Ad industry analysts saw unexpected signs of improvement in third-quarter results posted by Interpublic Group last week. Still, even while garnering cautious accolades from analysts, the holding company disputed a report from proxy advisor Glass Lewis & Co. that gave it the worst ranking among Standard & Poor's 500 companies it tracks in "pay for performance" for 2005.
In a report titled "Pay Dirt," Glass Lewis weighed IPG CEO Michael Roth's compensation against a 28 percent decline in IPG's share price, a 27 percent decline in its market capitalization, accounting irregularities, restatements and a six-month delay in the filing of its 2004 annual report.
While IPG didn't dispute the poor performance that Glass Lewis outlined, the No. 3 holding company took issue with the $14.6 million estimate of Roth's total compensation last year. An IPG rep said Roth took home a fraction of that because most of the stock options and stock he received were either "under water" or worthless because he didn't hit performance targets.
"Over 80 percent of the compensation that Glass Lewis attributes to Mr. Roth is in equity grants that require performance to pay out and will therefore not vest or currently have no value. This is consistent with our stated commitment to pay for performance in executive compensation," the rep said. "In 2005, Mr. Roth received actual cash compensation of approximately $2.5 million, which we believe is fair value for the leadership he demonstrated in taking the company through a difficult yet necessary financial review and restatement."
Some of the equity came in the form of stock options that won't vest until 2009. Last year, Roth received some 450,000 options with a strike price of $13.60 and another 398,000 options at the strike price of $12.10. Glass Lewis incorporated the options in its estimate, calculating a future value of about $4.8 million. The IPG rep, however, said the Glass Lewis estimate was high and reiterated that since the stock still trades below both price levels, Roth has yet to realize this compensation.
In response, Jonathan Weil, editor of financial research at Glass Lewis in San Francisco, said: "The important point is that when equity awards are granted, they have a value at the grant date. That value may go up or down over time, but they're not worthless." Weil added that, save for the 848,000 options, Glass Lewis used numbers from IPG's own proxy statement to compile its estimate, including what IPG identified as $7.1 million in "restricted stock awards."
Industry analysts were largely encouraged by IPG's Q3 results, but remained cautious about the company's financial future, given signs of softness in client spending and IPG's seemingly aggressive goals for 2008.
Within two years, IPG has vowed to achieve peer-level revenue growth and boost its operating margin into double digits. The company's margin at the end of Q3 was around -1.4 percent and its organic revenue for the quarter grew 2.7 percent. For the first nine months, organic growth stood at 1.2 percent. IPG also reduced its Q3 net loss in part by cutting costs (see chart).
"The good set of Q3 figures suggest that IPG is making progress toward its 2008 goals, although we see them as stretch goals," Merrill Lynch analyst Lauren Rich Fine wrote in a report. "In fact, over the course of history, we have never seen a holding company show the type of margin progress IPG is attempting to achieve in such a short amount of time."
That sentiment was echoed by Bear Stearns' Alexia Quadrani. "With lackluster growth in Europe, inferior representation of revenues from higher growth marketing services and a mediocre media platform, we believe IPG's revenue growth may lag its peers for some time," wrote Quadrani, in another report.