Performance Enhancers

Two people have done more than anyone in advertising recently to focus attention on whether executive pay is linked to performance: McCann Worldgroup CEO John Dooner and WPP Group CEO Martin Sorrell. Interpublic Group disclosed in April that Dooner will retire as McCann CEO with a $37.7 million payout. Sorrell, separately, created a five-year incentive plan last May that could net him a £60 million ($90 million) payday.Dooner's package is controversial because he leaves McCann Erickson, IPG's flagship agency, following a series of high-profile client defections since 2008. Verizon's wireless and Droid businesses, Microsoft, Hewlett-Packard and Pfizer's Viagra have all gone, reducing the shop's billings by an estimated $970 million, according to Wall Street analysts. He spent 15 years at the helm of McCann, and now IPG will pay him $2.5 million annually for the next 15 years not to work at McCann.Sorrell's deal made headlines because of its sheer potential size. A joint report on investment ethics by Britain's major churches singled out Sorrell as the highest paid U.K. CEO in 2008. The churches did not criticize Sorrell directly, but hinted that his high pay was problematic, saying: "Companies seeking to enhance their prestige through competitive remuneration policies are operating in clear opposition to shareholder interests."It's not just the agencies. Major advertisers and the media vendors who serve them also have top executives with extravagant compensation packages, according to their SEC filings. At CBS, CEO Leslie Moonves has a comp so high he deferred $12.9 million of it last year. At Walt Disney, CEO Robert Iger received 93 percent of his $10 million bonus, even though the company's revenues and earnings per share both decreased. At AT&T, CEO Randall Stephenson received $865,000 in perks such as travel and club memberships. Verizon offers its CEO, Ivan Seidenberg, a "golden coffin": $39 million in the event of his death.All publicly traded companies insist that executive compensation is linked to the performance of the company. But a closer look shows that in many cases, pay formulae are murky or arranged in such a way that top executives are likely to get generous bonuses and stock awards no matter how they perform.Top executives get paid in several ways. Their base salary is usually relatively modest, around $1 million. It is usually accompanied by retirement benefits and perks, like free use of the company's private jet.On top of that, executives earn bonuses in cash, stock and options, which are all linked to how well their agencies perform. The vast majority of any holding company CEO's compensation consists of the performance-related rewards. Omnicom Group CEO John Wren's total compensation for 2009 was $7.9 million-nearly eight times his base salary. That ratio is typical of his counterparts at competing companies. In theory, this is as it should be. But the devil is in the details. There are often many different performance-pay rewards, sometimes attached to dozens of different variables, including revenue, profits and the price of the company's stock. As these variables frequently move in different directions relative to each other -- last year, most companies saw their revenue fall but their stock prices rise -- CEOs can still win some bonuses when other bonuses don't pay out."This is the case with all the companies we looked at, apart from the two non-U.S. companies [the U.K.'s WPP and France's Publicis Groupe]," says Paul Hodgson, a senior research associate at The Corporate Library, an independent, Maine-based research firm. "The incentives are structured in such a way to prevent the incentive payments never being paid. If the stock price is falling and your equity is worthless, you [as a CEO] can still earn bonuses based on cash flow or net margins or some other short-term metric."At AdweekMedia's request, The Corporate Library examined executive compensation at five ad-agency holding companies (the top three U.S. and top two European companies according to revenue), the top five publicly held media companies (based on revenue) and the top five marketers/advertisers (based on ad spend).Click here for the Corporate Library's write up of its findings on the compensation schemes.AdweekMedia also ranked total compensation against the companies' revenue, net income and change in stock price to assess whether ad execs really were rewarded for performance over the last year.Turns out it's not always clear how industry leaders earn their money. For instance, Omnicom, IPG, WPP and MDC Partners all fail to describe exactly what executives must do to meet their bonuses, according to The Corporate Library. Reasons are often vague or given after the fact, meaning the company didn't set a bonus target at the beginning of the year and instead awarded it after looking at the exec's performance and deciding it was worthy.IPG did that last year for Dooner. His supplementary bonus award came to zero because McCann's operating income fell below his bonus target. But he earned an $800,000 incentive award for meeting "high-priority objectives."The company gave no specifics on either the income target or the incentive award. IPG said the incentive bonus "reflects McCann Worldgroup's performance, actions taken on specific talent-related initiatives, and progress on diversity and inclusion initiatives across the operating company." But it did not reveal what those actions were, "as this data provides competitive insights that could harm our business," according to a company disclosure to the SEC."None of the companies in our industry provide detail on the objectives used to determine incentives," says an IPG representative. "To do so in a highly competitive industry . . . could telegraph elements of our strategy in ways that could hurt us."IPG has since discontinued the pension plan under which Dooner amassed his wealth. The company points out that the payments come after decades of service."John's nearly 40-year tenure at McCann is almost unique in the industry," adds the rep. "He drove the company's growth into a multi-discipline powerhouse and returned there in 2002 to manage and stabilize the world's largest global network. He also played a key role in successful succession management. We have always been fully transparent concerning his retirement benefits."Pay structures can be opaque. Although U.S. company disclosures put an exact price on CEO