22 March 2022
The economic effect of the Russian invasion of Ukraine is having increasing consequences across global markets, as the conflict continues and as further sanctions take effect.
Yesterday, the Investment Association (IA) responded to queries from remuneration consultants in relation to the potential impact of the current economic circumstances on forthcoming LTIP grants. The two key issues are:
- The quantum of long-term incentive grants in light of the recent fall in share prices
- The ability of companies to set LTIP performance targets against the current economic backdrop, and whether a six-month delay in setting performance targets would be appropriate
LTIP grant sizes
The IA notes that its Principles of Remuneration state that grant sizes should be scaled back following a share price fall, to address the potential for windfall gains to arise where grants are made over a larger number of shares than would otherwise have been the case, due to depressed shares prices. The IA confirms that its members would expect that approach to be followed in the current circumstances.
Delayed target setting
In the context of the COVID pandemic, the IA supported a six-month delay in the setting of LTIP targets, due to the widespread uncertainty across all sectors. The IA notes that the impact of Russian sanctions is more limited and affects a smaller number of companies, principally those with material profits or revenues arising from Russian operations or the Russian economy. It notes that many of its members are willing to support a delay in setting performance targets by companies with a material exposure to Russian operations or the wider Russian economy. There is an expectation that any such delay should be linked to statements from the company on the impact of the current situation, the management of its Russian operations as well as its overall financial position and performance. The IA notes specifically that increased energy costs and other aspects of the macroeconomic impact of the Russian invasion would not be sufficient justification for delaying target setting.
The situation in Russia and Ukraine remains highly volatile and the impact of the associated sanctions and restrictions will have a significant and extended impact for some businesses, and will need to be factored into those companies’ remuneration committee decisions. However this publication also makes it clear that, for the much larger number of businesses affected indirectly rather than directly by the current situation, the IA does not expect to see delays for LTIP target setting.
In making these comments, the IA has reiterated to remuneration committees that it believes they should be careful not to insulate executives from the wider impact of the economic uncertainty, particularly in a manner that is inconsistent with the approach taken to the general workforce. Remuneration committees for those companies materially impacted by Russian sanctions will therefore need to consider the position carefully and ensure that executives remain sufficiently aligned with other stakeholders through their remuneration structures.
Our thoughts remain with all those affected by the conflict.
Suzannah Crookes and Sarah Bruce