Compensation Committee report on behalf of the Board
Dear share owner
Following a very challenging 2009, the performance of the Group improved considerably in 2010. The design of compensation policy at WPP ensures that there is a clear and direct link between the performance of the Group and executive compensation throughout the Group. In 2010, the strong performance of the Group therefore resulted in both increased incentive levels for management and strong returns for share owners. The use of performance-driven compensation ensures the continued alignment of share owner and executive interests and is essential to enable the Company to attract, retain and motivate the most gifted talent in the industry.
The committee’s work during 2010 included:
- a review of the total compensation packages of the executive directors relative to the marketplace to ensure competitiveness;
- the approval of all stock plan awards used to attract, retain, reward and motivate employees;
- a review of the fees of the chairman and the non-executive directors;
- the approval of all incentive payments, payable in cash or in shares, for senior executives throughout the Group and setting appropriate performance targets for the Group chief executive and the other executive directors;
- approving the deferral and further deferral of significant share incentive awards by the Group chief executive; and
- implementation of clawback provisions in the Company’s senior management share incentive plans.
What changed in 2010?
Details of all elements of compensation and any changes made to them are set out in the following pages. To summarise, the key decisions and changes to compensation during the year were as follows:
- the fees of the chairman and the non-executive directors, all of which have been in place since 1 January 2007, were increased with effect from January 2011;
- bonuses for 2010 performance were larger than those in 2009, reflecting the strong Group performance over the year. In accordance with the Company’s policy, a substantial proportion of the 2010 bonus was paid in the form of deferred shares that vest two years after grant;
- changes to the compensation packages for the executive directors were considered and increases in base salary for both Paul Richardson and Mark Read were agreed and implemented, with effect from January 2011; and
- a review of the Group chief executive’s overall incentive structure commenced and is continuing. The committee intends to consult share owners on this subject before the proposals are finalised. The final changes agreed will be disclosed in the 2011 Compensation Committee report.
As always, I would like to thank my fellow committee members, Philip Lader, Esther Dyson, Tim Shriver and Colin Day, as well as Bud Morten, the former chairman of the committee, for their continued support. The committee’s thanks also go to Marie Capes (the Company Secretary), Mark Linaugh (the chief talent officer) and Derek Steptoe (the worldwide compensation & benefits director).
Composition of the Compensation Committee
During 2010, the Compensation Committee comprised the following:
- Jeffrey Rosen (chairman of the committee);
- Esther Dyson;
- Philip Lader;
- Tim Shriver (from 29 June 2010); and
- Colin Day (from 1 December 2010).
No member of the committee has any personal financial interest (other than as a share owner as disclosed on Director's interests) in the matters to be decided by the committee, potential conflicts of interest arising from cross-directorships or day-to-day involvement in running the Group’s businesses.
The terms of reference for the Compensation Committee are available on the Company’s website and will be on display at the AGM, as set out in the Notice of AGM.
Advisors to the Compensation Committee
The Compensation Committee regularly consults with Group executives, particularly the Group chief executive (who is not present when matters relating to his own compensation or contracts are discussed and decided), the chief talent officer and the worldwide director of compensation & benefits. The latter two individuals provide a perspective on information reviewed by the committee and are a conduit for requests for information and analysis from the Company’s external advisors. Towers Watson are the committee’s appointed compensation advisors; they did not provide any other material services to the Group. Squire Sanders Hammonds advises the committee on legal and tax issues relating to compensation and benefits, and provides legal advice on a range of matters to the Group.
The Compensation Committee receives external advice on all matters pertaining to the determination of fair and appropriate compensation packages for the executive directors. This advice covers competitive practice in comparator companies, tax and regulatory changes and governance issues related to the role of the Compensation Committee.
The link between compensation and business objectives
WPP competes on the basis of its intellectual capital. This intellectual capital is created entirely by its people, and the committee endeavours to strike the right balance of fairness between employees and share owners.
