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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 450 companies annually, are a team of nearly 75 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

Preparing for Year Two of Pay versus Performance Disclosures


The SEC’s final Pay versus Performance (PVP) disclosure rules were issued on August 25, 2022. Given the number of implementation issues that were raised as companies struggled to comply with the new rules, the SEC staff issued several Compliance and Disclosure Interpretations (CDIs) to clarify the disclosure requirements: fifteen CDIs were issued on February 10th, nine CDIs were issued on September 27th, and ten CDIs (including revisions to two prior CDIs) were issued on November 21st.

This Viewpoint highlights some of the most important SEC guidance that companies should consider in preparing their 2024 PVP disclosure.

Key 2024 PVP Disclosure Considerations

The following list of key 2024 PVP disclosure considerations addresses some of the more challenging issues that companies grappled with due to the SEC’s lack of clarity and varying opinions among experts on how to interpret the SEC rules. The full list of CDIs can be found on the SEC’s website, with all the PVP-related topics under Sections 128D and 228D.

1. Retirement eligibility alone is not a vesting event for compensation actually paid (CAP) purposes — CDI 128D.18 clarified that equity awards which include “double trigger” vesting provisions (i.e., participant is retirement eligible and must actually retire to receive or exercise the award) are not considered vested when calculating CAP. Instead, the CAP calculation should treat the award as vested on the contractual vesting date or retirement if earlier.

2. Companies using custom peer groups— February’s CDI 128D.07 guided companies who use a custom peer group disclosed in the Compensation Discussion and Analysis (CD&A) to show total shareholder return (TSR) in the PVP table using the peer group disclosed in each year’s proxy. Amended CDI 128D.07 issued in November tells such companies to revert to the long-standing performance graph rules under Item 201(e) for the 2024 proxy, which requires a company to report TSR for the most recent custom peer group for all years disclosed in the table. In other words, for calendar year companies, TSR for 2020, 2021, 2022, and 2023 is to be based on the 2023 peer group.

For companies using custom peer groups, CDI 128D.27 confirmed that if the peer group changed due to (i) an entity omitted solely because it is no longer in the line of business or industry or (ii) the changes are the result of the application of pre-established objective criteria, the disclosure requirement to compare the TSR of the old and new groups is not required. For example, a peer group change due to merger and acquisition activity would only require a footnote to highlight the change to the peer group, and no comparison of the current year and prior year’s peer group market cap weighted TSR would be required.

3. Simplified footnote disclosure of amounts deducted and added (“adjustments” from Summary Compensation Table Total to CAP) — CDI 128D.03 states that starting with the second year of the disclosure, companies are only required to footnote the current year’s Summary Compensation Table (SCT) compensation to CAP calculation unless such footnote disclosure for previous years would be material to an investor’s understanding of the PVP table for the most recent year or relationship disclosure provided under Item 402(v)(5).

4. Expected term used in option valuations— CDI 128D.21 confirmed that both the “short-cut” approach of simply subtracting elapsed time from the original expected term used for grant date valuations and the “simplified” method are not appropriate methods for calculating expected term. Unfortunately, the SEC staff did not provide any safe harbors for determining the expected option term, which could lead to second guessing of a company’s assumptions by the SEC staff.

5. Smaller Reporting Companies (SRCs) losing status as of January 1, 2024 — CDI 128D.28 allows such companies to provide the scaled disclosure for an additional year (e.g., FY2021, FY2022, and FY2023). They will be subject to the full, non-scaled disclosure beginning with their 2025 proxy for fiscal year 2024, though the FY2021, FY2022, and FY2023 information does not need to be revised from scaled to non-scaled disclosure.

6. Treatment of dividends— CDI 128D.23 provides that dividends and dividend equivalents paid on unvested shares or options must be included in CAP in the year paid and labeled as dividends paid in the SCT to CAP reconciliation footnote to the PVP table if the value of such dividends or dividend equivalents were not reflected in the fair value of the awards. However, the guidance does not clarify whether dividends paid (i) currently or (ii) deferred until underlying shares vest are to be treated similarly. Additionally, the guidance does not address the treatment of prior dividend payments for awards for which the initial fair value included the value of future dividend payments.

