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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with over 400 companies annually, are a team of nearly 70 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

Pay Governance understands that times remain uncertain. Our domain expertise remains executive compensation consulting. Therefore, each week we will continue to provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

Does the SEC's New PVP Disclosure Facilitate Shareholders' Assessment of Pay for Performance Alignment?

The SEC released its final version of the rules mandated by Dodd-Frank regarding the disclosure of pay versus performance (PVP) on August 25, 2022. Since then, thousands of calendar-year U.S. companies have been working diligently to prepare the required information for their 2023 proxies, including compensation actually paid (CAP), a new definition of compensation that is intended to demonstrate the potential value of total pay that has been or may be received by proxy-named executive officers. Importantly, many of the components included in the SEC’s definition of CAP are highly contingent on future financial performance and stock price and do not reflect compensation actually received during the year.

There is a long history of media, government officials, academics, pension funds, and investors criticizing U.S. companies for executive pay and performance disconnects. Such disconnects may be caused, for example, by large grants of time-vested shares and may also be driven in part by the use of grant date fair value of equity incentives that are not adjusted for actual, post-grant financial performance or stock price changes. These grant date values are currently disclosed in the Summary Compensation Table (SCT) and Grants of Plan-Based Awards Table. The SEC PVP disclosure is intended to provide investors with a clear analysis of the alignment or misalignment of the top executives’ CAP with the company’s financial and stock price performance over a 5-year period, starting with 3 years of data in the inaugural year. This analysis, while complex, was intended by the SEC to be viewed by investors as a window into the governance and workings of the company’s pay for performance model.

Pay Governance LLC has prepared this Viewpoint using the PVP disclosure of 50 S&P 500 companies that filed their proxies on or before March 10, 2023, based on data collected by ESGAUGE.

Our Analysis

Because virtually all publicly traded companies use short-term cash and stock-based incentives that are valued for CAP purposes using recent operating and stock price performance, it was expected that the SEC’s new PVP disclosure requirement would demonstrate some degree of alignment of the companies’ executive compensation with stock price and financial performance. What was unknown was just how strong the alignment might be and if the new disclosure would truly assist shareholders in understanding the relationship of a company’s pay and performance.

To begin addressing these questions, we used the 50 companies’ PVP data to calculate the degree of alignment based on the year-over-year (YOY) change in CAP compared to the YOY change in total shareholder return (TSR), relative TSR, GAAP net income, and the company selected measure. For this initial study, we focused on whether changes in CAP were directionally correlated with each company’s changes in TSR. We illustrate this approach in examples in Table 1 below. Future Viewpoints will explore the alignment with the other measures, but preliminary analysis of these measures also shows alignment with CAP (although to a lesser degree than observed with TSR in our initial sample).

Given the initial year’s PVP disclosure is limited to the 3 most recently completed fiscal years, our analysis reflects 2 years of change (i.e., 2021 vs 2020 and 2022 vs 2021) for 50 companies yielding a total sample size of 100 data points. Because the PVP disclosure adds an additional fiscal year each of the next 2 years, there will eventually be a “rolling” 5-year data set to evaluate the alignment of pay and performance.

We used the following taxonomy to categorize each data point:

  1. “Positive Alignment” is where the changes for both YOY CAP and YOY TSR are positive.
  2. “Negative Alignment” is where the changes for both YOY CAP and YOY TSR are negative.
  3. “Not Aligned, but Positive” is where change in YOY CAP is negative and change in YOY TSR is positive.
  4. “Not Aligned, but Negative” is where change in YOY CAP is positive and change in YOY TSR is negative.

Table 1: Illustration of Assessment of YOY CAP and TSR Alignment for Individual Companies

Table 1: Illustration of Assessment of YOY CAP and TSR Alignment for Individual Companies

Table 1 (column b) shows that the Company 1 Principal Executive Officer’s (PEO’s) CAP increased by 40% from 2020 to 2021 and cumulative TSR (column c) increased by 45%. For 2021 to 2022, the Company 1 PEO’s CAP decreased by 141% and cumulative TSR declined 32%. Company 1 demonstrates positive and negative alignment in 2021 and 2022, respectively. It also illustrates the potential volatility of CAP and the substantial impact of stock price and earned or expected incentive payouts on CAP, which is what most compensation committees intend when designing and setting executive compensation. Table 1 (column e) shows that the Company 2 PEO’s CAP decreased by 3% from 2020 to 2021 and cumulative TSR (column f) increased by 12%. While not directionally aligned, it is unlikely shareholders would vote against Say on Pay in this situation. For 2021 to 2022, the Company 2 PEO’s CAP increased by 51% and cumulative TSR declined by 9% which falls under our category of not aligned.

