CLOSE-UP: LIVE ISSUE/REWARDS PACKAGES - Holding company chiefs cash in despite ad slump

The salaries and bonuses of network heads continue to increase.

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
                                                  Post-tax profit
                                           Latest          Change
                                             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
                                                       pounds
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
available.

BONUSES AND OTHER REWARDS
                  Annual remuneration package1       Total        Change
                         Salary   Bonus  Other    2001    2000   on 2000
                                           dollars
                           '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.

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