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News and Information Article
-- Growth in Venture Backed IT and Life Sciences Companies Continues to
Fuel Increases in Executive Pay --
NEW YORK, Oct. 26 // -- According to the 2006 Compensation
and Entrepreneurship Reports in IT and Life Sciences released today, total
cash compensation for CEOs in both these industries showed robust growth in
2006. CEOs in the IT sector enjoyed a 4.3% increase in base salary and an
overall 17% increase in total cash compensation, and Life Sciences CEOs
reported a 16% rise in their total cash compensation with base salary
accounting for 5.1% of that increase.
The report, co-sponsored by Ernst & Young LLPs Strategic Growth
Markets Practice, J. Robert Scott Executive Search, and Wilmer Cutler
Pickering Hale and Dorr LLP (WilmerHale), presents a correlation between
executive compensation and a number of other variables including financing
stage, company size in terms of revenue and headcount, founder/non-founder
status, industry segment, product stage and geography.
Some additional trends in the IT sector include:
* Incentive stock options remain the most common form of equity granted,
accounting for 62% of the aggregate equity given.
* Equity holdings for the founding CEO, President/COO and Chief
Technology Officer drop significantly after the first round of
financing.
* Average CEO salaries increased from $211,000 in 2005 to $220,000 in
2006.
* The average target bonus for the CEO is $93,000 in 2006 versus $57,000
in 2005.
* With the increasing headcount, total cash compensation for the CEO
generally rises from $260,000 in companies with 20 full-time employees
(FTEs) to $397,000 at the largest companies surveyed with greater than
75 FTEs.
Some additional trends in the Life Sciences sector include:
* The average target bonus for the CEO in 2006 is $94,000, a rise of
$39,000 from the 2005 actual.
* Average equity holdings across the 13 executive positions surveyed
totaled 16.2%, an increase from 14.5% in 2005.
* There was an increase in the use of stock options in 2006.
Approximately 82% of the companies surveyed utilized options while just
4% used restricted or common stock only.
* Approximately 66% of the non-founding CEOs in the survey have a
severance package with a median of 12 months. Forty-four percent (44%)
of non-founding CSOs (Head of Research and Development) had a severance
package.
* A non-founding CEO commands a 22% premium in total cash compensation
over the founding CEO.
* Dilution of equity for the founding CEO is consistent across rounds of
financing raised, moving from an average of 18.10% at companies with
one or fewer rounds raised, to 7% at companies with four or more rounds
of financing.
Companies nearing a liquidity event, or the 24-month "Red Zone," should
be addressing compensation issues that could dramatically impact the
success of their exit strategy.
"We are in an era of increasing pressure on transparency to have
refined and well articulated compensation strategies and philosophies,"
said Dave Johnson, National Functional Leader, Executive Compensation,
Ernst & Young. "Companies preparing to go public need to articulate their
overall compensation strategy including the rationale for the pay mix
between short and long-term incentives, the rationale for the mix between
cash and stock- based compensation, and the rationale for how competitive
pay is determined. Additionally, how does the company ensure it is paying
not only for short-term performance but for sustained performance and
shareholder value creation?"
"The time to ensure your equity valuations are correct is well before
you get in front of the SEC," explained Arthur Miller, Valuation and
Business Modeling, Ernst & Young. "And companies need to be aware that the
timing between 409A and FAS 123R is different. With 409A your valuation can
last all year and 123R is every time you issue options."
"Companies should be proactive and thinking about all of their
compensation programs throughout the entire lifecycle," said Kimberly
Wethly, Partner, WilmerHale. "The convergence of 409A and FAS 123R requires
companies to look at those issues on an ongoing basis. And while companies
review their executive agreements for 409A compliance, it is the perfect
opportunity to look at the program in its entirety to determine what
preparation needs to be done for the next stage of development. The Red
Zone is the time to make some meaningful changes as far as adding
performance metrics and in terms of the equity awards mix used."