pay, the value of stock and options changes every day. The data are thus continually out of date. An example of that occurred at Omnicom. In 2008, with the recession crushing the company's stock to a historic low of just $22.27, the top five executives there all received what The Corporate Library calls "mega grants of stock options." Wren received 1 million options at a strike price of $25.48 -- an easy target to beat. He got another 500,000 options at $23.40 in 2009. No one complained when the options were worth little. But now that the stock has rebounded to $40.53, an investment group has sent a letter to shareholders complaining that the company's managers now own around 8 percent of the entire outfit. Omnicom declined comment. The situation is similar in Europe. After reading WPP's annual report, one would be forgiven for thinking Sorrell's total "emoluments" (to use the fusty British term for compensation) for 2009 were just £2.7 million. But that doesn't count the current value of matching shares he earns under the company's Leadership Equity Acquisition Plan, which WPP doesn't include in its "emoluments" section. Sorrell received 1.8 million shares at £6.10 each under the plan last year, which adds up to about £11 million on top of his regular compensation. That probably overstates his compensation: he will only get all his bonuses -- the full £60 million -- if the performance of WPP shares beats those of similar companies over the next five years. In prior periods, Sorrell hasn't reached his maximum payout target. "What we're doing is putting together a suicide pact in a sense because you can't take your money out for four or five years," Sorrell explained in an exclusive interview. "If the shares fall, you suffer, even though you may have had significantly better performance."Indeed, if the stock goes down, then the £22.3 million that Sorrell has invested of his own money also goes down. "The net result of that is if they win, they win big," Hodgson says. "And if they lose, they lose big, too."The good news is that last year there was some loose correlation between performance and compensation at most ad-agency holding companies. At Omnicom and Publicis, compensation roughly increased in line with the stock. At IPG, compensation decreased in line with net income. At MDC and WPP, compensation appears broadly correlated to revenue.At MDC, CEO Miles Nadal (pictured) is rewarded mostly with stock grants that vest over three-year periods, providing certain goals are met. The Corporate Library lauds this scheme, but notes that the overlap between the long-term incentives and short-term incentives "create a situation where executives are rewarded twice for the same achievement."Says Nadal: "If we don't grow organically or overall, and we don't increase shareholder value, we don't get paid. We have more modest compensation but much more upside if we deliver shareholder value."At Omnicom, by contrast, compensation appears to be mostly unlinked to basic performance metrics. Revenue and net income decreased by 12.3 and 21 percent, respectively, last year, yet all five top executives took raises from 15 to 203 percent. Omnicom's stock went up 38 percent, but it was still the worst performer among the five we examined. Omnicom declined to comment.But compared to their clients and the media vendors who serve them, agency compensation seems relatively rational. Fox News Channel CEO Roger Ailes receives a guaranteed bonus of $1 million in addition to his $5 million salary, though he does not have to do anything to get it, according to The Corporate Library. His boss, News Corp. CEO Rupert Murdoch, received 420,997 shares last August as a "retention" incentive, even though, as the founder of the company, he's hardly likely to leave.Among advertisers, AT&T's revenue, net income and stock price all declined last year. Yet executives took total compensation raises of between 89 and 139 percent. CEO Randall Stephenson's $865,000 in perks included personal aircraft use, club memberships and home security. "When added to base salary, the CEO is receiving more than $2.3 million in fixed pay just between his salary and perks," says The Corporate Library. (Stephenson is pictured at right.)Macy's policy is to set executive pay between the 50th and 75th percentile of a peer group of retailers. The formula all but ensured that if his rivals get a raise, CEO Terry Lundgren will get one, too.Under Ivan Seidenberg, Verizon's stock declined 4 percent last year, following an earnings tumble of 18 percent. Yet the company will give him $39 million just for dropping dead. According to The Corporate Library, about a quarter of that "comes from a life insurance benefit valued at more than $10 million."But it is the compensation of Sorrell that has some fellow leaders gasping. "It's unbelievable," says an agency chief who declined to talk on the record.That may be because they don't understand it: WPP's official description of the plan is 12 pages long and filled with dense corporate-finance terminology. But The Corporate Library gives it high marks. Sorrell and his managers are required to buy their own stock and hold it, giving them "skin in the game." (Most other companies simply give the stock to their CEOs.) "The difference between that plan and the other equity long-term incentives typically in place in U.S. companies is that in order to get any kind of compensation from it at all, it requires Martin Sorrell and the others to invest their own money in WPP stock. You'd be surprised how rarely that happens in the U.S.," says Hodgson.And the incentive is based on long-term performance -- it pays out only after five years. The other agency companies typically reward on a one- to three-year basis. "It continues to be as unique now as it was when first introduced," Hodgson says.Company chiefs repeatedly point out that the main performance levers within their control are revenues and costs, not the stock price. "There are things we can do and things we can't do," explains Sorrell. "We can manage our revenues, including our market share and our investment in people. But WPP can't control the entire stock market or political regimes." Yet much of executive pay is linked to stock, and with the recession largely over and a global economic recovery under way, stock prices are likely to risen -- and take CEO pay packages right along with them.

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Jim Edwards