Analysis: IPG Loses $2 Billion but Top Executives Win Big

Pay-to-Performance Tie Criticized by Some Investors

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LOS ANGELES ( -- Over the past five years, Interpublic has lost $2 billion, and its top five executives had a payday initially worth $107 million. Over the same five years, Omnicom Group made $3.2 billion, and top management earned $111 million.
Interpublic notes that $6 million of Chairman-CEO Michael Roth's $14 million pay package last year came in restricted stock that he'll get only if Interpublic meets revenue and profit goals.
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Omnicom CEO John Wren and his cohorts were rewarded for handsome performance. Interpublic managers ended up making far less after factoring in stock losses, but they still enjoyed a rich payday for their contributions to the disastrous performance of a floundering giant during a period riddled with earnings restatements.

Activist shareholders
It's a point not lost on two activist shareholders who have submitted proposals -- to be voted on at Interpublic's May 25 annual meeting -- one of which asks the board, in the event of a restatement, to review all bonuses and other rewards received by senior executives in the restated period.

Since Interpublic's accounting and operating problems became apparent in 2002, the company has restated results for every year from 1997 to 2005. For those years, the top five executives received pay originally valued at $232 million, according to Ad Age's analysis of proxy disclosures.

Up in smoke
Much of that prospective payout went up in smoke with Interpublic stock, which has plunged 78% since 2001. The $232 million included stock options initially valued at $61 million -- all now "underwater," according to Interpublic, and worth nothing unless the stock rebounds.

The total also included $74 million in so-called restricted stock that vests over time, but that stock now is worth only $27 million. How so? Chairman-CEO Michael Roth is unlikely to collect $6 million in restricted stock because the company hasn't met performance goals, and Interpublic indicated the rest of the restricted stock is paying out at only about 40% of the initial value at the time of the grant. Factoring in the share collapse, the top five executives received $124 million over the past nine years. (The top five ended up with $56 million over the past five years, not the $107 million originally envisioned.)

'Appropriate' compensation
"All of the outstanding options have no current value, and the restricted stock awards are today worth a fraction of their value at grant," Interpublic said in a statement. "The large difference between the potential and realized value of past awards reflects the company's performance and is both appropriate and in keeping with the intent of incentive compensation."

In other words it appears to be Interpublic's feeling that the fact the top five executives ended up with $124 million after the share collapse, rather than the $232 million they might have anticipated, is proof that its pay-for-performance system works.

Yet long-suffering shareholders still may feel $124 million is too rich for their blood. It works out to an average of $2.8 million a year for each top executive -- nice pay for lousy results. And it includes $37 million in executive bonuses for years in which Interpublic later restated results.

Annual meeting vote
At the annual meeting, stockholders will vote on a proposal to recoup some bonuses and incentive pay after a restatement. In the event of a restatement, the proposal asks the board to review "all bonuses and other awards ... made to senior executives on the basis of having met or exceeded performance targets during the period of the restatement" and to recoup "such bonuses or awards to the extent that these performance targets were not achieved."

Activist shareholders William and Kenneth Steiner submitted this and a second proposal that seeks to separate the jobs of chairman and CEO. Interpublic wants shareholders to reject both proposals, and they likely will; proposals from gadfly shareholders rarely pass.

"The (bonus) proposal adopts an overly rigid approach" requiring the board "to mechanistically recoup bonuses in inequitable circumstances and potentially violate Interpublic's existing contractual commitments," Interpublic said in a proxy rebuttal.

But Interpublic did take some recent action regarding bonuses during periods of restatement. Weeks before the proxy came out, the board adopted a policy that in the event of a future restatement, it would "review all bonuses that were made to executive officers of the company on the basis of having met or exceeded specific performance targets for performance periods beginning after Dec. 31, 2005."

New bonus policy
"If such bonuses would have been lower had they been calculated based on such restated results," the new policy states, "the board will seek to recoup ... all such bonuses" from officers "whose fraud or misconduct resulted in such restatement, as determined by the board." Interpublic told Ad Age it voluntarily adopted the new policy "in keeping with best practices in corporate governance." Absent from the policy is any mention that Interpublic would review lucrative performance incentive awards such as restricted stock -- often far bigger than bonuses -- in the event of a restatement.

Three firms that advise institutional investors on proxies -- Institutional Shareholder Services, Proxy Governance and Glass, Lewis & Co. -- agreed shareholders should reject the bonus petition. Glass Lewis, however, recommended shareholders vote to split the chairman and CEO jobs, and it recommended investors withhold votes for five outside directors.

Glass Lewis also harshly criticized Interpublic for compensation, giving it an F for tying pay to performance. "For the past three years, Interpublic has consistently performed worse than its peers but either paid its top executives the same or more than its peers...," the proxy adviser said. "Interpublic's compensation practices have failed to effectively align pay with performance."

Link beween pay and performance
Interpublic argues that its board has strengthened the tie between pay and performance with advice from a compensation consultant, Hewitt Associates, hired in 2004. "Our new plans link equity awards to specific stretch performance targets," Interpublic said in a statement. "These plans are also linked to the goals we have set in our discussion of the turnaround with the financial community."

Interpublic notes that $6 million of Mr. Roth's $14 million pay package last year came in restricted stock that he'll get only if Interpublic meets revenue and profit goals.

Based on recent results, Mr. Roth, who took the top job in January '05, is unlikely to get that payout. But he should be OK; his $1.35 million cash bonus last year was the highest for an Interpublic CEO since 2000. Early this year, the board's compensation committee raised Mr. Roth's target annual bonus and incentive pay, so more money could be coming his way. Shareholders still are waiting for their reward; the stock has fallen 29% since Mr. Roth became CEO.

It's clear Interpublic executives have paid a price for the slumping stock. The top five executives netted just $267,102 from exercising options over the past five years before all options went underwater. Interpublic said average strike price for outstanding options is about $28, three times the current price, so it's questionable how many will pay out before expiration (generally 10 years from option grant).

Contrast with Omnicom
Contrast that with Omnicom, where Mr. Wren cashed in nearly $20 million in options over that time -- and is sitting on $53 million more. Four of his colleagues cashed in $41 million in options and have another $53 million that are "in-the-money."

If the Interpublic board has its way, management will own lots more stock. At the annual meeting, shareholders will vote on a revised incentive plan authorizing the issuance of stock options, stock rights and other stock-based awards representing 9.5% of outstanding shares. Proxy adviser ISS recommended shareholders reject the plan; Glass Lewis and Proxy Governance recommended approval.

Compensation committee reports stress the need to align interests of shareholders and management. As the committee said in last month's proxy statement: "In 2005 we continued to place greater emphasis through the program on long-term stock ownership and performance."

For now, top management has comparatively little skin in the game: Officers and directors own or have exercisable options for just 1.2% of the company. That's the same stake just one executive, then-Chairman-CEO Philip H. Geier Jr., had 10 years ago, when officers and the board owned 3.2% of Interpublic. At Omnicom, officers and directors own or have options for 3.6% of the company, and stockholders at this point are happy to share the wealth.
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