"While I would categorize the talent markets current state as being
more frothy than it was a couple of years ago, it has yet to reach the
levels of the boom market of the late 90s," said Aaron Lapat, Managing
Director, J. Robert Scott Executive Search. "The job market for executive
talent for private, venture-backed companies is becoming increasingly more
competitive. Executives are also becoming more open to embrace the cash for
equity trade- off inherent in considering small, emerging businesses, which
is a change from only a few years ago when the level of risk aversion was
disproportionately high."
About the 2006 Compensation & Entrepreneurship Reports in Information
Technology and Life Sciences
This is the seventh annual Compensation and Entrepreneurship Report in
Information Technology, which collects data on the top executive positions
in privately held, primarily venture-backed companies. 2006 represents the
largest participation in the history of the survey with responses from more
than 1,500 executives representing over 300 companies from across the
country in five industry segments: Software and Communications, Hardware,
Semiconductors and Electronics, Services, Consulting and Integration, and
Content and Information Providers.
The annual Compensation and Entrepreneurship Report in Life Sciences
collects data on the top executive positions in privately held, primarily
venture-backed companies. 2006 represents the largest participation in the
history of the survey with responses from more than 800 executives
representing over 170 companies in a wide variety of industry segments:
Pharmaceuticals, Therapeutics, Diagnostics, Devices, Bioformatics, Genomics
and Molecular Technologies.
The survey data was collected between April and June of 2006. The
surveys were designed by Noam Wasserman, Assistant Professor at the Harvard
Business School, and used extensively in his ongoing academic studies
surrounding the early choices faced by founders that have important
implications for them and for their ventures. The development of these
reports is supported by WilmerHale, J. Robert Scott, and Ernst & Youngs
Strategic Growth Markets practice, which tailors the firms national and
global capabilities to meet the unique needs of emerging and high-growth
companies.
About Ernst & Young
Ernst & Young, a global leader in professional services, is committed
to restoring the publics trust in professional services firms and in the
quality of financial reporting. Its 114,000 people in 140 countries pursue
the highest levels of integrity, quality and professionalism in providing a
range of sophisticated services centered on our core competencies of
auditing, accounting, tax and transactions. Further information about Ernst
& Young and its approach to a variety of business issues can be found at
http://www.ey.com/perspectives. Ernst & Young refers to the global
organization of member firms of Ernst & Young Global Limited, a U.K.
company limited by guarantee, each of which is a separate legal entity.
Ernst & Young Global Limited does not provide services to clients. Ernst
&Young LLP, a Delaware limited liability partnership, is the U.S.
client-serving member firm of Ernst & Young Global Limited.
About WilmerHale
WilmerHale is internationally recognized for its expertise in
representing both venture-back companies and venture capital firms in their
initial public offerings, mergers and acquisitions, intellectual property
and intellectual property litigation. As a leader in technology and life
sciences, the firm represents clients in a wide variety of sectors,
including telecom and wireless, software, electronics, biotechnology and
medical devices. The firms full-service practice also includes antitrust
and competition; aviation; bankruptcy; civil and criminal trial and
appellate litigation (including white collar defense); communications;
defense and national security; financial institutions; international
arbitration; securities regulation, enforcement and litigation; tax; and
trade. The firm has more than 1,100 lawyers strong and has office in
Baltimore, Beijing, Berlin, Boston, Brussels, London, Munich, New York,
Northern Virginia, Oxford, Palo Alto, Waltham and Washington DC. If you
would like more information about WilmerHales compensation and benefits
practice group, please go to http://www.wilmerhale.com.
About J. Robert Scott
J. Robert Scott is a retainer-based executive search firm specializing
in the recruitment and selection of senior executives across a broad range
of selected industries. Founded in 1986 as a wholly owned subsidiary of
Fidelity Investments, the firm has developed a specialization in
entrepreneurial oriented businesses. Specialty vertical practices include:
Information Technology, Life Sciences, Financial Services, Higher Education
and Not-for- Profit. J. Robert Scott provides a thorough, timely and proven
process for locating and attracting highly qualified candidates to fill key
positions. Our approach is client-oriented and distinguished by a
commitment to service that is not only promised, but guaranteed. If you
would like more information about J. Robert Scotts services, please go to
http://www.j-robert-scott.com.
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