7. Broad-based index used to vest shares cannot be used as the TSR peer group in the PVP table — CDI 128D.25 states that a broad-based index, even if used for measuring relative TSR performance for performance-based equity, cannot be used as the TSR peer group in the PVP table. This may come as a surprise to some companies who may have relied on 128D.05, which indicated “The registrant may use a peer group that is disclosed in its CD&A as a peer group actually used by the registrant to help determine executive pay, even if such peer group is not used for ‘benchmarking’ under Item 402(v)(2)(xiv) of Regulation S-K.”

Closing Remarks

We believe that the preparation of the second year’s PVP disclosure will be far less burdensome than the past year, as only one year of CAP needs to be calculated instead of three years (two years for SRCs) of CAP; companies have established processes and controls to manage the disclosure; and selected SEC staff guidance, including the retirement vesting clarification, has removed some of the disclosure uncertainty.

However, portions of the guidance included in the thirty-two CDIs may conflict with positions taken by companies in their initial disclosure, which raises issues of how to best address such inconsistencies; as noted above, some interpretative issues are still unresolved.

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.
Questions about this Viewpoint can be directed to Mike Kesner (, Ed Sim (, or Ben Stradley (

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Featured Viewpoint

Issues Facing Compensation Committees in 2024


The current economic environment and geopolitical unrest have created substantial uncertainty as companies prepare annual budgets and long-term forecasts for 2024 and beyond. At the same time, the U.S. Securities and Exchange Commission (SEC)’s unprecedented release of new regulations and guidance has many companies scrambling to adopt new policies and comply with new disclosure requirements, and the onslaught of new rules does not appear to be abating anytime soon. Further, the number of proxy proposals this past year reached an all-time high as the SEC changed its rules, making it more difficult for companies to exclude such proposals.

Over the last several months, our Firm’s partners and consulting staff have attended hundreds of corporate Boards of Directors’ compensation committee meetings and engaged with company C-Suite executives on a regular basis in our role as executive compensation advisors. From these meetings, we have learned a great deal about the key issues and dominant themes that are on the minds of board members and have prepared a summary of these items along with some commentary.

The goal of this Viewpoint is to highlight the emerging issues and developments in executive compensation as Board committees and management teams prepare for 2024.

Emerging Issues and Developments

The following list of emerging issues and developments is organized into three sections: Goal Setting and Performance Measurement, Long-Term Incentive (LTI) Design, and Corporate Governance. We consider each of these issues to be noteworthy discussion topics that will surface within committee discussions depending upon each company’s individual situation.

Goal Setting and Performance Measurement

1. Rethinking Incentive Plan Performance Ranges — Given the significant economic and geopolitical uncertainties facing companies as we approach 2024, it is likely that compensation committees will reevaluate the performance range around target performance levels to determine if minimum and maximum performance levels need to be lowered and increased, respectively. The use of a wider performance range provides several possible advantages, as it reduces the likelihood of a zero payout if actual performance falls short of expectations and minimizes the likelihood of a maximum or near-maximum payout if the company set overly conservative targets and/or an uptick in the economy boosts company performance more than originally anticipated. Also, compensation committees should be aware that setting lower performance targets compared to the prior year’s actual results could attract unwanted attention and criticism unless the company provides a clear rationale for the lower performance targets. The challenge facing compensation committees anticipating a downturn in performance is the need to strike the right balance between rigorous yet achievable performance goals with shareholder sensitivity over potentially paying higher incentives for lower actual performance.

2. Use of Discretion — The exercise of discretion to increase formulaic payouts during COVID-19 resulted in a fierce backlash by investors and the proxy advisory firms, many of whom recently codified strict policies regarding discretion. To summarize, these policies do not support the exercise of discretion to increase LTI plan payouts under any circumstances and require a strong rationale to exercise upward discretion when adjusting annual incentive plan payouts, with a further proviso that the adjusted incentive payout not exceed target.

Unfortunately, the COVID-19 fallout has also tainted the responsible use of discretion in annual incentive plans that carve out 20% to 30% of the target incentive for strategic or non-financial performance goals. While many compensation committees may feel pressured to abandon any form of discretion, the use of judgement to assess performance is often required. This is especially true when evaluating milestone type goals — such as progress towards commercialization of a new product — or improvement in diversity initiatives such as improved recruiting practices or building a pipeline of diverse candidates. The key to successful use of discretion is compelling disclosure of the factors that led to the performance evaluation and payout decision.

