Disconnect Between Amgen CEO's Pay and Peformance

| About: Amgen Inc. (AMGN)

Having finally capitulated to long-standing calls from investors to provide a dividend (see here), Amgen (NASDAQ:AMGN) CEO Kevin Sharer is now under attack over his compensation. In the run up to the annual meeting next week, one shareholder advisory firm argues there is a disconnect between his pay and performance, and is urging stockholders to reject an Amgen proposal to ratify his package.

In a 22-page report, ISS Proxy Advisory Services recommends shareholders vote no "in light of the disconnect between the CEO's 53 percent pay increase and the company's above-median benchmarking, in contrast to lagging and mediocre shareholder returns." ISS goes on to argue Sharer received 200 percent of the CEO peer median figure. And so, "further analysis is warranted." Coincidentally, a separately analysis by The Hay Group found Sharer was the highest-paid CEO in the health care sector (see here).

The advisory firm notes that "above-median benchmarking may lead to pay inflation without a strong link to performance; the company's practices is particularly notable given that total CEO pay is significantly above (approximately 200 percent) the median of the ISS peer group of companies closer in size." [For those interested in perquisities, Sharer used company aircraft for personal use to the tune of $126,478; here is the proxy].

Not surprisingly, Amgen disagrees, and does so rather vociferously. In a separate SEC filing, the biotech argues ISS "significantly overstated (Sharer's) compensation based on its methodology for valuing (his) stock options. As a consequence, the ISS methodology results in valuations which, in addition to being significantly overstated, are inconsistent with applicable accounting guidance and proxy disclosure rules." For 2010, Amgen says Sharer was given $6.7 million, not $9.8 million.

Amgen also insists ISS is wrong to say Sharer received a 53 percent increase, because the firm used "a flawed stock option valuation model." The correct figure is just 37.7 percent. Of course, Amgen is quick to acknowledge that, "ether way, the increase is significant." But the biotech then argues his actual earned compensation fell by 2 percent, since the overall pay hike reflected an increase in the fair value of share-based compensation based on "relevant competitive data for our real peer companies." Amgen adds ISS chose the wrong peer group (see the Amgen response here).

Notably, Amgen is also riled over a shareholder proposal to allow written consent among shareholders to raise substantive matters in lieu of a shareholder meeting. In arguing against this, Amgen maintains this would disenfranchise stockholders and run counter to "our culture of openness and good governance." The move would leave Amgen vulnerable to unsolicited takeover attempts and permit board members to be replaced or removed.

However, ISS notes that 15 percent of Amgen shareholders may call special meetings. This "threshold is a substantial hurdle at a company with a market capitalization of over $50 billion, and at which no shareholder owns more than 5.2 percent … the likelihood that a company as large and widely held as Amgen could be taken over using written consent is remote. Thus, the risks of abuse associated with shareholders' ability to act by written consent are mitigated, and as with special meetings, the use of written consent would be an extraordinary event."

One Amgen investor says the biotech is feeling anxious. "Rarely, does Amgen get nervous about losing control of what they have, when a dissident group makes a proxy statement all the way to a ballot," says Steve Silverman,* a retired insurance exec who holds an undisclosed amount of Amgen stock in a family trust and has been a vocal critic of Amgen management "It has to do with taking away more voting power which they have had way too long. Pockets are getting lined at the cost to us shareholders. Bottom line: They are worried sick about the possibility of losing any kind of control."

* No, he is not a relation.

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