Cleveland Clinic, Chris Coburn’s big payoff (and challenge): $840,000

The success of Cleveland Clinic Innovations has triggered a puzzling dilemma for the world-renowned health system: how to manage the windfall of its leader. Innovations’ Executive Director Chris Coburn gets 3 percent from the sale of spinoff companies, according to several sources familiar with Coburn’s contract – including one who has personally reviewed Coburn’s deal. […]

The success of Cleveland Clinic Innovations has triggered a puzzling dilemma for the world-renowned health system: how to manage the windfall of its leader.

Innovations’ Executive Director Chris Coburn gets 3 percent from the sale of spinoff companies, according to several sources familiar with Coburn’s contract – including one who has personally reviewed Coburn’s deal. The implication of that number became clear after Boston Scientific bought Cleveland Clinic spinoff Intelect Medical for $78 million.

The Clinic received $28 million from the sale.

Coburn’s take, based on the 3 percent figure, was about $840,000.

The sheer size of Coburn’s haul presents a conundrum for the Clinic – and it’s likely a teachable moment for the health systems nationwide that badly want Innovations’ ability to commercialize and pull in serious cash from hospital research.

Obviously the Clinic wants to reward star performers like Coburn for the financial gain they’ve helped bring to the health system. But it’s not a stretch to think that it could easily cause tension within such a physician-centric organization: a non-physician is suddenly out-earning all but the Clinic’s brightest of rockstar doctors.

CEO Dr. Toby Cosgrove made $2.1 million in 2009, the last year for which figures are available, and 10 other employees that year made more than $1 million. Only one of them, former Chief Operating Officer David Strand, was not a physician.

Coburn wasn’t included in the Clinic’s most recent tax filing that listed its highest-paid employees, so his compensation is unclear. The mean salary last year for directors of privately-held tech transfer operations was $173,400, according to a survey by the Association of University Technology Managers. So if Coburn’s salary is in line with the average, the Cleveland Clinic Millionaire’s Club has a new member – assuming the Clinic doesn’t split Coburn’s Intelect payout into multiple years.

Most tech transfer offices keep their employee-compensation plans private. So it’s unclear how many arrangements there are like Coburn’s. But Robin Rasor, director of licensing for the University of Michigan’s tech transfer office, said a compensation package like Coburn’s would be rare in the tech transfer industry, based on her experience.

If tech transfer offices offer incentive payments, the money typically comes out of one large bonus pool for multiple employees, she said. Razor said a compensation package such as the one afforded Coburn “would be interesting for the rest of the people in the office, I suppose.”

The Clinic declined to make Coburn available for an interview or make any comment on Coburn’s compensation or related topics. The $840,000 figure is calculated from the $28 million top-line figure. According to the Clinic’s policies, 40 percent of net commercialization revenues go to the inventors, with the remainder going to the Clinic’s research endowment (40 percent) and commercialization fund (20 percent).

Using the $28 million figure, Intelect’s inventors would split $11.2 million between themselves.

“Cleveland Clinic employee compensation is market-competitive and not shared publicly,” Cleveland Clinic spokeswoman Eileen Sheil said. “We’re very proud of the work that comes from our Innovations team.”

But no matter what that final bonus number, there are other issues. State dollars fuel many of Innovations’ startup companies and Coburn has a role advising a key state grant-making program.

The Clinic obtained the money to launch Intelect through a $7.6 million state-funded Third Frontier grant for brain neuromodulation research. The Clinic has been awarded $129 million from the Third Frontier since the technology support program launched in 2003.

Coburn has been a member of the 16-member Third Frontier advisory board since 2007 — after the grant that led to Intelect’s creation, according to the Ohio Department of Development (ODOD), which administers the program.

But does Coburn’s position with the state, which brings with it the possibility to influence funding in the Clinic’s direction, represent the potential for a conflict of interest — given the likelihood of future exits by a number of promising Clinic spinoff companies? Norm Chagnon, interim director of ODOD’s technology and innovation division, stressed that Coburn’s presence on the advisory board doesn’t represent a conflict of interest because the advisors don’t have a direct say in the allocation of taxpayer dollars. Rather, that responsibility falls to the nine-member Third Frontier commission, which votes on which proposals to fund.

The main role of the advisory board is to come up with a strategic plan that identifies the type of investments the Third Frontier program should be making, Chagnon said. For example, a few years ago the board suggested that the state should do more to get investment capital in the hands of early-stage companies. That led to increased state investment in venture development groups like JumpStart, which provides investment and business support services to young, promising companies.

The advisory group meets three or four times a year, and members of the Third Frontier commission are always present at those meetings, Chagnon said.

“If there’s an appearance of bias that comes from the recommendations from the advisory board, the commission has the authority to make adjustments,” he said. “They are only recommendations, and the commission can accept or reject them.”

Sheil, the Clinic spokeswoman, essentially echoed Chagnon’s statements. “Members of the Third Frontier Advisory Board provide advice on the business environment and developing technologies and are meant to be representative of the organizations that participate in the program,” she stated. “Members are not compensated for their participation. All decisions for funding levels, program design, and award selection are made by the Third Frontier Commission as established by state law. Funds are provided directly to institutions.”

While Chagnon and Sheil’s points are certainly credible, there’s no denying the ability of advisory board members to influence the allocation of taxpayer dollars; after all, that’s what the advisory board is there to do. A better retort from ODOD would’ve been simply: “If we don’t get people with specific industry expertise like Coburn to serve on this thing, then who can we get who’ll actually have any clue about where the industry is going?” Similarly, ODOD could credibly make the case that setting more stringent restrictions on advisory group membership – such as those that would required Coburn to recuse himself from talks on investment areas that could lead to his own wealth – would render membership so undesirable to executives and investors as to deprive the state of their expertise.

In the end, I must begrudgingly admit that I lean toward the state’s side on this one. It seems that part of supporting Third Frontier means accepting that it’ll enable a group of insiders to engorge themselves at the public trough, and sometimes in a way that may be self-serving. (That’s why they’re called “insiders.”) And if that’s the price of creating 55,000 jobs — if those direct and indirect jobs numbers from the state are to be believed — then Mr. and Mrs. Ohio Taxpayer will just have to live with it.

Also — because Cleveland Clinic Innovations is such a success and will no doubt have more successful exits in the future– this won’t be the last windfall for its leader.