3. Non-Generally Accepted Accounting Principles (GAAP) Incentive Plan Metrics — A significant number of companies disclose non-GAAP financial results when reporting earnings, as the adjusted results often provide a clearer picture of the company’s performance deemed within management’s control. Many of these companies also use non-GAAP results when determining incentive plan performance and payouts, often to exclude items that may not be related to the underlying business or ongoing operation of the company. These exclusions could include the impact upon operations of conflicts in Ukraine and the Middle East. Such exclusions have led to increased scrutiny by investors and the proxy advisory firms. Institutional Shareholder Services (ISS)’ recent policy survey, for example, asked respondents if companies should be required to include in the proxy a detailed reconciliation of GAAP financial results to the disclosed non-GAAP incentive plan performance used to calculate incentive plan payouts. In addition, the SEC provided guidance in December 2022 in the form of Compliance & Disclosure Interpretations outlining when non-GAAP reconciliations may be misleading.

Given the heightened scrutiny and desire for greater understanding of outcomes, more compensation committees are likely to review or implement guiding principles for such adjustments at the beginning of the performance period and are likely to evaluate the impact the adjustments have on incentive payouts in the context of shareholder outcomes during the performance period. Companies may also consider enhancing the disclosure of non-GAAP adjustments in the Compensation Discussion and Analysis (CD&A) by providing a compelling rationale for the adjustments and their impact on incentive payouts or by adding a reconciliation of GAAP to non-GAAP results as an addendum to the proxy rather than simply referring to the earnings release. While many companies establish threshold values to minimize the number of adjustments, the most tenuous situations typically arise in the treatment of material items— those that when included in the incentive plan calculation result in a low or zero incentive payout but when excluded result in a significant or above-target payout. These events are situational in nature and need to be evaluated on a case-by-case basis.

4. Addressing Foreign Exchange Fluctuations — Global companies generally manage foreign currency fluctuations by purchasing goods and borrowing in local currencies or by hedging some of the exchange risk. However, significant foreign currency fluctuations, including the recent strengthening of the dollar, are generally outside of management’s direct influence and control and have led several companies to establish performance targets on a constant currency basis or allow adjustments to GAAP financial results for all or a portion of such fluctuations. Some companies have been reluctant to adjust targets or results for foreign currency fluctuations, which may alienate some shareholders with higher incentive payouts, and have instead accepted the volatility these fluctuations may have on incentive plan payouts. Some companies “split the difference” by using a currency corridor, wherein fluctuations within 5% to 10% of budget or plus or minus 10% of the target payout are not adjusted and any fluctuations outside the corridor are adjusted.

5. Pay Versus Performance (PVP) Disclosure— The SEC’s PVP rules required significant effort to prepare the necessary disclosure. Given the recency and complexity of the disclosure, compensation committees, investors, proxy advisors, and even the media have struggled to determine if the data is useful. Interestingly, in many cases, the new PVP compensation actually paid data shows strong alignment to changes in total shareholder return (TSR) and therefore can be used in combination with “realizable” compensation to explain the alignment of CEO compensation and company performance, the main tenant of a company’s compensation philosophy. Whether companies use PVP or a separate realizable pay analysis, we believe compensation committees find such analyses useful to gain insight into how the company’s executive pay aligns with performance.

6. Environmental, Social, and Governance (ESG) Goals — While about 75% of Standard and Poor’s (S&P) 500 companies use ESG metrics to some extent in incentive programs, the practices have varied (i.e., scorecard of metrics/goals, standalone metric/goal, or included in individual goals or discretionary evaluation). This suggests that companies have adopted practices that align with the evolution of their approaches to measuring and managing ESG. As Vanguard Investment Stewardship recently communicated, a common framework that can be applied to all companies does not exist, but expectations for selecting, implementing, and disclosing a company’s approach are the same as they are for financial incentive metrics or goals.[1] Additionally, there is skepticism that the addition of ESG metrics is leading to inflated incentive payouts. However, initial research by Pay Governance (see Viewpoint “ESG Incentives: Intended to Improve Corporate and Societal, Environmental, and Social Outcomes” May 2022) indicated that such criticism is not empirically supported.

