Water firms ease fat cat bonuses ahead of Ofwat clampdown
Water bosses are paring back bonus payments ahead of a regulator clampdown on executive pay, according to Ofwat.
The water industry watchdog revealed that senior executives at six water companies declined a bonus for the 2022-23 financial year, while five other companies ensured only shareholders coughed up for bonuses rather than customers.
It reported the findings as part of its annual assessment of how performance-related pay was aligned to delivering positive outcomes for customers and the environment — assessing the 16 largest companies in England and Wales.
Meanwhile, Bristol Water, Southern Water, Thames Water and Dŵr Cymru achieved an 80 per cent alignment, with Ofwat encouraging more companies to match those levels.
Ofwat revealed three companies: Severn Trent, South West Water, and Portsmouth Water had failed to ensure pay was linked sufficiently to performance.
When approached for comment, Portsmouth Water chief executive, Bob Taylor, said: “We have proactively engaged with Ofwat over some of the details and updated our bonus scheme as a result of Ofwat’s comments. The new arrangements are already in place for the current financial year, and we will continue to engage with Ofwat in an open and transparent way moving forward.”
A spokesperson for Severn Trent added: “We welcome the feedback from Ofwat and will continue to engage with them on our approach to remuneration policy. Around 75 per cent of executive pay is variable and linked to a range of targets which are stretching and can only be achieved by continuing to deliver an industry-leading performance for customers and the environment.”
South West Water has also been approached for comment.
The regulator further warned companies that they needed to be more transparent about the targets they have set and how they will improve performance.
No company explained why each target was used and how it was stretching — with Ofwat warning that stakeholders needed to see the standards to which executive directors are held.
Chief executive David Black said: “It is welcome that a number of companies responded to our calls for a change in how bonuses are awarded. But we want to see more transparency around this and if companies do not meet the criteria we have set out, from next year we will intervene to block customers from paying for these bonuses.”
This is the last assessment of the industry before Ofwat establishes new rules, requiring shareholders to fund bosses’ bonuses rather than households when they do not meet expectations.
Ofwat will be able to trigger a recovery mechanism from next year in relation to 2023-24 payments, blocking customers from paying for inappropriate executive bonuses — which will still have to be reported on annually.
“We are determined to drive up standards of governance in the water industry by taking action on executive pay and company dividends, as well as pushing the sector to improve its environmental performance,” Black said.
The pay of water bosses across the industry has been scrutinised with companies failing to meet standards for fixing leaking pipelines and creaking infrastructure alongside reducing overflows of sewage into rivers and bathing spots.
Chief executives have been paid in the millions for their roles, with Liv Garfield, Severn Trent’s chief executive paid the industry highest at £3.2m per year.
Companies are committing to expensive turnaround plans, totalling tens of billions of pounds, but this is expected to be chiefly funded through households — who are expected be on the hook with higher bills.
Currently, the water industry is creaking under a £54bn debt pile, with the UK’s largest supplier Thames Water reeling from a boardroom exodus.
Top five highest paid water industry bosses. * Now left company. Source: Companies House reports
Meanwhile, Ofwat is overseeing enforcement cases into six suppliers over their treatment of sewage.
A spokesperson for trade association Water UK said: “We agree that any financial reward should be tightly linked to performance for customers and the environment. Today’s report shows that most companies have established this link.
“Water companies have set out the biggest ever investment plans to ensure the security of our water supply in the future and reduce the amount of sewage entering rivers and seas as fast as possible. Ultimately, it is this significant investment which will achieve the change we all want to see.”
Southern Water told Morning Wire it has paid no external dividends to shareholders since 2017, confirming all profit has been reinvested in the business for the past six years.
“Furthermore, our majority shareholder’s investment of £1.6bn support is allowing us to spend £3bn between 2020 and 2025 — or £1,500 per household to improve our network,” a spokesperson said.