Salary and Compensation Trends in the Medical Device Industry Ed Speidel, Partner Rob Surdel, Associate Partner October 12, 2012
Topics > State of the Market
> Labor Trends > Pay Frameworks
> Pay Mix > Private vs. Public – Cash
> Private vs. Public – Equity > Key Takeaways
1
State of the Market
Economic Forecasts > Overall economic growth remains sluggish > However, the overall unemployment rate has dropped ~1.8% since its peak in 2010 (9.6%)
Category
2008
2009
2010
2011
2012
GDP Year-Over-Year
-0.3%
-3.5%
3.0%
1.7%
1.7%*
Unemployment %
5.8%
9.3%
9.6%
8.9%
7.8%**
*Q2 2012 **October 2012 Sources: United States Bureau Economic Analysis, Congressional Budget Office and Bureau of Labor Statistics
3
Unemployment Rate >
Massachusetts unemployment rates continue to be lower than the regional and national average
>
Unemployment levels in the Northeast have historically been lower than the national average until recently 10.5%
9.9%
10.0%
9.6%
9.5%
9.1%
9.1% 8.8%
9.0%
8.5%
8.5%
8.3%
8.8%
8.0%
8.2%
7.5%
7.8%
7.4%
7.0% 6.3%
6.5%
5.5%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July August
6.0%
2009
2010
2011
Northeast
Source: United States Bureau of Labor Statistics
Massachusetts
4
U.S.A.
2012
Stock Price Recovery >
The Dow Jones (DJI), NASDAQ (IXIC) and NASDAQ Health Care Index (IXHC) have been steadily increasing, despite the dip in 2011
100.00% 90.00% 80.00%
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00%
0.00% -10.00% -20.00% -30.00% -40.00% -50.00%
Dow Jones
Stock price performance relative to 8/1/2009 Source: Yahoo! Finance
NASDAQ
5
NASDAQ Healthcare Index
2012 News Headlines > “Medtronic is acquiring Chinese medical devices maker China Kanghui Holdings in a move that could strengthen its foothold in the rapidly growing Chinese device market. Medtronic will shell out approximately $800 million for the deal.” - www.money.msn.com (Oct. 4, 2012) > “Medical device and biotech startup companies experienced a surge of investments from venture capital firms over the past few years, with a large majority of these funds being ‘Big Exits’.” - www.kahnlitwin.com (July 31, 2012) > “Over the past year or two, the competition for talent has hit a fever pitch in the Boston area and across the country, with companies of all stripes pulling out all the stops to land their top prospects.” – www.xconomy.com (Aug. 8, 2012) > “Bausch & Lomb Inc. could be ready to go public as early as the end of this year, people familiar with the company's thinking said, a move that would come amid renewed health for the eye-products maker.” - www.wsj.com (July 5, 2012)
6
Labor Trends
Profile > The Medical Device and Diagnostic market was segmented into three groupings from Radford’s Global Life Sciences Survey database: Median Company Profile
Private
Small Public
Large Public
Employee Size
47
397
2,593
Revenue ($M)
N/A
$118M
$728M
Number of Companies
40
34
29
Source: 2012 Radford Global Life Sciences Survey – Public Medical Device Companies
8
Labor Trends: Current Hiring Environment > Private and large public companies are more aggressively hiring than smaller public companies…
Hiring Practices
Percent of Companies
60%
56%
54% 46%
50% 40%
31%
31%
30%
23% 19%
20% 10%
15%
19%
6%
0% Hiring Freeze
Very Selective Hiring
Private
Source: Radford Trends Report – Life Sciences Edition – Q3 2012
Small Public
9
Normal Hiring
Large Public
Aggressive Hiring
Labor Trends: Turnover > …which translates into higher voluntary turnover among smaller public companies where employees are looking for the next career step or are concerned about the viability of the company US Turnover 20.0%
17.3%
18.0%
Percent of Employees
16.0%
12.6%
14.0% 8.4% 12.0% 10.0% 8.0%
9.5% 5.5% 4.2%
6.0% 8.9%
4.0% 2.0%
7.1% 5.3%
0.0% Private
Small Public
Voluntary Turnover
Source: Radford Trends Report - Life Sciences Edition – Q3 2012
10
Involuntary Turnover
Large Public
Labor Trends: Salary Increases > Private companies experienced higher actual and budgeted1 overall salary increases in 2012 Overall Salary Increases 3.6% 3.5%
3.5%
3.5%
Percent of Payroll
3.5% 3.4% 3.3% 3.2% 3.1% 3.0% 3.0%
3.0% 3.0%
3.0%
3.0% 2.9% 2.8% 2.7% 2012 Budget Private
2012 Actual Small Public
2013 Budget
Large Public
> Median actual and budgeted merit salary increases were 3% for reporting companies 1Note:
There was insufficient data to report 2013 budget for private companies
Source: Radford Trends Report – Life Sciences Edition – Q3 2012
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Pay Frameworks
Defining a Pay Philosophy Overall Objectives
Comparative Framework
> It is all the same - attract, retain and motivate top talent
> What is our labor market? For what population? > To whom do we compare practices? > What forms of compensation are available?
