Is it time to increase executives salaries?
Philip Carrigan
According to one of Japan’s leading venture capital firms, underpaid executives is one reason that more biotechs have not gone public in recent years. It is not due to science, but the fact that Japan’s CEO’s are grossly underpaid. According to this venture capitalist, there needs to be a significant carrot for a candidate to leave the comfort of their present position and dive into the unknown. He explained that comparable positions in the US or EU are often paid twice as much. Are Japan’s executives underpaid?
Our research has shown this to be true. A CEO or CMO in Japan could expect to be earning between 20-30m Japanese yen but in the States or Europe the figure could be easily 40-60m Japanese yen. Is there significant incentive for leading candidates to leave big Pharma for a venture capital company?
For the first time since 2002-2005 when 11 biotechs went public, biotechs are enjoying a rally in the market. The Nikkei (Wednesday, October 24, 2007) reported that “buying is focused just on firms with promising products in the pipeline or with partnership agreements with major drug makers.” Is it time now to address the perceived inequity of executive salaries?
Other venture capitalists have complained to Optia Partners that there is a lack of entrepreneurial spirit in Japan’s biotech market. He believed that there is a talent shortage. He theorized that the comfort afforded to many employees in Japan did not create an environment of risk taking. He explained that the dynamic environment of western society reinforces to employees that they need to be responsible for their careers, families and finances. He stated that unlike Japan the company does not wet nurse or mother the employees. He went on to say that a more open society and robust business environment leads to the top talent being willing to take more risks.
Are Japanese companies a reason for some employees not being more adventurous?
One could conclude that the spirit of entrepreneurship could well be flamed with an increase in executive’s salaries. It would be simplistic to surmise that it is only salaries or company culture are the only factors in why there have not been more biotechs going public in recent times. However, according to the venture capitalist it is a significant contributor.
It may be the case of the chicken or the egg when it comes to entrepreneurial spirit, biotechs and salaries. Would a significant increase in salaries increase the talent pool? Is the market paying what they think the talent is worth? Are Japanese companies to blame?
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13 comments:
Western experienced management is what is needed for Japanese biotech to attract Western investment levels ($10MM plus per early round). Retired Japanese executives who work with Japanese biotech companies are often coming from a background where they were one of a part of a team that had the care and consideration to take 1-3 years to complete a transaction. A biotech in Japan often receives $1 to 5MM in a venture round. This will not last as long as the Japanese executives are used to taking to make a deal. The executives have to take chances and move quicker, finish the deal, and raise more money.
Yes, a Western CEO may get in the $250K to $400K range plus considerable stock options but upping the Japanese standard by 100 to 200K, I doubt is going to change anything. There are very few people out there who can work in Japanese language and culture-if they can, they probably are interested in the job anyway as long as the pay is not insultingly low. However, I believe a suitable expat package would be needed to get Western based people with these special talents to move their family to Japan.
I think there are some cultural issues that a Japanese CEO of a biotech that acts in a Western manner is going to run into. He or she may be accused of "not being Japanese enough" if they are aggressive in seeking opportunities-but they have to be aggressive as they do not have the job security and the funds to take the time they are used to in chasing opportunties.
M.
Philip,
I think you are right. There is a difference in time frame and attitude between start-ups in the US and Japan. However, problems are similar. I recently worked with a US VC company who had an IP position in an interesting CV drug. However, they had a hard time to understand how much time and $$$ would be involved to develop this asset into a viable option to sell to a mid-to-large size pharma company.
Very few outsiders understand the long-term nature of our business, and that seems to be the same in Japan.
Happy to discuss further...
Best regards
T
Dear Philip,
I think there might be several reasons in addition to lower salaries.
Japanese society used not to allow a "consolation race." This means
one who went bankrupt had difficulty in getting money for a second chance.
This will discourage one from being entrepreneurial, thought the environment is
changing rapidly. Another reason is education. Schools do not teach
their students the importance of entrepreneurialship.
E,
Carrigan-san,
Thank you for sending interesting article.
Although I feel that this is a “chicken and egg story” as you stated in your essay, CEO or CMO of domestic biotech company is significantly underpaid and this fact hampers recruiting of competitive talents into biotechs in addition to cultural background such as lack of entrepreneurial spirit and/or too comfortable working environment in big pharma.
But more fundamentally, domestic venture capital does not have enough ability to evaluate biotech business and the competence of CEO/CMO and that is why they can not convince themselves to make big and sustained investment ultimately fall into this vicious cycle.
First of all, venture capital should hire someone with the pharmaceutical background such as PharmD+MBA or MD/PhD+MBA for themselves.
Of course, it will cost a lot but I am sure they can find right person.
Regards
H
Dear Philip,
Before writing about the compensation, I think that I need to clarify "what is venture business".
When I met people with one venture capital, they said that their business model is to introduce drugs
which are not approved only in Japan for some reason and to establish a venture company
for the purpose. They also said confidently that their business model has surely low risk. I have
to admit that it is surely low risk and that it is pretty reasonable to offer minimum compensation.
However, I believe that the company should not be "venture company" but "great niche company".
