Corporate long-term incentive schemes: regulators’ recommendations
The Bank of Russia and the Russian Ministry of Finance advise public companies to design their remuneration policies in such a way so as to link management’s motivation to long-term shareholder value. The recommendations are addressed to issuers of shares that are already traded on exchanges as well as to those who are yet to enter the equity market.
The document is intended to encourage certain employees and top management of companies to work on increasing capitalisation and achieving market-oriented targets. Currently, only every third listed issuer has a programme in place, entitling managers to receive shares as a reward for achieving key performance indicators (KPIs).
The information letter with the recommendations is published on the regulators’ websites. It provides examples of both positive and negative practices, as well as proposes common approaches to developing such programmes, including with respect to selecting KPIs and determining the programme’s effective period, terms, payment forms and amounts.
In terms of KPIs, the document suggests using the total shareholder return (which factors in share prices and dividends paid) or the market value (capitalisation) of a company if it does not pay dividends.
According to the recommendations, the programme should be long-term, extending for at least five years. For companies with a short investment cycle (e.g. in trade), the effective period may be from three to five years. During this period, bonuses should be allocated unevenly, with the bulk of payments shifted to the final stages of the programme. The regulators recommend companies to limit the size of the bonus pool, which can reach 2–5% of the issuer’s market value.
The implementation of these recommendations will help companies enhance the efficiency of their incentive programmes, make shares more attractive to investors, and contribute to the achievement of the national goal to ensure growth in equity market capitalisation to at least 66% of GDP by 2030.