 3.5%
Average diluted data
Types of Incentive Plans
Across all groupings, the majority of companies provide some form of cash incentive plan
Historically the medical device industry has stood out against other life
sciences industries with higher rates of discretionary and cash profit sharing bonus plans
Metric Prevalence
Bonus Metric
Public Private MA East Coast
All US Med. Dev. + Diagnostics Companies with bonus/incentive compensation plan 95.8% 86.2% 100.0% 100.0% 89.3%
Types of Plans (% companies = of those with any plan)
Formal Bonus 96.7% 73.4% 94.1% 93.1% 83.8%
Discretionary Bonus 31.5% 44.4% 35.3% 41.4% 39.3%
Cash Profit Sharing 9.8% 5.8% -- 3.4% 6.0%
Formal Bonus Plan Participation
Source: Q3 2015 Radford Custom Practices Reports for medical device and diagnostics companies.
% Employees Receiving Formal Bonus
Public Private MA East Coast
All US Med. Dev. + Diagnostics Percent of Employees in the US 64.5% 65.9% 65.2% 65.1% 65.2% Percent of Employees Globally (includes US) 62.9% 64.0% 63.5% 61.6% 63.2%
Incentive Plan Participation
Bonus participation is high across all levels of medical device organizations
Radford Level
Annual Cash Participation Rates
Public Private MA East Coast
Executive 100% 99% 100% 100% Director (M4-M5) 98% 93% 94% 93% Manager (M2-M3) 97% 84% 88% 89% Supervisor (M1/M2) 78% 77% 81% 85% Expert (P5-P6) 84% 83% 88% 85% Career (P3-P4) 78% 77% 81% 78% Entry (P1-P2) 69% 69% 75% 70% Support (All) 58% 64% 56% 56%
Evolution of Incentive Plan Metrics
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)
Bonus Plan Metrics
Public Private MA East Coast
New Product Introduction 27% 25% 31% 37%
Other Non-Financial 66% 64% 69% 70%
Sales 87% 72% 69% 78%
Profit 86% 63% 75% 74%
Quality 22% 19% 25% 22%
Customer Satisfaction 15% 18% 19% 15%
Most public companies report that 2015 bonus plan funding will be the same as last year
Compared with last year, fewer private companies will be making larger payouts (22% planned to make larger payouts last year)
Projected Incentive Payouts
2015 projected payouts based on 2014 performance
Source: Q3 2015 Radford Custom Practices Reports for medical device and diagnostics companies.
11% 9% 13% 12% 10% 77% 79% 73% 80% 80% 11% 12% 13% 8% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Public Private Massachusetts East Coast All US Med. Dev. + Diagnostics Smaller Similar Larger
Private and Public
Private vs. Public Pay Philosophies at a Glance
Typical Private Firm Typical Public Firm
Peer Group Development
Usually, no specific identified peer list Focus on companies similar in size
and stage of development Key metrics: industry, invested
capital, revenue, stage of
development and employee count
Usually, a specific group of 15 to 20 identified public peer companies 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 prevalent
Base salary: 50th percentile Annual bonus: 50thpercentile 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 75thbased 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
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)
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
Focus on Individual Ownership
Private companies typically focus on employee ownership percentages as the best apples-to-apples point of comparison for delivering competitive equity packages
Employee Level
Median Individual Ownership by Level of Invested Capital
Under $40M $40M to $80M Over $80M CEO 7.509% 4.293% 3.803% Founder 8.623% 5.506% 4.195% Non-Founder 7.127% 4.195% 3.082% CFO 0.926% 0.639% 0.825% Top HR Executive 0.351% 0.347% 0.309% Vice President 0.688% 0.614% 0.548% Director 0.254% 0.283% 0.075% Manager 0.063% 0.120% 0.040% Professional 0.027% 0.032% 0.012% Support 0.006% 0.012% 0.005%
Manage Overall Employee Ownership
Meanwhile, investors and Boards of Directors focus heavily on the total amount of employee ownership, otherwise known as overhang
Fully diluted overhang is the most common metric used by private companies
Employee Level
Median Ownership by Level of Invested Capital
Under $40M $40M to $80M Over $80M
Total Employee Ownership 16.0% 10.6% 11.2%
Executives (VPs and above) 13.0% 8.2% 8.7%
All Other Employees 2.5% 2.0% 2.0%
Total 20.1% 15.2% 13.4%
Equity Receipt: Public Company Practice
Broad-based ownership remains common in the medical device industry so long as companies can manage dilution
Employee Level
Annual Equity Receipt Rates
Public MA East Coast
CEO 92% 83% 88% VP 90% 93% 87% Director (M4-M5) 84% 72% 82% Manager (M2-M3) 42% 38% 55% Supervisor (M1) 10% 13% 13% Expert (P5-P6) 33% 15% 33% Career (P3-P4) 14% 12% 19% Entry (P1-P2) 4% 8% 8% Support (All) 3% 1% 1%
Equity Value: Public Company Practice
Equity values are heavily concentrated at the executive level, with values diminishing toward the lower levels of the organization
Massachusetts companies stand out with higher annual equity values over the overall East Coast, especially at the top levels of the organization
Employee Level
Annual Equity Value
Public MA East Coast
CEO $2,040.3 $2,286.8 $1,657.6 VP $97.8 $152.9 $117.3 Director (M4-M5) $35.7 $57.7 $53.3 Manager (M2-M3) $16.2 $13.2 $13.3 Supervisor (M1) $10.1 $5.2 $5.0 Expert (P5-P6) $25.2 $26.6 $19.9 Career (P3-P4) $11.7 $6.5 $6.9 Entry (P1-P2) $7.2 $4.3 $4.3 Support (All) $6.7 $1.3 $1.3
Equity Vehicle Mix
When we look at vehicle mix, we see that companies use a blend of options and RSUs across all levels, especially at higher levels in the organization, but from the Management 5 level downward, an RSUs-only approach dominates
Source: Q3 2015 Radford Custom Global Long-Term Incentive Reports for the medical device and diagnostic companies.
