The controversy over WPP Group PLC's (pound) 25 million incentive pay proposal for its chief executive represents a "clash of cultures" between U.K. and U.S. institutional investors over the size of compensation.
"There was no negative reaction whatsoever from our major shareholders in the U.S." over the pay incentive proposal for Martin S. Sorrell, WPP's chief executive, said Brian J. Brooks, WPP group director of human resources. London-based WPP is the parent of advertising agency giants J. Walter Thompson Co. and Ogilvy & Mather, both based in New York.
FMR Corp.'s Fidelity Investments, WPP's biggest U.S. shareholder, will support the proposal, he said. The Boston-based Fidelity group owns 8.76% of the stock, according to the 18-page WPP pay proposal.
Fidelity officials couldn't be reached for confirmation on their support.
Institutional Shareholder Services, Bethesda, Md., issued a recommendation that shareholders support Mr. Sorrell's pay incentive package, Mr. Brooks said.
Howard Sherman, ISS senior vice president and principal, confirmed the proxy analysis firm's recommendation in support of the pay proposal. "We support it," he said. "It fell within our guidelines."
"It happens that our guidelines aren't always in line with the views of activist shareholders," Mr. Sherman added, referring to WPP's dissident shareholders in the United Kingdom.
In the United States, shareholders hold in total 30% of WPP stock, Mr. Brooks said.
"The pay package is more typical of U.S. norms" in contrast to more limited pay incentives typical for U.K. executives, he said.
"That's exactly because our principal competitors are virtually all U.S.-based.
"With this view, it's the right (pay) package," Mr. Brooks said.
In addition, he said, "The package reflects a trend in the U.S. market of having executives invest large amounts of their own money in the companies."
The pay proposal calls for Mr. Sorrell to invest (pound) 900,000 more in WPP shares, after he invested 1.3 million last September.
"From a philosophical standpoint, (the pay proposal) is the most appropriate way to reward and design incentives for a chief executive and it's the right thing to do for shareholders," Mr. Brooks added.
Dissident shareholders, all apparently from the United Kingdom, have sought to muster enough votes at an extraordinary meeting to be held after WPP's annual general meeting June 26 in London to force a change in Mr. Sorrell's incentive proposal, whose potential maximum value is disputed - between (pound) 25 million and (pound) 35 million. WPP volunteered to bring the pay proposal to a shareholder vote.
Leading the dissidents were Hermes Investment Management, which manages pension funds of the British Post Office and British Telecommunications PLC, and Fleming Investment Management Ltd.. Both firms are located in London.
Hermes owns 1.7% of WPP and Fleming, 8%, though those amounts couldn't be confirmed.
The dissidents, according to reports, contend the pay package is far out of line with typical U.K. corporate compensation and overly generous in its potential rewards.
Prudential Corp. PLC and Provident Mutual Life Assurance Association, both of London, and Scottish Amicable Life Assurance Society of Glasgow, Scotland, among a few other leading members of the Association of British Insurers, could join opposition against the pay package, although the reports couldn't be confirmed.
Provident Mutual and its Provident Mutual Managed Pension Funds Ltd. unit together are WPP's second-largest shareholder, owning 3.5% of the stock, according to the pay proposal. The other dissident shareholders reportedly own only a small amount of stock, leaving the extent of opposition uncertain.
Mr. Brooks conceded the WPP package is much higher than U.K. standards. But he argued WPP is a global concern and must offer competitive compensation.
U.S. shareholders might understand such pay incentives better than U.K. investors, he said.
"That's pretty much why it hasn't met opposition in the U.S.," he said. "This is a clash of cultures.
"The executive compensation market is in turmoil right now" in the United Kingdom, heightening the WPP pay issue, Mr. Brooks said.
"We're pushing the envelope" on the proposal for Mr. Sorrell. "We're doing things new in the U.K. and not well understood. This puts us in the front line" of the controversy over rising executive pay, he said.
More than 85% of WPP's operating profits from its businesses in advertising, public relations and related fields comes from outside the United Kingdom and 40% within the United States, according to the pay proposal. It is seriously considering listing its shares on the New York Stock Exchange. Currently, its American depository receipts trade in the Nasdaq National Market. He said a decision on the NYSE listing, and what type of shares it would trade there, could come soon.