For this reason, the design of all executive compensation at WPP is governed by three guiding principles:
- performance-driven reward; and
- alignment with share owner interests.
The Compensation Committee regularly reviews fixed and variable compensation against appropriate benchmarks both internal and external. When making decisions on executive compensation, the committee is briefed on the remuneration levels within the Group. This includes, for example, the consideration of actual and budgeted salary increases across the organisation when determining executive salary increases. In addition, the committee approves the design of incentive plans and reviews all the awards made under those incentive plans.
The chart below shows the proportion of total compensation for executive directors which is variable (due to the linkage to performance) compared to fixed compensation.
WPP is committed to aligning executive performance and reward with share owner interests. From a compensation perspective, this is encouraged in a number of ways:
- Total Shareholder Return (TSR) has been chosen as the performance measure for the LEAP plans as it represents the best objective measure of the success of the Company as far as share owners are concerned;
- share ownership is encouraged for the WPP Leaders (approximately the top 200 executives), all of whom have stretching ownership goals;
- all eligible employees are given a share ownership opportunity through participation in the Worldwide Ownership Plan; and
- the majority of the compensation package of executive directors is paid in the form of shares (comprised of deferred share bonus and long-term incentive awards under the LEAP plans).
The role of the Compensation Committee in improving risk management
The Compensation Committee is always sensitive to the requirement that the decisions that it makes and the compensation programs the Group has in place serve to improve the management of risk in the Group. In particular:
- the incentive plans take into account performance across a broad range of financial and non-financial measures;
- Compensation Committee meetings are generally held at the time of Board meetings, at which the committee members are usually given a comprehensive briefing on issues and risks facing each of the business units as well as the Group as a whole;
- one of the single biggest challenges for WPP is attracting and retaining key talent. Incentive plans are designed to be attractive in the marketplace and provide as much retention value as possible, such as the use of deferred share bonuses that normally vest after two years, and the use of restricted stock awards that vest after three years; and
- the clawback provisions that have been added into key share incentive plans (i.e. those other than the all-employee plans) give the Compensation Committee the right to cancel or reduce unvested share awards should this be justified by a participant’s acts or omissions.
The Company’s TSR for the period from 31 December 2005 to April 2011 is shown on the graph below. The FTSE 100 is the index the Board considers most relevant for the purpose of comparison as WPP is a mid-ranking FTSE 100 company. WPP considers its key competitors to be Omnicom, Interpublic and Publicis and it is the performance of these companies with which the Company’s own performance is most commonly compared. For that reason, values for those three companies are also displayed.
- * Measured on a common currency basis.
Key elements of short- and long-term remuneration
The principal elements of WPP executive remuneration currently comprise the following:
- base salaries and fees (fixed);
- short-term incentives paid both in cash (payable immediately) and shares which vest in the medium-term, usually after two years (variable); and
- long-term incentives paid in shares (variable, subject to performance conditions, and in the case of LEAP, co-investment conditions).
Pension contributions, life assurance, healthcare and other benefits are also provided.
Compensation packages for the most senior people at WPP are normally reviewed every 24 months. These reviews are undertaken within the context of:
- the mix of fixed and variable compensation;
- the performance of the relevant business unit;
- pay and employment conditions elsewhere in the Group; and
- general market conditions.
In determining suitable benchmarks, the Compensation Committee looks at the compensation of executives holding similar roles in competitor organisations and, if appropriate, general industry data for organisations of comparable size and complexity.
Base salary and fees
|Current salary and fees||Effective date|
|Sir Martin Sorrell||£1,000,000||1 Jan 2007|
|Paul Richardson||$925,000 and £100,000||1 Jan 2011|
|Mark Read||£425,000||1 Jan 2011|
As reported in previous years, fees of £100,000 are paid to each of the executive directors in respect of their directorships of WPP plc and are included in the numbers above.
