Ofwat has confirmed new plans that will ensure customers no longer fund executive bonus payments where they have not been sufficiently justified, following a consultation which saw the largest response the regulator has ever received.
The final guidance on performance related executive pay (PRP) follows the draft proposal announcement in March 2023 and a consultation on Ofwat’s plans. The consultation received more than 25,000 responses from the general public - the largest response to a consultation the regulator has ever received - and supported further action on executive pay.
Commenting on the responses, Ofwat said the consultation had received 26,974 responses, “indicating a significant degree of stakeholder interest in the topic of water company PRP….
“We have taken these responses into account where appropriate, although would note that many of the sentiments expressed, including some of the questions, did not directly relate to Ofwat's proposed guidance. Nevertheless, the level of engagement clearly demonstrates the strong public feeling on this issue.”
Of these, 14 were from water companies, two were from e-NGOs, one was from the Consumer Council for Water (CCW), and 26,957 from individuals. Of the individual responses ten were freeform text, whilst 26,947 appeared to have been based on a questionnaire pro forma provided by a third party.
Of the 26,947 responses, the overwhelming majority thought CEOs' pay should be related to whether or not the company is doing enough to crack down on sewage pollution.
David Black, Ofwat CEO said:
“Customer trust is damaged when executive bonuses are not aligned to water company performance. We are pleased that a number of companies and Chief Executives have already responded to our concerns with respect to last year. Going forward we will review all executive directors’ bonus payments and where our expectations have not been met, we will use this tool to secure protection for customers in the future.”
This is the latest in a series of measures Ofwat has put in place to ensure that water companies are accountable for their actions. The regulator has recently announced new powers that will enable it to stop the payment of dividends if this would risk the company’s financial resilience, and take enforcement action against water companies that don’t link dividend payments to performance.
Ofwat is also currently consulting on a new licence condition that will ensure companies better reflect customer expectations, drive higher standards of customer service and support the full diversity of customer needs.
According to the regulator, by incentivising companies to strengthen their financial health, Ofwat will also improve the attractiveness of investing in water and wastewater companies. This, in turn, helps ensure the sector can continue to focus on the investment and performance improvements needed to protect customers and the health of the environment.
In line with the new guidance Ofwat expects water company remuneration committees to take full account of performance for customers and the environment, and performance overall, when deciding whether to award bonuses to senior executives.
Ofwat will regularly review all executive director bonus payments - where companies have not met expectations, it will step in to ensure that customers do not pick up the bill for executive pay. Company policies and decisions on bonus payments will need to align to the expectations set out in the published guidance.
Ofwat said that while the water companies will remain responsible for setting performance related pay, in their role as a monopoly provider of essential public services, they need to demonstrate greater accountability. The recovery mechanism will apply new regulatory scrutiny to Board room and remuneration committee decision-making will ensure that customers do not fund PRP awards for executive directors if a company is unable to demonstrate that its decisions reflect our expectations.
The regulator will report later in the year on its assessment for 2022-23, and calculate adjustments, where appropriate, in relation to decisions made for the 2023-24 financial year onwards.
Click here to read the final guidance document
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