As institutional investors line up to attack public companies that they regard as over-generous in rewarding their top executives, inevitably the spotlight falls again on WPP’s chief executive Sir Martin Sorrell. And yet no-one other than an envious green-eyed monster would question the man’s business achievements.
But that is not the issue. The question is: why would a founding shareholder need any more shares?
Sir Martin has already accumulated massive wealth and, many would say, deservedly so (see Latest £41.5m share award brings Sorrell’s WPP stake to £385m). That wealth grows in response to the further improvement in the profits earned by WPP, begging the question: is that not reward enough? Why dish out even more shares which dilute the interests of other shareholders and perhaps could be more usefully reserved to motivate emerging executives who might, for example, secure the longer term continuity of management?
However, there is no case for penalising entrepreneurial businessmen simply because they have been successful. That would be mean and destructive, particularly if those businessmen have taken significant risks in founding or acquiring their company. Far better to celebrate the growing value of the shares they already hold, but to restrict the scope for increasing those holdings beyond a sensible limit unless those new shares are paid for in cash.
Already the WPP scheme required LEAP participants to buy some shares alongside the free ones available as a performance based award – for this year’s LEAP award, participants had to buy one share for every five they might earn for nothing. And the successor scheme will be capped at £11.2 million which, according to WPP, would equate to 9.74 times Sir Martin’s base salary of £1,150,000. But WPP is not the only company that has attracted criticism.
So what further might be done to assuage the concerns of investors without doing unnecessary damage to those company executives who have only a small shareholding, if any, and who would be motivated by the prospect of a bigger share stake? Here is a simple suggestion:
1. Options and similar performance based share awards should not be granted to an employee of a public company who already holds shares and options that together account for more than a specified statutory percentage of share capital issued or under option – say 15%. (That would not prevent an executive from buying more shares on the open market for cash.)
2. Options and similar performance based share awards granted to an employee of a public company in any one financial year should not exceed the higher of a specified percentage of the aggregate shares and options held by that employee at the start of that period and an absolute percentage of the company’s issued share capital – say 5%.
To police such a regime, companies would need to disclose any award that resulted in the prescribed limits having been breached, with particulars of the nature and extent of the breach.
How would the above proposals have affected the share awards made to Sir Martin Sorrell? Today his holding accounts for only 1.744% of WPP’s issued capital, or just over 2% if related trusts are included, so the recent awards are likely to have fallen well within the suggested overall limit under rule 1 above. However, to comply with the suggested rule 2, the latest individual LEAP award would have been curtailed to considerably less than the amount actually granted.