How Executive Pay Packages are Negotiated
Pictured: Men shaking hands over table/courtesy Getty Images
As turbulent economic conditions persist and layoffs become more commonplace, some high-profile tech CEOs have elected to take large pay cuts to preserve cash flow. This has sparked a larger conversation about how, exactly, executives’ salaries are decided.
In February, Eric Yuan, CEO of Zoom, told his staff he would cut his pay by 98% and forgo his yearly bonus. Similarly, Tim Cook, CEO of Apple, plans to cut his salary by 40% in 2023, bringing his annual target salary to $49 million.
Though these salary totals are not relatable for the average American, they are commonplace across several industries, including the life sciences.
Len Schleifer, CEO of Regeneron Pharmaceuticals, took home $453 million in 2021, making him the highest-paid executive in biopharma that year, according to a STAT analysis. Tim Walbert, CEO of Horizon Therapeutics, followed behind at $70 million.
Stephen Provost is the managing director and co-founder of Prestige Scientific, a life sciences recruiting and executive search firm. He told BioSpace the negotiation process for executive pay packages is more complex than for most other roles.
“Most people either have a base salary plus an annual bonus. Others may have equity in the form of stock options or restricted stock units,” Provost said. “Once you are at an executive level, there tend to be more components.”
For executives, these components include, but are not limited to:
Annual cash bonus/sign-on bonus
Golden parachute clause (guaranteed severance)
Flexible work locations
Demystifying CEO Compensation
CEOs, in particular, are a special case, as there is no one person who has the power to decide their compensation.
This is why there is often a compensation committee made up of board members. It’s common for members of a venture capitalist group or other financing organization that provides funding for the company to sit on said committee.
For many public companies, the committee issues a yearly report in which they explain to shareholders how the CEO and other top executives’ compensation packages were decided based on the yearly budget and revenue. The shareholders then choose whether to approve the compensation.
However, according to reporting by Harvard Business Review, “Many committees adjust performance numbers in obscure and inappropriate ways that lead to overly generous CEO pay.” They do this by being selective in which data is included in the report, skewing the numbers in a way that makes it difficult for anyone, even seasoned investors, to spot.
Because of this, it’s rare for shareholders to downvote a compensation committee’s proposal, regardless of how the data is presented. According to the same report, shareholders approve the pay recommendations over 95% of the time.
Changing with the Times
Provost said most often, companies base their salary ranges and compensation expectations for C-Suites on market data provided by the Radford Global Compensation Database. According to the organization, this suite of surveys provides individual incumbent data for base salary, incentives and equity for 6.3 million employees in industries like technology, sales and the life sciences.
For most roles, the database provides a salary range that individuals fall under based on factors like experience and education. For example, a hiring manager looking to hire a CFO may look at the database and see that a base salary of $250,000 is in the 50th percentile for that role. The hiring manager can then decide that based on the qualifications they seek, they want their offer to fall in the 75th percentile, comparatively.
However, Provost said that over the last three years, basing an offer according to the Radford database hasn’t been good enough for employers to score top talent.
He said the average salaries provided by the Radford database haven’t mirrored the offers he’s seen being extended to C-suites - they weren’t competitive enough for executives to leave their current roles. Companies have been forced to either sweeten the deal or leave the position vacant.
This could be due to inflation and major shifts in market conditions since the onset of the COVID-19 pandemic. According to BioSpace’s Life Sciences Salary Trends report, wages increased across the industry over the past year, though at a slower rate than in previous years.
It could also be due to a shift in how executives choose to divide their time.
Provost said he has seen more and more executives choose to divvy their time between multiple companies instead of committing to one full-time position. By charging an hourly or flat rate paid in the form of cash or equity, executives can often make more than they would in a full-time role.
And though money talks, Provost said it isn’t everything. Many executives choose this route even if it means taking a pay cut.
“There's more flexibility, and it's more interesting to them because they're working with different companies,” he said. “If there’s a situation in which they don’t want to work with a specific team anymore…. they only have to fill 10 to 15 hours instead of losing their entire job.”
Like everyone else, executives are looking for that sweet spot: they want to earn as much as they can while still enjoying their jobs. Now more than ever, companies have to up the ante if they want to stay competitive.
“When we start an executive search, we are usually given a compensation range,” Provost said. “More times than not, the final offers push that range and go slightly over what the client originally budgeted for.”