WPP: 'Sacrificing' pay rises for staff in favour of profits was a mistake

It was "not sensible" to keep such a "tight" lid on incentives in final years of Sorrell era.

Jun 17, 2019 08:47:00 AM | Article | Gideon Spanier

WPP has admitted that giving its 130,000 staff relatively modest salary increases and bonuses and focusing on profit margin, rather than revenue growth, may have contributed to its financial woes in recent years. 
Paul Richardson, the group finance director, told shareholders at the annual general meeting that he believed the world’s biggest agency group by staff numbers had not been "sensible" by holding salaries and bonuses "tight" to inflation.
Average pay per head at WPP was an estimated £51,800, including bonus and benefits, last year. Base salary was increased on average by 1.2% in 2018, 1.8% in 2017 and 1.5% in 2016, according to the annual report. 
Richardson said: "We have for a number of years achieved good [profit] margin performance but at the sacrifice, in part, to incentives and holding salaries fairly tight to inflation. I think ultimately that probably wasn’t a sensible financial decision." 
That was a tacit acknowledgement that the company’s finances began to suffer towards the end of former chief executive Sir Martin Sorrell’s tenure, which ended abruptly in April 2018.
WPP’s revenues have declined every year since 2017, partly because of some big account losses, and net debt hit reached £5bn last year, while the company’s stock market valuation halved to £12bn.
"We have adjusted the cost base [because of the account losses] but probably have to recognise now that the business running at a 17% margin is not likely to be the long-term margin that we’re striving to achieve [in future]," Richardson said in response to a shareholder’s question about why margin was in decline.
WPP’s new management felt "we would not try to hold an unsustainable margin, in our opinion, but [instead] devote all our resource and energy to returning the top line to growth," he explained.
Margin has dropped from 17.4% in 2016 to 17.2% in 2017 and 16% in 2018 and is set to hit about 15% this year.
Richardson said a 15% margin after incentives had been paid out and 18% before incentives was a more realistic "medium-term" ambition – a target that Mark Read, Sorrell’s successor, first outlined last year.
That is why the company has changed its incentive scheme to put more emphasis on revenue growth as well as profit and is willing to set aside as much as £100m in additional incentives to motivate staff, Richardson said.
"Once we return our business to growth, our share price should improve significantly," he added, acknowledging the halving in WPP’s value between 2017 and 2019 had been "disappointing".
A source close to WPP pointed out average pay per head of £51,800 was a global figure that varied widely in different markets.
The source added that Richardson’s comment about holding salaries and incentives tight to inflation was more about delaying pay increases for six months or until the next financial year – rather than the "quantum" or size of any pay increase not being large enough.
Sorrell was famously one of Britain’s best-paid bosses and his annual pay peaked at £70m in 2016 as profits soared and he collected huge long-term share awards, even though his base salary stayed flat for years at £1.15m.
WPP subsequently reduced the size of the potential bonus package for its chief executive.
Read, who earns a base salary of £975,000, has made investing in talent a priority and has recruited Jacqui Canney from Walmart to be global chief people officer. 
Richardson, a longstanding Sorrell lieutenant, is stepping down after 23 years in charge of WPP’s finances.
(This article first appeared on CampaignLive.co.uk)