Amgen’s Bidness

As we’ve discussed many times in the context of high-stakes student testing, Campbell’s Law is a bitch. That is, any metric to which outcomes are attached will eventually be gamed by those being measured, rendering the metric useless as a tool of measurement.

Another area where Campbell’s Law applies is earnings-per-share (EPS). Here’s how that metric is gamed (boldface mine):

Companies like to use EPS as a performance metric because it is the primary focus of financial analysts when assessing the value of a stock and of investors when evaluating their return on investment.

But “it is not an appropriate target, it’s too easy to manipulate,” said Almeida, the University of Illinois finance professor.

In 2011, Amgen Inc CEO Kevin Sharer oversaw $8.32 billion of buybacks, by far the largest in the pharmaceutical maker’s history. More than $5 billion of those repurchases came in the fourth quarter of the year.

Soon after, Amgen reported that net income was lower than it had been in the three preceding years. At the same time, the buybacks lifted EPS far above the target level that determined 30 percent of Sharer’s bonus, doubling the amount he earned for that portion of his $4.88 million annual bonus. Without the buyouts, EPS would have fallen below the target level

The Amgen board’s compensation committee removed EPS as a performance metric the next year. It opted, instead, to begin using net income, saying in a 2012 proxy statement that doing so would “align compensation with a measure that more directly correlates with the underlying performance of our operations.”

Members of Amgen’s 2011 compensation committee declined to comment.

For the scientists who read this, in 2011, Amgen laid off over two hundred researchers. In the same year that Amgen spent $8.32 billion buying back its own shares.

But don’t worry, the story has a happy ending:

Sharer left the company in May 2012 and is now on the faculty of Harvard Business School.

Well, not happy for the researchers who lost their jobs or the shareholders, especially those who were thinking long term.

He now teaches two courses on “General Management” at Harvard Business School, training tomorrow’s business leaders.


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