Compensation Committee report on behalf of the Board
Dear share owner
2011 has been another strong year, indeed a record year, building on our growth in 2010. Our compensation policy has long been linked to the performance of the Group, with a particular focus on delivering strong relative returns over the longer term to you, our 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.
In 2011 the Group delivered excellent performance. Highlights included billings of almost £45 billion, profit before tax breaking the £1 billion barrier for the first time and a 38% increase in dividends per share. This strong performance is reflected in the rewards received under our incentive plans by our executive directors.
Following our 2011 AGM we recognised that a number of our share owners had issues with some aspects of the Group’s executive compensation arrangements. The Compensation Committee took into account the feedback from share owners in its continuing review of our long-term incentive plan, LEAP, and as part of the ongoing review of the Group chief executive’s compensation, consideration of which began in 2010, and factored this feedback into the final decisions.
While details of all elements of compensation and any changes made to these matters are set out in the following pages, I would like to highlight the key decisions and changes below:
- As part of our culture of leading in matters of corporate governance, we have already sought to adopt some of the disclosure measures currently being proposed by the UK Government including greater transparency on short-term incentive measures and a table showing a single figure for executive directors’ total compensation.
- The LEAP III comparator group has been expanded, effective 2011, to include Nielsen, to reflect the greater significance of the consumer insight business within WPP and the emergence of Nielsen as a major public company.
- The revisions in the Group chief executive’s compensation structure (which, along with the compensation structures of the other executive directors and senior management, are reviewed every two years) mark only the second time in the last ten years that salary and incentive compensation have been adjusted. The revisions incorporate constructive input from share owners and their representatives during the consultation process. The committee recognises that the subject of executive compensation is particularly contentious in the current political and governance environment. We are sensitive to all the related issues and to our fiduciary obligation to make decisions, sometimes difficult and challenging, that we believe to be in the best interests of both our share owners and the Group. The new package has been shaped by WPP’s guiding principles on compensation, among them our commitment to provide fully competitive remuneration opportunities, including the potential for superior rewards for exceptional performance. The changes are also designed to reflect the substantial increases in the Group’s size and complexity since the last review in 2007, and to provide an overall level of opportunity that is commensurate with the importance of Sir Martin Sorrell’s contributions to the Group’s success. The committee is of the view that the revisions ensure that the Group chief executive’s compensation is clearly linked to and supports the Group’s strategic objectives, and that the reward levels are properly calibrated to challenging performance conditions.
In summary, the other matters dealt with by the committee in 2011 were:
- supervising the Group’s equity incentive plans that are critical to the attraction and retention of talent;
- overseeing the Group’s cash incentive programs and approval of the awards to the most senior business leaders below the Board; and
- reviewing developments in areas of corporate governance and ensuring the Company’s compliance with regulatory changes.
As in previous years, I would like to thank my fellow committee members for their continued support as well as the members of management who provided invaluable assistance to the committee.
Jeffrey Rosen Chairman of the Compensation Committee 20 April 2012
During 2011, the Compensation Committee comprised the following:
- Jeffrey Rosen (chairman of the committee);
- Colin Day;
- Esther Dyson;
- Philip Lader; and
- Tim Shriver.
No member of the committee has any personal financial interest (other than as a share owner as disclosed in Directors’ 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.
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 Company Secretary, the chief talent officer and the worldwide director of compensation and 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.
The committee receives external advice on all matters pertaining to the determination of fair and appropriate compensation packages for the executive directors, including competitive practices in comparator companies.
WPP competes on the basis of its intellectual capital and services. This intellectual capital is created entirely by its people, and the committee endeavours to strike the right balance of fairness between its people and share owners.
For this reason, the design of all executive compensation at WPP is governed by three guiding principles:
- performance-driven reward;
- competitiveness; 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 salary increases across the organisation when determining executive salary increases. In addition, the committee approves the design of incentive plans and reviews all awards made under those incentive plans.
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 a strong 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 230 executives), all of whom have stretching ownership goals;
- all eligible employees, approximately 47,000, 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 following charts show the breakdown of total target remuneration for the executive directors in 2011 and 2012, illustrating both the significant element of pay linked to performance, and the alignment of interests with share owners through the proportion of compensation payable in WPP shares.
In relation to 2011, while the target bonus was to be split half in cash and half in deferred shares, the Compensation Committee determined that, for Sir Martin only, 40% of the bonus achieved would be paid in cash and 60% in deferred shares (ESA) further increasing alignment with share owner interests.
