When UK public companies in the marketing sector introduced substantial profit-sharing bonuses into their bosses' reward packages a few years ago, one could have been forgiven for thinking that their basic earnings would thereafter remain broadly in line with inflation. Think again.
While none of the top bosses enjoyed any profit-sharing bonus for the past year, several of them did enjoy chunky increases in their core remuneration.
Not least was Cordiant's chief executive, Michael Bungey. His basic package of salary, pension and benefits went up by 16 per cent to £821,000, while the company incurred a £278 million loss after writing off the cost of over-priced acquisitions made during Bungey's period in office.
To be fair, Bungey can argue that some of the 16 per cent increase was owing to "US tax equalisation arrangements and abnormal pension contributions, but the fact remains that his core package cost 16 per cent more last year than the year before.
Bungey was not alone, however. The Incepta Group chairman, David Wright, enjoyed a 16.1 per cent increase, albeit from a much lower base than Bungey.
And the Aegis Group's Doug Flynn enjoyed an extra 7.7 per cent - including a massive £270,000 pension scheme contribution - at a time when the company incurred a loss of £7 million.
Such figures will doubtless inspire bile from those unfortunate staff at the holding companies who have been made redundant. The lucky people who remain employed in the industry, many of whom have been asked to accept little or no salary increase in these tough economic times, will also be nonplussed.
When the top guys can earn up to double their basic package in profit-sharing bonuses in the good times (in the previous year the WPP group chief executive Sir Martin Sorrell's bonus was £1.3 million), surely that upside opportunity should be balanced by an obligation to enjoy very little additional core remuneration in the bad times. Sorrell and the Chime Communications chairman, Lord Bell, have been around for long enough - and understand the investors' thinking well enough - to have recognised that.
Nevertheless, Sorrell and Bell can look with envy at the packages drawn from the US groups last year by Peter Mead and Sir Frank Lowe, both of whom carry less overall responsibility. While Sorrell had to make do with slightly less than £1.3 million (excluding pension contributions), Mead enjoyed a handsome $2 million and Lowe earned $1.4 million.
Much of our current reward culture has emanated from the US, where there are big bucks for those bosses who deliver, but often swift retribution for those who don't. And yet there is a major difference between the US approach to rewarding bosses and that applied in the UK.
Consider John Dooner, the chairman and chief executive of Interpublic.
Like Bungey and Flynn, his company incurred a loss last year and it was a big one - $505 million. Even Cordiant didn't sink to such depths.
But Dooner enjoyed an 8 per cent (or $95,000) rise in basic pay and a bonus of $500,000 (down from $1.5 million in 2000) for the year. Admittedly 2001 was Dooner's first year in the job and it may be unfair to penalise him so soon, but Bungey could still feel he has been more harshly treated by comparison.
So what lies behind the difference in approach across the Atlantic? There are two aspects to the issue. The first difference is in the way profit-sharing bonuses are calculated. In the UK, the trend is to set clear targets for the year. Beat them and enjoy a bonus bonanza. Miss them and there's nothing.
In the US, a remuneration committee reviews performance after the year-end by reference to various objective and subjective factors. So there is more discretion.
This rather woolly wording summarises the remuneration committee's assessment of Dooner's performance: "The committee took into consideration Interpublic's operating results (11.5 per cent operating profit margin ... excluding non-recurring items) which was a 24.4 per cent decline ... The combination of operating performance and the adverse general business conditions during 2001, the committee believed, warranted the payment of a limited bonus."
The other difference in approach is in the lower tolerance of continuing under-performance in the US. The UK approach seems to be to cancel the bonus but keep the job. In the US, the bonus is merely reduced, but the job remains at risk.
It is difficult to assess how much of Interpublic's financial performance can be blamed on Dooner. Did he preside over the very expensive True North merger and the loss of the Chrysler account? Yes. Did he initiate the disastrous foray into internet consultancy? No. Was he in power when the inter-company accounting defects were allowed to evolve unchecked? No, but he was previously in charge of the McCann-Erickson worldwide network where the defects arose.
Over at Omnicom, the chief executive, John Wren, is probably deeply conscious of the need to enhance the company's share price in these troubled times, as he contemplates the recent offer of an option to acquire 1.5 million extra shares if he does so. But what if he doesn't?
- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.
UK REMUNERATION COMPARED TO COMPANY PERFORMANCE
year from last
pounds m year pounds m
Sir Martin Sorrell Group CEO, WPP 271.2 26.5
Michael Bungey CEO, Cordiant 277.6 - 313.7
Lord Bell Chairman, Chime 5.8 - 3.7
Doug Flynn CEO, Aegis -7.0 - 54.5
David Wright Exec chairman, Incepta 3.8 - 12.7
Lord Chadlington1 CEO, Huntsworth -1.8 3.9
Basic remuneration package
Basic Benefits Company Change
salary for in kind pension year on
year pounds pounds contrib'n year
Sir Martin Sorrell
Group CEO, WPP 849,000 24,000 339,000 - 0.5%
Michael Bungey CEO,
Cordiant 653,000 96,000 72,000 16.0%
Lord Bell Chairman,
Chime 559,300 36,571 123,000 0.7%
Doug Flynn CEO, Aegis 540,000 25,000 270,000 7.7%
David Wright Exec
chairman, Incepta 350,000 1,576 35,000 16.1%
Lord Chadlington1 CEO,
Huntsworth 200,000 9,000 0 n/a
Annual Total Share options
profit- for at year end
sharing year pounds (number of
bonus pounds shares)
Sir Martin Sorrell Group CEO, WPP 0 1,212,000 14,375,676
Michael Bungey CEO, Cordiant 0 821,000 1,182,089
Lord Bell Chairman, Chime 0 718,871 1,029,840
Doug Flynn CEO, Aegis 0 835,000 8,826,896
David Wright Exec chairman, Incepta 0 386,576 300,000
Lord Chadlington1 CEO, Huntsworth 0 209,000 6,000,000
Source: Marketing Services Financial Intelligence.
1. Lord Chadlington is newly appointed so year-on-year change not
BONUSES AND OTHER REWARDS
Annual remuneration package1 Total Change
Salary Bonus Other 2001 2000 on 2000
'000 '000 '000 '000 '000 %
John Wren Omnicom 875 1,300 15 2,190 3,099 -29%
John Dooner IPG 1,250 500 73 1,823 2,750 -34%
Roger Haupt Bcom3 950 950 0 1,900 2,003 -5%
Sir Martin Sorrell2 WPP 1,223 0 35 1,258 3,139 -60%
Sir Frank Lowe IPG 1,000 100 272 1,372 2,013 -32%
Peter Mead Omnicom 750 1,275 50 2,075 2,937 -29%
1. Remuneration excludes payments earned from long-term incentive plans
and new stock options granted
2. Translated at $1.44 to £1; Note that pension scheme
contributions are not included in above figures.