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Biopharma industry still relies on stock options

Examining the use of stock-based incentives across S&P 1500 biopharma executive compensation

By Hemant Patel , Matthew Mullery and Megan Boyce | January 14, 2021

The biopharma industry relies on stock options, and there is a direct correlation between the size of the company and the degree of reliance on options.
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Despite the declining use of stock options in executive compensation programs, the healthcare sector more than any other continues to include them thanks in large part to the biotechnology and pharmaceutical industries.

Much has been written about the declining role and use of stock options in U.S. executive compensation programs since the height of their popularity in the 1990s. Various factors, including changes to accounting rules, the enactment of the Dodd-Frank Act and institutional investor preferences towards long-term performance plans, have resulted in options now representing less than 20% of the average CEO long term incentive (LTI) mix in the S&P 1500.

In our recent CEO pay study looking at pay levels and practices for S&P 1500 CEOs that served in fiscal years 2017 through 2019, an evaluation of LTI mix by sector showed that CEOs in the healthcare sector had on average 35% of their LTI awards delivered in stock options — more than any other sector.  This data raises the question: how different would the healthcare results be if it compared only companies categorized as biotechnology or pharmaceuticals (the combination of which we refer to in this article as biopharma)? Willis Towers Watson’s Global Executive Compensation Analysis Team reviewed the sector evaluations and found that options account for 46% of the average LTI mix in the biopharma S&P 1500 companies, which is more than double the sectors with the next highest weight on options (communication services and consumer staples, both at 21%).

46% of biopharma long-term incentives are stock options.
CEO average LTI mix by sector

How does size impact options use?

Biopharma companies in the S&P 1500 can generally be divided into two broad categories:

  • Large, global pharmaceutical companies with numerous commercial products generating billions of dollars of revenue
  • Smaller, earlier-stage biotechnology companies that are either pre-commercial or with only one or two commercial products generating less than a billion dollars of revenue

Companies in these categories have very different business models and approaches to Total Rewards so the LTI mix is very different in each.

Since most smaller biotechnology companies do not deliver dividends, they typically prioritize stock price growth, and stock options better reward price growth through longer option terms and higher potential upside value potential. In contrast, larger pharmaceutical companies rely more heavily on full-value shares, at least in part to minimize dilution of the available share pool.

We hypothesized that this diversity of approach to LTI mix potentially skewed the data for the S&P 1500 biopharma companies overall towards a heavier weighting on options due to the relatively higher number of biotechnology companies in the overall index. To test this hypothesis, we broke out the biopharma companies into two categories by market capitalization:

  • S&P 500 large-cap (n=11) – predominantly large pharmaceuticals
  • S&P 600 small-cap (n=16) – predominantly small biotechnology

There was an insufficient sample size of biopharma companies in the S&P 400 mid-cap with CEOs that served from 2017 to 2019 period. This lack of mid-sized companies reflects the overall biopharma landscape, which some industry observers refer to as a “barbell”; i.e. it is made up of either large or small companies, with very few companies in-between because once small biotechnology companies become large enough to be considered “mid-cap,” they are often acquired.


As predicted, there is a significant difference in average CEO LTI mix in large-cap versus small-cap biopharma companies. On average, small-cap companies place more than two times the weight on options (62%) than their large-cap counterparts (27%), and nearly four times the S&P 1500 overall (16%). Furthermore, large-cap biopharma companies also have a materially different LTI mix than other sectors:

  • 27% weighting on stock options is higher than all other sectors in the S&P 1500
  • Only 13% of LTI awards delivered in time-vested restricted stock is the lowest weighting on TVRS across any industry

These results not only demonstrate that biopharma sector, as a whole, experiences a heavier reliance on options, but there is significant differentiation in LTI mix within the industry that has a direct correlation to company size.

There is a significant difference in average CEO LTI mix in large-cap versus small-cap biopharma companies. On average, small-cap companies place more than two times the weight on options (62%) than their large-cap counterparts (27%), and nearly four times the S&P 1500 overall (16%)
CEO average LTI mix by biopharma sub-sector

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Director, Executive Compensation & Rewards  (New York)

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