Life Sciences Firms Reconsidering Compensation Role of Cash versus Equity

May 1, 2003 ( - With stock option expensing on its way to becoming mandatory, nearly half of life sciences industry (LSI) companies will shift to a compensation scheme emphasizing cash over equity, according to a new study.

According to the Buck Consultants report, 2003 Trends Life Sciences Industry – Compensation and Job Family Career Levels, current stock option expense proposals are forcing LSI companies to rethink fundamental assumptions about the role of compensation in motivating scientific innovation and keeping the talent relied upon for such innovation. Nearly 90% of respondents expressed concern over the new expensing proposals.

Most notably, the Financial Accounting Standards Board (FASB) unanimously agreed earlier this month that companies should be required to treat stock option grants as expenses (See FASB Says Yes to Option Expensing). The Norwalk, Connecticut-based accounting rulemaker will now move on to determining how to value options. The board said it expects to have a new rule in place sometime next year. Also, boards of directors at other companies are considering recently passed shareholder initiatives calling for stock option expensing (See Delta Shareholders Approve Option Expensing, Severance Limits).

Buck analysts said LSI companies have traditionally relied on the broad-based distribution of stock options to promote entrepreneurship, a classless culture and long-term retention of employees. “LSI companies would have preferred to maintain their `share the wealth’ culture, but they realize they probably are going to have to redefine that employment arrangement to deal with this new dynamic of expensing stock options,” Linda Amuso, a principal in Buck’s compensation practice, said in a statement.

The willingness to change shown in the LSI study is in contrast to the findings of Buck’s Underwater Stock Option Exchange Programs in High Technology project in February 2003, which noted that high technology companies are going to great lengths to preserve their commitment to grant stock options at all levels of the organization.

The LSI study, completed in the first quarter of 2003, includes information from nearly 100 pharmaceutical and biopharmaceutical companies.