EDITORIAL: Best laid scheme of mighty ad men

The headlines generated by the staggering pounds 35 million bonus WPP chief executive Martin Sorrell is due to collect when his five-year incentive scheme pays out next month cannot just be put down to silly season distortions. Sorrell’s is the biggest single bonus in UK company history.

The headlines generated by the staggering pounds 35 million bonus

WPP chief executive Martin Sorrell is due to collect when his five-year

incentive scheme pays out next month cannot just be put down to silly

season distortions. Sorrell’s is the biggest single bonus in UK company

history.



The payout is undoubtedly a reward for success - WPP and its share price

have increased more than five-fold in the last five years. The company

is now worth pounds 4.5 billion and its shares stand at 580p. But

Sorrell is in line for a further pounds 31 million under his next

five-year bonus scheme.



A second scheme restricted just to Sorrell might have caused a little

resentment in the ranks of senior WPP managers. So the decision to let

up to 14 executives share a further pounds 31 million, by putting in

pounds 6 million of their own money, can only be applauded.



WPP’s closest competitors, Omnicom and Interpublic, are both US

companies and already reward their executives with lottery-sized

salaries and bonuses.



The WPP scheme should help the group to recruit and retain the best

staff.



Criticism of the scheme has tended to focus on the terms by which

executives are rewarded for the company’s performance.



If WPP’s return to shareholders, measured by dividends and share price,

is among the top two in a predesignated 15 company peer group, the

company will pay out five times what participants in the scheme

invested. However, even if WPP comes eighth in the group, the company

will pay out twice what was invested. And in the unlikely event that WPP

should come last, participants will keep their investment and be given

half as many shares again.



Observers have also questioned the peer group WPP will measure itself

against. After the largest players, Interpublic and Omnicom, WPP is

mostly comparing itself to much smaller or more specialist marketing

services companies. But it is easier to grow, as WPP did, from a smaller

base, and other challengers could emerge.



Arguably, the richest bonus schemes should be for industries which are

exposed to the most risk, such as merchant banks which are largely

dependent on the state of the economy. When economies suffer, their

business shrinks.



Marketing services companies suffered during the last recession, but the

performance of advertising agencies has tended to fluctuate less since

then. And WPP has made itself less dependent on advertising revenues by

acquiring a substantial portfolio of below the line businesses.



However, on the strength of WPP’s performance over the last five years,

shareholders should not be too difficult to convince that the scheme

will also benefit them.



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