Our Findings

The overall findings for the full sample are straightforward and unambiguous, as seen in Table 2 and Chart 1: we find that the vast majority of companies have directionally aligned changes in CAP and cumulative TSR.

Based on our analysis, we found that:

82% of the companies in the analysis demonstrated directional alignment of change in CAP and cumulative TSR (53% positive and 28% negative alignment).

  • Initial findings also show that 83% of the companies with positive alignment also outperformed the peer group TSR and that 86% of the companies with negative alignment performed below the peer group TSR.

15% of the companies in the sample had a negative change in CAP and a positive change in cumulative TSR, which we have labeled as “not aligned, but positive.” This may have been due to downward adjustments in expected performance share plan payouts and/or transition in CEO incumbents.

The remaining 3% of companies in the sample had positive changes in CAP and negative changes in TSR, which we have labeled “not aligned, but negative.” For this sample, it appears the disconnect was related to a substantial increase in compensation granted during the year and/or transition in CEO incumbents. Further, these same 3% of companies show positive alignment with both net income and the company-selected metric.

Table 2: Results of Analysis of Alignment of Change in CAP with Change in TSR

Table 2: Results of Analysis of Alignment of Change in CAP with Change in TSR

Chart 1: Change in CEO CAP versus Change in TSR for 50 S&P 500 Early Filers

Chart1: Change in CEO CAP versus Change in TSR for 50 S&P 500 Early Filers


While it may be too early to draw definitive conclusions given the relatively small sample size, our findings are encouraging: changes in CEO CAP show alignment to changes in Company TSR, which is what shareholders expect due to the significant proportion of CEO pay delivered through equity-based compensation. Should these early findings continue to show alignment, the new PVP disclosure would appear to support shareholders’ consistent strong support for Say on Pay over the past 12 years.

This new disclosure provides an additional tool to review pay decisions in the context of the relationship between pay and performance. While we believe the new PVP disclosure is a better tool for evaluating pay for performance than relying on the grant date fair value of equity awards, there are alternative methodologies for evaluating pay for performance alignment, such as a realizable pay2 analysis, that evaluates a company’s relative realizable pay rank and performance rank over a 3-5 year period.

While this Viewpoint considers the directional alignment of changes in CAP and TSR performance, future Viewpoints will take a more in-depth look at these figures. For instance, we will examine the magnitude of such alignment and identification of the causal factors driving CAP besides TSR, such as the impact of changes in equity-based compensation grant values over time as reflected in the SCT and executive transitions.


1 The analysis is based on data provided by ESGAUGE.
2 Pay Governance’s definition of realizable pay includes the sum of salary, actual annual incentives/bonuses earned, time-vested equity awards valued as of the end of the measurement period, long-term performance plan awards valued as of the end of the measurement period (based on actual and/or projected payout levels), and the in-the-money value of stock options as of the end of the measurement period.

General questions about this Viewpoint can be directed to Ira Kay (, Mike Kesner (, Linda Pappas ( or Ed Sim (

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Featured Viewpoint

Biotech Equity is Largely Underwater: Now What?


Across the life sciences industry, equity is often considered by both executives and employees as a key foundational element within their compensation package. Ask any biotech recruiter — whether they are talking to a newly graduated research associate or a seasoned executive — and one of the most prevalent questions asked is, “What is my equity package?”

In light of the 2022 biotech sector market downturn, many compensation committees and sector leaders are concerned with the percentage of stock option awards that are underwater and contemplating how to manage equity grants and share reserve pressure in 2023 if biotech stock prices remain depressed.

This Viewpoint provides an overview of equity alternatives that can be implemented when faced with underwater stock options instead of repricing or exchanging those options.

The Current Biotech Environment

2022 was a sobering year for the life sciences sector.

  • Total shareholder return (TSR) for the median company in the IBB index (reflecting a market basket of biotechnology stocks) was down -43% during 2022 and -58% from the start of 2021 to the end of 2022.1
  • 119 biotech and pharma companies laid off workers in 20222; this trend is continuing into 2023, with 40 additional life sciences sector companies reporting reductions in force as of March 1, 2023.3
  • Venture capital funding dropped by approximately 23% in 2021, from $39 billion and 1,415 deals to $30.7 billion and 1,054 deals in 2022.4
  • 21% of pre-commercial biotech companies on the IBB index were trading below cash on hand as of
    December 31, 2022, and a number of high-flying biotech companies have closed their doors in the last year due to a lack of funding.
  • Annual equity grant rates across the biotech sector increased in 2022 with select public, pre-commercial biotechs granting as high as 8+% of common shares outstanding. This trend has raised a yellow flag as the typical newly public biotech only has 4% to 5% of authorized shares available for equity grants annually under their approved evergreen provisions.
  • Similarly, overhang levels (the total amount of equity committed to employees and directors) continue to rise, with many smaller bitoechs experiencing overhang of 20% or more due to the fact that stock option recipients are not exercising underwater options.

