WPP’s Martin Sorrell Pushes Back Against Investor Backlash Over CEO Pay

Investor unhappiness with executive compensation is not new, but CEO pushback, particularly in public is. Investor groups including ISS and [...]

June 18 2012 by JP Donlon

Investor unhappiness with executive compensation is not new, but CEO pushback, particularly in public is. Investor groups including ISS and Glass Lewis frequently urge shareholders to vote against compensation packages they deem excessive, but when they did so with WPP, the world’s largest advertising firm, founder chief Sir Martin Sorrell didn’t take it lying down. He wrote a highly vitriolic riposte in the Financial Times saying among other things that he was worth every penny of the 56 percent hike in total comp. This has now been tagged as the L’Oreal Defense: “Because I am worth it!”

According to Bloomberg reports, Sorrell’s pay package, including long-term incentives, was worth 11.6 million pounds ($18 million) last year, making him the second-highest paid company head in Britain’s FTSE 100 index where CEOs got a median compensation of 3.2 million pounds, as estimate by remuneration researcher Manifest and MM&K.

Experts differ over whether the WPP chief acted wisely or was a hothead. Most CEOs tend to ignore (or try to) the imprecations of such outside groups. The revolt over CEO pay has more wind in its sails in the UK than the U.S. but winds shift. In 2008, 90 percent of shareholders rejected the pension plan for former chief executive Fred Goodwin of the Royal Bank of Scotland. (Goodwin even lost his knighthood into the bargain.) In 2009 60 percent of of the shareholder votes on Royal Dutch Shell’s compensation scheme were in dissent. According to reports in the Financial Times, WPP shareholders delivered one of the biggest investor rebukes over CEO pay in UK corporate history. And Sorrell is someone who is commonly regarded as fairly good at his job. He may not be Jack Welch or A.G. Lafley but he’s hardly a Bernie Ebbers slacker.

Media pundits are claiming we have reached a turning point in the perennial dispute over CEO compensation. It’s not just about high levels of pay per se but whether it is “appropriate.” The irony here is that Sorrell is a founder CEO like a Bill Gates, Steve Jobs, or Michael Dell. He created WPP 27 years ago with a personal loan from friends and family. He always had “skin in the game” as the VC and PE folks like to say. In addition, he has 2 percent ownerhip. Isn’t that supposed to be the ideal for all top executives at large companies. Most of his personal net worth is tied to WPP shares, just like most privately held company CEOs. How much more “aligned” can an executive be? “I thought that was he object of the exercise,” he told the FT. “to behave like an owner and an entrepreneur and not like a bureaucrat.”

The problem is twofold. Investors have not been overwhelmed with the returns they’be been getting. WPP’s ten year total return, according to the FT is 5.4 percent compared to the FTSE 100’s 5.5 percent. Understandably investors say they have had to accept dismal performance and that Sorrell has no basis to pump up his comp. Secondly, we live in an age of increasing transparency where outside group have access to more data and want a say on critical issues. Referencing the politics of the Middle East, some are calling it “Shareholder Spring.” This lot claims that so-called excessive rewards rarely benefit shareholders. This will come into conflict with some CEOs who feel, correctly or otherwise, that they deserves as much as their peers. It is natural that CEOs wish to take pride in their creation and want the status to go with it.

We know from Chief Executive’s research that CEOs of privately held firms earn considerably less than their counterparts in publicly traded companies, but this asymmetry is mostly due to differences in size and complexity. Going private isn’t the answer. Leaders , in some circles, may find that investor group’s everywhere, restless over mediocre returns are going to raise their voices from time to time.

Read: WPP Investors Vote Against Pay Package of CEO Martin Sorrell
Read: Excessive CEO pay rarely rewards investors
Read: WPP’s Sorrell seeks peace after pay revolt
Read: Shareholder Unrest Grows In England, Now Hits WPP
Read: WPP Investors Vote Against Pay Package of CEO Martin Sorrell