While this is “old” it ties neatly into our previous post on “So What do you Want as a Board Member” from the Berkshire Hathaway archives. For an update on Sir Martin, google S4 Capital PLC and that stock chart. Which is why one should re-read old pieces that sounded interesting at the time and DO SOMETHING about it.
The following content was originally published in the Financial Times.
“Mea culpa – I act like the owner I am”
If Britain wants world class companies, pay must be competitive, writes Sir Martin Sorrell
June 5 2012
Many may think it is invidious for me to comment on my own compensation, but I wanted to add to the debate on CEO compensation.
Twenty-seven years ago we started WPP, or Wire & Plastic Products as it was then known, from one room in London with two people and a market capitalisation of just £1m. Today we have more than 160,000 people in 108 countries and a market capitalisation of about £10bn.
In 1985 I borrowed £250,000 to buy almost 15 percent of WPP. Today, anybody who invested £1,000 in WPP at the beginning in 1985 would have more than £46,000, including dividends, or £31,000, excluding dividends. WPP ranks as the ninth-most successful FTSE company based in the UK including receipt of dividends and seventh excluding them. Over the past five calendar years, WPP has materially outperformed the FTSE 100. Last year we reported record revenues of £10bn and record profits of £1bn, which has never been done before in our industry, and won the first Lion Award for Most Creative Holding Company at the Cannes advertising festival.
I have continued to invest and co-invest (through the WPP long-term co-investment programmes) in the company, rarely selling any shares, and investing almost £40m more in the company. I now have a stake worth about £140m, which represents less than 2 percent of the company, and almost all of my net worth, which almost all advise me is highly risky. I have no contract with the company, am “at will” and can be dismissed or leave instantly without compensation or restriction – another point that for the life of me I cannot understand why ISS, the proxy voting adviser, says is wrong.
I find the controversy over my compensation deeply disturbing. Some imagine that I wake up every morning and make decisions, including those overcompensation, in the shaving mirror. WPP has a very independently minded board and compensation committee, which makes decisions that they believe are in the long-term interests of the company and its shareholders, of which I am one. The board’s compensation decisions are right because they reward performance, not failure, reject options in favour of a long-term incentive scheme with co-investment and five-year performance periods, and are competitively fair against our big US and French competitors, which we consistently outperform.
For inexplicable reasons, ISS and other shareholder advisory bodies compare our US-based competition with companies such as Time Warner, Viacom and CBS, and do not include WPP. They compare us only with UK companies, although less than 10 percent of our revenues and profits originate in the UK and all WPP’s big competitors, including those with pay schemes that are very generous by comparison, are excluded from these analyses. By the way, over the past two years we have increased UK revenues by almost 15 percent and added 1,500 UK jobs at a time when growth and jobs are in short supply.
The most wounding comment, made anonymously, is that I deserve a “bloody nose” because I have been behaving as an owner, rather than as a “highly paid manager”. If that is so, mea culpa. I thought that was the object of the exercise, to behave like an owner and entrepreneur and not a bureaucrat, who loads up with “heads I win, tails you lose” options by just being there.
Warren Buffett pointed out many years ago that you don’t give institutions a cost-free option on your shares for 10 years, so why should you do it with management?
Our biggest challenge remains to ensure that the company continues to behave with the mind and heart of a small company, particularly as it continues to grow – it is already 20 percent larger than its next biggest competitor and doubles the size of most others. We have to ensure that WPP remains an entrepreneurial, performance-based company to maintain its global leadership. That is why we target an incentive pool of 15-20 percent of our operating profits before bonuses and taxes for distribution to our top-performing people. Last year that totaled more than $500m, a just reward for record performance.
The compensation debate in the UK now seems to have shifted, from undeserving bankers paid for failure and from payment for performance, to what is fair pay. 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. WPP is not a failure, it is a success.”
-Sir Martin Sorrell is CEO of WPP
