Executive Compensation Rises Again

Improved economic conditions and stronger financial results elevated executive compensation in fiscal 2014 (FY14) as a majority of presidents and CEOs in IBO’s Laboratory Instruments and Products Stock Index (including Sigma-Aldrich) (Lab Index) recorded double-digit pay increases. For the 24 presidents and CEOs of companies in the Lab Index, who have served in their respective roles for more than one year, average total compensation jumped 22.3% to $5.7 million in FY14. Excluding Illumina President and CEO Jay T. Flatley, who accrued the largest nominal pay increase, average executive pay climbed 15.3% to $5.2 million. This escalation mirrors the average 15.6% pay increase in FY14 for the CEOs of S&P 500 companies.

The following information, except when noted, and all of the tables, except for the Diversified Lab Instruments and Product Companies table on page 6, refers to the compensation for the 24 Lab Index executives listed in the tables on pages 4–5.

Lab Index Executive Compensation

Long-term equity-based incentive awards, which include stock and option grants, continue to drive compensation packages in order to align executive interests with long-term company financial results. Average long-term incentives grew 28.7% to $3.7 million to account for 65% of total pay. Excluding Mr. Flatley, average long-term equity awards increased 17.2% to $3.2 million. There continues to be a shift toward awarding performance and restricted-stock units versus stock options due in part to previous changes in expensing requirements, but also to mitigate the negative implications of market volatility and encourage executive retention. Average annual cash incentive bonuses were also strong in FY14, climbing 30.9% to $921,507 to make up 16% of total pay. Average base salary grew 3.9% to $780,167 to make up 14%. Other compensation, which consisted primarily of changes in pension value, perks and nonqualified deferred payments (deferred compensation that is not deductible from the company’s taxable income), accounted for the remaining 5%.

Executive compensation varied widely based on company size, performance, individual accomplishments and length of service. In FY14, four CEOs and one head of a dedicated business unit each received total compensation of more than $10 million, each from companies with over $1.0 billion in sales.

For the third consecutive year, Thermo Fisher Scientific President and CEO Mark N. Casper recorded the largest compensation package. Mr. Casper’s total pay increased 7.9% to $17.4 million, including a 16.0% rise in long-term equity awards to $12.3 million and 12.7% increase in base salary to $1.3 million. The loftier pay was attributed to Thermo’s financial achievements and was designed to reflect the company’s higher revenue and market capitalization following the acquisition of Life Technologies (see IBO 4/15/13).

The acquisition of Life also resulted in the appointment of Mark P. Stevenson to the position of president of Thermo’s Life Science Solutions segment. Mr. Stevenson, who was made an officer following the integration, was awarded a $3.1 million retention bonus in FY14 and a $756,000 bonus for contributions made during the integration. His total FY14 compensation was $12.0 million, far exceeding his $5.3 million in reported pay in FY12 as Life president and COO. He was the only executive of a dedicated business unit to reach the $10 million level.

As noted above, Mr. Flatley recorded a substantial jump in pay, as his total compensation soared 103.6% to $14.9 million. His payout included the largest long-term equity award, climbing 144.3% to $12.7 million. Consistent with Illumina’s shift toward performance-based stock units in lieu of stock options, Mr. Flatley’s long-term incentive award consisted of 75% performance stock units and 25% restricted stock units.

Becton, Dickinson President and CEO Vincent A. Forlenza recorded more than $10 million in total compensation for the first time in FY14. With 25.8% and 14.3% increases in long-term equity and short-term cash incentives awards, respectively, his total compensation climbed 19.6% to $10.9 million in FY14. These increases, based on strong financial results as the company either met or exceeded revenues, adjusted EPS and free cash flow targets, were meant to more closely align his compensation with the median of selected peers. Mr. Forlenza joined a group of five executives in the Lab Index who received a base salary of $1 million or more in FY14.

Rounding off the list of executives earning more than $10 million in FY14 is former Agilent Technologies President and CEO William P. Sullivan (see IBO 3/31/15). Despite missing financial targets, including operating profit and revenue goals, Mr. Sullivan recorded total compensation of $13.9 million in FY14, an increase of 35.9%. Mr. Sullivan’s short-term incentives and long-term equity awards, which climbed 32.7% and 41.2% to $1.6 million and $11.2 million, respectively, included incentives for the successful spin-off of Keysight Technologies (see IBO 9/30/13) and to ensure his retention. Michael R. McMullen was promoted to president and COO of Agilent in September 2014 (see IBO 9/30/14), elevating his total compensation 58.6% to $4.5 million in FY14.

Another notable compensation payout was recorded by PerkinElmer CEO Robert F. Friel, who earned $8.9 million in FY14 for an increase of 17.4%. The largest variation in his payout from FY13 was realized in short-term bonuses, which climbed 24.1% to $2.7 million due to adjusted EPS and free cash flow achievements, product introductions and completed acquisitions. Like Mr. Forlenza, in FY14, Mr. Friel’s base salary exceeded the $1 million level for the first time.

Fifteen of the 18 current presidents and CEOs recorded base-salary increases in FY14. For the second consecutive year, Michael Hunkapiller, PhD, president and CEO of Pacific Biosciences, opted for a $1 base salary and waived all bonus incentives. VWR President and CEO Manuel Brocke-Benz recorded a slight decline in base salary due to the conversion of his compensation from euros to US dollars.

