WPP has announced that it’s CEO, Martin Sorrell is to have total remuneration of £21 million this year. Of that £18.4 million will be paid in shares for boosting the share price.
What’s the significance? It’s this. Sorrell has been threatening WPP will move to Ireland to exploit its lower tax rates.
Let me explain why. WPP is on a price earnings ratio (p/e) of about 16 now. The p/e ratio equates the market value of a share with the net after tax earnings per share. So,what’s one of the quickest ways to boost your price earnings ratio assuming that you can keep the number of shares constant and that the ratio is independent of earnings (as it will be in most cases)? Simple: it’s cut your tax bill. That increases earnings per share without having to generate any more profit. And up goes your market price, which is what Sorrell is gaining from in his personal salary package.
Just to look at WPP in a little more depth. In 2007 it made profit of £704 million. Its tax charge was £204 million. All of this was overseas tax (which makes the move abroad slightly ironic) since the UK will lose little or no tax as a result of WPP going, as was also the case with Shire and UBM. But what it might mean is that if Ireland is lax in charging controlled foreign companies to tax the effective overseas rate might fall, cutting the effective tax rate from 28% now to, maybe, something more like 20%.
What’s the result? A tax saving of maybe £50 million. Multiply that by 16 and the value of WPP goes up by £800 million. Current market capitalisation is £7.33 billion. So there’s 10% added to market value simply by reducing tax paid.
And who will be one of the biggest winners? Sorrell, of course. His bonus would be enormous.
So let’s not for one minute think Sorrell is acting in any way in this matter but out of self interest.
And let’s, once more, ignore the absurd claims made that the UK will be losing from companies relocating – WPP has had net tax refunds in its accounts in the UK of £30 million in the last three years. And still he wants to leave. Some people are very hard to please. Perhaps we’re better off without them. Especially as not one UK job will be lost as a result of this move.