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When Total Variable Pay Is More Than 58x Salary....

Posted on June 6, 2016 at 9:30 AM

Investors and regulators keep talking about corporate culture, and how important it is to setting the tone of a business. What about executive pay ? When total variable pay represents more than 58 times salary and is stratospherically unrelated to what the average employee earns, surely something is very wrong on culture.

This week advertising giant WPP holds its AGM - on Wednesday, June 8. The Local Authority Pension Fund Forum (LAPFF) has advised its 70 member funds to vote against its  remuneration report.

LAPFF says its recommendation is based "on the company’s excessive payments offered to Sir Martin Sorrell, WPP’s CEO, which have been consistently increasing, and have reached a record high of £70.4 million this year."

Looking at Sir Martin’s total variable pay - it represents more than 58 times his £1.15 million salary. This, says LAPFF, "is the highest of the sector peer group and in the top 10 highest CEO salaries of the FTSE 100." (my emphasis)

The ratio between this CEO's pay (excluding the long-term element) and the average employee’s pay is  196:1.

"In 2015, (Sir Martin) also received dividend equivalents of £1.5 million, more than his base salary" says LAPFF.

Sir Martin will doubtless say, as ever, "because I'm worth it."

"Most shareholders will, in the main, accept what they consider a reasonable level of pay for performance. However, with WPP, we consider there are several aspects of the payment which do not reflect this, and we are advising our member funds to oppose the remuneration report on this basis" said Kieran Quinn, LAPFF Chairman.

LAPFF’s recommendation for an oppose vote points out:

On 'Quantum': Sir Martin’s pay has increased by 56% p.a. over the past five years. "This represents twice the year-on-year average increase in the Company’s Total Shareholder Return (TSR) over the same period (28.8%). (my emphasis) Such misalignment raises concerns over the level of his total pay and also about the ability and will of the Remuneration Committee to perform its role appropriately."

 "WPP has granted long-term incentive awards since 2013 under the Executive Performance Share Plan (EPSP). While this plan may be seen as an improvement on the previous ‘LEAP’ scheme, outcomes are still excessive. The maximum variable award available to the CEO, including the value of the 2016 EPSP grant (974% of salary) and maximum annual bonus opportunity (435% of salary), represents 14 times base salary."


And on personal shareholding: "Sir Martin holds 1.42% of share capital which is of a size to invalidate many of the assumptions underpinning his bonus and long-term awards. The shares already held should provide him with substantial alignment with other shareholders and an incentive to perform."

I wonder - does this sort of pay reward have any effect on the average employee's "incentive to perform" ? And regardless of that, how will it ever be possible to break out of the cycle of mutually benficial relationship between external  remuneration consultants and board remuneraton comittees unless a stand is taken and we say - "Enough."

There was an excellent cartoon on Twitter this Sunday in the now established  #CorpGov tradition I started - this one from Nell Minnow (@nminow) in the US, retweeted here by James McRitchie (@CorpGovnet).

As someone caustically commented on Twitter - they preferred it when Alex did satire. And once again, we need to join up the dots between different sorts of behaviour, and how they might come together to make up corporate culture, and in turn have an impact on employees, and on productivity.

See weekend post on Forbes - on BHS and Tata Steel.

Categories: Governance, Pay, Culture