Compensation Trends in the Medical Device Industry September 2014 One Firm. Complete Solutions.
Our Value Global Knowledge. Local Perspectives. For more than 35 years, Radford, an Aon Hewitt company, has served as the leading provider of compensation intelligence to the global technology and life sciences sectors. Our ability to combine deep industry expertise with global survey knowledge and local consulting perspectives makes Radford an unmatched partner for innovation-based companies seeking truly comprehensive compensation and governance solutions. Today, more than 2,500 companies choose to partner with Radford s survey, compensation consulting and equity valuation businesses for these reasons. Industry Expertise + Global + Knowledge Local Perspectives 1 Compensation Trends in the Medical Device Industry MassMEDIC
Today s Presentation US Market and Employment Outlook Labor Trends Pay Frameworks Pay Mix Public vs. Private Cash Public vs. Private Equity 2 Compensation Trends in the Medical Device Industry MassMEDIC
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% 12.0 10.0 8.0 6.0 4.0 6.1% 5.5% 2.0 0.0 Northeast Massachusetts US Source: Economic Data, Federal Reserve Bank of St. Louis. 3 Compensation Trends in the Medical Device Industry MassMEDIC
US Market and Employment Outlook US Markets The US stock market continues to appreciate and stocks are at fiveyear 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 Source: Yahoo! Finance. 4 Compensation Trends in the Medical Device Industry MassMEDIC
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 Median Company Profile Private Small Public Large Public Revenue ($M) N/A $175.5M $2,142.4M Number of Cos. 40 31 33 5 Compensation Trends in the Medical Device Industry MassMEDIC
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 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% All US Med. Dev. 4.8% 33.3% 54.8% 7.1% Source: Radford Custom Trends Reports, Q2 2014 and Radford Medical Device Trends Report, Q2 2014. 6 Compensation Trends in the Medical Device Industry MassMEDIC
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 20.0% 18.1% 15.0% 5.2% 14.4% 14.6% 10.0% 4.5% 5.7% 5.0% 12.9% 9.9% 8.9% 0.0% Private Small Public Large Public Voluntary Involuntary Source: Radford Custom Trends Reports, Q2 2014. 7 Compensation Trends in the Medical Device Industry MassMEDIC
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% Diluted data includes zeros. Source: Radford Custom Trends Reports, Q2 2014. 8 Compensation Trends in the Medical Device Industry MassMEDIC
Pay Frameworks Private vs. Public Pay Philosophies at a Glance Peer Group Development Cash Approach Equity Approach Pay-for- Performance Typical Private Firm 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 Base salary must be competitive (no longer getting away with low cash) Annual bonuses are becoming more prevalent these days Aggressive award sizes, especially to those risking early entry Vehicles: Stock options dominate Award sizing metric: Ownership percentage Egalitarian: we re all in this together Typical Public Firm 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 Base salary: 50th percentile Annual bonus: 50th percentile or above, emphasizing the at-risk nature of compensation 50 th percentile and up to 75 th based on performance Vehicles: Options, RSUs, performance shares Award sizing metric: Value Pay is targeted to key roles and high performers 9 Compensation Trends in the Medical Device Industry MassMEDIC
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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 11% 9% 12% 7% 77% Engineer 4% 8% 84% 88% Percent of Total Direct Pay Manager 15% 11% 7% 9% 9% 10% 75% 80% 84% 42% 13% Executive 37% 16% 31% 18% 45% 47% 51% Private Small Public Large Public Private Small Public Large Public Private Small Public Large Public Base Bonus LTI Source: Radford Custom Compensation Reports, Q2 2014. 10 Compensation Trends in the Medical Device Industry MassMEDIC
Private vs. Public Cash Dispelling Myths About Private Cash Pre-IPO/Venture-Backed Cash Compensation as a Percent of Global Life Sciences Totals Level Base At Median Target Total Cash Executive 92% 87% Management 103% 104% Professional 103% 103% Support 103% 103% Source: Radford Pre-IPO Venture-Backed Survey, April 2014, Radford Global Life Sciences Survey, July 2014. 11 Compensation Trends in the Medical Device Industry MassMEDIC
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 Companies with bonus/incentive compensation plan Metric Prevalence Private Small Public Large Public 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% Source: Radford Custom Practices Reports, Q2 2014. 12 Compensation Trends in the Medical Device Industry MassMEDIC
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% Source: Radford Custom Practices Reports, Q2 2014. 13 Compensation Trends in the Medical Device Industry MassMEDIC
