This Department for Environment, Food & Rural Affairs (DEFRA) has granted Ofwat the power to ban bonuses from being paid to CEOs and chief financial officers (CFOs) at water companies. Ofwat will also be able to claw back the bonuses if water companies fail to comply with a new set of requirements on bonus payments.

The six banned companies are Thames Water, Yorkshire Water, Anglian Water, Wessex Water, United Utilities, and Southern Water, and the ban comes into force with immediate effect. These six companies paid over £3.5m in bonuses in 2023/24, with Thames Water paying the most and failing two of the requirements.

In the last 10-year water bosses have been paid more than £112m in bonuses and incentive payments, while the service customers receive and excessive dumping of waste into rivers and seas in the UK continues to get worse.

Over the last decade, the biggest bonuses were paid out by Severn Trent Water, although they are not affected by the ban, with the company awarding a total of £29.3m in bonuses since 2014/15, and since 2020 the water company has paid almost £14m with £4.5m of this in 2021/22 alone.

Environment secretary Steve Reed said: ‘Water company bosses, like anyone else, should only get bonuses if they’ve performed well, certainly not if they’ve failed to tackle water pollution.  

‘Undeserved bonuses will now be banned as part of the government’s plan to clean up our rivers, lakes and seas for good.’

Reed also indicated that the banned companies would not be able to avoid the rules by ramping up base salaries and long term incentive plans (LTIPs).

Environment secretary Steve Reed said: ‘Water company bosses, like anyone else, should only get bonuses if they’ve performed well, certainly not if they’ve failed to tackle water pollution.  

‘Undeserved bonuses will now be banned as part of the government’s plan to clean up our rivers, lakes and seas for good.’

Reed also indicated that the banned companies would not be able to avoid the rules by ramping up base salaries and long-term incentive plans (LTIPs).

Bonuses need to be paid, says Thames Water chairman

On 13 April at a heated Environment, Food and Rural Affairs Committee, Sir Adrian Montague CBE, Chair of Thames Water told MPs that bonuses need to be paid due to the competitiveness of the sector.

‘It’s true that this business, like many businesses needs to reward its staff effectively, we are in a competitive marketplace, we do need to reward them competitively, but the amounts of bonuses paid to staff is very small compared to the capital cost,’ said Montague.

MPs on the committee were exasperated when Montague said that during the last financial year, although Thames Water came close to running out of money, it still managed to pay Chris Weston, CEO of Thames Water, £150,000 in bonuses just three months after being appointed.

Under the new Ofwat powers, Thames Water has been banned from paying bonuses to the CEO and CFO after recording seven environmental failures and failing its financial resilience obligations last year.

To combat the issues with sewage leaks and service the government has secured £104bn of private investment to cut sewage discharges by half over five years. This will go towards new pipes and treatment works, and ringfenced from being paid to shareholders.

Helen Campbell, senior director for sector performance at Ofwat, said: ‘Water company bosses have a clear duty to safeguard our precious natural environment. 

‘That’s why we welcome these new powers from government – they strengthen our ability to hold water companies accountable to their customers by stopping their most senior directors from taking bonuses when there have been serious environmental or other failings.

‘Company bonuses continue to cause real concerns and understandably damage trust, so this new power significantly increases the pressure on water company executives to become better custodians of our rivers and seas.’

So far six water companies have been banned from handing out ‘unfair bonuses’ that have failed to meet the standards required of them with immediate effect.

The new powers will put a stop to excessive bonuses and dividends being paid out to water bosses when they are continuously failing to mee the standards set by the regulator.

The government has set four requirements for the six water companies to follow if they want to pay bonuses in future, starting with ‘consumer matters’.

This revolves around breaches to the Water Industry Act 1991 and is breached when a company fails to comply with it.

The environment is next, if the Environmental Protection Agency (EPA) records a category 1 pollution incident from a company or receives a 1-star rating at the end of the year then the company will not have met this requirement.

The third requirement is for the water firms to ensure their credit ratings a good enough, and lastly if a company is convicted of a criminal offence, then the requirement is also breached.

Ofwat said: ‘Public trust in the water sector is at an all-time low and it is in the public interest for Ofwat to apply the new rule to bonuses paid in relation to the 2024/25 financial year.

‘Ofwat will be reviewing all performance related bonuses paid in relation to the financial year starting 1 April 2024 onwards and will announce any action we decide to take for non-compliance with the rule later in the year.’