Pay Cuts Reflect Move to Pay-For-Performance

This article published with permission from The Burrill Report.

With earnings season underway, reports on chief executive officer pay are delivering mixed news as the life sciences industry continues to move toward a greater linkage between pay and performance, albeit at a slow pace.

Early reports show some Big Pharma execs taking hits to their 2012 compensation as disappointing sales take their toll. GlaxoSmithKline’s CEO Andrew Witty saw his 2012 compensation fall to $5.9 million from $10.2 million as GSK’s sales in Europe fell 7%.

In the face of what Johnson & Johnson characterized as “disappointments,” CEO Alex Gorsky, saw his bonus cut by 10%, although his overall compensation grew to $8.9 million, up from $5.5 million in 2011. Allergan CEO David Pyott enjoyed a 51% jump in compensation to $21.2 million in 2012, thanks in part to a $9.4 million stock award.

Allergan’s board awarded Pyott a “special recognition and retention restricted stock unit award” that vests over time and is subject to his achieving performance goals. To meet those goals, he will need to create $14.4 billion in new stockholder value, the company said in a proxy statement. It said this is intended to reinforce its pay-for-performance philosophy and ensure retention of Pyott, who the company notes has grown revenue to about $5.7 billion from around $1.2 billion and grown market capitalization to more than $30 billion from roughly $2 billion in his 15 years as CEO.

Overall, privately held life sciences chief executives are seeing an overall increase in total cash compensation of about 3.5%. That compares to about a 1.5% increase in 2011, according to Park Square Executive Search, which conducts an annual compensation study of privately held life sciences companies with Harvard Business School, WilmerHale and Ernst & Young.

Erik Lundh, managing partner with Park Square, said the downturn in the economy slowed the growth in compensation for life sciences executives in 2011, but that in 2012 it returned to normal levels. In part, he said, that’s because of ongoing competition for talent, particularly for people capable of transforming a private company into a public company.

“We are moving toward a more pay-for-performance kind of culture,” said Lundh. “I think that’s true irrespective of whether that’s pharma or biotech or medical device or services. It’s very much evolving in that direction. It’s still early, but that’s certainly what we’re seeing.”

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