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 Percent of Companies 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Higher 22% Similar 65% Lower 13% 2014 Bonus Funding Compared to the Prior Year Higher 9% Similar 79% Lower 12% Higher 4% Similar 77% Lower 19% Private Small Public Large Public Lower Similar Higher Source: Radford Custom Practices Reports, Q2 2014. 14 Compensation Trends in the Medical Device Industry MassMEDIC
Public vs. Private Cash Incentive Plan Receipt Rates Bonus participation among private companies is catching up to publiccompany levels With high levels of participation across all levels of the organization 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% Source: Radford Custom Practices Reports, Q2 2014. 15 Compensation Trends in the Medical Device Industry MassMEDIC
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 longterm 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 (50 th Percentile) 4.7% to 6.0% 1.6% to 3.6% 0.8% to 1.8% Source: Radford Pre-IPO Venture-Backed Survey, April 2014, Radford Global Life Sciences Survey, July 2014. 16 Compensation Trends in the Medical Device Industry MassMEDIC
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 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 (50 th 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 (50 th Percentile) 0.2% - 0.5% 0.1% to 0.5% 0.1% to 0.3% Annual LTI Value - $176,352 $380,800 Source: Radford Pre-IPO Venture-Backed Survey, April 2014, Radford Global Life Sciences Survey, July 2014. 17 Compensation Trends in the Medical Device Industry MassMEDIC
Pay Frameworks Private vs. Public Equity Practices Equity Award Sizing New-Hire vs. Ongoing Awards Equity Vehicle Mix Equity Program Participation Typical Private Firm Primarily established by targeting specific ownership percentages; conversion into shares based on total common shares outstanding 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 Stock options dominate Caveat: A few notable companies have used RSUs pre-ipo; however, large cash reserves are needed to address taxes 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) Typical Public Firm Primarily established by targeting specific values; conversion into shares is typically based on stock price 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 Mix of stock options and RSUs, with an emphasis on RSUs as the firm matures Rising prevalence of performance shares for executives 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) 18 Compensation Trends in the Medical Device Industry MassMEDIC
Private vs. Public Equity 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 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. 19 Compensation Trends in the Medical Device Industry MassMEDIC
Private vs. Public Equity 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, the most common metric used by private companies, looks at total employee ownership plus shares available for grant divided by fully diluted shares outstanding 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% Source: Radford s Pre-IPO/Venture-Backed Survey. 20 Compensation Trends in the Medical Device Industry MassMEDIC
Private vs. Public Equity Aligning Equity with Stage of Development Company Profile Long-Term Incentive Vehicles Startup/ Pre-IPO Mid-Cap/ Growth Market Mid-Cap/ Mature Market Large Cap/ Mature Market Objectives and Implications 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 Most Common Practice Emerging Practice Least Common Practice 21 Compensation Trends in the Medical Device Industry MassMEDIC
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 Radford Level Source: Radford Custom Global Long Term Incentive Reports. 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% 22 Compensation Trends in the Medical Device Industry MassMEDIC
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 Radford Level Small Public Annual Equity Value 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 Source: Radford Custom Global Long Term Incentive Reports. 23 Compensation Trends in the Medical Device Industry MassMEDIC
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 4.5% 4.0% 3.5% 3.0% 2.5% 3.8% 2.8% Burn Rate 3.6% 2.5% 18.0% 16.0% 14.0% 12.0% 10.0% 10.0% Overhang 13.6% 13.8% 2.0% 1.5% 8.0% 6.0% 6.5% 1.0% 4.0% 0.5% 2.0% 0.0% LFY Gross Equity Burn Rate 3-Year Average Gross Equity Burn Rate 0.0% LFY Issued Overhang LFY Total Overhang Small Public Large Public Small Public Large Public Source: Radford s proprietary burn rate and overhang database. 24 Compensation Trends in the Medical Device Industry MassMEDIC
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 25 Compensation Trends in the Medical Device Industry MassMEDIC
Questions? Ed Speidel Partner 508-628-1552 espeidel@radford.com Ram Kumar Director 508-628-1557 rkumar@radford.com 26 Compensation Trends in the Medical Device Industry MassMEDIC