NEW YORK (GenomeWeb News) – The average CEO compensation at publicly traded omics tools and molecular diagnostics firms rose nearly 7 percent year over year in 2012, according to documents filed with the US Securities and Exchange Commission.
Based on proxy statements filed by 28 of the 29 firms in the GenomeWeb Daily News Index, CEO compensation for 2012 averaged more than $4.8 million, up from a little less than $4.5 million in 2011.
One firm, Rosetta Genomics, based in Rehovot, Israel, did not report compensation for its CEO, Kenneth Berlin, either in 2011 or 2012. The firm did not respond to requests for information.
The base salary for CEOs in 2012 averaged $686,017, also up about 7 percent from $644,109 in 2011, according to the proxy statements.
As a total dollar amount, CEO compensation for the 28 companies in the GWDN Index reached about $135.3 million last year, up about 8 percent from $125.7 million, while the base salaries in 2012 totaled $19.2 million, an increase of 6 percent from $18.0 million in 2011.
Executive compensation across all industries has become a lightning rod in recent years with shareholders and the general public seeking greater transparency in how compensation is determined and justification for sometimes extravagant pay perks.
According to Susan Stemper, managing director at executive compensation consulting firm Pearl Meyer & Partners, investors need to scrutinize executive compensation because they provide a window into the strategic direction that a board has set for the business and whether a board's decisions around CEO pay are competitive and appropriate for the business.
Investors need to focus on how executive compensation levels are designed, said Stemper. "I'd say, 'Don't look at the numbers, look at the design,'" she told GenomeWeb Daily News, adding that, in particular, it is important to focus on achievements made in the past year and how they compare to the company's goals and objectives.
Setting appropriate compensation levels for executives, which include stock and other option awards, is a tricky art that, in addition to using measurable metrics, often include more difficult to measure factors that are meant to reward executives for their performance during the past year.
Such pay-for-performance components, however, present special challenges to omics tools/MDx firms, Stemper said.
"The challenge is when you're looking at these sectors where the return from the research and development — if it follows at all — perhaps only follow quarters or years after that initial investment has been made," she said. "The conundrum that we face is trying to look at this year's pay and trying to align it with this year's financial performance of the business."
In the omics/MDx sector, "you need a lot of shots on goal" before a target is hit, and "you can't count on all those shots on goal happening in a given year," Stemper said. "So does it really make sense not to grant the stock, or not award the stock because we didn't make the shot on goals when we recognize that that is just part of how we do business?"
As a result, companies in the omics tools/MDx space have come to rely on time-vested stock and option grants, which become exercisable after a defined amount of time has elapsed.
"To me, those are the perfect performance-based vehicles, because if the stock price doesn't perform, the executive is not going to realize the value that you're reading in the table," she said. The values for such options that are listed on a company's proxy statement are based on the value at the time they are issued to the CEO and may go up or down as time passes. "They've got 10 years to do it, typically on the term, but the stock price has to exceed, by some measure, what it was at the time of grant," Stemper added.
Many companies also look at how their competitors compensate their executives as benchmarks for paying their own executives. For example, Illumina's compensation committee used a peer group of 18 firms to set 2012 compensation levels for their executives, including President and CEO Jay Flatley, whose total compensation for the year dropped 18 percent to $8.2 million.
Among the firms in Illumina's peer group were Affymetrix, Bio-Rad Laboratories, Bruker, Cepheid, Hologic, Life Technologies, PerkinElmer, Qiagen, and Waters.
In its proxy, it said that it "considered a number of factors in defining the peer group, including industry competitors of similar revenue range, net income, growth rates, employee size, and market capitalization range that we believe reflects the market for talent and stockholder investment."
Illumina said that it targets its direct compensation to its executives at between the 60th percentile and 75th percentile of compensation that executives in its peer group receive. The largest component of the total direct compensation is delivered through equity-based awards in order to retain its executives, while aligning their interests with those of its shareholders, it said in its proxy, although it may "deviate from these general target levels to reflect the executive's experience, the executive's sustained performance level, and market factors as deemed appropriate by the compensation committee."
Such a peer group approach, though, also provides challenges, because in such a niche market, the pool of such firms is shallow, Stemper said, and different firms may be at different stages of the business cycle. They may not have similar experiences in terms of success and regulatory approvals, either, or may have dissimilar financial dynamics.
Because of this, firms often include in their benchmark peer groups companies that may be analogous to where they are in terms of their business but which have only the vaguest connection, if any, to what they do. Affymetrix, for instance, included in its peer group for 2012 Nordion, a health science firm that provides targeted therapies, sterilization technologies, and medical isotopes. Genomic Health, meanwhile, looked at, among others, ultrasound shop FujiFilm Sonosite to determine its compensation levels, and Thermo Fisher Scientific had diversified manufacturing and technology company Emerson Electric in its peer group.
In niche markets, such as the omics tools/MDx space, "it will be difficult to simply say 'I want to look at the median'" compensation offered by competitors, Stemper said. "It's more likely going to be 'I want to look at the universe at a dataset level and understand where we believe our CEO fits in best.'"
Among the firms in the GWDN Index, the CEO with the highest year-over-year compensation increase in 2012 was Thermo Fisher's Marc Casper, whose total compensation climbed 146 percent to almost $13.6 million from $5.5 million in 2011. The uptick was largely driven by a stock award of $10.4 million granted in 2012, compared to none in 2011.
Two other CEOs whose compensation doubled year over year in 2012 were Bruker's Frank Laukien, who took in $1.9 million last year, compared to $892,100 in 2011, and Exact Sciences' Kevin Conroy, whose compensation reached $2.7 million from $1.3 million in 2011.
Frank Witney of Affymetrix had the biggest year-over-year drop, 76 percent, as his 2012 compensation of $657,291 was down from $2.7 million in 2011. The drop-off is largely attributable to a decrease in stock awards in 2012 to $115,750, compared to $1.4 million the year before. Witney became president and CEO of Affy on July 1, 2011.
Another whose compensation narrowed significantly was Waters' Douglas Berthiaume, who made $1.1 million in 2012, down 60 percent from $2.6 million the year before. Also, William Moffitt, the former CEO of Nanosphere, who was succeeded this past February by Michael McGarrity, saw his compensation fall 48 percent to $457,885 in 2012 from $885,946 in 2011.
And GenMark Diagnostics' Hany Massarany's 2012 compensation was down 33 percent at $1.3 million last year from $2.0 million in 2011.
Among the CEOs of firms in the GWDN Index, Danaher's Lawrence Culp raked in the most in compensation last year, making $21.9 million in total compensation, up from $21.7 million in 2011. Four others made more than $10 million in 2012: Thermo Fisher's Casper; William Sullivan of Agilent with $10.1 million; Life Technologies' Greg Lucier with $10.3 million; and PerkinElmer's Robert Friel with $10.8 million.
For a breakdown of each CEO's year-over-year compensation comparison, please click here.