Dear share owner
s Chairman of the Compensation Committee, I am pleased to present this report on directors’ compensation for the year ended 31 December 2015. This report sets out how we have implemented the compensation policy that you as share owners approved in 2014, and for your convenience, provides a reminder of the details of that policy. I would also like to take this opportunity to describe the key topics that have been considered in 2015.
During the year, the Nomination and Governance Committee reviewed the composition of each of the Board committees, including the Compensation Committee. Following this review, it was agreed to reduce directors’ committee membership, to most effectively align their skills and interests with the needs of each of the Board committees. The result of this review is that the Compensation Committee now comprises myself as Chairman, Roberto Quarta, Jacques Aigrain and Tim Shriver.
At the 2015 AGM, 80% of share owners voted in support of the 2014 Compensation Committee Report. The committee carefully reviewed the reasons why 20% of share owners felt they needed to abstain or vote against the report and considered what was necessary to address their concerns. The primary reason for their vote related to the 2014 total compensation for the CEO. This ‘single figure’ was largely driven by the vesting of a five-year long-term incentive award that was granted under a plan approved by share owners in 2009 (‘LEAP III’), based on a plan first approved in 1999 (‘Original LEAP’). Of this ‘single figure’, 84% of the value realised resulted from the vesting of this long-term incentive award, with a further 8% being awarded to reflect short-term performance. The committee, while aware of the concerns, needs to remind share owners that the LEAP stock awards are contractual and it is not possible to reduce awards if the targets have been achieved. The committee was and remains comfortable that the value realised under LEAP aligned with very strong returns in terms of share price growth and strong dividend payments. It also reflected excellent annual and multi-year operating performance, with 2014 being another record-breaking year for the Group. The secondary reason for some share owners abstaining or voting against the report was the provision of a spousal travel benefit to the CEO. As a result, this benefit was removed, with the CEO’s agreement, as of 2015. Furthermore, Sir Martin Sorrell decided to repay the sum he received for spousal travel disclosed in last year’s report.
2015 was yet another record-breaking year for the Group with many performance highlights, including EBITDA exceeding £2 billion for the first time. Against this backdrop of excellent sustained long-term performance, the committee again expects share owner and media focus in 2016 to be on the total compensation for Sir Martin Sorrell. I will explain this in more detail in the sections below, but again, it is driven by the outstanding performance of the Company over the last five years relative to our peers and the market-leading returns delivered to share owners.
Pay for performance 2015
A focus on performance and an ownership mindset are central to the culture at WPP, and the committee firmly believes the compensation programs are an important part of this principle. WPP incentivises its Executive Directors and other senior executives to deliver and drive sustainable share owner returns, with plans that measure performance over the short- and long-term. The annual performance of the Company is measured and rewarded under the short-term incentive plan. In 2015, performance against our key measures of like-for-like PBT growth of 9.3%, like-for-like net sales growth of 3.3% and constant currency net sales margin improvement of 0.4% were all excellent. For the financial component of the short-term incentive plan, this resulted in awards of 162% of target. The individual component for each Executive Director was based on areas of strategic importance to the Group, for which they are directly accountable. Details are set out later in the report, but in general performance was equally strong.
Since 2013, WPP has granted long-term incentive awards under a new plan: the Executive Performance Share Plan (EPSP). The design of this plan was strongly informed by share owner feedback, including the removal of the upside of five times the executives’ investment, potentially available under LEAP, and the incorporation of additional performance metrics. The historic long-term incentive plan, LEAP, under which the 2011 award was made, was a co-investment plan that required executives to pledge shares that would be matched at the end of the five-year performance period depending on the TSR performance of the Company relative to our peer group.
The 2011 awards, which vested in full on 14 March 2016, were based on performance over the five financial years to 31 December 2015. Over this period WPP achieved TSR of 134.9%, out-performing our peers and broader market indices in Europe and the US. This was underpinned by strong financial performance. The key performance highlights over the five-year performance period were:
- More than doubling of market capitalisation to £20.2bn, represented by a 14.6% compound annual increase in share price
- a 31.1% increase in revenue
- a 44.4% increase in headline PBIT
- a compound annual growth in the dividend of 20.2%
- TSR that out-performed our most direct competitors, Omnicom and Publicis, as well as 95% of the FTSE 100, weighted by market capitalisation
- An increase in permanent employees of 23% to 124,930
While the value of Sir Martin Sorrell’s award is very large, it was the result of an outstanding set of returns to share owners.
Pay policy and implementation
At the end of January 2015, Mark Read stood down from the Board to take up the role of CEO of Wunderman. We have pro-rated his compensation and benefits to reflect his time on the Board, as outlined in the report that follows.
During the year, the committee reviewed the base salary of the Chief Executive and Chief Financial Officer. The committee decided that in light of other pay and incentive rewards, no change to the level of base salary would be made. This means there haven’t been any changes to the Executive Directors’ base salaries since January 2013 for Sir Martin Sorrell, when his salary was reduced to its current level, and July 2013 for Paul Richardson.
Finally, in accordance with commitments made last year, we have implemented clawback arrangements to the cash bonus and EPSP awards. These arrangements take effect for 2016 and subsequent awards and permit a clawback of incentives for a period of up to three years after payment in the case of a prescribed event occurring. This amendment will work in tandem with the pre-existing malus clauses in the incentive plans.
Performance targets for 2016
As part of the Committee’s normal practice, in preparation for the 2016 EPSP awards, we have reviewed the ranges applied to the ROE and EPS measures and have concluded they remain appropriate, stretching and aligned to the guidance issued to share owners. The short-term incentive plan financial measures will remain the same as used in 2015.
Consultation with share owners
Our Executive Remuneration Policy will be re-presented to share owners for approval at the AGM in 2017. We plan to consult with our major share owners and representative bodies during 2016 to present our thoughts and seek their views.
Sir John Hood
Chairman of the Compensation Committee
15 April 2016