Analysis of CEO and Employee Compensation at Biotechnology and Pharmaceutical Companies

Over the past two years, CEOs of pharmaceutical companies of all sizes have received substantial pay raises, a trend that remains evident despite the industry's continued public criticism, largely driven by strong stock market performance.

Compared with high drug prices, the rise in executive compensation at biotech and pharmaceutical companies has not been subject to the same level of scrutiny, even though CEOs have benefited significantly from the industry's steady growth.

Among companies analyzed by BioPharma Dive, median CEO compensation in 2019 was about 50% higher than in 2017, an increase that outpaced the more modest pay growth for employees.

This upward trend is broad-based, driven both by significant increases in executive pay at small research-focused biotech companies and by steady growth at larger firms.

BioPharma Dive's findings are based on total compensation data from regulatory filings submitted this year by about 230 pharmaceutical companies, covering numerous publicly traded biotech firms as well as well-known drugmakers such as Johnson & Johnson, Pfizer, and Merck.

CEO-to-median employee pay ratio

Data show that in 2019, compensation for 225 biotech and pharmaceutical CEOs—including salary, stock awards, and bonuses—ranged from $365,725 at Krystal Biotech to $45,635,037 at United Therapeutics. The median was $4.8 million, with an average of nearly $7 million.

Median employee compensation (which may include bonuses or other benefits) ranged from $41,455 at Opko Health to $791,000 at Madrigal. The median of median employee compensation (a rough estimate) was $194,000, with an average of $205,000.

Large pharmaceutical companies often have larger CEO-to-employee pay gaps due to their extensive workforces. Pharma CEO pay tends to be higher than the industry typical level, sometimes significantly so. In contrast, median employee compensation at pharmaceutical companies is lower than at many biotech firms.

For example, Johnson & Johnson's Alex Gorsky received total compensation of $25 million last year, while the company's median employee compensation was only $76,000.

Stock market performance drives pay growth

The recent rise in industry CEO pay comes as biotech stocks hit record highs. Since the five-year low in February 2016, the S&P Biotechnology Index has risen 160%, reaching an all-time high in late July. The Nasdaq industry index has performed similarly, though less dramatically.

In March and April, as the COVID-19 pandemic hit the global economy, biotech and pharmaceutical stocks fell with the broader market, but have since recovered and surpassed prior levels, as treatment and vaccine progress boosted the industry's profile.

Soaring stock prices benefit executive pay because compensation is largely composed of stock awards designed to align executives' interests with shareholders. These awards can be substantial, especially for new CEOs or upon contract renewals.

For example, UroGen CEO Elizabeth Barrett received a one-time "sign-on" award including 317,000 shares of company stock and options to purchase 277,000 shares, valued at about $24 million, or 35 times her base salary. Both the stock and options vest over three years.

As a result, many CEOs' compensation packages tend to be uneven, rising by millions or tens of millions in one year and potentially falling the next.

The total CEO compensation reported by companies does not always reflect the actual value an executive may realize in a given year. Stock granted in the past may vest in tranches, or a CEO may purchase new shares by exercising previously granted options. If the stock price has risen since the original grant, the CEO's actual gains may far exceed the figure initially reported by the company.

Companies also report these totals annually, calculating the "realized" value for executives. For long-tenured CEOs who accumulate stock and option awards year after year, these figures can be much larger than one year's total compensation.

For example, Regeneron CEO Leonard Schleifer last year exercised previously granted options to acquire nearly 313,000 shares of company stock, valued at about $111 million.

Top 25 CEOs by realized value in 2019

The table below lists the 25 CEOs who realized the highest value in 2019 through exercising stock options and vesting stock awards. Regeneron's Leonard Schleifer topped the list at $111.2 million, followed by Vertex's Jeffrey Leiden at $77.7 million, and Novocure's Asaf Danziger in third place at $61.6 million.

Industry pay gaps are relatively modest

Compared with top CEOs in other industries, biopharma executives are not particularly prominent. The highest-paid biotech CEO in 2019 by total compensation—Martine Rothblatt of United Therapeutics—ranked 7th among all S&P 500 CEOs (according to Wall Street Journal data). The 10th-highest-paid CEO in BioPharma Dive's dataset—Amgen's Robert Bradway—ranked 83rd.

However, unlike other industries, except for the largest pharmaceutical companies, the gap between CEO and median employee pay is typically more moderate. This is because biotech companies' workforces (especially scientists and researchers) are well compensated: among the 124 companies reporting data, nearly half had median employee compensation exceeding $200,000.

Analysis of CEO pay ratios

Under the Dodd-Frank Act, companies are generally required to disclose the "CEO pay ratio," which compares executive compensation to median employee compensation. Among the 124 companies reporting this metric, the median CEO pay ratio was 31:1, meaning CEO pay was 31 times the median employee pay.