2023 comes with ambiguous indicators.

  • While biotech investment declined to $30.7 billion in 2022, it was still higher than the $29.6 billion total for 2020 as well as all of the previous years going back to 2012.4
  • According to data released on February 3, 2023, the U.S. unemployment rate was 3.4%, which was last seen in 1969.5 This contrasts with the U.S. inflation rate which slowed from a multi-decade high in 2021 to 6.5% in 2022; still far exceeding the next highest annual U.S. inflation rate in the past ten years of 2.3% experienced in 2019.6
  • According to a Life Sciences Compensation Planning survey conducted by Pay Governance in Q4, 2022, median salary budgets for merit increases in the biotech sector were approximately 4%. When market adjustments are included, total salary budgets ranged from 5.0% to 6.5% (25th – 75th percentiles) within both private and public as well as pre-commercial and commercial participants.
  • Moreover, we are still hearing from biotech companies that hiring, while softening in some areas, remains highly competitive in clinical and technical tracks. This is especially true of biotech companies that are using artificial intelligence and machine learning capabilities to build their platforms.

As the biotech sector grapples with the macroeconomic environment, and pre-commercial companies struggle with shorter cash runways, the pressure on how companies compensate their employees is mounting. At many biotechs, the majority of employee and executive stock option awards are underwater. Further, when companies target their stock option grants to a dollar value, it results in share reserve pools diminishing quickly and annual equity grant use (also known as “burn rates”) climbing to unsustainable levels. Faced with these factors, many biotechs are asking if an option “exchange” or option “repricing” should be considered.

Are Option Exchanges or Repricing the Answer?

It depends.

And that dependency is a result of the company situation and its equity profile.

Before considering how to manage underwater equity, and whether an exchange or repricing is a viable alternative, it is important to understand the “equity profile” of the organization. In other words, understanding what proportion of the stock options previously granted have a grant price higher than the current stock price and, how much higher.

This exercise is especially powerful when viewed on an individual basis and then overlayed onto the critical talent, high potential and key contributor segments of the employee population. A detailed equity profile analysis should consider all equity grants – stock options, restricted stock units and performance shares. For the stock option portion of the equity mix, we suggest analyzing the following:

  • Percent of stock option grants that are vested and underwater, versus percent that are vested and in-the-money.
  • Percent of stock options grants that are unvested and underwater, versus the percent that are unvested and in-the-money.
  • Under each scenario, test what the share price needs to be achieved for the stock options to be “in-the -money.”
  • Under each scenario, calculate the intrinsic value (the spread, if any, between strike price and current trading price multiplied by the number of stock options) to understand the “holding power” of the unvested stock option grants and the “walking power” of the vested stock option grants.
  • For stock option grants that are underwater, whether vested or unvested, identify the remaining terms of the stock options to understand the timeframe by which the stock price needs to exceed the option grant price in order to be “in-the-money” before the option expires.

While many biotech companies may consider option repricing or exchanges as potential approaches to solving the underwater issue, these solutions are relatively rare. Pay Governance’s research found that 29 biotech companies sought shareholder approval for either an option exchange or repricing between 2017 and 2022. Of those 29, all but two received shareholder approval despite the majority of the proposals receiving an “against” vote recommendation from Institutional Shareholder Services (ISS).

The limited use of option exchanges and repricing is due largely to the opinion that such exchanges are not shareholder friendly. A common point raised when discussing option repricing or exchanges is that the employee equity experience should have direct alignment with the shareholder equity experience in both good times and bad. Repricing or exchanging stock options decouples that shared sense of economic outcome. Further, stock options typically have a 7- or 10-year term. In other words, as a “long-term incentive,” stock options are literally designed to reward value creation over the long-term, and their terms should not be altered as a quick fix.

Case Study: CureCo’s Conundrum

Let’s consider an illustrative biotech company: CureCo Therapeutics.

Fictious CureCo went public in the 2021 IPO boom at an IPO price of $17 and is currently trading at $3. The CureCo Compensation Committee and leadership team have concerns regarding retention of key staff as many employees, including some executives, do not value their underwater stock options. CureCo is closely managing its cash expenditures as the cost of raising capital is now much higher than in previous years and additional funding is scarce. This means that meaningful cash retention or recognition awards, even if used in a targeted manner, are not a viable alternative at this time.

CureCo is sensitive to the fact that shareholders may not be supportive of an option exchange proposal given the stock options still have 8 years of their 10-year term left. Further, the stock options are only $14 dollars underwater, and their largest shareholder has already expressed concern that a repricing would signal that the company does not believe the stock price will significantly surpass $17 in the next several years.