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:
- incentive plans take into account performance across a broad range of financial and non-financial measures;
- 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;
- incentive plans are designed to be attractive in the marketplace to enable WPP to attract and retain key talent that is critical to achieving business success. The plans are designed to motivate, reward and provide as much retention value as possible. The use of deferred share bonuses that normally vest after two years, and the use of restricted share awards that vest after three years, support the business need for employee retention; and
- clawback provisions have been added into key share incentive plans (i.e. those other than the all-employee plans) to give the 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 2006 to April 2012 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.
The committee thought that share owners would benefit from seeing the effect that foreign exchange rates have had on relative TSR. The following graph (measured on a local currency basis) illustrates the distorting effect of foreign exchange rates on relative TSR performance for the same period.
These graphs have been calculated on a daily return basis and do not reflect the TSR measures used in the LEAP performance calculations.
The design of compensation policy at WPP ensures a clear and direct link between the performance of the Group and executive compensation. Substantial use of performancedriven compensation not only ensures the continued alignment of share owner and executive interests but also enables the Group to attract, retain and motivate the talented people upon whom our success depends.
In light of this policy, the principal elements of WPP executive compensation currently comprise the following:
- base salaries and fees (fixed);
- short-term incentives paid in cash and shares which vest after two years (variable); and
- long-term incentives paid in shares under LEAP, which are subject to a stretching performance test with participation linked to a significant co-investment requirement over the five-year performance period.
Executive directors are also entitled to receive a pension contribution (or a cash allowance in lieu), life assurance, healthcare and other benefits.
Compensation packages for executive directors and the most senior people at WPP below Board level are normally reviewed every 24 months. These reviews consider the mix of fixed and variable elements of the compensation package, general market conditions and internal factors such as the performance of the Group or relevant business unit and pay and employment conditions elsewhere in the Group or relevant business function.
In determining suitable benchmarks, the Compensation Committee looks at the compensation of executives holding similar roles in competitor organisations and, if appropriate, media industry or general industry data for organisations of comparable size and complexity.
Base salary and fees
|Current salary and fees||Effective date|
|Sir Martin Sorrell||£1,300,000||1 Jan 2011|
|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.
Share owners will recall from last year’s Compensation Committee report that the committee undertook an extensive review of the executive directors’ compensation at the end of 2010 and considered that increases to the base salaries of the executive directors were appropriate.
The consideration in respect of Sir Martin’s base salary continued during 2011, and the committee consulted share owners in the summer with regard to quantum and the structure for Sir Martin’s remuneration arrangements. Having adjusted the proposals following that consultation, the arrangements were finalised towards the end of 2011. The decision was made to increase Sir Martin’s base salary and fee from £1,000,000 to £1,300,000. That was the first increase to Sir Martin’s base salary since 1 January 2007 (which was the only increase since September 1999). Since 2007, the Group has continued to grow in scale and complexity, with worldwide headcount increasing from fewer than 80,000 people in 2,000 offices to over 113,500 people in over 2,500 offices; revenues increasing by over 69%; and earnings per share increasing by over 61% by the end of 2011. The level of the increase in compensation was determined by several factors including business and personal performance, competitive pay levels and the extended time period since the last review.
Paul Richardson’s and Mark Read’s base salaries were reviewed during 2010 and no further review was undertaken in 2011.
All pension benefits for the Company’s executive directors are provided on either a defined contribution or a cash allowance basis. Only the aggregate of base salary and director fees is pensionable. As part of the committee’s review of the chief executive’s compensation, the allowance for Sir Martin was increased from 40% to 45% of base salary and fee, effective from 1 January 2011. Paul Richardson’s and Mark Read’s pension contributions remained unchanged at 30% and 10% respectively. Details of pension contributions or allowances for executive directors for the period under review are set out in Directors’ remuneration and other statutory information.
WPP sets stretching performance targets for each operating company on an annual basis. Performance against these targets determines the size, if any, of the incentive pool for that business unit. In aggregate, incentive payments in 2011 were £338.2 million, reflecting strong Group financial performance. That strong performance is 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 which vest a further two years after grant. The grant of those deferred share awards typically occurs within three months of the end of the financial year.
In a similar way, the committee sets objectives for the executive directors. The extent to which these objectives are met will determine the size of both annual cash bonuses (under the short-term incentive plan (STIP)) and Executive Share Awards (ESAs, the portion of the annual bonus paid in shares which normally vest a further two years after grant). Since 2010, unvested ESAs are subject to clawback provisions, which give the committee the right to cancel or reduce unvested share awards should this be justified by a participant’s acts or omissions.
