Read the article on

Amgen’s compensation committee has eliminated one-year financial goals, such as earnings per share, as benchmarks in its executives’ performance-based long-term incentive plan. Instead, the biotech company will base LTI compensation entirely on total shareholder return relative to its peer companies over a three-year period.

Amgen’s compensation committee made the changes “to focus on longer-term measurements and to fully align with the interests of shareholders,” says David Polk, a company spokesman.

Some companies have incorporated TSR into their compensation programs in response to the Dodd-Frank Act, which includes a provision requiring that proxy statements disclose in detail the relationship between pay and performance. Since TSR is widely considered the most significant measure of how a company has performed for its shareholders, it is an increasingly popular benchmark for executive pay.

“You could hit your revenue or earnings goal, but if it doesn’t translate into improved shareholder return then you might not be achieving what shareholders really want,” says Eric Hosken, a partner with Compensation Advisory Partners.

The recession led many companies to shorten performance-period benchmarks in their incentive programs because of difficulties making predictions in the volatile economy. For companies that moved to using a one-year performance period, returning to a multiyear benchmark will probably become a trend now that the economy has stabilized, say experts.

But according to Amgen, macro events were not what prompted its compensation committee to do away with the shorter-term performance period.

Still, relative metrics do allow companies to avoid having to make specific long-term growth or earnings forecasts. Benchmarking with TSR also motivates executives to focus on boosting the company’s stock price.

Although Amgen’s shares are down 10% in the last 12 months (as of March 29), Polk says the change in the company’s long-term incentive program “was not due to any external pressure.” In fact, Amgen has tweaked its executive comp plan several times over the past few years.

In 2007, the company used three-year financial performance measures as a basis for LTI compensation. The following year, the comp committee decided to link performance-based awards for the LTI program to absolute TSR “in part, because of the difficulty in setting multiyear company financial goals,” according to its 2010 proxy statement.

Then in 2009, the comp committee adopted single-year financial performance measures. It also replaced absolute TSR with relative TSR over three years, for compensation in 2009 and 2010.