Comment: Admen sell shareholders an old line on top pay

"One of the main functions of a chief executive is to earn value for shareholders. The idea that he needs to be incentivised to do it over and above a salary that would make most people green with envy, is ridiculous."
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The Independent Online
In the history of great business comebacks, that of Martin Sorrell, chief executive of WPP, the ridiculously named J Walter Thompson advertising group, is perhaps one of the more remarkable. It is, however, in the history of gold-plated executive remuneration packages that Mr Sorrell really excels.

What is being proposed is so unusual and controversial - a package potentially worth pounds 17m after five years - that directors of WPP are giving shareholders a chance to vote on it; such arrangements are usually settled in advance and behind closed doors by the remuneration committee. Indeed, when it comes to the professionalism with which Martin Sorrell has presented the proposals, details of which were sent to shareholders yesterday, it is hard to fault him. WPP's approach is a model of full disclosure and consultation set against the botched way Maurice Saatchi's never-to-be package was leaked and dribbled out by Saatchi & Saatchi.

While some shareholders (yes, institutional too) will find the package just too big to stomach, WPP is unlikely to be faced with a Herro-like rebellion. Advisers would not have got to the stage of posting yesterday's circular if they thought there was any chance of the plan being scuppered. Furthermore, it is a package that directly links Mr Sorrell's fortunes to those of shareholders. Unlike a conventional share option scheme, Mr Sorrell is locked into the downside as well as the upside.

The Sorrell scheme seems also to provide a genuine incentive to performance, unlike most options, which are widely regarded by their beneficiaries as money for old rope. Even so, most ordinary folk would regard the scale of this package as in the land of make-believe. It is hard to understand how anyone could be worth this amount to an established organisation.

All the usual hackneyed explanations are advanced. "The remuneration arrangements for the Group's chief executive have for some time been below the median for comparable positions within the industry peer group", the company opines. By "peer group" WPP seems to mean advertising men in the US.

The problem with this argument is that American admen are not in fact Mr Sorrell's peer group, any more than the high-earning American music industry executives employed by Thorn EMI are the peer group of Sir Colin Southgate. Despite his high-earners, Sir Colin takes a salary as chairman of Thorn EMI that genuinely reflects his peer group - large, British publicly quoted companies. In truth, Mr Sorrell is not an adman at all; he is a finance man and an administrator. His real peer group are the chief executives of medium-sized, British publicly quoted companies.

While the targets Mr Sorrell must meet to claim his "performance shares" are demanding, they are not nearly as taxing as the company claims. Mr Sorrell has made great strides in bringing WPP back from the brink, but it is still essentially a recovery play. It should therefore be perfectly possible to achieve the 15.8 per cent compound growth rate in the share price necessary to claim the first tranche of performance shares.

Nor should it be forgotten that this is the second bite at the cherry for Mr Sorrell. The situation is not quite as bad as that presided over by Maurice Saatchi, but it is bad enough. By over-expanding in the mid 1980s, Mr Sorrell took the company to the edge of the abyss; he is lucky still to be there at all. He has since worked hard, diligently and effectively to put WPP back on its feet, but that is perhaps the least shareholders might have expected after the loss in value they have experienced.

In the mid-1980s, the shares hit a high of 933p; today they trade at 128p. Mr Sorrell's new incentive package allows him to rebase at close to the bottom. In essence, he is being given the opportunity to make a good deal more money than ever he was likely to make had WPP remained a solvent and stable company. Most shareholders can only wish they were in the same position.

There is also a wider problem with "incentivising" the chief executive of a public company in this way. Believe it or not, it is actually one of the main functions of a chief executive to earn value for shareholders. The idea that he needs to be incentivised to do it over and above a salary that would make most people green with envy, is ridiculous. If the chief executive wants to share in the value he is creating, he should, like the rest of us, invest in the company. If he believes himself capable of generating wealth beyond the dreams of avarice, he should go off and try it; he would rapidly discover that it is a good deal more difficult being a successful entrepreneur than running an established public company.

New script for Ken & Eddie

What a difference a month can make. When Kenneth Clarke last met the Governor of the Bank of England on 5 May 5, the City was banking on a further rise in interest rates. The short sterling contract which is used to bet on rates fully reflected that expectation. Now the surprise would be if the Chancellor did raise rates when he meets Eddie George on Wednesday. And any postponement may extend beyond June into the autumn. It is the Governor's reputation that is on the line rather than the Chancellor's.

One reason for this turnaround in expectations is the accumulation of evidence that the economy is weakening faster than expected. The housing market remains in a state of trauma, the high street is depressed and official figures show stagnant manufacturing output. This week's fall in the purchasing managers' index was the latest indicator to go Ken's way. But as important as the domestic is the international picture. Here, too, the signs are proliferating that the world economy is slowing down sharply.

The unexpected fall in US employment in May is the strongest signal yet that the American economy is slowing much faster than expected. In fact, economic activity appears to be weakening through most of the developed world. Japan is teetering on the brink of renewed recession and German economic prospects have also been downgraded.

As usual, the markets sniffed out the trend first: there has been a strong and unexpected rally that has taken bond yields down in G7 countries by over one point since February. The effect has been to transform the climate for interest rates.

When the Federal Reserve policy-making committee met at the end of March, economic conditions appeared to warrant a further tightening in monetary policy - if not then, before long. Now the markets are pencilling in interest-rate reductions as early as the next meeting of the Fed on 5 July. Much the same is true in Germany, where a further reduction in rates is now expected sooner rather than later.

The change in climate may help Kenneth Clarke for the time being. But there is a downside. If the world economy falters, so will our exports which drove the expansion of the UK economy in 1994.

And as the view gains currency that the tempo of global growth is slackening, then investment plans may be shelved. The pressure may be off interest rates. But the pain of slower growth - if that becomes reality - will hardly compensate.

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