In this week’s update: The 2022 IA Principles of Remuneration, the Government consults on payment practices and performance reporting and the Chancery Lane Project publishes three more net zero supply chain model clauses.

Investment Association publishes 2022 Principles of Remuneration

The Investment Association (IA) has published its updated Principles of Remuneration for the 2022 AGM season. The Principles (which are updated annually) contain best practice guidelines and highlight investor expectations that publicly traded companies invariably follow to ensure shareholder support for their executive remuneration arrangements.

This year’s changes are relatively minor and mainly seek to clarify certain aspects of the IA’s existing guidance. The key changes are set out below.

  • Clarification that the board should disclose a clear rationale for any significant increase in any element of remuneration. A company should consider potential increases in salary along with the effect this will have on overall quantum. The IA notes that, for most remuneration structures, increasing salary will have a “multiplier effect” on the overall level of remuneration, with small percentage increases potentially leading to substantial increases in overall remuneration.
  • Clarification that companies should not only construct a “peer universe” against which to measure the proposed level of their executives’ remuneration, but also disclose that universe clearly to investors.
  • The IA has removed guidance stating that the market standard for “malus” and “clawback” is to apply on gross misconduct or misstatement of results. The Principles now simply state (as they did before) that malus and clawback should apply in a “more expansive” range of cases and that remuneration committees should establish a list of specific triggers for malus and clawback.
  • The Principles now contain more detail on setting and terminating directors’ service contracts, which replaces the previous IA and PLSA statement on the topic. Among other things, the IA encourages companies to set contracts with a fixed term or notice period of one year or less, align executives’ financial interests with those of the company, and ensure that termination payments arising from poor corporate performance do not extend beyond fixed pay.
  • Clarification that the IA does not consider it appropriate to justify salary increases solely by reference to benchmarking.
  • When approving payment of the bonus, the remuneration committee should consider whether the level of pay-out is commensurate with the wider stakeholder experience (especially shareholders and employees). The Principles also encourage companies to disclose in their remuneration report why the committee is satisfied that the bonus pay-out is appropriate given that stakeholder experience.
  • Clarification that, when selecting a long-term incentive plan (LTIP), remuneration committees should be confident that the scheme is appropriate considering the company’s long-term strategy. They should not choose it as a result of short-term performance or change it regularly.
  • New guidance on introducing a restricted share plan when there has been a substantial fall in the company’s share price. The Principles note that the recommended discount rate of 50% when moving from an LTIP to an RSP may not be sufficient in these circumstances. The remuneration committee should be wary of “windfall gains” and scale back awards to avoid them.
  • New guidance on value creation plans (VCPs). Among other things, the IA notes that VCPs are not a standard arrangement and should be used only where appropriate to the company’s specific circumstances. The IA recommends including substantially more stretching targets for a VCP and placing a cap on the number of shares and total value of awards. The remuneration committee should provide a clear rationale for the VCP, its targets and the chosen monetary cap.

Government seeks views on reporting on payment practices

The Government has published a call for evidence seeking views on the current payment practices and performance reporting regime.

What is the current regime?

Under the regime, certain UK companies and limited liability partnerships (LLPs) are required to publish a half-yearly report setting out their practice for paying supplier invoices and statistics for their actual performance in paying invoices over the preceding year. The regime applies to most contracts for the supply of goods, services and intellectual property to the entity’s business.

The regime applies only to large companies and LLPs. To be large, a company must satisfy two or all of three conditions: more than £36 million annual turnover; more than £18 million balance sheet total; and more than 250 employees.

If an entity is subject to the regime, it must report (among other things):

  • a description of the entity’s standard payment terms;
  • a description of its procedure for resolving payment-related disputes;
  • the mean average number of days the entity took to pay invoices in the preceding year;
  • the percentage of invoices which the entity paid within 30 days, 60 days or more than 60 days;
  • broadly speaking, the number of invoices that were paid late;
  • the entity’s arrangements for supply chain finance and electronic invoicing;
  • whether the entity makes and has made deductions from payments to suppliers in respect of charges payable to remain on the entity’s list of suppliers; and
  • whether the entity has signed up to a payment practices code (and, if so, which).

An entity must publish this information every six months through the Government’s online platform.

What is the Government asking?

The call for evidence forms part of the Government’s statutory review of the regime following its initial implementation in 2017. The Government is seeking to gain an understanding of how effective the regime has been in practice. Specific questions the call for evidence raises include the following.

  • Has reporting brought greater transparency on payment practices and performance?
  • Has reporting helped to overcome the asymmetry of information regarding payment practices and performance between large businesses and their suppliers?
  • Has reporting helped businesses to better understand what to expect from their customers?
  • Has reporting incentivised businesses to improve payment practices?
  • Has reporting made it easier for representative bodies, suppliers and other businesses to identify late-paying businesses and put commercial and reputational pressure on them to pay promptly?
  • Have there been any unintended effects of the reporting regime?
  • Should the reporting regime remain in effect?

The Government has asked for responses by 4 February 2022.

Other items

  • Chancery Lane Project publishes further net zero supply chain clauses. The Chancery Lane Project has published three further supply chain clauses as part of its Net Zero Toolkit. Runa’s Clause is designed to avoid food wastage in supply chains, Rowen’s Clause is designed to help parties better understand their greenhouse gas (GHG) emissions from land use, and Matilda’s Annex is designed to cascade GHG reporting and reduction obligations through supply chains to meet net zero targets and reduce scope 3 emissions.