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Elements of remuneration

The principal elements of WPP executive remuneration currently comprise the following:

  • base salaries (fixed);
  • annual cash incentives (variable); and
  • share plans (variable).

Pension contributions, life assurance, health and disability, and other benefits are also provided.

Base salary

The Compensation Committee believes that base salary is only one element of compensation and therefore should only be reviewed in the context of the total compensation being provided to an executive.

As noted in last year's Report and Accounts Sir Martin Sorrell's base salary was increased from £840,000 to £1,000,000 on 1 January 2007. This is the first increase to Sir Martin's base salary since September 1999.

With effect from 1 July 2007 Paul Richardson's base salary was increased from £450,000 to £500,000. Paul Richardson's base salary was last increased in May 2003.

Annual cash incentives

The annual cash bonus is paid under plans established for each operating company as well as the parent company. Challenging performance goals are established and these must be achieved before any bonus becomes payable. Each executive's annual incentive opportunity is defined at a 'target' level for the full achievement of objectives. Awards in excess of the target level may be paid up to a prescribed maximum for superior performance.

In the case of the Group chief executive and other parent company directors, the annual cash bonus is based on Group and individual performance:

  • one-third is based on Group financial results;
  • one-third is based on individual strategic objectives determined prospectively by the committee at the commencement of each year; and
  • one-third is based on the achievement by the individual director of key business objectives assessed by the committee at the end of each year.

Where appropriate, performance objectives relating to environmental, social and governance issues are measured in the second and third sections above.

The table below shows how the objectives for the Group chief executive are aligned with the overall objectives of WPP, as outlined in the How we're doing section.

  Performance measure Relevance to WPP objective Performance in 2007
1/3 Group financial results: Absolute financial performance. Objectives 1, 2 & 5 Margin improvement in line with target (headline PBIT margin up 0.5%) and operating profit growth above target (Reported operating profit up 8.5%).
1/3 Strategic objectives: relative financial performance of WPP against its peer group. Objectives 1, 2, 3 & 5 Strong relative performance in both TSR and margin improvement.
1/3 Key business objectives (amongst others): Development of the Group in fast-growing geographies and practice areas, attracting and retaining talent and enhancing creative reputation. Objectives 4, 5 & 6 Continued leadership in key growth markets (e.g., BRIC), practice areas (e.g., media investment management), technologies (e.g., digital media) and client service initiatives (e.g., super-agency global solutions); strong talent management; growing creative acclaim.

As a percentage of base salary, the target, maximum and actual bonuses for 2007 paid to executive directors were as follows:

  Target Maximum Actual
Sir Martin Sorrell 100 200 165
Paul Richardson 80 120 96
Mark Read 50 75 70

In some countries an opportunity exists to defer part of the annual bonus for four years in the form of WPP shares. At the end of the deferral period a 25% match is applied to the original shares, subject to continuous employment.

Share plans

Following the policy review in 2005, the committee continues to believe that share plans approved by share owners later that year remain appropriate in terms of grant levels, performance criteria and vesting schedules. None of WPP's share awards are pensionable and, other than the stock option awards, all will be satisfied out of one of the Company's ESOPs or WPP shares held in treasury.

Renewed Leadership Equity Acquisition Plan (Renewed LEAP)

2007 was the fourth year of operation for Renewed LEAP and awards were once again granted to the Group's key executives.

Under Renewed LEAP, which was approved by share owners in 2004, participants have to commit to acquire and retain WPP shares (investment shares) in order to have the opportunity to earn additional WPP shares (matching shares). The number of matching shares that a participant can receive at the end of the investment and performance period depends on the Company's TSR performance measured over five years (four years in the case of awards made in 2004).

Because relative TSR may not always reflect the true performance of the Company, the Compensation Committee is required to perform a 'fairness review' on the basis of which it may, in exceptional circumstances, decide to vary the number of matching shares that will vest. Factors the committee considers in its fairness review of any awards include, amongst others, various measures of the Group's financial performance (such as growth in revenues and in earnings per share) and any evidence of distortions in the share price of either WPP or the peer group (such as bid price premia).

For awards made in respect of LEAP programs commencing in 2005, 2006 and 2007 the vesting schedule is as follows:

Rank compared to peer group* Number of matching shares
1 5
2 5
3 4.5
4 3.5
5 2.5
Median 1.5
Below median 0

Notes

* For actual performance between these positions the match is calculated on a pro rata basis.

