Sir Martin Sorrel draws shareholder ire

Shareholder revolts taking the 2016 AGM season by storm in the UK do not seem to be losing any steam.

In what is building up to be an unusual season of anger over executive compensation, shareholders have rejected remuneration packages at BP (59%), Smith & Nephew (53%), and Weir (72%; pay policy) and mounted serious challenges at Shire (49%), Anglo American (42%), Reckitt Benckiser (42%), Ladbrokes (42%), CRH (40%), and Man Group (37%). WPP joined the fray yesterday where 33.5% of shareholders outraged by Sir Martin Sorrel’s ballooning pay voted against the remuneration report.


Britain’s highest paid boss keeps his coveted spot at the helm in 2015 raking in a staggering £70.2 million up 63.8% from the prior year period as measured using the UK Single Figure pay metric. Most of this generosity stems from WPP’s Leadership Equity Acquisition Plan III (LEAP) approved by 83% of shareholders at the 2009 AGM. The plan had a performance measurement period of 5 years (2010-2014) and vested solely according to the Total Shareholder Return (TSR) metric relative to a custom peer group that included competitors such as Omnicom, Publicis, Ipsos, and GfK. Participants in the plan where required to invest shares in WPP in 2010 and earned a multiple thereof in matching shares depending on performance. WPP reported that its 5-year TSR of 135% outperformed 93% of said peers resulting in a 500% pay-out, or 5,092,095 shares, to the 17 executives who participated in LEAP. 


Sir Martin, for his part, collected 2,326,945 shares, or 45% of the total. On grant date in 2010, this allocation was worth some £16.86 million growing almost two-fold to reach £36 million by March 13, 2015 (share price went from £7.25 to £15.49 during the performance period). The largesse did not end there for Sir Martin additionally received £4.35 million in restricted share awards (deferred annual bonuses).  


Our expected value measure for total compensation, which takes into account compensation awarded during 2015 rather than vested, revealed similarly troubling trends. Total compensation was £18.49 million, up 5.5% from the previous year. Included in this figure are short-term incentives (STI) of £4.28 million, representing 372% of the base salary vs. a target of 217% and a maximum of 435%. Financial criteria accounted for 70% of this bonus with the remaining 30% were awarded according to personal objectives. 50% of the bonus was deferred over two years and will vest subject only to the presence condition.  The Executive Performance Share Plan (EPSP), which replaced LEAP after being adopted by shareholders at the 2013 AGM, awarded Sir Martin 728,267 shares valued at £11.2 million, or 974% of his base salary.  The EPSP has a 5-year time horizon and will vest based on three equally-weighted performance criteria: relative TSR, Earnings per Share (EPS), and Return on Equity (ROE). 20% of the EPS criterion will vest at a 7% cumulative annual growth rate over five years falling below analyst forecasts of 9.31% and calling into question the challenging nature of these performance measures. Moreover, a total maximum variable compensation of almost 1,409% of base salary dwarfs our limit of 300% and is excessive by UK standards.

Given the extremely excessive nature of remuneration overall, the failure to amend the pay policy in response to shareholder concerns, the lack of challenging EPS targets for the LTIP, and the specific concerns over the excessive nature of the LEAP awards, we at ECGS recommended that shareholders oppose WPP’s remuneration report. After many years in which WPP blatantly ignored the concerns of its minority shareholders, we are pleased by the fact that more shareholders have taken note of the excessive nature of the company’s remuneration policy and will continue to advocate for more shareholder engagement in the future.

True to form, the ‘Sage of Soho’ confronted his many detractors noting that his pay package is ‘really pay performance for the long term, 30 plus years’. Back in 2012 and in response to a shareholder revolt that year, Sir Martin defiantly wrote an op-ed in the Financial Times concluding famously that ‘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’.


Shareholders should note that ISS regrettably recommended that investors vote in favour of the remuneration report. One cannot help but ponder whether an unfavourable opinion by ISS may have significantly increased the possibility of rejecting the report.


Interestingly, the Chairman of the Remuneration Committee, Sir John Hood served in the same role at BG in 2014 when the company approved an excessive recruitment award for CEO Helge Lund creating a public uproar in the process. BG responded by revising the award downwards. At the 2016 AGM, 8.36% of shareholders voted against the re-election of Sir John, second only to the 30% opposition to the re-election of Ruigang Li who missed a third of Board meetings during the year.


WPP Chairman Roberto Quarta assured dissenting shareholders, which included fund managers the likes of Railways Pension Scheme (Railpen) and Standard Life, that their concerns will be taken into consideration when the company submits its Remuneration Policy to a biding vote next year. For policymakers in London dismayed by spiralling executive compensation, a cursory look at the German model could provide some insight. The German Corporate Governance Code stipulates that companies set annual pay caps for their CEOs and executive committee members.


A defiant boss in the face of a vociferous group of dismayed shareholders in what will surely be a memorable AGM season will only serve to ignite the flames of the growing debate in the UK over executive compensation. Only time will tell if WPP will change course and start heeding its shareholders’ concerns.