CureCo is open to exploring other approaches to equity that do not involve option repricing or exchanges, and, as such — engaged in the process outlined below — selecting several of the alternatives from the equity continuum outlined on the following pages.

Establish a clear equity framework.

Before exploring the continuum of equity alternatives, it is important to ensure that both management and the compensation committee are clear on the company’s equity philosophy and granting framework. For example, does the company grant awards as:

  • Percent of common shares outstanding

         – For example, 4% of common shares outstanding are granted to employees each year

  • Fixed number of shares

         – For example, the same number of shares are granted each year regardless of whether the stock price increases or decreases

  • Targeting a dollar value

        – For example, establishing a target value for the long-term incentive grant based on competitive market rates with the number of shares awarded increasing or decreasing based on the stock price at grant

Other questions to consider are:

  • How many shares remain in the company’s share reserve?
  • Does the company have a share plan “evergreen” feature that annually refreshes the share reserve?
  • Does the company need to obtain shareholder approval for a share pool refresh and is it feasible to make such a proposal at the next annual meeting?
  • From a talent perspective, is the company growing quickly (e.g., increasing hiring as it approaches commercialization or has it recently closed on a meaningful acquisition)?
  • Is the company looking to add any key executive roles that will require competitive new hire equity awards?
  • What is the company’s current annual grant rate and how does the organization’s dilution and equity overhang compare to market norms and shareholder/proxy advisor perspectives?

The methodology that a company uses to determine equity grant size is usually driven by the company’s size and stage as outlined below. Both management and the compensation committee should be clear on what grant methodology is being used, as well as whether conserving shares / stretching the life of the approved share pool is a primary objective when considering changes to the equity granting approach.

Exploring a continuum of equity alternatives.

While there is no silver bullet, many companies pivoted to the use of creative approaches in 2022 to re-engage their employees while conserving their share pool to the extent possible given increasing overhang associated with a larger percent of stock options that were underwater. A continuum of equity approaches is outlined in the following table, with key considerations and market prevalence specific to the biotech sector.


Companies should explore alternatives to address the challenges associated with underwater stock options beyond option exchanges and repricing given the negative shareholder perceptions of these practices.

We recommend that you review your compensation philosophy and equity strategy, assess what talent is needed to successfully execute on your strategy and priorities, understanding that some of this talent most likely is embedded in the organization at the mid-levels and may not be solely residing in the executive suite. Consider what approaches, programs, and rewards are feasible to implement and will resonate best within your company’s unique culture, as well as your shareholder’s expectations. Finally, remember that compensation is just one of many tools that human resources, executive leadership, and the board of directors have at their disposal to engage and retain key talent through turbulent times.


1 Data obtained from Capital IQ (






Featured Viewpoint

SEC Finalizes 10b5-1 Trading Plan Rule

Summary of Key Provisions

On December 14, 2022, the Securities and Exchange Commission (SEC) released the final Rule 10b5-1 requirements for preplanned trading plans for officers, other insiders, directors, and companies to qualify for the “affirmative defense” rule for such plans (i.e., the stock transaction was not entered into based on material non-public information). The new rule applies to trading plans entered on or after February 27, 2023.

The table below summarizes the impact on 10b5-1 plans and the related disclosure requirements.

SEC Rule 10b5-1 Implications and Considerations

Executives and directors who wish to avail themselves of the affirmative defense afforded trading plans under Rule 10b5-1 may need to consider whether to adopt such a plan prior to February 27, 2023, as it would be subject to fewer restrictions and the new disclosure requirements.

Companies and their advisers may also want to revisit their policies regarding the use of 10b5-1 compliant trading plans to buy and sell company stock. Several companies encourage, but do not require, the use of 10b5-1 plans while other companies require they be used or do not have a formal policy. Given the additional restrictions to qualify, some companies may be reluctant to require the use of such plans.

It is also advisable that companies establish rigorous internal controls for collecting and reporting the adoption, modification, and cancellation of both qualified 10b5-1 and nonqualified trading plans, as both types of arrangements are subject to quarterly reporting requirements.

Finally, compensation committees will need to discuss and approve a policy regarding the granting of stock options (and other forms of equity compensation) when they are in possession of MNPI, as the policy must be disclosed in the company’s proxy.

Stock Option Grant Table

As noted above, the following table is triggered by stock options, SARs, or similar instruments granted four days before or one day after the release of MNPI.


This Viewpoint is intended to inform compensation committees, executives, and compensation professionals about developments that may affect their companies; it should not be relied on as specific company advice or as a substitute for legal, accounting, or other professional advice.

General questions about this Viewpoint can be directed to Mike Kesner (

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