Sir Martin Sorrell’s base salary was last increased on 1 January 2007. It was due to be reviewed in November 2008 with any change to be implemented from January 2009; however, Sir Martin informed the Compensation Committee that an increase would not be appropriate in light of business conditions. His salary and directors’ fees therefore remained unchanged throughout 2008, 2009 and 2010. As part of the extensive review of the executive directors’ compensation at the end of 2010, the committee considers that an increase in base salary and adjustments to incentive opportunities are appropriate. Consideration of these issues has continued during 2011 and the committee intends to consult share owners before the proposals are finalised. The final changes agreed will be disclosed in the 2011 Compensation Committee report.
As a result of the review, and being mindful of the time that has elapsed since the last salary increases, the committee decided to increase the base salary of the other two executive directors. Paul Richardson’s base salary was increased from $830,000 plus £100,000 fees to $925,000 plus £100,000 fees. The committee believed that Mark Read’s package of base salary and fees at £325,000 was uncompetitive and, given the increased importance of digital strategy to the Group and Mr Read’s continuing personal development, an increase to his remuneration was in order. As a result, Mark Read’s package of base salary and fees was increased to £425,000. These increases were the first increases since July 2008 and January 2009 respectively, and both increases were implemented with effect from 1 January 2011.
All pension benefits for the Company’s executive directors are currently on a defined contribution basis. Only the aggregate of base salary and director fees is pensionable. Details of pension contributions for executive directors for the period under review are set out in Directors’ remuneration and other statutory information.
Each year WPP sets stretching performance targets for each operating company. Performance against these targets determines the size, if any, of the incentive pool for that unit. In aggregate, incentive payments in 2010 were higher than in 2009 due to improved performance. This trend was also reflected in the bonuses paid to executive directors.
Individual targets (both financial and strategic) for the operating company CEOs are set by WPP and in turn, these CEOs set similar targets for employees who report directly to them. Payment is in the form of both cash bonuses and deferred shares, being Performance Share Awards (PSAs), which vest a further two years after grant. The grant of PSAs typically occurs three months after the end of the financial year.
In a similar way, the Compensation Committee sets objectives for Sir Martin Sorrell and the other executive directors. The extent to which these objectives are met will determine the size of both annual cash bonuses (under the STIP) and Executive Share Awards (ESAs, the portion of the annual bonus paid in shared which normally vest a further two years after grant).
No changes were made in 2010 to the levels of short-term incentive payouts that would be payable for achieving either target or maximum performance. The target and maximum cash bonus and ESA awards for each of the three executive directors in 2010 were as follows (shown as a percentage of salary):
|Target %||Max %||Target %||Max %|
|Sir Martin Sorrell||100||200||67||100|
Consistent with previous years, for 2010 the performance of each executive director was measured in the three areas shown below:
- Group financial objectives: Examples of measures include margin improvement and operating profit growth.
- Individual strategic objectives: Examples of measures include relative financial performance, advancing CSR strategy, improving back office synergies and integrating digital assets.
- Key business achievements: Examples of measures include improving creative reputation and developing digital strategy.
Each of these three elements is equally weighted for bonus purposes (i.e., one third of the bonus is payable for the achievement of each objective). Except for the Group financial objectives, the exact measures differ for each individual executive director.
After considering each of these areas and the respective measures for each executive director, the committee assessed the following levels of performance:
|2010 achievement as % of target||2009||2008|
|Sir Martin Sorrell||200||170||200||190||41||125|
|2010 achievement as % of target||2009||2008|
|Sir Martin Sorrell||150||127||150||142||82||112|
These achievement levels resulted in the following bonus payments:
|Cash bonus||ESA bonus|
|Sir Martin Sorrell||190||1,900||142||950|
The executive directors are eligible, but decided not, to participate in a cash bonus deferral plan whereby they can defer receipt of part of their bonus for four years, and receive a 25% match in the form of WPP shares (subject to continuous employment).
