At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.
The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving.
But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect.
Bias can creep into the process in several ways. At Amgen, it began with the choosing of “peers.”
Amgen selected 11 companies in the biotech/pharmaceutical field, which seems natural enough. But most of the companies on the list are far larger than Amgen. Amgen’s revenue in 2010 was $15 billion; the median revenue of its peer companies was $40 billion, according to Equilar.
The practice of choosing peers that boost pay is common. Studies by Faulkender, Bizjak and ISS Corporate Services have shown that when choosing “peers” for pay-setting purposes, companies tend to choose larger firms or firms with more highly paid chief executives.
Not sure if this is the result of corruption or rampant system-wide stupidity.Moreover, the effects of his raises are not limited to Amgen.
In fact, because of peer benchmarking, raises at one company have ripple effects across corporate America: Thirty-seven other companies name Amgen as a “peer,” including Wal-Mart, MasterCard and Time-Warner, as well as other drug companies, according to Equilar.
Next year, at those companies that use Amgen as a peer, Sharer’s new compensation package will be used as a benchmark, propelling executive pay upward.
