Omnicom CEO All But Accused of Backdating His Stock Options

Investment manager David Poppe has all but accused Omnicom (OMC)'s top executives of backdating their stock options in a letter to shareholders. The note is the latest in a line of controversies surrounding CEO John Wren's compensation, which has flourished even as Omnicom and its agencies have withered in the recession.

While Wren et al were enjoying the appreciation of their stock, Omnicom asked its staff to take unpaid vacations; about 5,000 staff were laid off at the company's ad agencies (such as BBDO, TBWA and DDB); and top execs retained jackpot payouts even if they were fired until June of last year. Although BBDO's brass did take a pay cut so that their underlings could still receive bonuses in 2008, that sacrifice doesn't look quite so selfless once you realize that they were loading up on options instead.

The rumblings are another example of the fact that top managers operate in a goldfish bowl; details of their pay are available to all. The days of hiding excessive bonuses in paper filings that a person would have to physically visit at the SEC to obtain are gone.

Poppe, a director of Ruane, Cunniff & Goldfarb's Sequoia Fund, believes that a massive grant of 22 million stock options on March 31, 2009, coupled with 3.5 million options granted on the last day of 2008, gave Wren and his managers 8 percent of the entire company's stock at bargain-basement prices. The stock was trading in the low $20s at the time. It's now worth around $40. Poppe told the WSJ:

I can't ever remember seeing a grant of this size ... We felt it was so egregious it needed to be challenged.

He wants shareholders to reject the nominations for Omnicom's compensation committee, which approved the option grants. Poppe's letter further noted that the recent Omnicom grants may have been part of a longer historical pattern:

... there was an academic study cited by the Wall Street Journal last summer that found evidence Omnicom granted options at unusually favorable times on several occasions around the turn of the century.

Our own subsequent review of the timing of various Omnicom grants from 1995 to 2001 suggested to us that there was merit to the study. In particular, the academics cited a March 2000 grant that occurred at the stock's lowest closing price for the first six months of the year.

Three separate grants in 2001 occurred at either monthly or quarterly lows. The company has told us it did not backdate any grants.

Backdating options is the practice of looking back at a stock's history and then picking the date it was at its lowest as the "grant date." It's illegal.

The recent options grants were virtually worthless in 2008 and early 2009, but by the end of the year, with the stock market rallying, the value of Wren's annual compensation had leaped to $7.9 million in from only $2.9 million the year before, according to SEC filings.

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