In conjunction with the committee’s review of total compensation for the executive directors, the committee decided to adjust the levels of short-term incentive awards available for executive directors. The target and maximum levels for both Paul Richardson and Mark Read have been adjusted for 2011 in order to better balance the cash and share incentive elements of their remuneration, and to reflect market practice, and are shown below (as a percentage of salary):
|Target %||Max %||Target %||Max %|
As mentioned in the Base salary and fees section, a decision regarding adjustments to Sir Martin Sorrell’s incentive opportunities is pending the outcome of share owner consultation.
During the latter part of 2010, the Compensation Committee reviewed the long-term incentive plans to assess whether they continued to meet the long-term strategic objectives of the Company particularly given the increased competitive pressures that have been fuelled by the general economic recovery and competitors’ behaviour. The committee reviewed grant levels, performance criteria and vesting schedules. The conclusion of the review was that the grant levels and vesting schedules remained appropriate and well suited to the nature of the business. While the committee believes that the relative TSR measure that has been used for a number of years continues to be the most appropriate performance measure, the committee periodically reviews whether the plans would be strengthened by the addition of one or two further non-market measures in order to balance TSR.
Other than stock options, all awards will be satisfied out of WPP shares held in treasury or one of the Company’s employee share ownership plans (ESOPs). The proceeds from any of the cash or share-based equity plans are not pensionable.
Leadership Equity Acquisition Plan III
In 2010, awards under LEAP III were made to 18 of the Group’s key executives. Details of the awards made to the executive directors can be found in the Directors’ remuneration and other statutory information section.
Participants have to commit and retain investments in WPP in order to receive awards under LEAP III. Such investments are in the form of WPP shares (investment shares) and, at the invitation of the Compensation Committee, also in the form of options over WPP shares purchased from an independent third party (investment options). LEAP III awards provide participants with the opportunity to earn additional WPP shares to match their investments (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 and compared with a peer group weighted by market capitalisation.
Following the end of a performance period, 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. This is because relative TSR may not always reflect the true performance of the Company. Factors the committee considers in its fairness review of any award include, amongst others, multiple measures of the Group’s financial performance (such as growth in revenue 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 premiums).
Vesting of the 2005 and 2006 LEAP awards
As previously reported in the 2009 Compensation Committee report, the 2005 award vested in March 2010 with a match of 2.50.
As described above, the Compensation Committee is required to perform a ‘fairness review’ before any awards can vest. When performing this fairness review in the context of determining the level of vesting of the 2006 award, the committee reviewed a broad range of factors in its consideration of whether the relative TSR achievement was a fair reflection of the performance of the Group over the 5-year performance period or whether there were factors that required the result to be adjusted. For the vesting of the 2006 award, the committee considered the following factors:
- the constituents of the peer group and whether there were any events that had an undue impact on their TSR performance in either a positive or negative way;
- the impact of changes in exchange rates on the TSR calculation; and
- the financial performance of the Company, relative to its peers, covering a wide range of measures including EPS, PBIT, margin, revenue and several other factors.
Following the fairness review, the committee concluded that the relative TSR result fairly reflected the performance of the Company over the five-year investment period, and that no adjustment was deemed necessary. The relative TSR performance of the Company resulted in a match of 4.14 for each investment share committed to the program despite the fact that on a local currency basis the match was 4.80.
Restricted Stock Plan
Other than to satisfy awards under the short-term incentive plans (ESAs and PSAs), the principal use of the Restricted Stock Plan is for awards under the WPP Leaders and Partners program. This program is used to reward, retain and align the interests of about 1,250 of our key executives with the interests of share owners.
In the program, awards are made to participants that vest three years after grant, provided the participant is still employed within the Group. Executive directors are ineligible to participate in this plan.