LTI Design

7. LTI Programs will Continue to be Dominated by Performance Shares — Performance shares represent most of the value granted in LTI programs (performance plans for S&P 500 CEOs are now at 54% of total LTI value) while the use of stock options continues to decline (prevalence is down from 70% to 56% in the last 6 years). We believe the trend towards a higher proportion of performance-based LTI awards for CEOs will continue over the next few years as both a means for motivating and rewarding their performance and to ensure their compensation is heavily performance based.

8. Reconsidering the Use of a 3-Year Performance Period — Compensation committees and management teams can struggle to establish reliable 3-year performance targets as preferred by shareholders and the proxy advisory firms. COVID-19 forced many companies to adopt other approaches to goal setting given the substantial uncertainty it created, and the current economic and geopolitical turmoil has not made it any easier. To address the difficulty of establishing multi-year goals, several companies have adopted the use of three 1-year goals within the 3-year performance period. Some of these companies also added a 3-year relative TSR modifier to incorporate a longer-term aspect to the amounts earned.

The use of three 1-year goals allows companies to establish more reliable performance goals that are set and measured over a shorter (and presumably more predictable) timeframe. Goals can be set at the beginning of each year permitting one-third of the award to be earned and banked until the completion of the three-year performance cycle. While such plans may be criticized for using annual performance goals to determine LTI payouts, the inclusion of a relative TSR modifier alleviates the concern to some degree. Companies often provide an explanation for selecting this design choice in the CD&A in addition to a description of the mechanics of the plan to reduce criticism.

9. Revisiting the Inclusion of Relative TSR as a Long-Term Performance Metric — Recent surveys show that the inclusion of relative TSR is a majority practice among large cap companies, although such use may have topped out at the 60% to 70% prevalence range. Some companies not already employing relative TSR may reconsider its use given the impact economic uncertainty can have on the ability to establish reliable LTI plan targets. Perhaps a similar number of companies may determine that the lack of a suitable performance peer group or management’s inability to directly influence results makes inclusion of relative TSR a non-starter. Companies evaluating relative TSR as a performance measure should consider that once adopted, it can be difficult to eliminate or reduce its weighting in the future without a strong rationale, as doing so could send an unintended signal to investors that management has lost some of its confidence in future stock price performance. While many companies prefer the use of internal financial metrics in their LTI plans in order to maximize line of sight, other companies use a relative TSR modifier to serve as a “governor” to internal goal setting. This ensures that payouts based on internal goals are adjusted up or down to align with the results experienced by shareholders more loosely.

10. “Mega” Grants — While the use of “moonshot” or “mega grants” continues to be a minority practice, we have seen an uptick in their prevalence, particularly in certain industries. The quantum of some awards and/or the lack of performance goals have faced sharp criticism from investors and the proxy advisory firms. Committees exploring the use of such awards should carefully consider their design and potential shareholder reaction, as some awards have received significant shareholder support while others have not. Beyond the quantum and design, the committee should also consider how the company will disclose its underlying rationale and justification for the award.

Corporate Governance

11. Activist Investors Use of Executive Compensation to Support a Broader Agenda — CEO pay is an easy target for many activist investors as a lever to pursue their broader agenda whether that includes a desire for Board seats, changes in top management, or the pursuit of strategic change. The involvement of an activist investor exacerbates the risk of “high pay and low performance” situations. Good corporate governance, solid relationships with institutional investors developed through outreach efforts, and careful decisions about CEO compensation will be needed to withstand the potential pressure imposed by activist investors.

12. Organized Labor — Recent strikes by labor unions and a tight labor market have created significant risk of organizing efforts and/or union demands for higher wages. One of the tools currently being used by organized labor in its negotiations or organizing efforts is to focus on the wage gap between the company’s management and its workers. Compensation committees may want to better understand if the company is at risk and how the company is compensating and addressing front-line employees’ concerns. In addition, companies should consider having a communication plan ready that details and reconciles changes in executive compensation compared to the workforce over the past 3 to 5 years.