Position/Level
Percent of Employees Receiving Each Vehicle – Market 50th Percentile
Massachusetts East Coast All US Med. Dev. +
Diagnostics Options Only RSUs Only Options + RSUs Options Only RSUs Only Options + RSUs Options Only RSUs Only Options + RSUs CEO 30% 20% 50% 36% 14% 50% 23% 22% 55% SVP/Officer 25% 13% 63% 25% 8% 67% 26% 21% 54% VP 5% 25% 70% 5% 5% 91% 17% 16% 68% Management 5 -- 78% 21% 1% 51% 48% 22% 38% 41% Management 3 1% 95% 4% 1% 96% 3% 22% 58% 20% Professional 5 -- 89% 11% -- 91% 9% 8% 66% 26% Professional 3 2% 96% 2% 2% 97% 2% 13% 75% 12%
Equity Vesting Schedules
Vesting over four years remains the common practice among medical device companies for both options and RSUs, which can aid retention
Yet, many companies also use a three-year vesting schedule for RSUs, which can be a competitive advantage
8% 30% 53% 8% RSUs 2% 13% 75% 9% Options
1-2 Years 3 Years 4 Years 5+ Years
Burn Rates in the Medical Device Industry
Median last fiscal year (LFY) and 3-year gross burn rates are similar across the full US medical device industry
Relative to the East Coast and overall US medical device industry, Massachusetts medical device companies use the most equity
1.8% 2.1% 3.2% 3.3% 4.4% 4.9% 0% 1% 2% 3% 4% 5% 6%
LFY 3-Year Average
Gross Equity Burn Rate 25th 50th 75th
4.0% 3.2% 3.2% 0% 1% 2% 3% 4% 5%
Massachusetts East Coast All US Med. Dev + Diagnostics
Median LFY Burn Rate by Industry
Overhang in the Medical Device Industry
Median issued overhang sits at 8.9% for the industry as a whole, with total overhang at 14.3% 5.9% 10.4% 8.9% 14.3% 12.8% 19.4% 0% 5% 10% 15% 20% 25% Issued Total
Issued Equity and Total Overhang 25th 50th 75th
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
Source: Radford Custom Compensation Reports, January 2016.
78% 53% 77% 78% 79% 87% 78% 78% 58% 70% 59% 60% 8% 47% 8% 8% 12% 13% 12% 12% 20% 30% 21% 21% 14% 15% 14% 9% 10% 11% 22% 20% 19% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Public Private MA East
Coast Public Private MA CoastEast Public Private MA CoastEast
Pay Mix Base Bonus LTI
Executive Manager
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
Source: Radford Pre-IPO Venture-Backed Survey, Radford Custom Compensation Reports, January 2016.
CEO Public Private MA East Coast
Base Salary $604,135 $350,000 $600,000 $600,000
Target Total Cash $1,126,250 $412,250 $1,200,000 $1,175,000
Executive Compensation
CFO, Top HR and Top Regulatory Affairs Executive 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, Radford Custom Compensation Reports, January 2016.
CFO Public Private MA East Coast
Base Salary $350,000 $252,024 $343,382 $343,382
Target Total Cash $532,213 $304,858 $571,159 $541,722
Annual LTI Value $683,485 -- $797,351 $771,678
Top HR Exec.
