Letter from the chairman
Dear share owner
On behalf of the Compensation Committee, I am pleased to present the Compensation Committee Report for 2013. This year’s Compensation Committee Report has been drafted with the new UK remuneration reporting regulations in mind. The Report therefore comprises three parts: my cover letter and summary of the key events that occurred in 2013, our Executive Remuneration Policy, and an Implementation Report. The latter two will be put to share owners at the forthcoming AGM for approval.
Key changes in 2013
Following an extensive consultation program with our share owners during 2012 and 2013, we implemented a revised remuneration package for the Group chief executive, partly in 2012 and fully in 2013. At the beginning of 2013, the base salary and pension allowance of the Group chief executive were reduced in line with the amended policy, as was advised to share owners in the last Annual Report. A new long-term incentive plan, the Executive Performance Share Plan (EPSP), was approved by share owners at the 2013 AGM. The first awards under that plan were made in June 2013. These awards have a five-year performance period, with performance being assessed using stretching targets over TSR, EPS and ROE measures. These substantial revisions to our remuneration policy resulted in a materially increased level of support from our share owners and the advisory bodies, as demonstrated by the share owner vote in favour of the Compensation Committee report at the 2013 AGM.
In July 2013, we undertook the review of the pay packages of the Group financial director and the chief executive of WPP Digital, whose pay packages were previously reviewed in January 2011. These 2013 previously reviews resulted in modest increases to base salary and fees of 1.8% and 3.5% respectively, and in the case of the chief executive of WPP Digital, a modest increase in his pension allowance to 15% of base salary and fees in order to align his position with that of other UK executives. Employees across the Group who were subject to a salary review received an average annual salary increase of approximately 3%.
In drafting the Executive Remuneration Policy, we have maintained the structure of compensation as discussed extensively with share owners in 2012 and 2013 and implemented in 2013. An addition for 2014 is the inclusion of a recruitment policy, as set out in the new UK remuneration reporting regulations. This recruitment policy has been drafted while taking into consideration input received from share owners last year. The policy represents a lower level of incentive opportunity than that provided to the incumbent Group chief executive, while seeking to retain the flexibility required to recruit talent of the level necessary to run such a complex global group.
Pay for performance in 2013
In 2013, the operational performance of the Group was strong, with like-for-like revenue growth of 3.5%, headline PBT growth of almost 11% and headline diluted earnings per share up over 10%. In addition, the last year has seen very strong share price growth and a considerable increase in TSR. The share price increased 55% from 888p at the end of 2012 to 1,380p at the end of 2013, versus a 14% gain in the FTSE 100 from 5,898 to 6,749, reflecting a high level of investor confidence in the Group’s future prospects.
The annual bonuses awarded to the executive directors for 2013, of which 70% is based on financial performance, take into account not only the impressive performance of the Group but also the stretching targets set by the committee. The executive directors’ bonus awards average 143% of target. Half of the annual bonus is paid in cash and half in deferred shares which vest in 2016, thereby reinforcing the alignment of the executive directors’ interests with those of share owners. WPP was an early adopter of long-term incentives that measure performance over the longer five-year period. Each of the three LEAP plans and the replacement plan, the EPSP, are based upon a five-year performance period. In addition, participation in the LEAP plans has required executives to commit shares that could be matched, up to five times, dependent upon the Group’s performance over the five-year period. The long-term incentive awards that were granted in 2009 under LEAP III vested in February 2014. The exceptional share price and relative TSR performance over the performance period of the 2009 LEAP award cycle has resulted in awards vesting at 87% of maximum. While the level of vesting will undoubtedly attract public attention, the close relationship between WPP’s pay and performance is again demonstrated by the considerable value that has been created for share owners during that period. Indeed, over the five years from 1 January 2009 to 31 December 2013, the share price increased by 243%, which translates to 28% per annum on a compound basis. WPP’s TSR of more than 241%, averaged over six months at the start and end of the investment and performance period in accordance with the plan rule, ranks the Company in the top decile of the FTSE 100 over the same period. On the next page, I have set out some charts that illustrate the strong performance of the Company over the short and long-term.
Compensation and policy issues for 2014
There are no planned changes to the way in which the Executive Remuneration Policy will be implemented in 2014. For the executive directors, base salaries and fees will be unchanged as will annual bonus opportunity and EPSP award levels. The committee has undertaken its regular review of measures and has set new targets for the 2014 annual bonus. The impact of the proposed merger between Publicis and Omnicom on the LEAP and EPSP TSR peer groups will be considered on completion of the transaction (a date for which is yet to be confirmed); details of the impact on the LEAP and EPSP comparator group and TSR calculation approach will be confirmed in next year’s Compensation Committee Report. The nature of benefits provided in 2014 will also be unchanged, although the value may be higher or lower depending upon individual circumstances during the year. The fees for the current chairman and non-executive directors will also be unchanged.
Committee membership 2014
John Hood replaces me with effect from close of the AGM. He will chair a committee of engaged directors whose contributions have been constructive and supportive over the tenure of my chairmanship, especially those of Philip Lader and Esther Dyson, who are retiring from the committee. John will also inherit the strong and able support of Mark Linaugh, chief talent officer, Derek Steptoe, worldwide compensation & benefits Director, and the indefatigable Marie Capes, Company Secretary. Their professionalism and good humour makes for the smooth functioning of the committee and adds pleasure to the job of chairing it. I thank them all for their service.
Chairman of the Compensation Committee
16 April 2014
Chapter 9 of 13