WPP has paid a £800,000 legal bill towards a libel dispute involving chief executive Sir Martin Sorrell, it emerged today.

The world's second biggest advertising firm revealed in its annual report that it has already paid the bulk of costs from legal wranglings brought by Sir Martin against two Italian businessmen.

The bill increased by £500,000 in the first half of this year, after it paid an initial sum of £300,000 in 2006. However the costs of the case could rise further, WPP hinted in the report.

Meanwhile, the accounts revealed that Sir Martin received a 20 per cent annual pay rise to £1 million at the beginning of this year, before the dispute was settled. He can triple this with annual bonus payments of 200 per cent of his basic pay.

Sir Martin claimed that a series of emails and blogs between Marco Benatti and Marco Tinelli, in which he and his lover were referred to as "the mad dwarf and the nympho schizo", were "vengeful, spiteful and vindictive".

The 62 year-old boss accepted damages of £120,000 in March this year before the Italian pair gave evidence.

Last month, the board of WPP agreed to pay the majority of the costs of the legal bill on the gounds that the action was in the commercial interests of the company. However shareholders criticised the decision, claiming that the dispute was personal and not the responsibility of the company.

The chief executive's pay rise is the first he has received since 1999, the group said in its annual report. Sir Martin joined WPP as a director in 1986 and became chief executive in the same year.

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