For example, Mylan CEO Heather Bresch's compensation was $18.5 million, nearly 430 times the company's median employee pay. In contrast, Sarepta CEO Douglas Ingram's pay was only 5 times the median employee pay. But ratios can change quickly: in 2017, a $45 million stock option award granted to Ingram pushed Sarepta's ratio to 225:1.

CEO-to-employee pay gaps tend to be larger at big companies. At smaller biotech firms with fewer employees, median employee compensation can be quite high, resulting in ratios far lower than in other industries.

Pay equity and diversity issues

Higher employee pay at biotech companies means industry CEO pay is relatively less disparate. (For comparison, Starbucks' CEO pay is 1,675 times the median employee pay.)

Roy Saliba, head of the compensation business at ISS Corporate Solutions, said companies compare their ratios with peers or track changes over time, but rarely make decisions based solely on the ratio. "Cross-company comparisons are difficult," Saliba said, "Even if comparable, what's the conclusion? The discussion has shifted more toward pay equity, racial and gender equity."

Although these issues may receive more attention than ever, the corporate leaders addressing them in the pharmaceutical industry remain predominantly white and male. Of the 231 companies analyzed by BioPharma Dive, only 21 were led by women in 2019—a situation that has changed little from prior years, despite ambitious goals set by the industry organization BIO.

On average, the 21 female CEOs actually earned more than the overall group, thanks to exceptionally high compensation for United Therapeutics' Rothblatt and UroGen's Barrett. Measured by the median, female CEO pay was 8% lower last year, but the comparison is limited by the imbalance in group size.

The link between drug prices and executive incentives

When biotech and pharmaceutical CEO pay comes under scrutiny, it is often tied to questions of whether drug price increases play a role. Over the years, drug price hikes have made the industry one of the least liked by the public and have brought its top companies before angry lawmakers in Washington, D.C., multiple times.

For example, early last year, Oregon Democratic Senator Ron Wyden questioned whether AbbVie CEO Richard Gonzalez would earn more because the company raised the price of its top-selling anti-inflammatory drug Humira. Sales of the drug had previously been factored into AbbVie's calculation of executive short-term bonuses, but in 2019 the company removed explicit references to the drug from its methodology.

Direct references to individual drugs in executive performance goals are relatively rare. Apart from AbbVie, a few companies such as Incyte and Seattle Genetics have tied compensation to sales of specific products. But most companies use broader financial metrics, making the relationship between revenue increases from a single drug and incentive compensation less direct.

Over the past three years, the Interfaith Center on Corporate Responsibility (ICCR) has pressured several top pharmaceutical companies on this issue. ICCR, composed of about 300 advocacy groups and investors, argues that pharmaceutical companies' reliance on price increases poses a significant risk to their sustainable long-term growth. Through shareholder proposals submitted by its members, ICCR seeks greater disclosure on drug prices and whether executives benefit from price increases.

This year, both Johnson & Johnson and Biogen noted in their proxy statements that their directors would consider how executive incentives affect drug pricing decisions. Previously, both companies had recommended against proposals supported by ICCR that called for detailed reports on the issue.

"This isn't necessarily aimed at one specific company, but rather an industry issue," said Meg Jones-Monteiro, ICCR's program director. She said more companies now set expectations that growth will come from increased prescription drug volume rather than higher prices. The changes at Johnson & Johnson, Biogen, and AbbVie indicate they acknowledge that incentives may play a role in encouraging aggressive pricing.

Future trends

Whether pharmaceutical companies adjust their strategies or not, the trend of rising CEO pay appears set to continue. Strong biotech stock performance should help executives secure substantial compensation in 2021 and boost the value of stock awards. More simply, the way companies benchmark compensation may encourage ever-increasing pay.

"Companies target the peer median," said ISS Corporate Solutions' Saliba, "But everyone is aiming for it, so the median inevitably keeps moving up."

Methodology

For this report, BioPharma Dive created a representative industry group of 231 publicly traded biotech and pharmaceutical companies. First, it combined the company lists from the SPDR S&P Biotech ETF and the iShares Nasdaq Biotechnology Index, then added a dozen large multinational pharmaceutical companies. Since the focus was on drugmakers, about 24 companies primarily engaged in gene sequencing or diagnostics, as well as contract research organizations, were removed.

Using proxy statements, we obtained company-reported data on executive compensation and median employee compensation for 2017, 2018, and 2019. Six companies did not directly report CEO compensation in their 2019 filings, and 107 did not report median employee compensation. From this, we calculated medians and averages for CEO and employee compensation for each year, as well as interquartile ranges for 2019. Because company employee counts vary widely, taking the median of median employee compensation provides only a rough estimate of industry pay levels. Some reported CEO pay ratios were rounded to the nearest whole number. Employee data come from the most recent relevant regulatory filings (typically Form 10-K).

For further analysis, the 231 companies were divided into four groups by employee count: small (fewer than 200), medium (200 to 999), large (1,000 to 9,999), and mega (over 10,000). A public version of the database created by BioPharma Dive can be viewed at this link.