Effective 2011 the committee adjusted the bonus opportunity for all executive directors. These adjustments provide for a better balance of the cash and share incentive elements of their remuneration. As explained last year, the decision regarding adjustments to Sir Martin’s incentive opportunities was unconfirmed, as the committee was keen to engage with share owners on that subject. Following the share owner consultation process, the committee decided to adjust the target and maximum bonus opportunity, effective 2011, from 167% to 250% at target and from 300% to 500% at maximum (with at least half being delivered in the form of deferred shares), as shown in the table below. As noted above, these adjustments reflect the fact that WPP is now a considerably larger and more complex organisation than in 2007, when Sir Martin’s compensation was last reviewed. The rapid growth of the organisation and the increasing complexity of the sector have resulted in Sir Martin’s role becoming significantly more demanding and the committee believes that there should be greater reward opportunity available for success. These adjustments strengthen further the direct and clear link between reward and performance and are better aligned to the incentive opportunities available at our direct competitors.
|% of base salary and fees||Target %||Max %||Target %||Max %|
|Sir Martin Sorrell||125||250||125||250|
The STIP seeks to incentivise the executive directors to achieve specific goals over a one-year period, while continuing to contribute to the on-going and sustainable success of WPP and demonstrating the core values of ownership and alignment of interests with share owners. Consistent with previous years, the plan rewards for performance in three equally weighted areas shown in the following tables (financial, strategic and business performance). Except for the Group financial objectives, the exact measures differ for each individual executive director.
In 2011 the Group achieved significant growth in all the core measures including revenue, profit before tax and earnings per share. In addition, our profit margin improved strongly while we increased the number of employees by 9.2% to over 113,500 across the Group. The Group was also recognised at Cannes for its creative leadership. The following tables summarise the measures in place for 2011, along with the committee’s assessment of the level of performance.
|Sir Martin Sorrell||2011 target performance range||Achievement||Actual bonus |
(% of salary)
|Group financial objectives||Headline PBT growth; headline PBT margin improvement and revenue growth.||Above Maximum||167%|
|Individual strategic objectives||Relative financial performance of WPP against key competitors.||Target||83%|
|Key business achievements||Creative reputation recognition; succession planning; capital effectiveness and acquisition success.||Target to Maximum||135%|
|In 2011 the committee decided that a greater portion (60%) of the achieved total bonus be delivered in the form of deferred shares (ESA)|
|Paul Richardson||2011 target performance range||Achievement||Actual bonus|
(% of salary)
|Group financial objectives||Headline PBT growth; headline PBT margin improvement and revenue growth.||Above Maximum||100%|
|Individual strategic objectives||Cost reduction in IT, Finance and Establishment; property management.||Target to Maximum||90%|
|Key business achievements||Development of sustainability strategy and practice; finance talent development.||Target to Maximum||85%|
|To be delivered as 50% deferred shares (ESA) and 50% cash|
|Mark Read||2011 target performance range||Achievement||Actual bonus|
(% of salary)
|Group financial objectives||Headline PBT growth; headline PBT margin improvement and revenue growth.||Above Maximum||67%|
|Individual strategic objectives||Digital performance and improvement of the Group’s digital assets and capability through acquisition and development of data and technology strategy; successfully integrate acquisitions.||Target to Maximum||60%|
|Key business achievements||Develop WPP Digital through the launch of Possible Worldwide, Xaxis and other initiatives.||Target to Maximum||63%|
|To be delivered as 50% deferred shares (ESA) and 50% cash|
The committee has determined that deferred shares (ESAs) will, subject to continued employment, vest after two years.
The executive directors are eligible to participate (although, in 2011, have chosen 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).
Bonus opportunity for the executive directors will be unchanged for 2012, but the measures and ranges will be assessed in light of expectations and the business strategy, meaning that they may change depending on the strategic imperatives for 2012.
During the latter part of 2011, the committee reviewed the long-term incentive plans to assess whether they continued to meet the strategic objectives of the Company. The conclusion of the review was that the plan design, 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 used in LEAP for a number of years continues to be the most appropriate performance measure, the committee periodically reviews whether the Plan would be strengthened by the addition of one or two further non-market measures in order to balance TSR.
Other than share options, it is intended that all awards will be satisfied out of WPP shares held in treasury or one of the Company’s employee share ownership plans (ESOPs).
Leadership Equity Acquisition Plan III
In 2011, awards under LEAP III were made to 15 of the Group’s key executives. Details of the awards made to the executive directors can be found in Directors’ remuneration and other statutory information.
LEAP III is a co-investment plan under which participants must make and retain an investment in WPP shares (investment shares) in order to be eligible to receive awards. The committee may also extend the invitation to participate in the Plan to include options over WPP shares as part of the co-investment commitment. In 2011, participants were not given this opportunity.