On the other hand, contrary to the above fact, some people believe that introducing "innovative drug or technology" providing
new benefit to patients, itself is very attractive enough to lure "good experts" and that people should be proud of being part of such
noble "adventure". From traditional Japanese mentality, if they give up good compensation for the purpose, they shall be admired more.
The very problem is that investors rely on such traditional mentality of experts, whereas they are only interested in "profit".
In other words, investors want to have good benefit without taking risk to pay certain money to experts.
However, they do not understand that "real experts" are well compensated in the big companies and enjoyed wealthy lives
with their families. They are also smart to know that the invertors are trying to use their "professional enthusiasm/satisfaction" to reduce
necessary investment and to make investor's benefit maximum.
I have met several experts who worked for venture companies and most of people are less competent and have done
poor jobs even to sacrifice seeds which are very important to such companies.
They are lucky in a sense, as I imagine that they have never been tested their expertise but their enthusiasm to bear minimum
compensation before join the companies.
It is surely time to hire real experts to venture company and the most important key is not "professional enthusiasm" but "compensation".
It is also time for investors to know that they have taken huge risk with hiring poor experts to avoid small risk to pay higher salary.
Best regards,
N
Before writing about the compensation, I think that I need to clarify "what is venture business".
When I met people with one venture capital, they said that their business model is to introduce drugs
which are not approved only in Japan for some reason and to establish a venture company
for the purpose. They also said confidently that their business model has surely low risk. I have
to admit that it is surely low risk and that it is pretty reasonable to offer minimum compensation.
However, I believe that the company should not be "venture company" but "great niche company".
On the other hand, contrary to the above fact, some people believe that introducing "innovative drug or technology" providing
new benefit to patients, itself is very attractive enough to lure "good experts" and that people should be proud of being part of such
noble "adventure". From traditional Japanese mentality, if they give up good compensation for the purpose, they shall be admired more.
The very problem is that investors rely on such traditional mentality of experts, whereas they are only interested in "profit".
In other words, investors want to have good benefit without taking risk to pay certain money to experts.
However, they do not understand that "real experts" are well compensated in the big companies and enjoyed wealthy lives
with their families. They are also smart to know that the invertors are trying to use their "professional enthusiasm/satisfaction" to reduce
necessary investment and to make investor's benefit maximum.
I have met several experts who worked for venture companies and most of people are less competent and have done
poor jobs even to sacrifice seeds which are very important to such companies.
They are lucky in a sense, as I imagine that they have never been tested their expertise but their enthusiasm to bear minimum
compensation before join the companies.
It is surely time to hire real experts to venture company and the most important key is not "professional enthusiasm" but "compensation".
It is also time for investors to know that they have taken huge risk with hiring poor experts to avoid small risk to pay higher salary.
Best regards,
N
Dear Philip,
Thanks for your interesting article,
I think that business culture in Japan is still very conservative and many students have come through the competitive race to get in good schools, good universities and get good jobs in famous companies. It cannot be neglected that the name of the university is one important factor in standing out among other candidates. With the amount of effort they have put to get in big companies, they would not want to leave this stable job and it takes some courage to move to small companies. Once the salaries are increased in biotechs I think it will be attracting factor for those who are not so satisfied in the big companies, but the selection should be done well to keep the high standard candidates. Still, in Japan, I assume it takes some effort to find talented candidates to move to small biotechs unless the job post has very good conditions.
R
Dear Philip,
I would like to convey my thoughts to you as follows.
I think that a CEO or COO at biotech companies should earn 30-50M level salaries based on consideration of their leaving big stable companies and try to sustain a risk taking business creation . A Japanese VC firms also have to accept such level of executive salaries in order to make their bets on those biotech companies successful in the market place. Level of executive salaries is one of important factors to attract well-trained talent professionals.
T
The new The new blog, executive salaries, is also interesting. I have been wondering why salaries of CEOs in Japanese companies are not so high compared to those in EU and the US. Pressures from banks, rather than share holders are so strong? Getting much money other than salaries? Priority given to saving money in a company safe rather than paying to executives? No cultures in Japan to get huge money as salaries? Some hidden standards for executive salaries existing in Japan? As I would like to know reasons, please release next version. One of reasons would be lower level of banks in terms of assessing real values of new inventions and/or products. I heard that some major Japanese banks have quite few scientific specialists who can assess real values of new technologies and therefore, loosing many business chances compared to that in EU and the US., executive salaries, is also interesting. I have been wondering why salaries of CEOs in Japanese companies are not so high compared to those in EU and the US. Pressures from banks, rather than share holders are so strong? Getting much money other than salaries? Priority given to saving money in a company safe rather than paying to executives? No cultures in Japan to get huge money as salaries? Some hidden standards for executive salaries existing in Japan? As I would like to know reasons, please release next version. One of reasons would be lower level of banks in terms of assessing real values of new inventions and/or products. I heard that some major Japanese banks have quite few scientific specialists who can assess real values of new technologies and therefore, loosing many business chances compared to that in EU and the US.
thanks
J
My comments are:
It is not very surprising to me that the salaries of venture executives are lower in Japan than those in US or EU, because a similar difference is also seen in those of big firms/companies. When we remember a grossly twice-high living cost in Japan compared to US, it seems funny that the Japanese, even the established, may be several-fold poorer than those who live in the developed western countries.
