Blending Two Worlds
How Genzyme Attracts Experienced Scientists
Adapted from Rewards That Drive High Performance: Success Stories From Leading Organizations, by Thomas B. Wilson, published by AMACOM, 1999. Genzyme is a Wilson Group client.
Large, well-established pharmaceutical companies can afford to pay their scientists well. Biotechnology companies cannot. Instead, they typically offer moderate pay coupled with stock options that promise large future payouts if the company succeeds. So how does a biotechnology company like Genzyme Corporation attract the experienced scientists it needs for the company to achieve long-term success?
Genzyme's compensation challenge has been to straddle the compensation styles of the biotechnology and pharmaceutical industries - to create programs to attract experienced scientists from the pharmaceutical industry, without losing its existing personnel to other biotechnology companies.
Genzyme itself straddles both industries. Started in 1981, Genzyme was one of the first biotechnology companies to bring a product to market. It has since evolved into a diversified healthcare products company, with 3,500 employees worldwide, and a stream of potential products in the pipeline.
Adding a "J-Curve"
Genzyme began to address its compensation challenge in 1994 with an in-depth review of the base compensation of the pharmaceutical and biotechnology industries. An analysis of the data revealed an important discovery - that the midpoint line of biotech salaries did not contain the pronounced "J-curve" that can be found in pharmaceutical industry salaries. The "J-curve" is a dramatic rise in compensation beyond a certain level in an organization.
Based on this discovery, Genzyme's first step was to reposition its midpoint line to more closely resemble the steeper curve found in the pharmaceutical industry. Midpoints for middle managers moved up as much as 15%.
The second step was to develop a cash compensation strategy that blended biotechnology and pharmaceutical industry rates. For positions where Genzyme could obtain data from both industries, salaries were calculated by combining 60% of the pharmaceutical market rate and 40% of the biotechnology market rate. This acknowledged that Genzyme was evolving beyond a pure biotechnology company, and competing in a diverse labor market.
Addressing Stock Options
The third step was to address equity compensation, which presented a clash between cultural philosophy and shareholder needs. Genzyme promotes "a culture of allowing employees to influence and participate in the success of the company," so senior management was emphatic that all employees have stock in the company. However, the extensive use of equity compensation results in overhang, or a large number of outstanding stock options. Shareholders dislike overhang, because it can dilute value per share.
Shareholders typically will accept having stock options account for up to 15% of outstanding shares. In the biotechnology industry, it is not unusual for options to approach 20% of outstanding shares, as they did at Genzyme.
To design a workable solution, Genzyme studied the use of equity compensation in the pharmaceutical and biotechnology industries, including eligibility requirements, the value of options granted at various salary levels, and the extent of distribution to the eligible population. The study showed that Genzyme's annual distribution was exceptionally generous, due not only to the value of options granted, but to the extent of participation.
The most expedient way to reduce dilution was to reduce the number of options, but that would be counter to the corporate philosophy. Instead, Genzyme calculated the number of shares needed to give all eligible employees options proportionate in value to their salaries. The market line used values from pharmaceutical and biotechnology industry competitors and the 60/40 weighting used for the base salary program.
Remarkably, the number of shares required was about half of the average distribution for each of the previous three years. The number assumed that everyone would receive Genzyme's most commonly used performance rating and that all raises for the reminder of the year would be at the company average.
Adopting the concept of an annual option pool funded as a set percentage of shares outstanding, compensation managers projected a significant reduction in usage and better control over distribution. The option pool allowed Genzyme to reduce the cost of its option program, sustain a competitive program and continue Genzyme's cultural commitment to company-wide equity ownership.