13. Clawbacks — The SEC and stock exchange’s mandatory clawback policy requirement forced companies to adopt compliant policies by December 1, 2023, which cover incentive compensation received by executive officers after October 2, 2023. Given the relatively short compliance period allowed by the SEC, many companies may not have fully assessed if changes were also needed to existing clawback policies that typically covered a broader group of participants, allowed the recovery of both time-based and performance-based equity, and included a wider range of clawback triggers (for example, material code of conduct violation, reputational harm, cybersecurity breach, etc.) or if a broader clawback policy should be adopted. Additionally, while recoupment of cash-based incentives is relatively straightforward, the impact of a clawback policy on share-based compensation is complex. Compensation committees may want to better understand how the new mandatory policy interacts with the broader policy or consider whether to adopt a broad policy over time. In addition, companies are required to disclose their SEC mandated clawback policy as an exhibit to the 10-K or 20-F, and it is likely some “best practices” may be identified from this disclosure.

14. Insider Trading Policies — The SEC revamped the requirements for Rule 10b5-1 trading plans. Some companies have suspended existing provisions within their insider trading policies that mandated executive officers use 10b5-1 plans for all sale transactions to allow time to further study the new requirements and determine if the use of such plans would be overly burdensome. This also provided companies with time to ensure that proper internal controls were in place to comply with the SEC’s quarterly reporting requirements for the establishment, modification, or termination of such plans. Compensation committees may want to better understand market trends on the required or voluntary use of such plans as well as whether the insider trading policy needs to be updated. The SEC’s requirement that companies disclose their insider trading policies and procedures as an Exhibit to the 10-K or 20-F will aid compensation committees in better understanding market practice.

Closing Remarks

Significant economic and political uncertainty is emerging with possible downside economic risks in 2024 and beyond. Compensation committees will need to devote greater attention in the coming months to ensure their companies’ executive compensation programs continue to attract, retain, and motivate talent while maintaining alignment with shareholder expectations in a challenging environment. We expect many of the topics described above, and perhaps even more challenging issues, to surface over the coming months. Because shareholders have significant visibility into compensation committee decision making — including incentive plan performance metrics, goal rigor, pay level benchmarking, pay versus performance, and alignment of compensation with business strategy, among others — our firm advocates healthy dialogue about executive pay issues, at the compensation committee and board level and with shareholders as companies strive to maximize shareholder value and link executive pay to performance.

Questions about this Viewpoint can be directed to Mike Kesner (, Steve Pakela (, or Lane Ringlee (


[1] ESG Metrics in Compensation Plans. Vanguard. September 2023.


Featured Viewpoint

Biotech Industry Trends in Equity Compensation: Influence of Market Volatility on Equity Program Strategy


The biotech/pharma1 industry has experienced extreme volatility in the past 3-5 years. The period of late 2018 to mid-2021 brought rapidly-rising valuations, a seemingly unending source of investor funds for private financings, and a record-breaking number of initial public offerings (IPOs). Since mid-2021, however, valuations have declined and the IPO market has dried up, leaving many companies with sustained lower valuations, limited access to cash, highly dilutive capital raising events, and/or downsizing.

In reaction to these changes, compensation practices have shifted — particularly within equity compensation programs, which are heavily relied on by biotech companies, as a large component of incentivization, shareholder alignment, and potential wealth creation for their employees.

In addition to other talent-related questions, recent market conditions have led Compensation Committees to think differently about their pay strategy, leading them to question several long-standing industry compensation practices: the broad-based participation of an all-options-equity program, for example. From late 2021 through 2023, many Compensation Committee conversations have focused on the effectiveness of stock options as the sole equity vehicle in a down market. As stock options fell and remained underwater, Committees were eager to discuss alternative ways to retain, incentivize, and re-engage the workforce.

Many Committees acted — incrementally or otherwise — resulting in the following changes in equity strategy and design:

  • Increased use of restricted stock and restricted stock units (RSUs)
  • Increased rate of aggregate annual equity usage (“burn rate”)
  • Increased level of automatic equity reserve refresh rates and reliance on such refreshes (“evergreen provisions”)
  • Decreased levels of available shares authorized for grant to employee (“share pool” or “equity reserves”)
  • Increased levels of outstanding employee ownership (dilution)

To test our recent experience, Pay Governance analyzed over 400 biotech companies with greater than $50 million in market capitalizationto understand variations across companies of different sizes.2 We segmented the overall group into the following categories based on market capitalization (see Figure 1):

Figure 1.

