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The unique compensation needs of biotechnology start-ups

An excerpt from Executive Compensation “Guiding Principles”

Executive Compensation
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By Don Delves and Hemant Patel | June 26, 2018

We discuss how to apply executive compensation guiding principles to biotechs and balance alignment and engagement, as exemplified in our case study, BioCore.

Designing effective compensation systems at rising biotechnology companies must reflect many challenges, including volatile stock prices, a shifting ownership base that includes founders with large equity ownership and a heavy reliance on stock options as long-term incentives. This chapter describes the application of the overarching and operating principles of executive compensation (EC) at biotech companies using the example of BioCore, a fast-growing, U.S. biotech company that offers promising gene-therapy compounds. To redesign the company’s incentive system, senior management sought to balance and maximize alignment and engagement by offering incentives with a large, relatively stable upside that reflected stock-price swings, the ongoing need to attract strong talent and the challenge of evolving with a growing company facing increased leadership, regulatory and other challenges.

What makes biotechs distinct?

This excerpt focuses on biotechnology businesses, especially early-stage, pre-revenue entrants with less than 500 employees and offerings in phases one, two or three of the product development process. They could be pre- or relatively recently post-IPO (in the last one to five years), and typically have venture capital (VC) backing and VC representation on the board and/or compensation committee. Their objectives in most cases are either to “get to commercial” by themselves, which usually requires an IPO or other financial backing, or to be acquired by a larger biopharma company.

When designing or modifying executive compensation systems, biotechnology companies are often the exception rather than the rule, as best-practice or market-typical program designs and mechanisms in other industries or organizations are either difficult to implement or simply not appropriate in an early-stage biotech environment.

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