Base Salary $283,086 $257,034 $291,543 $283,086
Target Total Cash $397,500 $323,381 $396,320 $396,435
Annual LTI Value $293,142 -- $447,324 $318,722
Top Regulatory Affairs Executive
Base Salary $278,100 $226,600 $253,038 $290,332
Target Total Cash $390,670 $288,563 $341,601 $409,495
--Medical Device Professional IC Compensation
Source: Radford Pre-IPO Venture-Backed Survey, Radford Custom Compensation Reports, January 2016.
Development
Engineer 4 Public Private MA East Coast
Base Salary $123,978 $90,140 $109,847 $109,847
Target Total Cash $140,369 $98,730 $119,732 $119,732
Annual LTI Value $70,166 -- $5,991
--Scientist 3
Base Salary $96,999 $105,000 $101,436 $97,344
Target Total Cash $105,600 $110,549 $112,750 $107,842
Annual LTI Value $18,040 -- $19,480 $18,040
At the Development Engineer 4 position, we see public companies stand out with high annual LTI values
For the Scientist 3 position, base pay is higher at private companies, and total target cash is considerably higher among companies located in Massachusetts
Executive Compensation and
Governance Trends
Full implementation of Dodd-Frank still remains a work in progress
Dodd-Frank Update
Dodd-Frank Rule SEC Status
Say-on-Pay Final and Active
Say-on-Golden Parachutes Final and Active
Committee Independence Final and Active
Consultant Independence Final and Active
CEO Pay Ratio Disclosure Final and Active in 2018 proxy season
Pay-for-Performance Disclosure Rules were proposed
(Likely effective in 2017 proxy season)
Anti-Hedging Policy Rules were proposed
(Possibly effective for 2016 proxy season)
Clawbacks
Rules were proposed Comment period ends 9/14/2015
Equity Plan Scorecard (“EPSC”) modifications:
– ISS increased post-vesting/exercise holding period requirement to receive full points under the model from 12 months to 36 months or until employment termination. A holding period
requirement of 12 months or until stock ownership guidelines are met will continue to receive half
points under the revised model
Previously, a holding period of at least 12 months resulted in full points under the old scorecard model
– ISS also renamed the “Automatic Single-Trigger Vesting” plan features factor to “CIC Vesting” and modified the scoring levels to take into consideration the treatment of performance-based awards in the event of a CIC
Director Overboarding:
– For non-CEO directors, ISS will now note in its report if a director serves on more than five public company boards during 2016, but will only recommend that shareholders vote against directors who sit on more than six public company boards
However, starting on or after February 1, 2017, negative recommendations will be made for non-CEO directors sitting on more than five public company boards
Unilateral Bylaw and Charter Changes:
– Currently, ISS’s existing policy recommends that its subscribers vote against/withhold director nominees, certain committees, or the entire board if the board amends company bylaws or charter without shareholder approval in a way that materially diminishes shareholder rights. – ISS now bifurcates its analysis as to how it evaluates newly-public companies and companies
with a longer trading history
Possibly effective for proxy season 2016
Take Action: disclose whether your company permits employees (including
officers) or directors to engage in hedging activities with respect to shares granted as part of compensation, as well as shares held directly or indirectly
– If some hedging activity is permitted, identify the categories of persons permitted to engage in hedging activities as well as the types of hedging activities that are
permitted (or not permitted)
– Technically, these disclosures are required under Item 407 (Corporate Governance), and we would expect companies to provide this disclosure outside the CD&A
Since hedging is one of the SEC’s “15 items” to be covered in the CD&A, the proposed rule would allow companies to reference the Item 407 disclosure within the CD&A
Possibly effective for proxy season 2017
Take Action: include a new “Pay Versus Performance” table in the proxy
statement disclosing:
– Total compensation disclosed in the Summary Compensation Table (TCSCT) for each of the past 5 years for the CEO
– Total compensation actually paid (TCAP) to the CEO for each of the past 5 years – Average other NEO TCSCT for each of the past 5 years
– Average other NEO TCAP for each of the past 5 years
– Total shareholder return (TSR) for each of the past 5 years on a cumulative basis – Peer group TSR for each of the past 5 years on a cumulative basis
Stock options will use a Black-Scholes value as of the vesting date taking into account changes in share price since grant
In addition to the new table, discuss the relationship between (A) the TCAP of the CEO and the average other NEO TCAP and (B) the cumulative total
shareholder return (TSR) for each of the last 5 years
Continue to use the CD&A to reinforce how certain elements of pay are tied to corporate performance and/or share price movement and reference that
discussion in the pay versus performance disclosure
Reiterate why various financial metrics have been selected
We anticipate that both ISS and Glass Lewis may comment on such
disclosures in their say-on-pay evaluations, but will ultimately likely rely on their own existing peer group selection and pay-for-performance methodologies to determine whether a company has a disconnect or linkage in pay versus
performance
Given the SEC’s suggestion regarding the use of graphs, we anticipate most companies will use visuals as part of the requirement of providing a clear description of the relationship between the following:
– The company’s TSR and the peer group’s TSR; and
– The executive compensation actually paid to the NEOs and the company’s TSR
Pay vs. Performance Modeling
$100 $143 $211 $239 $97 $165 $250 $262 $0 $50 $100 $150 $200 $250 $300
Mar-13 Dec-13 Dec-14 December 2015 Estimate Peer Indexed TSR Company A Indexed TSR
$50 $100 $150 $200 $250 $300 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
Mar-13 Dec-13 Dec-14 December 2015 Estimate
Indexed TSR
CEO and
When will the clawback be triggered?
