Monday, January 16, 1995
Salaries, not equity for risk wary CEOs
By Karen Bernstein
In the good old days, when owning biotech stock options seemed like a surefire ticket to wealth, CEOs could be lured to young companies with packages that traded off some cash compensation for stock.
In today's environment, there's no guarantee that options are worth more than the paper they're printed on. As a result, companies are having to change the mix of compensation they're offering, sometimes straining already tight budgets in this era of less capital availability and heightened awareness of the need to preserve cash.
As the stock market has punished biotech, and as it has become clear that only a small percentage of startups will hit it big, three trends have become apparent in executive compensation, according to executive search firms: CEOs are increasingly unwilling to accept risk in the form of equity; executives are less willing to accept reductions in the cash portion of their compensation when they change positions; and executives are asking for substantial downside protection in the form of bigger severance packages.
Falling option value
The result is a strong shift away from risk, in favor of immediate compensation rather than deferred compensation, making biotech jobs more like other jobs.
The changing gains from options makes it painfully clear why this is so. Ernst & Young has collected data from 100 public companies for 1993, the latest year for which figures are available. In 1993, only 19 percent of CEOs exercised shares, for gains of $644,000 - compared to gains of $1.4 million in 1992. Option gains accounted for less than 30 percent of total compensation in 1993.
It's more normal for about a third of CEOs to exercise options, according to E&Y compensation specialist Richard Raymond. "The real trend is that fewer people are exercising, and they're exercising fewer shares, so that converges to make gains smaller," he said.