Some of our largest institutional stockholders agree our stock options are performance-based and the best
vehicle for our long-term compensation. Our independent compensation consultant did not recommend we
change our equity vehicles.
Over the past several years we discussed our use of time-vested stock options and
RSU awards with our institutional stockholders. The results of this process were that one of our largest
institutional stockholders agreed that time-vested options are the best long-term incentive compensation vehicle
for a biopharmaceutical company at our stage, and others agreed that our time-vested stock options are
performance-based compensation. Our independent compensation consultant also believes time-vested stock
options are performance-based compensation and an appropriate equity vehicle for Isis. Also we would be
disadvantaged if we did not offer time-vested equity awards since most companies we compete with for talent
(including most companies in the Executive Peer Group) do not use event-based vesting for equity compensation.
We grant existing employees new options and RSUs annually to provide a continuing financial incentive in
Isis’ long-term success. We set the size of the equity awards based on individual and company performance
during the previous year.
Vesting schedules reward long-term performance and incentivize long-term stock appreciation and increased
stockholder returns.
For each stock option and RSU granted, the Compensation Committee sets a vesting
schedule over four years, with no vesting during the first year. Therefore, the stock options and RSUs granted to
our executive officers directly align the interests of our executive officers with the interests of our stockholders
and Isis’ long-term success. The actual economic value of stock option awards depends directly on the
performance of our stock price over the period during which the awards vest and the period in which the options
may be exercised. In other words, the stock options are not worth anything if our stock price does not increase
above the exercise price. Our executive officers will only realize economic value when our stock price, and
consequently stockholder value, increases. Similarly, in the same way our stockholder returns increase and
decrease based on our stock’s performance, the value to our employees of the RSUs increases and decreases
based on our stock’s performance.
We do not tie vesting to the achievement of specific events, such as annual metrics, because we do not want
to encourage our employees to deviate from our company objectives, which we believe optimizes sustained
stockholder value; nor do we want our employees to take unnecessary risks just to meet a short-termmetric.
The stock option vesting schedule is typically over a 4-year period at the rate of 25% at the end of the first
year and then at the rate of 2.08%per month for 36 months thereafter during the optionee’s employment. The
RSU vesting schedule is typically over a 4-year period at the rate of 25%per year. In addition, as further
described below, our executive officers must hold shares received upon vesting of their RSUs until they meet
certain ownership thresholds or no longer serve the Company. These practices align our employee compensation
with our stockholders’ interests because if stockholder value declines over time, so too will the value of the
equity compensation provided to all employees. We have historically had low employee turnover, particularly in
our management team, and the members of our management have traditionally held their options for a long
period of time before exercise. Our low turnover is indicative of our employees’ commitment to Isis and its
technology, and reflects our officers’ belief in the long-term value of our stock.
Our stock compensation budget minimizes dilution.
Each year the Compensation Committee approves a
budget that sets the number of stock options and RSUs we can grant our employees for annual merit awards. We
do not grant options or RSUs that exceed this budget without the Compensation Committee’s approval. Over the
past three years, the average merit award stock budget set by the Compensation Committee has been
approximately 1.6%of our outstanding common stock on an issued and outstanding basis. This stock
compensation budget, and therefore our equity compensation burn rate, is well below the Executive Peer Group
average of 3.1% from 2011 through 2013. We believe this stock budget is an important tool to balance our
compensation objectives with stockholder interests. For 2014 performance, the Compensation Committee set a
merit stock award budget that resulted in 1.48 million stock options and 246,826 RSUs awarded to employees,
including the executive officers. Together these shares represent approximately 1.5%of our outstanding common
stock on an issued and outstanding basis for that year. This budget, as well as each employee’s position level and
performance in the previous year, ultimately determines the size of the individual annual stock grant.
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