Short-term cash incentives and long-term equity awards were again prevalent in FY14, combining to make up 82% of total average compensation. QIAGEN CEO Peer M. Schatz recorded the largest bonus increase, which climbed 256.9% to $570,000. Mr. Brocke-Benz earned the largest percentage change in equity compensation, up 2,618.6% to $3.0 million, which was awarded upon pricing of VWR’s IPO (see IBO 10/15/14). The lone CEO without long-term equity awards was Waters President and CEO Douglas A. Berthiaume, who since 2005 has waived his awards due to his significant stock ownership.

A number of top executives continued to accumulate a substantial amount of equity in their companies, which far exceeded their total annual compensation packages, especially during rising market conditions. These valuations are realized once the stocks are vested and options exercised. Using the alternative compensation measure, “realized” pay, the actual amount that an executive reports as taxable income for the fiscal year can be determined. This calculation includes salary, bonus, incentive awards and perks, as well as gains from shares vested and stock options exercised in FY14.

Based on realized pay, eight executives each recorded over $10 million in compensation in FY14, including four executives with more than $20 million pay each. Realized pay for Mr. Flatley jumped 205.3% in FY14 to $105.0 million to lead all Lab Index executives by a significant margin. Mr. Casper recorded the next-highest realized compensation, which grew 174.0% to $42.0 million.

In general, executive compensation totals may be overstated because a majority of long-term equity awards valued in the current year have not yet been earned or paid out—and may even be forfeited if certain performance goals are not satisfied. For example, in FY14, Mr. Friel earned only a portion of his previously valued performance-based stock units due to not meeting average annual organic revenue growth goals over a three-year period.

Executives of Dedicated Business Units

FY14 total average compensation for the 14 heads of dedicated instrument- and lab-related business units with reported salaries for the last two fiscal years (see bottom table, page 5) grew 12.2% to $1.9 million. Compensation changed greatly from FY13 due to a number of factors, including an IPO, timing of options granted, discretionary awards, company financial performances and position changes.

In addition to Mr. Stevenson, another business-unit head whose compensation was more closely aligned with presidents and CEOs was Alan J. Malus, Thermo executive vice president and president of Laboratory Products and Services. He recorded the highest payout among executives of dedicated business units. Total compensation for Mr. Malus, who moved to his new position in January 2014, grew 7.6% to $5.3 million. Also new in his position at Thermo is Thomas W. Loewald, who was named president of Analytical Instruments in January 2014. Mr. Loewald’s total compensation climbed 20.9% to $3.9 million in FY14. Both Thermo executives were awarded above-target bonuses to reflect joint contributions to the integration of Life.

The only other comparable payout to Mr. Malus’s and Mr. Loewald’s among executives of dedicated business units in FY14 was to Arthur G. Caputo, executive vice president and president of Waters’s Waters Division, who amassed $4.1 million in total compensation for growth of 5.6%. With a value of $16.0 million in options exercised and stock vested in FY14, Mr. Caputo’s realized pay totaled $16.9 million.

VWR Presidents of Americas, and of EMEA-APAC Lab and Distribution Services Mark T. McLoughlin and Peter Schuele, respectively, recorded the largest changes in total compensation among the heads of dedicated business units in FY14. Total payouts for Mr. McLoughlin and Mr. Schuele jumped 171.2% and 141.8% to $1.5 million and $1.6 million, respectively, due to options granted upon the IPO’s pricing.

In contrast, Bruker Nano Surfaces President Mark Munch, PhD, and Bruker CALID and Daltonics President Juergen Srega recorded the sharpest declines in total compensation in FY14 among heads of dedicated business units. Total compensation for Mr. Srega fell 29.2% to $1.5 million due to missed revenue, adjusted gross profit and adjusted operating profit performance thresholds. However, Mr. Srega was incentivized for the reduction in CALID working capital ratio and for operational initiatives, and earned a one-time $344,943 cash incentive for the divestments of the ICP-MS and part of the GC/MS businesses (see IBO 8/15/14, 10/15/14). Dr. Munch missed similar threshold targets for Nano Surfaces, resulting in a 20.7% decline in total compensation to $1.2 million. Although Dr. Munch was unable to exceed Nano Surfaces’ working capital–ratio goal, he either achieved or mostly achieved goals related to product development and other operational initiatives.

Diversified Companies

For the seven CEOs from companies in IBO’s Diversified Laboratory Stock Index (see bottom table, page 6) who have served in their respective roles for more than one year, average total compensation increased 13.4% to $14.6 million in FY14. Average long-term equity awards accounted for 54% pay, climbing 14.7% to $7.9 million. However, these seven CEOs received a much higher percentage of pay through nonqualified deferred compensation. Average Other compensation soared 274.6% to $2.6 million to account for 18% of pay. Average annual cash incentive bonuses fell 30.3% to $2.9% to make up 20% of pay. This decline was attributed to timing of a large bonus award for Honeywell CEO David M. Cote in FY13. Average base salary grew 3.7% to $1.2 million to represent 8%.

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