Investment column: WPP makes it all add up

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HALF-YEAR PROFITS at WPP, the advertising group, have again beaten expectations, but investors might be interested to judge chief executive Martin Sorrell's new incentive plan. After gaining pounds 28m in performance bonuses over the last five years, he is now seeking a new pounds 31m incentive plan for the next five years. Although the amounts are similar, the criteria for judging whether Mr Sorrell gets the "pot of gold" couldn't be more different.

Under the old scheme, Mr Sorrell had a stepped, five-year opportunity to collect nearly 5 million shares divided into four equal tranches. Gaining each successive tranche depended on WPP's stock rising to a progressively higher price and holding those gains.

But, just as the WPP boss has proven clever enough to make the company a global leader, so he is sufficiently wily to avoid betting his next incentive scheme on an unpredictable market where price/earnings ratios are already stretched. The new scheme benchmarks WPP against its peer group, a much more meaningful criteria and - given current market conditions - potentially more valuable for Mr Sorrell.

No one can deny that after taking WPP to the brink of insolvency, Mr Sorrell has performed well. The core ad agency business, led by J Walter Thomson and Ogilvy & Mather, is in rude health, with profit margins rising by 0.5 percentage points or more a year. WPP's multiple network structure and global scale is also helping it to win a rising share of new billings. In the first half, for example, new business jumped by 25 per cent to pounds 1bn, with billings added from NTL, IBM, Ford and Nestle.

The group has also diversified into fast-growing niche areas such as branding, consultancy, market research and healthcare communications. These business areas, growing at 15 per cent or more a year, are becoming increasingly important at group level. And on the Internet, WPP is well ahead of its industry peers - not to mention most British businesses - with annual revenue this year to hit $100m (pounds 62m).

Despite all this, WPP shares - 2p higher at 591p yesterday - only trade on par with the FTSE 100 on a price/earnings basis and at an undeserved 30 per cent discount to the media sector. Investors could book some profits, but short of a market collapse, WPP's global scale, matched with Mr Sorrell's hard-nosed management style, is worth backing for the long term. Accumulate.

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