Dear share owner
n behalf of the WPP Board I am pleased to present the Directors’ Compensation Report for the year ended 31 December 2016. The report includes an ‘at a glance’ snapshot of WPP’s performance and corresponding compensation for the year. We then set out for share owners’ consideration our Directors’ Compensation Policy incorporating proposed changes to the policy approved by 82% of share owners in 2014. This revised policy will be presented for approval at the 2017 AGM. This is then followed by our Compensation Committee Report, which details the compensation decisions made by the committee and the resulting outcomes for the directors.
Highlights of our proposed 2017-2019 Compensation Policy
During the year, the Compensation Committee dedicated considerable time to the re-evaluation of its policy. This necessarily involved extensive dialogue with share owners and other interest groups. We are most grateful for their interest and input.
WPP has a long-standing history of embracing a philosophy of pay for performance. This philosophy is incorporated into the Company’s compensation programs in a range of different ways, for example: the five-year time horizon used since 1995 to measure performance in long-term incentive plans, and the use of challenging performance conditions to govern awards under all incentive plans.
Pay for performance and alignment with share owner interests remain central to the Group’s culture. The committee believes these cornerstone features have been most effective in driving exceptional performance, which has resulted (inter alia) in WPP becoming the most valuable, international, integrated communication services company. As a result, the committee concluded that this ethos should continue to be reflected in the Company’s compensation arrangements.
Notwithstanding the Company’s superior performance, we understand share owners’ increasing discomfort with the levels of our programs’ reward opportunities for outstanding performance. Similar feedback led to the changes introduced by the (then) committee earlier this decade that were subsequently incorporated in the 2014-2016 compensation policy. Based on the more recent share owner concerns, we are proposing further significant reductions in the compensation levels for the Company’s Executive Directors. The changes to your CEO’s compensation levels are set out below.
- The total incentive opportunity (the combination of short-term incentive maximum and the face value of an award under the Executive Performance Share Plan, or EPSP) will reduce from 14.1 times to 10 times salary.
- The maximum short-term incentive opportunity will reduce by 35 percentage points, from 435% to 400% of salary. 40% of the achieved bonus will be delivered in shares in the form of an Executive Share Award (ESA) and these shares must be held for a further two years.
- The EPSP award will accordingly reduce by 374 percentage points, from 974% to 600% of salary.
- The pension allowance will reduce by 10 percentage points from 40% to 30% of salary.
- The range of benefits provided will be replaced by a fixed benefit allowance of £200,000, a 12% reduction on the 2016 benefits’ cost.
In aggregate, these changes will have the effect of reducing the Group CEO’s overall maximum pay opportunity, before any account is taken of share price appreciation or dividends, by 27% or £4.8 million. This brings the total reduction since 2011 to 58% or £18.1 million.
In addition to these changes our proposed policy also reflects the following:
- In respect of the Group CFO, the total incentive opportunity will reduce by 150 percentage points from 700% to 550% of salary. The level of benefits provided will also be capped at $85,000.
- The maximum incentive, short- and long-term, that could be offered to a new appointee to the Board, is being reduced by 20% from 10 times to 8 times salary.
- The maximum pension contribution that could be offered to a new appointee to the Board is being reduced by 15 percentage points from 40% to 25% of salary.
- The level of vesting associated with the threshold performance requirement under the EPSP will reduce from 20% of the award to 15% of the award.
The committee did not reach these decisions lightly. The process has proven to be challenging, reflecting the divergent views of share owners, the differences in competitive market practices in the UK (which may cause competitiveness issues in the US) and internationally where WPP competes, the imperative of retaining and motivating a high-performing leadership team, all while also maintaining the Company’s attractiveness to future leadership recruits.
We hope that you will find that our revised compensation policy appropriately balances these important factors.
Pay for performance in 2016
2016 was once again a record year for WPP. The Company achieved strong top-line growth with operating profits and margins meeting and exceeding targets across all regions and sectors.
This sustained strong performance was reflected in the outcomes of the Company’s incentive plans for the year. Awards under the short-term incentive plan ranged from 95% - 120% of target. Shares awarded in 2012 under the last cycle of the Leadership Equity Acquisition Plan (LEAP) vested in full on 7 March 2017.
The 2012 LEAP award was the final instalment of the existing LEAP incentive program. WPP significantly out-paced all except one of its peers with five-year TSR growth of 210%. In reviewing the outcome under the plan the committee noted:
- WPP’s TSR ranked in the upper decile of the FTSE 100 during the same period and out-performed US indices and broader industry peer groups;
- market capitalisation increased by £14.71 billion ($15.44 billion) or 172.0% from £8.55 billion ($13.27 billion) to £23.26 billion ($28.71 billion);
- the share price increased from 675 pence at the start of 2012, to 1,816 pence by the end of 2016, a compound annual growth rate of 22%;
- the Company’s dividend increased from 24.6p to 56.6p, a compound annual growth rate of 18%;
- TSR was ahead of the Company’s most comparable competitors: Omnicom (180%), Dentsu (114%) and Publicis (106%); and
- the Company’s strong underlying financial performance, including net sales growth of 34%, a 51% increase in headline PBIT and a 67% increase in headline diluted EPS.
The committee acknowledges that the value created for share owners throughout the five-year term of the 2012 awards, and throughout the eight years of the LEAP III program, has been significant.
In 2013, in response to share owners’ concerns about the design of LEAP, the committee adopted a new long-term incentive plan, the Executive Performance Share Plan (EPSP). The design of the EPSP was strongly influenced by share owners’ views. This plan has granted awards at lower levels, with further reductions proposed in 2017, and measures performance equally across three critical areas: EPS growth, return on equity and relative TSR. We anticipate that the value of awards vesting in subsequent years will be substantially lower than the values realised under LEAP.
Performance targets for 2017 incentive awards
The committee has approved performance targets for the 2017 short-term incentive awards. As previously, performance will be assessed against a mix of financial measures, for 70% of the award, with the balance being determined by achievements against individual strategic objectives.
The three financial measures are unchanged for 2017 and are headline PBT growth, headline net sales margin improvement and growth in net sales. The performance ranges and outcomes will be disclosed in next year’s report.
The committee has also reviewed the 2017-2021 EPSP measures and targets, concluding that they remain appropriate, stretching and aligned to the guidance issued to share owners. The targets that will apply are as follows:
||7% – 14% compound annual growth
||15% – 18% annual average
||Median to upper decile
We hope that you will recognise the significant steps the committee has taken in responding to any concerns in presenting its proposed policy. With the majority of compensation still contingent on the sustainable performance of WPP, we are confident that these proposals will continue to provide meaningful alignment between performance and reward. As in previous years, we extend our thanks to those share owners and advisors who helpfully engaged with us in formulating our proposed policy. We hope they will meet with your support at the 2017 AGM.
Sir John Hood
Chairman of the Compensation Committee
19 April 2017