Pay Vehicles > What works for us? (salary, bonus, equity) Competitive Positioning
> Where do we target each pay element? (25th, 50th, 75th percentiles)
Allocation Strategy
> Are we egalitarian, or do we differentiate pay based on performance? 13
Example of Compensation Philosophy > Attract, retain and motivate qualified executives to support growth expectations
Overall Objectives
> Provide total direct compensation, consisting of salary and short-term and long-term incentives, that are competitive with the market > Ensure executive compensation program and actual payouts are aligned with financial performance and strategic business goals > Ensure a substantial portion of each executives’ total compensation is at risk and varies based on both overall company and individual performance > Align the executive compensation program with both short-term and long-term shareholder interests Employee Group
Primary Industry
Geography
Executives
Medical device companies with less than $300M in annual revenues
National scope
Employees
Medical device or broader tech/biotech companies
New England
Comparative Framework
> Comparative framework is used to define specific peer companies and data sources to be used in the assessment
Compensation Positioning
Employee Group
Base Salary
Target Total Cash
Long-Term Incentives (within dilution constraints)
Target Total Direct Compensation
Executives
50th Percentile
60th Percentile
50th to 75th Percentiles
75th Percentile
Research and Development
60th Percentile
60th Percentile
75th Percentile
75th Percentile
Business Functions
50th Percentile
50th Percentile
50th Percentile
50th Percentile
Sales
50th Percentile
75th Percentile
50th Percentile
50th to 75th Percentiles
> The actual targeted total direct compensation for each executive may be above or below the 75th percentile reflecting the executive’s tenure with the organization, overall individual contribution, scope of responsibilities and level of experience
14
Philosophy Comparison Element
Typical Private Philosophy
Typical Public Philosophy
Peer Group
> Typically, no specific identified peer group > Focus on comparative companies that have similar invested capital levels > Key metrics may include industry and invested capital
> Specific group of 15 to 20 identified public peer companies > Key Metrics: revenue, market cap, headcount, product phase/stage, profit measures
Cash Approach
> Base salary must be “in the ballpark” > Annual bonuses a “definite maybe” these days
> Base salary: 50th percentile > Annual bonus: 50th percentile or above, emphasizing at-risk nature of compensation
Equity Approach
> Aggressive award sizes, especially to those risking early entry > Vehicle: Stock options predominantly > Metric: Ownership percentage
> 50th percentile and higher based on performance > Vehicle: Options, RSUs, performance shares > Metric: Value
Pay for Performance
> Egalitarian, “all in this together”
> Targeted to key roles and high performers
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Private vs. Public Peer Group > A public company can be more selective about peers than a private company Private Peer Group
Peer Name Company A Company B Company C Company D Company E Company F Company G
Industry Medical Device Medical Device Medical Device Medical Device Medical Device Diagnostic Diagnostic
75th Percentile 50th Percentile Average 25th Percentile Client
Medical Device
Public Peer Group
Invested Capital ($M) $25.0 $40.0 $30.0 $15.0 $50.0 $60.0 $45.0
Peer Name Company H Company I Company J Company K Company L Company M Company N
$47.5 $40.0 $37.9 $27.5
75th Percentile 50th Percentile Average 25th Percentile
$40.0
Client
16
Industry Medical Device Medical Device Medical Device Medical Device Medical Device Medical Device Medical Device
Medical Device
Employees 75 100 60 120 80 90 65
Revenue ($M) $70.0 $200.0 $75.0 $150.0 $200.0 $100.0 $60.0
Market Value ($M) $100.0 $600.0 $450.0 $200.0 $800.0 $250.0 $300.0
95 80 84 70
$175.0 $100.0 $122.1 $72.5
$525.0 $300.0 $385.7 $225.0
80
$100.0
$300.0
Private vs. Public Compensation Equity Practices Comparison Element
Typical Private Philosophy
Typical Public Philosophy
Setting Award
> Established based on a target ownership percentage
> Equity grants are established based on a target value > Converted to a number of options/shares based on the current stock price
New-Hire vs. Ongoing/ Refresh
> Large new-hire grant > Refresh grants delayed until IPO approaches, or 3-4 years after hire > Refresh guidelines set anywhere from 25% to 33% of new-hire awards
> New-hire award typically 1.5x – 2x ongoing award size > Most employees eligible for ongoing award after one year of service
Vehicle Mix
> Stock options predominantly (A few notable exceptions have used RSUs pre-IPO recently, however, requires cash reserves to address employee taxes)
> Mix of stock options and RSUs > Emphasis towards RSUs with maturity over time > Prevalent use of performance shares for executives
> New hires: nearly 100% > Refresh awards: targeted at key performers and those employees greater than 50% vested (25% to 30% of population receives)
> New hires: participation decreases as company increases in size (may eliminate eligibility altogether below certain level) > Ongoing awards: Broad eligibility is maintained, although awards targeted at top performers (40% to 60% of population receiving annually)
Participation
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Pay Mix
The Employee Value Proposition Has Changed! > Pre-IPO employee proposition from the dot-com bubble days… All Employees
Equity
Salary
> Everyone got equity > Employees were bullish on IPO likelihood > Annual bonuses were non-existent
> Lower cash vis-à-vis public companies was an acceptable tradeoff for equity wealth opportunity 19
Pay Mix – Private Company > Today’s private company employee pay mix… Executives
Salary
> Equity is concentrated at the top, and for key contributors only Bonus
Equity
Non-Executives
Salary
Bonus
Equity
20
> Annual bonuses are much more prevalent > Lower cash vis-à-vis public companies is no longer an acceptable tradeoff for all employees!
