The water regulator announced that new rules on exec bonuses and dividends are beginning to bite in their first full year of operation (2023/24). The rules require water companies to demonstrate that executive bonuses are sufficiently linked to company performance.
Ofwat has used its new powers to step in and directly stop three firms – Thames Water, Yorkshire Water and Dwr Cymru Welsh Water – from using customer money to pay bonuses collectively worth £1.6m.
Ofwat determined that these companies had not adequately reflected overall company performance issues in their bonus payments. In these cases, Ofwat will adjust costs for the companies in question so they cannot recover it from customers.
For the further £5.2m of the remuneration payments, six more firms voluntarily decided to use shareholder money to fund bosses’ bonuses. Had this not been the case, Ofwat said it would have acted to ensure these were not funded by customers.
This means that in the first year in which Ofwat’s new rule on exec pay has been applied, bonuses amounting to £6.8m (73% of the overall total) will now be impacted in this way.
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The Water (Special Measures) Bill that is being brought by the Government extends Ofwat’s current powers. Rather than preventing company directors’ bonuses being funded by customers, it would allow Ofwat to prohibit performance-related pay entirely in certain circumstances.
Water companies ‘need to do more to rebuild public trust’
David Black, chief executive of Ofwat, said: “In stopping customers from paying for undeserved bonuses that do not properly reflect performance, we are looking to sharpen executive mindsets and push companies to improve their performance and culture of accountability. While we are starting to see companies take some positive steps, they need to do more to rebuild public trust.
“Our new rules on exec pay and dividends link both to company performance. Through these new rules, our enforcement action and our incentive regime, which has imposed £430m in performance penalties since 2020, we are challenging companies to deliver improvements for both customers and the environment.
“We will take forward further action under powers to regulate exec pay proposed in the Government’s Water (Special Measures) Bill.”
Ofwat is also set to support companies through an “unprecedented investment period”. Its latest annual Monitoring Financial Resilience (MFR) report, covering the 2023-24 financial year, shows that the regulator has been making progress to ensure that any dividends paid by water companies reflect company performance and do not threaten their financial resilience.
Year-on-year, companies have paid out £400m less in dividends, a reduction of almost a third (£1bn versus £1.4bn). This is due to a range of reasons, with a much clearer link now between dividends and performance.
Thames Water, South East Water and Southern Water are also subject to cash lock-up measures that prohibit them from paying dividends without consent.
