Sky-high pay sometimes brings less extravagant returns on investment. But Big Pharma isn’t always getting bang for its buck when it comes to CEO compensation, according to analysis.
While entertainment industry CEOs typically dominate the list in As You Sow’s annual report “The 100 Most Overpaid CEOs,” which is now in its eighth year, pharma is, unfortunately, often well represented. Rosanna Landis Weaver, the report’s author, and the wage justice and executive pay program senior manager at As You Sow, says that next to entertainment CEOs, she suspects pharma CEOs are one of the next highest categories on the annual list — a who’s-who of leaders who earn exorbitant pay while steering their companies to lower-than-average returns compared to other S&P 500 companies.
Leading the pharma pack for 2021 was Regeneron Pharmaceuticals co-founder and CEO, Leonard Schleifer, who came in at No. 10 on the list with a package that totaled $135,350,121.
“Regeneron has lower stated pay this year, but the CEO exercised shares and realized a value of $446 million, which is mind boggling. Did that individual provide that much value?” Weaver asks. “I’m very skeptical that any individual could.”
Alex Gorsky, the executive chairman and former CEO of Johnson & Johnson, which is the largest healthcare products company by market capitalization, came in at No. 21 on the list with a compensation package totaling $29,575,974.
“There's a huge societal dissatisfaction with pharmaceutical companies and these pay packages do not help dissuade people who are, you know, struggling to pay their medical bills,” Weaver says. “So, I think it's very bad for the industry in general as these glaring examples are just sort of lightning rods.”
However, while the pharma industry may feature prime examples of bloated pay packages, industry leaders shouldn’t be painted with a broad brush, some experts caution. Not all CEOs earn stratospheric salaries that are untethered to reality. Pay for biopharma CEOs at early stage and growth-stage companies, for example, is often more closely tied to value, says Leslie Loveless, CEO of Slone Partners. In addition, there is also some movement toward reining in the outsized pay packages that do exist. Corporate shareholders seem to be gaining some traction in pushing for better value.
As You Sow is a nonprofit focused on increasing “environmental and social corporate responsibility through shareholder advocacy, coalition building and innovative legal strategies.” The As You Sow CEO report came about as a means to encourage shareholders to exercise more oversight on executive pay through advisory votes on compensation programs, which were mandated under The Dodd–Frank Wall Street Reform and Consumer Protection Act “say on pay” provision passed in 2010, Weaver says.
But oversight can be a challenge. In many instances, it’s difficult to get a clear picture of CEO earnings because pay packages often include complicated equity-based compensation and incentives. The CEO payment system is designed to boost pay and sow confusion, Weaver says.
"If you were a CEO in the bull market you did very, very well and it wasn’t because you were a better CEO, it was because you had the good fortune to be in the right place at the right time."
Rosanna Landis Weaver
Wage justice and executive pay program senior manager, As You Sow
“It’s evolved through compensation consultants and lawyers, and disclosure is often designed more to obfuscate than to clarify. And it can be intimidating,” she says.
Despite some CEOs pledging to take base salary cuts in response to the pandemic, many earned more in 2021, primarily due to larger long-term equity incentives. And pay is often not based on performance, but market forces, Weaver says.
“If you were a CEO in the bull market you did very, very well and it wasn’t because you were a better CEO, it was because you had the good fortune to be in the right place at the right time,” she says.
But shareholder advisory votes that come close to, or successfully oppose pay packages are becoming more common.
“More of these votes are happening,” Weaver says.
This year, more than half of shareholders at 16 companies in various industries rejected CEO packages — a 60% increase from 2020, according to the report. This type of pushback can make a difference.
Take the case of Amerisource Bergen, an American drug wholesale company.
“In 2021, 48.47% of shareholders voted against the pay package,” she says. It didn't lose, but it came very close — and the company responded.
“Here was a case where there was a high vote against, so they actually made a decision. They applied negative discretion — a reduction of 45% for the CEO’s annual bonus.”
Other companies may increasingly follow suit.
Smaller companies more tied to value
While there are many examples of out-of-scale compensation packages in the pharma industry, it’s important to note that CEO compensation can vary considerably.
“When you're looking at compensation as it relates to [startup and early stage biotech companies] versus Big Pharma or the midsize biopharma companies, it's quite different,” Loveless says. “What we generally see is that salaries for a CEO at seed or a series A come in anywhere from high $300,000s to $500,000. Most of the time, it is somewhere in the $425,000 to $475,000 range — that's the hot zone.”
Sometimes, the initial salary comes with a caveat that once the series A is closed, the salary will increase, she says. So, the initial salary may start at $375,000, but later rise to $450,000 or $475,000. Bonuses and equity are also a factor.
“When you're talking about bonus targets in early stage companies, where there's no revenue to speak of, they're tied more to milestones, advancing targets, getting something into the clinic, raising a round of capital. Those are the kinds of things that bonuses are based on,” Loveless says.
Most commonly, the bonus target for a CEO is 50% of base salary, she says. The sweet spot for equity is anywhere from 4% to 6%. However, while salaries in these companies may be lower than those in Big Pharma, they’re still rising along with industry trends.
“Definitely, salaries have gone up,” Loveless says. “We can see salaries creep over the $500,000 mark. But [for] early stage [companies], that doesn't happen very often. I will say that we used to see more of the $350,000 to $450,000 range, and now it's pretty rare that we would see something even under $425,000.”
Founder CEO compensation may differ because they often have more equity in the company, she says. But from what she’s seen, Loveless says early stage company CEOs aren’t necessarily as focused on pay as they are outcomes.
“If you're successful in biotech, you develop relationships with the biotech venture capital firms, and that carries a lot of weight in terms of where you go next."
CEO, Slone Partners
“A successful CEO has had the experience of making something big happen and they know what it's all about. In other words, they're not so much worried about, ‘am I going to get a salary of $400,000 or $550,000?’ They're more worried about what's going to happen on the back end. Am I going to create a situation in this biotech that allows for a multibillion-dollar buyout by a strategic [move] or am I going to see this to an IPO exit? And the success, the big success, is so much more than a base-salary differential. It's about the back end years down the road,” Loveless says.
A big payout happens as a result of the leadership and the accomplishments of that CEO and his or her team.
“They are definitely measured on what they’ve accomplished in biotech,” Loveless says.
And because many early stage biotech company CEOs are in the business to make their mark and leave a legacy, they often stay within the small biotech ecosystem, rather than moving on to larger companies.
“If you're successful in biotech, you develop relationships with the biotech venture capital firms, and that carries a lot of weight in terms of where you go next. And those investors want to back you again if you've been successful. There's just a lot of excitement in biotech. You get to build something. Once you have a success and you exit, you get to build it again and you put your stamp on it, and it’s fun,” Loveless says.
Overall, while some CEO pay is out of step with value, it’s hardly an industrywide truth. In fact, in some instances, it’s value that drives pay.
“The folks that have the track record are the ones that the investors are likely to get behind with big dollars,” says Loveless.