Is the government right to ban water company bonuses?
It is safe to say the water industry is not in the government’s good books.
Decades of underinvestment and mounting debt have led to a sewage spill crisis, sparking immense public outrage.
Thames Water, the UK’s largest water supplier, has come to symbolise the sector’s woes as it teeters on the brink of administration.
US private equity titans KKR walked away from exclusive talks over a rescue deal earlier this week in the latest, and potentially biggest, blow to its turnaround plans.
But is this the right decision?
Bonuses and dividend payments in the spotlight
Bonuses and dividend payments have shot into the spotlight in recent months, given the crisis.
Water companies have awarded over £112m in incentives to top executives over the last decade, with £7.6m paid out last year in England.
In the same period, those executives have presided over record levels of raw sewage being pumped into UK rivers and seas.
Sir Adrian Montague, the City veteran brought in to save Thames Water, told MPs last month the payouts were justified in order to keep top talent.
He may be correct that bonuses help attract talent.
Why else would anyone take the job at such a disastrous company as Thames?
The payouts also appear relatively small compared to the utility’s £18bn debt pile. The sector as a whole will need billions upon billions over decades to fix years of underinvestment in its infrastructure.
But perception is incredibly important and water executives have shown a complete disregard for just how bad it looks to suck out hefty pay packets as they continue to contaminate British rivers.
Think that doesn’t matter?
Consider reports that part of the reason KKR pulled the plug on its takeover was down to concerns over public scrutiny.
Public scrutiny leads to political and regulatory pressure – not a great combination for would-be investors.
Emergency loan bonus draws ire
Perhaps the worst example was revealed at last month’s committee hearing, when MPs drew from Thames chairman Montague that bonuses had been taken out of a £3bn emergency loan which bailed the company out of another close brush with administration earlier this year.
It highlights a broader flaw in the water lobby’s communications strategy.
The industry has sought to deflect criticism by blaming a “lack of public understanding” about the sector – some humility would go a long way.
And what are we incentivising executives to do? When you pay people more after their company performs terribly, will that help things improve?
While we should be cautious about tightening the noose too tightly – a blanket ban, for example, would be the wrong approach – the current plans only ban companies that fail to meet specific performance targets.
“It’s crucial that companies attract the best talent to deliver essential upgrades to the water system,” the government said yesterday.
“Companies that do meet Ofwat’s standards will still be eligible to pay executives bonuses – a powerful incentive for them to deliver immediate environmental improvements, better customer outcomes, and improve financial resilience.”