Pay Mix – Public Company > As organizational level increases, so too does at-risk pay –
Note: the charts below do not consider the overall “size of the pie” Percent of Total Direct Pay Manager
Executive
Scientist
100%
100% 100% 8%
8%
13%
5% 7%
9%
9% 80%
9%
80%
35%
33%
14%
17%
50%
50%
Small Public
Large Public
80%
40%
60%
60%
60%
88%
83%
40%
83%
78%
20%
20%
20%
0%
0% Small Public
Base
Large Public
Bonus
LTI
Source: 2012 Radford Global Life Sciences Survey
40%
0%
Small Public
Base
Large Public
Bonus
21
LTI
Base
Bonus
LTI
Private vs. Public – Cash
Dispelling Myths About Private Cash Pre-IPO/Venture-Backed Cash Compensation as a Percent of Global Life Sciences Surveys Totals Medical Device
Base
Target Total Cash
Executive
90%
88%
Management
103%
104%
Professional
103%
103%
Support
112%
113%
Category
Global Life Sciences Survey - Oct. 2012; Radford Pre-IPO/Venture-Backed Survey - April 2012
23
Executive Compensation > Unlike broad-based employees, executives are still willing to take a discount on cash for higher ownership
Medical Device
Position: CEO
Private
Small Public
Large Public
Base Salary (50th)
$350,000
$478,950
$825,200
Target Total Cash (50th)
$467,750
$733,815
$1,390,461
All
4.65%
2.54%
1.86%
Founder
5.86%
5.90%
4.82%
Non-Founder
4.19%
2.32%
1.67%
Ownership (50th)
Radford Pre-IPO/Venture-Backed Survey - April 2012; Global Life Sciences Survey – October 2012
24
Annual Bonuses > There is no doubt – bonuses are officially in the mix Medical Device Category
Private
Small Public
Large Public
% of EE’s Eligible
68%
72%
84%
% EE’s receiving bonus
60%
45%
73%
Avg. cost as a % of payroll
7.2%
8.9%
8.4%
Avg. cost as a % of revenue
3.7%
1.5%
0.7%
Radford Pre-IPO/Venture-Backed Survey - April. 2012; Global Life Sciences Survey - Oct. 2012
25
Evolution of Pay Practices – Cash Compensation > Salary differences disappear below the executive level -
Scientists and managers appear to be fair game, regardless of size
> Bonus targets become more formalized and richer as a company evolves, particularly at the manager level and above
Cash Compensation ($000)
Total Cash Compensation
$350 $300 $78 $250
$56
$60
$203
$213
$200
$150 $100
$234
$14 $106
$50
$11
$11
$9
$8
$7
$103
$101
$92
$89
$88
$Private
Small Public Large Public
Private
Small Public Large Public
Executive
Manager Base
Source: 2012 Radford Global Life Sciences Survey
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Bonus
Private
Small Public Large Public Scientist
Evolution of Pay Practices – Cash Incentives > Bonus metrics have a very different “look and feel” as a company grows in size Prevalence Bonus Metric
Private
Small Public
Large Public
New Product Introduction
65%
45%
5%
Other Non-Financial
73%
85%
57%
Sales
62%
80%
81%
Profit
42%
80%
95%
Quality
35%
15%
10%
Customer Satisfaction
23%
10%
5%
Source: 2012 Radford Global Life Sciences Survey Practices Report
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Private vs. Public – Equity
Equity Considerations > The development of a sustainable equity strategy must take into consideration a host of inter-related factors:
Share Pool Funding
>
Burn rate
>
Overhang
>
Equity mix
>
Growth
>
Shares available in the pool
>
Future share requests
Aggregate Equity Use Employee/ Shareholder Perception
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>
Retention value
>
Wealth creation
>
Vehicle economics (leverage)
>
Participation rates
>
Time vs. performance triggers/vesting
Defining Total Equity Pool Size – Private Company Practice > In general, earlier-stage private companies demonstrate higher total overhang levels than later-stage private or public companies due to: -
Financing rounds that dilute the pool after the equity plan is initially established;
-
Employee exercises removing outstanding options from equity pool; and
-
In the case of public companies, increased shareholder control over equity plan funding and pressure to reduce dilution
