Water companies are facing tougher rules on bonuses for top bosses under plans outlined by the industry watchdog to ensure payouts are only made when environmental and customer service targets are met.
Ofwat said its new plans “ensure customers do not fund executive bonus payments” for poor performance.
As part of new guidance published on Thursday, water firms will be expected to take full account of their record on customer service and waterways pollution, as well as company performance overall, when deciding whether to award bonuses to senior executives.
The regulator’s review of company decisions on pay awards will be based on a wide range of criteria, including environmental performance, delivery for customers, overall financial health, and compliance issues.
It comes after figures recently revealed that pay and bonus packages for water firm bosses soared by a fifth in 2021-22, despite significantly sewage spills in Britain’s waterways.
Analysis of data by the Liberal Democrats – which is calling for a ban on bonuses for water bosses – showed the average pay for executives at 10 firms across England and Wales jumped to £1.1 million in 2021-22, up by £193,000 on average.
This comes in spite of more than 370,000 sewage spills from storm overflows in England in 2021, according to Environment Agency data.
David Black, chief executive at Ofwat, said: “In too many cases, bonuses paid do not reflect the reality of company performance.
“Customer trust is damaged when executive bonuses are not aligned to water company performance for customers and the environment.
“We said that if companies did not address this we would take action, and that is exactly what we are doing.”
Ofwat is getting tough on water firms after a raft of high-profile sewage spills and environmental performance failures in recent years.
It also announced earlier this month new powers to be able to stop suppliers paying out shareholder dividends if they fail to meet performance standards.
On the new bonus plans, Ofwat said: “Water companies are monopolies established to provide an essential service.
“They have a range of obligations to customers, communities and the environment and, through their appointments, a privileged status.
“Remuneration, whether that be for investors through their returns or executives through their performance-related executive pay, should closely reflect and take account of these responsibilities, reward excellence and, importantly, should not reward poor performance or failure.
“In a context where the performance of the sector continues to be called into question, particularly with regard to environmental performance, we do not consider that all companies are applying performance-related pay in a way that lives up to the standards that we all expect.”
The new proposals are now open for consultation until May 1.
The Consumer Council for Water (CCW) said it would be “examining the detail”.
Emma Clancy, chief executive of the CCW, said: “Customers will want to see this making a clear difference.
“Our research shows that people want to see evidence bonuses have been earned by companies delivering on commitments to their customers and the environment.
“People also want far greater transparency on pay. We want chief executives to explain to their customers – who are not able to switch supplier – why their salaries are justified.”