Equity Mix — Increase in the use of RSUs

The use of stock options has been, and still is, a predominant industry-wide practice — particularly for early stage and pre-commercial companies. Options have many benefits: in particular, their appreciation-based design aligns award recipients with shareholders, whereby value is only realized with an increase in share price. However, in this environment, significantly underwater options have put pressure on many companies’ equity incentive programs, requiring many to consider different approaches.

Historically, RSUs are added to the equity award mix at a later stage in a biotech company’s life cycle or at more highly capitalized companies (e.g., recent commercialization, after significant share price growth and stabilization, etc.). In fact, RSU usage has remained relatively stable over the last 3 years among the mid- and large-cap companies we reviewed. Conversely, however, we have observed a marked increase in the prevalence of RSUs among micro- and small-cap companies which have traditionally been more likely to adhere to an all-options approach.3

Since 2020 (as shown in Figure 2), the prevalence of RSUs has increased from 39% to 51% at micro-cap companies and from 53% to 68% at small-cap companies, whereas at mid-caps and large-caps, RSU usage remained stable at approximately 80% and 90% of companies, respectively. Note that this increase in RSU usage is in conjunction with continued stock option usage. Most often, micro- and small-cap companies adopt RSUs in addition to using stock options as opposed to using RSUs as a single long-term investment (LTI) vehicle.

Figure 2.

Pay Governance attributes this increase in RSU usage at micro- and small-caps to three main factors:

  • Retention: Fiscal years 2021–2022 were incredibly difficult from a share price perspective for micro- and small-cap companies, with total shareholder return down by -76% and -44%, respectively, at median. Additionally, many of these companies underwent dilutive financing events to continue operating, further intensifying downward pressure on share prices. These phenomena have contributed to an overall decline in the realizable value of granted equity awards and, in particular, stock options. Since RSUs do not require share price appreciation to provide intrinsic value (i.e., the difference between the price at exercise and the grant price of an option), they improve retention, particularly by retaining value even in down markets. Therefore, companies have begun to include RSUs in their annual equity grant program mix earlier in their lifecycle and many, over the course of 2022, administered off-cycle retention programs that awarded RSUs.
  • Competition for Talent: The labor market for talent in the biotechnology space — while always highly competitive — was even hotter in 2020 and 2021, driven in part by the influx of cash and a focus on growth. Many micro- and small-cap companies who are in pre-clinical or clinical phases adopted RSUs to help recruit much-needed talent from the mid- and large-cap companies where the use of RSUs is already highly prevalent and well understood by employees.
  • Share Reserve: With share price declines, companies are required to deliver more shares to employees to deliver economic value commensurate with levels made in higher stock price environments. This has put pressure on equity plan reserves. Since the economic value of one RSU is greater than one stock option, companies can deliver fewer RSUs for the same dollar value at grant. Therefore, RSUs are less dilutive than an option award which, all else equal, can help with the conservation of equity share reserves.

Burn Rate — Increase of Annual Equity Usage

Annual gross burn rates (the percentage of outstanding shares that a company grants annually to employees, exclusive of forfeitures) for micro-, small-, and mid-cap biotechnology companies have historically sat in the range of 3.5–4.0% of common shares outstanding (CSO), this drops off significantly for large-cap companies. However, in fiscal year 2022 we observed a substantial increase in share usage across most company sizes (see Figure 3) .

Figure 3.

Aggregate annual grants tend to be targeted by companies at a level that is slightly less than their annual evergreen rate (which is sometimes seen as an upper limit for annual share usage). Evergreen rates are typically 4–5% of CSO (note that the “evergreen rate” is the proportion at which share pools increase programmatically and annually for companies with plans that have such a provision). However, in 2022, gross burn rates often exceeded this refresh rate, particularly among micro- and small-cap companies where median burn rates exceeded 5% and even higher at the 75 th percentile: 8.0% and 6.5% for micro- and small-caps, respectively (see Figure 4) .

Figure 4.

Given the number of layoffs (and consequent share cancellations) that occurred in 2022, one might expect equity usage rates to decrease (i.e., companies having fewer employees to distribute equity), but this was not the case. This leads us to believe that companies deployed additional shares to their remaining employee populations (e.g., through larger-than-typical annual awards or through retention grants).

