In Korea's pharmaceutical and biotech sector, the way companies pay employee bonuses is changing. The focus is shifting away from short-term, cash-centered rewards to long-term, performance-linked compensation using treasury shares. The aim is to grant employees stock to tie individual performance to corporate value. Some inside and outside the industry see this not just as a revamp of compensation systems but also as a management strategy to stabilize equity structures and prepare for regulatory changes.
On the 1st, according to the pharmaceutical industry, Hanmi Pharmaceutical recently added a stock-based performance compensation system (RSA/RSU) to its year-end bonus plan announced to employees. Adopted as a new compensation framework in Aug., the plan allows employees, based on individual evaluations, to receive 50% to 100% of their performance incentive (PI) in treasury shares. If the share price falls, the company will cover the loss, and the granted shares must be held for one year.
On the ground, the reaction is largely positive. Because cash bonuses were not large to begin with, many said, "If the share price goes up, we benefit, and even if it falls, the company covers it, so stock compensation is better."
However, interpretations differ over the background of the rollout. Some suggest that Hanmi Pharmaceutical, which has experienced a past management control dispute, may be seeking to secure friendly equity by increasing employee share ownership. The system applies, from its start date, to employees of key affiliates such as Hanmi Science, Hanmi Pharmaceutical, Online Pharm, and Hanmi Fine Chemical, excluding large shareholders.
Until now, the most common stock reward tool in the pharmaceutical and biotech sector has been stock options. Last year as well, many corporations, including Celltrion, Alteogen, HUGEL, and CHA Biotech, granted stock options to employees.
But recently there has been a growing move to address the limits of stock options. Stock options face many legal and regulatory constraints, and not a few employees who delivered short-term results exercised and sold their shares, then left the company. Critics have long said it is hard to achieve both long-term value creation and retention of key talent.
Stock options give the right to buy company shares at a preset price, so if the share price at exercise is lower than the exercise price, they may provide no real reward. By contrast, stock-based performance compensation, including RSUs, grants shares for free, so the shares themselves are the reward regardless of the share price. If the share price rises later, the value of the reward also increases.
For this reason, RSUs, which overseas corporations have mainly used, are emerging as an alternative. They carry relatively less downside risk from falling share prices and are easier to administer, making them a compensation tool acceptable to management, employees, and shareholders alike.
In fact, last year HLB, Daewoong Pharmaceutical, and HANALL BIOPHARMA also introduced RSUs. HLB granted RSUs totaling 13.5 billion won to 84 employees in the first half of last year. The structure pays 50% one year and the remaining 50% two years after the U.S. Food and Drug Administration (FDA) completes full approval of the anticancer drug Rivoceranib, which was under review at the time. Daewoong Pharmaceutical and HANALL BIOPHARMA also granted RSUs to their CEOs in the second half of last year, embracing long-term performance-linked compensation.
Analysts say changes in the regulatory environment are also at play behind this shift. Discussion of the third amendment to the Commercial Act, centered on mandatory retirement of treasury shares, is a prime example. The government is pushing to amend the Commercial Act to require corporations to retire treasury shares acquired, in principle, within one year, aiming to curb the practice of holding them long term or using them as a management defense.
Accordingly, the industry expects more companies to use treasury shares as employee compensation rather than simply holding or retiring them. An industry official said, "If treasury shares ultimately must be retired, companies will inevitably seek ways to use them that provide real benefits to both the company and employees," adding, "Stock-based performance pay is a choice that considers both enhancing corporate value and retaining talent."