Art of persuasion

WPP has a communications problem. The global advertising group is struggling to persuade the majority of its shareholders that Chief Executive Martin Sorrell deserves an annual pay package worth £13 million. That’s embarrassing in an industry selling the power of persuasion.

Barring a last minute change of direction, there will almost certainly be a sizeable protest vote against the Sorrell’s pay at the company’s annual general meeting on June 13. The re-election of the head of the board’s remuneration committee is also far from assured. WPP has had run-ins with shareholders before and could just tough it out – the vote on pay is not binding. Nevertheless, WPP’s board should start planning for the fallout.

The problem is the sheer size of Sorrell’s pay packet. He received a 30 per cent rise in his base salary to £1.3 mn last year. The figure would have been higher, had investors not complained about a planned 50 per cent hike. Sorrell is also entitled to a cash-and-share bonus worth up to five times that amount. Throw in pension contributions, deferred share awards from previous years and Sorrell received £12.96 mn last year.

WPP’s board can just about justify Sorrell’s pay with reference to US peers like Omnicom and Interpublic, which have awarded their CEOs bonuses at an even higher multiple of base salary. It’s also true that Sorrell is unusually pivotal to knitting together WPP’s disparate mix of businesses, parachuting in wherever he is needed across the empire. It seems implausible that Sorrell would quit in a huff over pay. But if he did, the company’s market value would probably drop by a lot more than £13 million.

However, WPP’s reliance on the 68-year-old Sorrell is neither healthy nor sustainable. It encourages him to act like an owner rather than a hired gun appointed by shareholders. And his value to the group will eventually start to decline.

The board should interpret the ugly AGM as frustration with these broader governance challenges. Shareholder protest will get harder to ignore: UK investors are set to get a binding vote on companies’ pay policies from 2014. The board needs to show not only that Sorrell is worth his pay, but also that it is actively preparing to make WPP less dependent on its charismatic and highly-paid CEO.