The comparator companies for the awards made in 2007 were: Aegis, Arbitron, Dentsu, Gfk, Havas, Interpublic, Ipsos, Omnicom, Publicis and Taylor Nelson Sofres.


Vesting of the 2004-2007 LEAP Award

For awards made in respect of the LEAP program commencing in 2004 the vesting schedule was as follows:

Rank compared to peer group* Number of matching shares
1 4
2 4
3 3.6
4 2.8
5 2
6 1.6
Median 1.2
Below median 0

Notes

* For actual performance between these positions the match is calculated on a pro rata basis.


TSR results indicated a vesting level of 3.27 matching shares reflecting a ranking between third and fourth place against the peer group of 13 companies. The committee then undertook its fairness review, the purpose of which was to ensure that the TSR ranking accurately reflected the true underlying performance of the Company and took into account any exceptional circumstances deemed relevant by the committee.

The committee compared WPP's financial performance to that of the peer group. It was noted that over the investment and performance period, WPP ranked first on margin improvement, and between third and fifth on other key measures such as growth in EBITDA, EBITA, EPS and Revenue. The committee was therefore comfortable that the TSR ranking was consistent with WPP's relative competitive performance over the period.

However, the committee noted two exceptional circumstances that materially affected the TSR performance of WPP relative to that of its peers.

First, based on the advice of WPP's broker, the committee concluded that the ending share prices of two of WPP's comparator companies (Aegis and Ipsos) contained an element of 'bid premium'. The committee concluded that including these premia did not reflect the underlying performance of these companies and therefore adjusted the TSR data accordingly. Removing the bid premia had no effect on WPP's ranking, but increased the vesting percentage by moving its TSR closer to that of the company ranked above it.

Second, it was also noted that there had been relatively large currency swings over the performance period that dampened the TSR performance of comparator stocks denominated in US dollars or Japanese yen. The committee determined that this currency factor, which was outside management control, had materially affected WPP's relative TSR ranking and vesting percentage.

The fairness review took both of these factors into account, each of which had a different impact on the results. The committee's judgement was to make an overall net reduction of 0.67 in the number of matching shares vesting from 3.27 to 2.60. This implies a ranking between fourth and fifth place against the peer group of 13 companies; the committee felt this was a fair reflection of WPP's true relative underlying performance over the period in question. As a result the number of ordinary matching shares that actually vested (including additional shares from reinvested dividends) along with the number at median and maximum, are shown in the following table.

  Median** Maximum** Actual
Sir Martin Sorrell* 1,238,899 4,129,664 2,823,786
Paul Richardson 37,168 123,892 84,715

Notes

* Sir Martin deferred receipt of the shares until November 2011.
** Not including additional shares from reinvested dividends.


Performance Share Awards (PSA) / Executive Share Awards (ESA)

Approximately 1,000 executives in the operating companies are eligible to receive PSAs. The size of each award depends on the extent to which annual performance targets are met. These awards are granted under the WPP Restricted Stock Plan but funded from the incentive pools at each operating company ensuring a significant proportion of these pools are delivered in shares. The ESA is the equivalent award at the parent company.

As a percentage of base salary, the target, maximum and actual awards for 2007 to executive directors were as follows:

  Target Maximum Actual
Sir Martin Sorrell 67 100 88
Paul Richardson 100 133 113
Mark Read 67 100 93

Leaders and Partners programs

To further align the interests of our key executives in the operating companies with the interests of share owners annual awards of restricted stock are granted under either the WPP Leaders or the WPP Partners programs. In both cases grants of restricted stock are made to participants which vest three years after grant provided the participant is still employed within the WPP Group. Some executives at the parent company participate in these programs but no awards are made to executive directors.

Other share awards

In order to attract or retain key talent it is sometimes necessary to make special grants of shares, usually from the Restricted Stock Plan or occasionally from the Executive Stock Option Plan. No such awards were made to executive directors in 2007.

Retirement benefits

All pension benefits for the Company's executive directors are currently on a defined contribution basis and only base salary is pensionable under any Company retirement plan. Details of pension contributions for the period under review in respect of executive directors are set out in th Directors' remuneration section.

The form and level of Company-sponsored retirement programs vary depending on historical practices and local market considerations. The level of retirement benefits is regularly considered when reviewing total executive remuneration levels.