– In event of a restatement without any requirement of misconduct or negligence of executives from whom compensation is being recovered
Applies to restatements compelled by error that is material to previously issued financial statements
From whom must compensation be recovered?
– All executive officers with a policy-making role; anyone who met the definition of an executive officer at any point during the incentive compensation’s performance period
What types of compensation are subject to the policy?
– All incentive-based compensation, whether short-term or long-term – Based on any financial reporting measure or stock price/TSR
– Equity awards are subject to clawback only to the extent the grant, vesting, or the amount of the award earned is affected by the restated measure or related impact on stock or TSR
– Time-based stock options and restricted stock are not incentive compensation subject to clawback
Board discretion
– No board discretion – recovery is compulsory, with the “excess” incentive compensation to be recovered pro rata from all executive based on their share of the original overstated award
We do not expect the policy to become effective earlier than the 2017 proxy season
Under the proposed rules, the listing exchanges must add a listing requirement for companies to adopt a clawback policy that minimally conforms to the SEC’s requirements:
– Clawback is triggered in the event of a restatement due to material non-compliance with GAAP reporting requirements (“no fault”)
– From the date the company is aware or should be aware that a restatement will be required, the company must look back to the 3 most recently completed fiscal
years
– If the financial restatement affects the amounts originally determined to be earned under incentive pay programs, the company must clawback the excess
compensation
– It is important to note that for life sciences companies, clinical / scientific
milestones are not considered financial metrics and therefore plans or portions of plans related to these types of metrics cannot be subject to recoupment
The effective date for the CEO pay ratio is for fiscal years that begin on or after January 1, 2017 (for calendar-year filers, that would mean the first disclosure would occur in the 2018 proxy season)
Identifying the median employee is only required once every 3 years
(provided the employee population has not changed in a way that would significantly affect the ratio (e.g., corporate mergers and acquisitions)
Median Employee can be identified using the employee population as of any
date during the last 3 months of the fiscal year
– This includes any full-time, part-time, seasonal, or temporary worker employed by the registrant or any of its consolidated subsidiaries on that day
Nondiscriminatory benefit plans can be added to the numerator and
denominator of the ratio
Optional narrative and supplemental ratios are permitted to provide helpful
context
Determining the CEO to worker pay ratio isn’t so simple…
The SEC has set forth several operational guidelines for determining the median employee, though companies must be sure to disclose and
consistently apply the methodology of their choosing
CEO Pay Ratio Modeling
Median Employee Selection Methodology Base Total Target
Cash
Target Total Direct Compensation
W-2
(or int’l equiv.) Wages Median Employee Total Pay $95,000 $85,000 $100,000 $90,000
CEO Summary Comp Table Pay $10,500,000 $10,500,000 $10,500,000 $10,500,000
The final rules retained several operational guidelines that give employers flexibility
– Registrants may use (A) a methodology that uses reasonable estimates to identify the median and (B) reasonable estimates to calculate the annual total compensation or any elements of total compensation
– In determining the employees from which the median is identified, a registrant may use (A) its entire employee population or (B) statistical sampling or other reasonable methods
– A registrant may identify the median employee using (A) annual total compensation or (B) any other compensation measure that is consistently applied to all employees included in the calculation, such as amounts derived from the registrant’s payroll or tax records
– A registrant may annualize the total compensation for all permanent employees (other than those in temporary or seasonal positions) that were employed by the registrant for less than the full fiscal year
Recently, we have seen increased scrutiny around director compensation, especially on equity awards
Because director compensation is typically set by the Compensation
Committee, who also receives the compensation, some are alleging that the compensation constitutes a breach of fiduciary duty
A number of publicly traded companies have recently faced legal action around director compensation, causing many to consider implementing a concrete and meaningful limitation on grants to directors to be included in an equity plan and approved by shareholders
Companies should consider including a hard coded limit on annual equity awards to directors in the text of the next amendment to their plan;
alternatively, a standalone policy could be put forth to shareholders for approval