12, 2012 11:23 pm
Is it good to go public
over pay dispute?
Last week Sir Martin Sorrell, chief executive and founder of
the advertising group,
defended the size of his
pay package in the Financial Times. His public intervention came
after shareholder activism had affected other companies including insurer
Aviva and drugs company
AstraZeneca. In light of the ‘shareholder spring’, is going
public the best way to handle a pay dispute?
The executive: Sir Michael Darrington
Trying to use the media to defend the indefensible is a very high-risk
strategy, particularly when it relates to one’s remuneration. Sir Martin may
not have invented the L’Oréal strapline “because I’m worth it”, but he is
definitely trying to exploit it now.
However, his experience should tell him there is little benefit in being
Canute standing up to the tide of public and shareholder opinion on chief
executive and bankers’ remuneration.
While I believe in wealth generation and give him great credit for building
a very successful business, his main rewards should be through his
The writer is a former chief executive of Greggs bakery chain
The analyst: Sarah Wilson
Does Sir Martin have the right to free speech? Yes, as do shareholders and
the analysts who support their proxy governance decisions.
Louis D. Brandeis, the former US Supreme Court justice, once said: “Sunlight
is said to be the best of disinfectants.”
What WPP’s board needs to consider is whether, in allowing their chief
executive to defend a process that is supposed to be managed by independent
non-executives, a little too much sunshine has been let in.
Sir Martin said “do not fiddle with the market mechanism”. If shareholders
are not the market, I am not sure what is.
The writer is chief executive of Manifest, the proxy voting agency
The pay consultant and academic: Donald Delves and Thomas S. Lys
Going public about one’s own compensation battle is not the best way to
respond to a proxy advisory firm’s recommendation to vote against it in a
non-binding shareholder “say-on-pay” proxy vote. One reason is that such
recommendations are rarely passed. In the US, about 14 per cent of companies
receive a negative recommendation but only 2–3 per cent receive a majority
What fuels shareholder opposition is the lack of a link between pay to
performance, and unseemly perquisites and benefits. Most companies are right
to choose a less public approach with the comments coming from the
business’s directors in direct communications with shareholders.
The writers are founder of the Delves Group and a professor at the Kellogg
School of Management, respectively
June 5, 2012 8:59 pm
Mea culpa – I act like
the owner I am
By Martin Sorrell
Many may think it is invidious for me to comment on
compensation, but I wanted to add to the
debate on CEO compensation.
Twenty seven years ago we started
WPP, or Wire & Plastic Products as it was then known, from one room in
London with two people and a market capitalisation of just £1m. Today we
have more than 160,000 people in 108 countries and a market capitalisation
of about £10bn.
In 1985 I borrowed £250,000 to buy almost 15 per
cent of WPP. Today, anybody who invested £1,000 in WPP at the beginning in
1985 would have more than £46,000, including dividends, or £31,000,
excluding dividends. WPP ranks as the ninth-most successful FTSE company
based in the UK including receipt of dividends and seventh excluding them.
Over the past five calendar years, WPP has materially outperformed the FTSE
100. Last year we reported record
revenues of £10bn and record profits of £1bn, which has never been done
before in our industry, and won the first Lion Award for Most Creative
Holding Company at the Cannes advertising festival.
I have continued to invest and co-invest (through
the WPP long-term co-investment programmes) in the company, rarely selling
any shares, and investing almost £40m more in the company. I now have a
stake worth about £140m, which represents less than 2 per cent of the
company, and almost all of my net worth, which almost all advise me is
highly risky. I have no contract with the company, am “at will” and can be
dismissed or leave instantly without compensation or restriction – another
point that for the life of me I cannot understand why ISS, the proxy voting
adviser, says is wrong.
I find the
controversy over my compensation deeply disturbing. Some imagine that I
wake up every morning and make decisions, including those over compensation,
in the shaving mirror. WPP has a very independently minded board and
compensation committee, which makes decisions that they believe are in the
long-term interests of the company and its shareholders, of which I am one.
The board’s compensation decisions are right because they reward
performance, not failure, reject options in favour of a long-term incentive
scheme with co-investment and five-year performance periods, and are
competitively fair against our big US and French competitors, which we
For inexplicable reasons, ISS and other shareholder
advisory bodies compare our US-based competition with companies such as Time
Warner, Viacom and CBS, and do not include WPP. They compare us only with UK
companies, although less than 10 per cent of our revenues and profits
originate in the UK and all WPP’s big competitors, including those with pay
schemes that are very generous by comparison, are excluded from these
analyses. By the way, over the past two years we have increased UK revenues
by almost 15 per cent and added 1,500 UK jobs at a time when growth and jobs
are in short supply.
The most wounding comment, made anonymously, is that
I deserve a “bloody nose” because I have been behaving as an owner, rather
than as a “highly paid manager”. If that is so, mea culpa. I thought that
was the object of the exercise, to behave like an owner and entrepreneur and
not a bureaucrat, who loads up with “heads I win, tails you lose” options by
just being there.
Warren Buffett pointed out many years ago that you
don’t give institutions a cost-free option on your shares for 10 years, so
why should you do it with management?
Our biggest challenge remains to ensure that the
company continues to behave with the mind and heart of a small company,
particularly as it continues to grow – it is already 20 per cent larger than
its next biggest competitor and double the size of most others. We have to
ensure that WPP remains an entrepreneurial, performance-based company to
maintain its global leadership. That is why we target an incentive pool of
15-20 per cent of our operating profits before bonuses and taxes for
distribution to our top-performing people. Last year that totalled more than
$500m, a just reward for record performance.
The compensation debate in the UK now seems to have
shifted, from undeserving bankers paid for failure and from payment for
performance, to what is fair pay. WPP is not a public utility. If Britain
wants world champions in the private sector, we have to pay competitively,
as ISS and other proxy services inconsistently accept for our direct
competitors, particularly those based in the US, but not over here. If the
government or institutions believe pay is excessive, tax it. Do not fiddle
with the market mechanism. WPP is not a failure, it is a success.
Sir Martin Sorrell is CEO of WPP
The Financial Times Ltd 2012