Shareholders opposing the pay proposal, however, forced WPP to consider modifications to the proposal.
"We're continuing to have intense conversations with a few of our major shareholders," Mr. Brooks said. He indicated Hermes and Fleming were the principal shareholders involved.
"We're considering potential modifications to our proposal to make them more responsive to shareholders," Mr. Brooks said.
"Nothing has been proposed yet" in terms of modifications, he added.
But Mr. Brooks said the modifications could strengthen the targets Mr. Sorrell must reach to earn his pay package, that is, making them harder to achieve, and could change the hurdle to total shareholder return on WPP stock, rather than just WPP share price.
The complex pay proposal is designed to reward Mr. Sorrell only if WPP stock reaches certain targets in the stock price and in outperforming the FT-SE 100 stock index over five years, covering the period from September 1994 through September 1999. If is successful, he would achieve the potential maximum total compensation for the period, an amount WPP values at 25 million.
Most reports put the value at 35 million, but Mr. Brooks said those estimates improperly include the value of phantom options, or all-cash incentives, Mr. Sorrell received before September 1994. The estimate also fails to adjust for the time value of money, because Mr. Sorrell can't cash in until 1999 many of the option incentives even though he would be vested earlier.
In its proposed pay package, WPP in some major ways tried to meet demands of corporate governance activists in general.
Among them, WPP volunteered to put the pay package up to a vote of shareholders. In addition, WPP pegged the pay incentives to external an target, namely, the stock price, or possibly total shareholder return, rather than internal targets such as income or revenue.
For Mr. Sorrell to earn all of the incentives, WPP stock price would in part have to rise an average 22.5% a year for five years. Thus, shareholders would gain as well, also.
"We aren't required to have a shareholder vote," Mr. Brooks said.
But he said the WPP board decided to open the issue to a vote in part to put a timeframe on resolving the issue. "Once we have the vote, the issue is closed," he said. Otherwise, the issue could linger, coming back at WPP whenever a shareholder complains.
In addition, he said WPP officials are confident they can persuade shareholders of the merits of the pay proposal and win their support.
But shareholders and others have been reported to criticize the package because Mr. Sorrell doesn't bear any risk if the WPP stock price fails to reach targets, nor did he share in the shareholder losses in the past as WPP's price fell, according to reports.
The brewing rebellion has some similarity with the shareholder revolt last December at another global advertising giant, Saatchi and Saatchi Co., linking executive pay and company performance, although the issue at WPP appear to be limited to the size of the pay package, not on the future of its chief executive.
WPP dissidents may need only a sizable minority of shares voting against a pay proposal to force a change, as the earlier shareholder revolt shows.
Saatchi & Saatchi's board succumbed when only 30% of the shares opposed it.
"The concerns of shareholders are understandable," said James D. Dougherty, senior vice president-research, Dean Witter Reynolds Inc., New York.
"But it should have come as no surprise to them," the shareholders.
The WPP revolt is "an indication of shareholder activism in the wake of Saatchi and Saatchi," he added.
The difference is "WPP is on the mend," Mr. Dougherty said. "Things are going in the right direction. You can argue degree, but not direction."
"With Saatchi and Saatchi, it clearly was on the rocks and going in the wrong direction."
As a result, shareholders pushed the board to force Maurice Saatchi, chairman, to resign.
No one interviewed expected the shareholder vote against Mr. Sorrell's pay incentives to lead to his departure. If the pay package is voted down, Mr. Sorrell would retain his current contract, which the WPP pay proposal says is below the medium for WPP industry peers.
Mr. Dougherty said he recommends WPP as a buy.
In price appreciation, the stock is up 16.7% since Jan. 1 and 23.5% so far in the second quarter, he said.
Mr. Dougherty credited Mr. Sorrell with putting WPP back on the upswing since the stock performed poorly in the 1980s and early 1990s.
But, Mr. Dougherty said, "I'd be neutral on whether he should stay."