Executive Stock Option Plan
In order to attract or retain key talent it is sometimes necessary to make special grants of options. No awards were granted in 2010 to any employee or executive director (1 award was granted to an employee in 2009). However, the Compensation Committee is conscious that stock options remain a powerful motivator and, in certain circumstances, it might be necessary to make awards to a broader population under the Executive Stock Option Plan.
Worldwide Ownership Plan
The Worldwide Ownership Plan is an all-employee plan that makes annual grants of stock options to employees with two years of service who work in wholly-owned subsidiaries. During 2010, awards were made to over 45,000 employees. By 31 December 2010, options under this plan had been granted to approximately 97,700 employees over 43.4 million shares since March 1997. Executives who participate in one of the other share plans described above are ineligible to participate in this plan.
Key elements of short- and long-term remuneration
|Conditions||Change of control|
|Base salary||To maintain package competitiveness at all levels within the Group.||All employees.||n/a||Salary levels are determined by taking a number of relevant factors into account, including individual and business unit performance, level of experience, scope of responsibility and the competitiveness of total remuneration.||n/a|
|Cash bonus||To incentivise delivery of value at all levels within the Group.||Approximately 10% of employees are eligible to receive a performance bonus.||1 year||Achievement of challenging performance goals (financial and non-financial) at the individual and business unit level.||The cash bonuses of executive directors do not crystallise on a change of control.|
|Performance share awards||To incentivise delivery of value and to align with interests of share owners.||Key operating company executives.||1 year||Achievement of challenging performance goals (financial and non-financial) at operating company level. Further two-year retention period.||See note below for Restricted Stock Plan.|
|Executive share awards||To incentivise delivery of value and to align with interests of share owners.||Key head office executives and executive directors.||1 year||Achievement of challenging individual annual bonus objectives. Further two- or three-year retention period.||See note below for Restricted Stock Plan.|
|LEAP III and Renewed LEAP||To incentivise long-term performance by comparing WPP’s TSR against the TSR of key comparators (which are weighted by market capitalisation in the case of LEAP III), and to maximise alignment with share owner interests through a high level of personal financial commitment.||Participation offered only to those key executives (currently no more than 20 people) whose contributions transcend their day-to-day role, including executive directors.||5 years||Relative TSR performance against a group of key communication services comparator companies, (weighted by market capitalisation in the case of LEAP III), subject to a fairness review by the Compensation Committee.||On a change of control, the investment period for all outstanding awards ends, the number of vesting shares is determined at that date (pro-rated in the case of LEAP III) and any other rights cease. The number of shares that vest may be reduced to prevent adverse US tax provisions applying. The Compensation Committee may determine that outstanding awards are exchanged for equivalent awards.|
|Restricted Stock Plan||To encourage a share ownership culture and long-term retention as well as supporting recruitment.||Directors and senior executives of the operating companies and senior head office executives.||n/a||Typically three-year retention period.||The vesting period for all outstanding awards is deemed to end. The Compensation Committee may determine that outstanding awards are exchanged for equivalent awards or that outstanding awards are unaffected by the change of control.|
|Executive Stock Option Plan||To provide a tool to promote retention and recruitment.||Occasional use only to deal with special situations.||3 years||Conditions, if any, are determined at the time of grant of the award.||The number of shares or ADRs is pro-rated down in accordance with the change of control date. The Compensation Committee may determine that outstanding awards are unaffected by the change of control.|
|Worldwide Ownership Plan||To develop a stronger ownership culture.||Employees with at least two years’ employment. Not offered to those participating in other share programs or to executive directors.||n/a||Three-year vesting period.||The number of shares or ADRs is pro-rated down in accordance with the change of control date. The Compensation Committee may determine that outstanding awards are unaffected by the change of control.|
Share incentive dilution for 2000 to 2010
The share incentive dilution level, measured on a 10-year rolling basis, has declined to 4.4% at 31 December 2010 (4.6% – 2009). It is intended that awards under all plans, with the exception of the Worldwide Ownership Plan, will be satisfied with purchased shares held either in the ESOPs or in treasury.