> Whether to include founder grants in the overhang calculation when comparing to market data is open to judgment -
Exclude if intended to recognize intellectual capital brought to the table at inception, as opposed to reward for go-forward service and contributions > Typically only applies to one-to-three key incumbents only > Founder awards typically have no vesting requirement (again, under the intent that these are not for future service)
-
Include if “founder” award concept was used liberally for many employees
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Fully-Diluted Total Overhang – Private Company Practice > As invested capital increases, employee ownership as a percentage of company decreases Fully-Diluted Total Overhang – Life Sciences
30.0% 25.0%
24.8%
20.0% 14.8%
15.0%
12.9%
10.0% 5.0% 0.0% Private - Under $40M Invested Capital
Radford Pre-IPO/Venture-Backed Survey - April 2012 and Radford proprietary database
Private - Over $40M Invested Capital
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Recent IPO Immediately Prior to IPO
The Private Grant Model > Current Model: - Large grant at time of hire - Refresh grants starting in year 3 or 4 that may be 25% of new-hire levels
> Employees are very heavily vested by time of IPO Time of Hire
Year 1
Year 2
Year 3+
IPO at $12.00
400,000
-
-
100,000
-
Exercise Price
$0.25
-
-
$4.00
-
Vested Shares
-
100,000
200,000
300,000
400,000
400,000
300,000
200,000
100,000
100,000
Parameter Equity Grant
Unvested Shares Vested Paper Value Unvested Paper Value
NA - no market until IPO
Example data for illustrative purposes
Should we consider layering in equity over time to provide a more balanced approach to retention? 32
$4.7MM $800K
Burn Rate and Overhang – Public Company Profile > Larger Medical Device Companies have lower rates of annual burn rate and equity overhang. Burn Rate
Overhang 18.0%
4.5%
4.0%
4.0%
4.0%
14.0%
3.5%
3.0%
3.0%
16.4%
16.0%
14.8% 12.7%
12.0%
2.8%
10.0%
2.5%
9.6%
8.0%
2.0%
6.0%
1.5% 1.0%
4.0%
0.5%
2.0%
0.0%
0.0%
LFY Gross EquityBurn Rate
Small Public
LFY Issued Equity Overhang
3 -Year Average Gross Equity Burn Rate
Small Public
Large Public
Radford proprietary equity database 33
LFY Total Equity Overhang
Large Public
Equity Participation – Public Company Practice > Companies try to hold on to broad-based ownership as long as they can while managing dilution Annual Equity Participation Position
Small Public
Large Public
Executive Function Head
88%
90%
Director
70%
60%
Manager
60%
55%
Career Scientist
53%
45%
Beginning Scientist
35%
35%
Source: 2012 Radford Global Life Sciences - US LongTerm Incentive Report
34
Annual LTI Value – Public Company Practice > Just as with cash compensation, there is little differentiation of LTI value below the executive level
> Due to competitive pressure, the value for directors and below is similar across the market Median Annual LTI Value ($000)
Position
Small Public
Large Public
Executive
$199.0
$251.0
Director
$30.7
$32.4
Manager
$17.3
$17.3
Career Scientist
$10.1
$11.9
Beginning Scientist
$6.2
$7.0
Note: LTI Value = the sum of option Black-Scholes value, full-value share face value and any long-term cash value Source: 2012 Radford Global Life Sciences Survey
35
Key Takeaways > Determine which framework is right for you based on your situation and use it as a tool to guide compensation decisions
> The value proposition to employees has changed! – It is one market below the executive level > Variable pay increases as organizational levels increase
> Understand which LTI vehicle is right for you > Know where your company is on the continuum and what’s to come; start planning ahead to not be reactive
> There is no “one-size fits all” approach. How is your organization “different”?
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Thank You! Questions?
Ed Speidel,
[email protected], +1 (508) 628.1552 Rob Surdel,
[email protected], +1 (508) 628.1551
