Our last update highlighted a slight rebound in health care sector performance in the second half of 2016, producing mixed results overall. A deeper dive within the health care sector revealed some considerable differences in financial results among the different industries within the sector – see “Fourth-quarter pay-for-performance update for the health care sector: Uncertainty looms,” Executive Pay Matters, March 27, 2017.
To follow on, this post focuses specifically on the biopharma industry, a fairly broad category that includes companies in the biotechnology, pharmaceutical and life sciences tools and services industries. It explores how the improved 2016 financial results affected annual incentives for 2016 and long-term incentive plans (LTIP) that culminated in 2016.
A year ago, the bonus payouts for the biopharma industry were substantially higher than all the sectors we reviewed. Approximately 80% of CEOs received bonuses between 100% and 150% of target, resulting in a median payout of 139% of target. The pattern continued in 2016, as evidenced by bonus levels shown in Figure 1. The median payout remained similar to 2015 (136% of target), with nearly 40% of the CEOs in the sample enjoying robust payouts of 150% of target or more. Almost half of those companies awarded bonus payouts above 170%, which reflects a significant increase compared to 2015.
Figure 1. Distribution of CEO bonus payouts in the biopharma industry
The distribution of 2016 bonus payouts reveals slightly more above target payouts: 67% of the sample above the target range (more than 110% of target) versus only 23% below the target range (90% of target or less). Furthermore, a closer examination shows considerable change in 2016 payouts compared to 2015:
- Only 12% stayed in the same payout range
- Almost two-thirds experienced a moderate change: moving up or down by one or two ranges
- Almost 25% experienced a significant change: moving up or down by three or more ranges
We also reviewed the results of LTIP payouts for performance awards ending in 2016 (generally granted in 2014). We compared the award payout to the award target in two ways: the LTIP payout without the impact the change in stock price has on the share-based plans, and the LTIP payout with the change in the stock price. Figure 2 shows the distribution of these outcomes.
When payouts are examined without the change in stock price, we notice about 40% of the sample realized payouts greater than 150% of target, while approximately 20% paid out near target. Considering the impact of stock performance over time, we tend to see an increase in target-or-better scenarios because target-or-better performance generally combines with strong stock performance to make the payouts more valuable. Including stock performance, approximately 70% of plans paid out above the target range (more than 110% of target), including 60% of plans that paid out at 170% or more of target.
Figure 2. LTIP payouts ending in 2016 as a percent of target
The high concentration of LTIP payouts at the top-end (i.e., > 150% of target), coupled with the fact that only 10% of the sample paid out below the target range, with no zero payouts, reveals the complexities of setting goals over a multi-year time horizon. Ignoring the impact of stock performance, we see many companies with LTIP awards in the top two buckets, which may call into question the rigor of their performance targets. Perhaps that’s why some companies simply opt to use relative total shareholder return in their long-term incentives. But there may be another way.
Increasingly, companies are considering how predictive analytics can be used to help calibrate annual and long-term incentive plan goals. In response to market demand, Willis Towers Watson has developed a proprietary approach to simulate future financial and stock performance to estimate the probabilities of various degrees of goal achievement. This modeling helps companies calibrate incentive plan goals and ranges. To learn more about our predictive performance model (PPM), follow the link here.
2017 may once again prove to be a challenging year for the biopharma industry as companies continue to struggle with the need to balance research and development investment and innovation with pricing pressures. In order to thrive, companies may have to increase their focus on growth through mergers and acquisitions and/or licensing and partnership agreements, as well as driving operating efficiencies to maximize the bottom line. Stay tuned for our next sector update which will examine mid-year performance and provide a preliminary sense of whether 2017 will continue the upward trend.
For a more detailed look at the health care equipment and supplies industry see "Pay-for-performance update for the health care equipment and supplies industry: pay for 2016 performance," Executive Pay Matters, June 27, 2017.
For a look at 2016 pay outcomes for CEOs in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.
Mitchell Bardolf is a senior executive compensation consultant in Willis Towers Watson’s Arlington office. Jang Han is a member of Willis Towers Watson’s Global Executive Compensation Analysis team in Arlington, Virginia. Email email@example.com, firstname.lastname@example.org or email@example.com.