Now, the problem of only a limited number of venture firms including biotechs becoming public in my country may be considred from several viewpoints.
1. We are surrounded by a busy environment at all. People especially with high education levels are usually grown in such an environmental pressure that may force them just to work hard in school studies, and thereby have deprived them of time and custom of thinking about their lives/future dreams. This situation may simply lead people to willingness for much safer/stable lives, for example, entering and graduating one of top universities and then being recruited by one of renowned big companies, and thereby they will hesitate to take more risks into unknown fields. Even in case of venture firms that have been in success in Japan, there is some doubt that the founders are really original, because those founders are often awakened by business models that are of foreign, in most cases, US origin but are quite new in Japan. Thus, Japanese venture founders are likely to be just followers, without original views at a global scale, of some successful precedents.
2. We Japanese know an old proverb that is still applicable to the modern Japanese society, saying 'nail sticking up ready to be hammered'. The proverb means those who break from traditional social rules are blamed/downed and may sometimes be exiled from their societies/organizations. Our behavioral and thinking manner is more or less and intentionally/unintentionally influenced by the situation represented by this proverb. That is, the each individual will hesitate to do or say quite new or different things; societies/organizations also hesitate to take quite new actions. Such a pattern may be acceptable in a certain facet in which coopretive manner is really needed, but we should realize this pattern may retard the society/organization and sometimes the whole nation at a time it must go ahead for a new era.
3. The third point is bureaucracy. I just point out that this is overwhelming the whole country including government (national as well as local), many societies/organizations, and individuals. Very few cases are seen in recent Japan, in which a responsible person takes true responsibility.
But, this time I particularly mention governmental bureaucracy in relation to venture firm driving. As you know, our government assures some yearly budget for driving venture companies including biotecs. I have been a first-stage reviewer for years of the applications submitted by those ventures that need any supports, especially money for their activities in developing new equipments/systems/methodologies. I usually review biotec's applications. The potential problem is that the first-stage reviewers including myself will never know the details of the second-stage review and the final outcome of these applications. I am seriously concerned about certain informational output regarding such review processes.
Another story about 'bureaucracy' has been reported by a friend of mine, who is a famous professor at a famous University. He has been a member of a special committee organized by Monbu-Kagakusho (Ministry of Education, Culture, Sports, Science and Technology). Members of the committee are supposed to discuss and propose future policies to take in this country in order to promote science and technology, especially those regarding leading-edge bioscience and biotechnology - such policies should of course cover venture bioscience. But, the actual aspect of the committee is that everything is arranged by the involving bureaucrats, including policies to be taken in the future, and that discussions and opinions seemingly not in line with the track preset by the bureaucrats should be excluded out. The only meaning of this committee is to manage 'apparent' free discussions to reach conclusions defined by the bureaucrats who will never take responsibilities on the newly proposed policies, even when they finally turn out to be in failure, because the committee arrangement will enable the government and bureaucrats to insist to have followed the policies proposed after 'apparently' free discussions made by the committee members. This is what he has told me recently, and I have learned that a committee member resigned because of such bureaucratic situation.
Taken together, it seems to me that recent activities of venture firms have difficulty for future development, based on the various viewpoints. Although very rough, I am thinking of one possibility for driving venture firms, that is, some leading companies will make funds to support venture firms in their developing activities. Using such funds, the executives of ventures will be able to manage their projects to success. I do not think lower salaries of the venture executives will be a serious issue, but the important thing is to provide them an excellent environment that will ensure their activities to be continued. The funding companies may provide money and/or facilities for ventures; either individually or a consortium.
Once the venture activities turn out successful, then the funding company(ies) may also take certain benefit or royalty. Though I do not know details, I personally deem a project such as bioethanol production being pursued by Honda may be a good model for the future of bio ventures.
Y
Dear Philip,
I have been enjoying your assay highlighting interesting points.
I agree that a higher salary would be one factor to attract talented CEO. However, I do not think it is appropriate to say that CEO in Japan biotec is underpaid based on direct comparison of salaries with CEO in US or European ventures. There are so many differences in internal and external structure as well as environment and time frame.
As a corporate investor, we have invested in Japanese biotec and joined in some of the board as well. I would believe that CEOs earn comparable sararies (including stock options) with management level in big Japanese pharmaceutical companies. If we think of time frame required to achieve the same one milestone in drug development, Japanese biotec might need two-three times longer than US one for example. The difference could come from environmental factors such as not-well established support system to conduct safety or clinical studies, smaller size of money he/she can collect in a round, shortage of talented staff and so on. It could not be blamed for difference in talents. To reduce these barriers in operating ventures would contribute to attract talented CEOs and to success of biotecs in Japan.
Some of my Japanese friends established ventures in US, some opened US subsidiary of ventures in order to speed up development. It would be time to think about environment to support entreprenership in this country once again.
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