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.”

Publish date: May 16, 2010 © 2020 Adweek, LLC. - All Rights Reserved and NOT FOR REPRINT