As stated above, typical evergreen rates hover between 4–5%. Historically, the most common evergreen rate implemented at IPO has been 4%, but this has trended upwards lately with recent IPOs more commonly implementing annual evergreen rates at 5% (see Figure 5).

Figure 5.

Among companies that went public during 2012–2015, 76% have a 4% evergreen rate and only 10% have a 5% evergreen rate. Among companies that went public during 2016–2020, 61% have a 4% evergreen rate and 35% have a 5% evergreen rate. Among companies that went public from 2021, the majority have 5% evergreen rates. The trend of increases in evergreen rates is likely an additional contributing factor to higher burn rates in 2022.

Although we have observed a meaningful increase in the annual share usage in 2022, we do not expect this trend to continue even with the recent uptick in annual evergreen rates. It is not sustainable for companies to grant equity at burn rates exceeding their respective evergreen rates, as this can overly dilute shareholders and put pressure on limited share pools — which we have already observed.

Available Share Pool — Decreasing in Size

Due to the heavy equity usage in 2022, the size of remaining available share pools has decreased below historical norms. At median, companies tend to start the year with approximately 18–24 months of equity in the reserve (i.e., ~8% for most pre-clinical and clinical companies) or longer for larger companies. However, we observed a shrinkage in available pools that was commensurate with the increase in equity usage (see Figure 6).

Figure 6.

We expect to see an uptick in proxy proposals to shareholders for increased reserves over the next few years, including among companies who may still have several years of life left on their original evergreen refresh provision (which typically last 10 years from IPO).

Shareholder Dilution — Increased

Similar to annual burn rates, the amount at which shareholders have been diluted by employee equity grants has increased in 2022 for micro-, small-, and mid-cap companies. As shown below, dilution is represented by the total equity that has been granted and remains outstanding for the employee population and does not include the available share pool (see Figure 7).

Figure 7.

When we review overhang levels, or potential dilution, as it includes the share reserve, we observe levels in the 17–18% range at median and 19–22% range at the 75 th percentile for micro-caps to mid-caps (most companies in this category are pre-clinical and clinical) and prioritize option grants in their LTI mixes. Dilution and overhang levels decrease for large-caps, as these companies typically prioritize full value shares in their LTI mixes (e.g., RSUs) (see Figure 8).

Figure 8.

Conclusion — RSUs are Likely Here to Stay in an Environment with Higher Share Usage, but Not at the Level of 2022

The recent increase in the use of RSUs was in reaction to several factors, starting with the market downturn (e.g., the need to retain talent in a competitive market, desire to conserve cash, and declining perceived value of options), and we anticipate that they will remain a popular vehicle among biotech companies. Nevertheless, we expect that stock options will continue to be the primary equity vehicle of choice.

Market factors have led to higher annual equity usage and shareholder dilution. However, it will not be sustainable for companies to continue to grant equity at the same rate as they did in 2022. As a result, we do not expect to see a continued upward trend in share usage.

As the industry continues to evolve, share delivery and usage will be impacted by external factors and a shifting competitive landscape. Compensation Committees play an important role in administering and making decisions around the equity program — decisions that appropriately account for these external influences while, more importantly, facilitating their company’s internal talent needs and business strategy. More frequent visibility and tracking (e.g., at every quarterly meeting) of the equity program via key usage statistics, share reserve impact, and expected remaining life may need to be the norm for the foreseeable future.

Pay Governance will continue to track these trends; in the coming weeks, we are planning to publish an additional Biotech Industry Viewpoint on retention and severance practices in a volatile market.

Terminology Table

General questions about this Viewpoint can be directed to Michael Keebaugh (, Brian Lane (, or Ryan Peterson (


1 Pay Governance recognizes the distinction between "biotech” and “pharma” but for simplicity refers to all companies as “biotech” throughout this analysis.
2 As of 12/31/2022.
3 Pay Governance required a minimum 10% of total equity usage for RSUs to be counted in totals. In other words, if RSU usage did not exceed 10% of total shares granted over the course of the year, they were not included as a company that “used RSUs.” The rationale is that many companies use a small portion of RSUs for consultant grants or “one-offs,” and we are looking to capture only those companies that used RSUs as a part of their annual equity program.


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