Compensation Trends in the Medical Device Industry · 1 | Compensation Trends in the Medical Device Industry – MassMEDIC Our Value Global Knowledge. Local Perspectives. For more

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Compensation Trends in the Medical Device Industry

September 2014

1 | Compensation Trends in the Medical Device Industry – MassMEDIC

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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.

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Knowledge + Local Perspectives


Today’s Presentation

US Market and Employment Outlook

Labor Trends

Pay Frameworks

Pay Mix

Public vs. Private Cash

Public vs. Private Equity



US Unemployment in a Recovering Economy

The unemployment rate in Massachusetts has tracked primarily below the national average, and currently stands at 5.5%

Source: Economic Data, Federal Reserve Bank of St. Louis.

5.5%6.1%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Northeast Massachusetts US



US Markets

The US stock market continues to appreciate and stocks are at five-year 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.


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

Company Profile

Median

Private Small Public Large Public

Revenue ($M) N/A $175.5M $2,142.4M

Number of Cos. 40 31 33


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

Source: Radford Custom Trends Reports, Q2 2014 and Radford Medical Device Trends Report, Q2 2014.

Industry Freeze Selective Normal AggressivePrivate 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%


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

12.9%9.9% 8.9%

5.2%

4.5% 5.7%

0.0%

5.0%

10.0%

15.0%

20.0%

Private Small Public Large PublicVoluntary Involuntary

18.1%

Source: Radford Custom Trends Reports, Q2 2014.

14.4% 14.6%


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%

Source: Radford Custom Trends Reports, Q2 2014.

Diluted data includes zeros.


Pay Frameworks

Private vs. Public Pay Philosophies at a GlanceTypical Private Firm Typical Public Firm

Peer Group Development

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

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

Cash Approach

Base salary must be competitive (no longer getting away with low cash)

Annual bonuses are becoming more prevalent these days

Base salary: 50th percentile Annual bonus: 50th percentile or

above, emphasizing the at-risk nature of compensation

Equity Approach

Aggressive award sizes, especially to those risking early entry

Vehicles: Stock options dominate Award sizing metric: Ownership

percentage

50th percentile and up to 75th based on performance

Vehicles: Options, RSUs, performance shares

Award sizing metric: Value

Pay-for-Performance Egalitarian: “we’re all in this together” Pay is targeted to key roles and high

performers


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

77% 84% 88%75% 80% 84%

45% 47% 51%

12%7%

8%

10%9% 9%

13% 16%18%

11% 9% 4%15% 11% 7%

42% 37% 31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private Small Public Large Public Private Small Public Large Public Private Small Public Large Public

Percent of Total Direct Pay

Base Bonus LTI

ExecutiveManagerEngineer

Source: Radford Custom Compensation Reports, Q2 2014.


Private vs. Public Cash

Dispelling Myths About Private Cash

Pre-IPO/Venture-Backed Cash Compensation as a Percent of Global Life Sciences Totals

Level

At Median

BaseTarget 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.



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 MetricMetric Prevalence


Companies with bonus/incentive compensation plan 82% 96% 100%

Bonus Plan CombinationsFormal 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.



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 PublicNew 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%




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

Lower13%

Lower 12%

Lower 19%

Similar65%

Similar79%

Similar77%

Higher22%

Higher9%

Higher4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Perc

ent o

f Com

pani

es

2014 Bonus Funding Compared to the Prior Year

Lower Similar Higher




Incentive Plan Receipt Rates

Bonus participation among private companies is catching up to public-company levels

With high levels of participation across all levels of the organization


Radford Level

Annual Cash Receipt RatesPrivate 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%



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 long-term 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 PublicBase 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 (50th Percentile) 4.7% to 6.0% 1.6% to 3.6% 0.8% to 1.8%




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: CFOMedical Device

Private Small Public Large PublicBase Salary $253,707 $325,000 $424,400

Target Total Cash $325,225 $581,424 $704,000

Ownership (50th 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 (50th Percentile) 0.2% - 0.5% 0.1% to 0.5% 0.1% to 0.3%

Annual LTI Value - $176,352 $380,800


Pay Frameworks

Private vs. Public Equity PracticesTypical Private Firm Typical Public Firm

Equity Award Sizing

Primarily established by targeting specific ownership percentages; conversion into shares based on total common shares outstanding

Primarily established by targeting specific values; conversion into shares is typically based on stock price

New-Hire vs. Ongoing Awards

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

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

Equity Vehicle Mix

Stock options dominateCaveat: A few notable companies have used RSUs pre-IPO; however, large cash reserves are needed to address taxes

Mix of stock options and RSUs, with an emphasis on RSUs as the firm matures

Rising prevalence of performance shares for executives

Equity Program Participation

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)

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)


Private vs. Public Equity

Focus on Individual Ownership

Employee LevelMedian Individual Ownership by Level of Invested CapitalUnder $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.

Private companies typically focus on employee ownership percentages as the best apples-to-apples point of comparison for delivering competitive equity packages



Manage Overall Employee Ownership

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%

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

Source: Radford’s Pre-IPO/Venture-Backed Survey.



Aligning Equity with Stage of Development

Long-Term Incentive Vehicles

Company Profile

Objectives and ImplicationsStartup/ Pre-IPO

Mid-Cap/ Growth Market

Mid-Cap/ Mature Market

Large Cap/Mature Market

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

PerformanceShares/ 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

Emerging Practice Least Common PracticeMost Common Practice


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

Source: Radford Custom Global Long Term Incentive Reports.

Radford Level

Annual Equity Receipt RatesSmall 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%


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

Source: Radford Custom Global Long Term Incentive Reports.

Radford Level

Annual Equity ValueSmall Public 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


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

3.8% 3.6%

2.8%2.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

LFY Gross Equity Burn Rate 3-Year Average Gross EquityBurn Rate

Burn Rate

Small Public Large Public

10.0%

13.6%

6.5%

13.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

LFY Issued Overhang LFY Total Overhang

Overhang

Small Public Large Public

Source: Radford’s proprietary burn rate and overhang database.


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


Questions?

Ed [email protected]

Ram [email protected]

Documents

Compensation Trends in the Medical Device Industry · 1 | Compensation Trends in the Medical Device Industry – MassMEDIC Our Value Global Knowledge. Local Perspectives. For more