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.
Following the end of a performance period, the Plan rules require the committee to perform a ‘fairness review’ dependent upon which it may, in exceptional circumstances, decide to vary the number of matching shares that will vest.
As previously reported in the 2010 Compensation Committee report, the 2006 award vested in March 2011 with a match of 4.14 shares for each investment share committed.
Vesting of the 2007-2011 LEAP award
In undertaking the fairness review described above for the 2007-2011 LEAP award, the committee considered a broad range of factors when determining whether the relative TSR result was representative of Group performance over the five-year performance period from January 2007 to December 2011, and the extent to which there were factors that required the result to be adjusted. For the vesting of the 2007 award the committee considered the following factors:
- the impact of major exchange rate shifts on the common currency TSR calculation (as illustrated by the TSR graphs);
- the underlying financial performance of the Company relative to its peers, covering a range of measures including EPS, PBIT, margin and revenue growth; and
- the constituents of the comparator group and whether there were any extraordinary events that could have had a positive or negative impact on their TSR performance.
On review, the committee determined that there had been no significant events at any of the comparator group companies during the performance period and, therefore, no adjustment was required.
In respect of the first factor, during the performance period sterling dropped sharply against the other currencies that feature in our peer group, falling 45% against the yen, 22% against the euro and 16% against the US dollar. This dramatic currency shift is a factor that the committee has previously had to consider when determining the vesting for prior awards, once adjusting the match upwards from the common currency result and once adjusting the match downwards. These significant currency movements meant that, while on a local currency basis WPP’s TSR ranked between second and third place (above both Omnicom and Interpublic and equating to a match of 4.62), on a common currency basis WPP ranked below median, equating to zero vesting.
The committee was of the view that the unprecedented turmoil in the currency markets during the financial crisis was an extraordinary event. Given the very international focus of the comparator group, (with all but one of our comparators listed outside the UK) and the five-year investment and performance period, this event has impacted several award cycles under the Plan including some awards that are yet to vest. While the committee has previously considered and adjusted for the impact of currency fluctuations, this is the most significant impact that has been observed to date.
The committee determined that this factor of currency, which was outside management control, had materially affected WPP’s relative TSR ranking and meant that the common currency TSR result was not a fair reflection of the Company’s true performance relative to its peers. This was supported by a review of the Company’s financial performance relative to the comparator group. Therefore, the committee’s judgement was to use the average of the common and local currency results, resulting in a match of 2.31 for the 2007 awards (which was also consistent with the underpinning measures considered by the committee). This implies a ranking between fourth and fifth out of nine companies, which the committee felt to be more representative of the Company’s underlying performance over the five-year performance period.
Management share incentive plans
The Company uses share-based compensation methods across the workforce, which not only helps the Company to incentivise, retain and recruit talent, but also encourages a strong ownership culture among employees. Share awards are granted under the Restricted Stock Plan, and share option awards are granted to employees under either the Executive Stock Option Plan or the Worldwide Ownership Plan.
- The Restricted Stock Plan is used to satisfy awards under the short-term incentive plans (including the ESAs) as well as to grant awards under the WPP Leaders, Partners and High Potential 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 the WPP Leaders, Partners and High Potential program, although they are eligible to receive ESAs under the Restricted Stock Plan.
- The Executive Stock Option Plan is used to make special grants of options in order to attract or retain key talent. One award was granted to an employee in 2011 (none were granted in 2010).
- 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 2011, awards were made to over 47,000 employees. By 31 December 2011, options under this plan had been granted to approximately 110,400 employees over 49.2 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
|Objective||Participation||Performance period||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.|
The share incentive dilution level, measured on a 10-year rolling basis, has remained constant at 4.4% at 31 December 2011 (4.4% – 2010). It is intended that awards under all plans, other than share options, will all be satisfied with purchased shares held either in the ESOPs or in treasury.
Having set out the Compensation Committee’s decisions and the changes to compensation during 2011, the committee wishes to keep share owners informed of the policy that it intends to apply in 2012. This policy can be summarised as:
- the base salary and fees of all executive and non-executive directors will be unchanged;
- pension contributions and cash allowances for the executive directors will be unchanged;
- executive directors’ entitlement to STIP and ESA opportunity will be unchanged;
- executive directors’ entitlement to participate in LEAP will be unchanged; and
- LEAP performance measures will be reviewed and if changes are thought appropriate, share owners will be consulted.
The committee will also continue to monitor the UK Government’s proposed changes in the area of executive pay and the consequential implications on disclosure and future pay policy.