Ofwat has published its assessment of how performance related pay awarded to water company executives during 2022-23 was aligned to delivery for customers and the environment, and overall company performance.

The report looks at the 16 largest companies in England and Wales – described by Ofwat as the latest step taken by the regulator in its “crack down on inappropriate pay outs in the sector.”

This is the last assessment before Ofwat introduces a performance related pay recovery mechanism to ensure that shareholders, not customers, will pay for bosses' bonuses where they do not meet expectations.

It highlights progress made and outlines further steps which companies should take before remuneration committees make pay decisions for 2023-24 onwards, when the new recovery mechanism takes effect.

Following Ofwat's consultation on new rules earlier this year and heightened public scrutiny, senior executives of six companies refused a bonus for 2022-23, and at five other companies, executive bonuses were paid for by shareholders, not customers.

Companies use a range of metrics when deciding on performance related pay and since 2020, Ofwat has told companies to clearly show how both annual and long-term pay incentives are substantially linked to stretching delivery for customers and the environment.

Three companies (Severn Trent, South West Water and Portsmouth Water) have been assessed by Ofwat as not meeting our expectations in this respect. All three companies have committed to make changes to address these concerns.

Bristol Water, Southern Water, Thames Water and Dŵr Cymru achieved or exceeded 80% alignment and Ofwat encourages more companies to show similar ambition.

Ofwat's assessment is also clear that companies need to be more transparent about the targets they have set and the alignment of decisions with overall performance. No company provided an explanation setting out why each target was used and how it was stretching. It is vital for companies' trust and legitimacy that stakeholders are able to see the standards to which executive directors are held, Ofwat says.

The report says the regulator’s analysis revealed that improvement is needed across all companies. In some cases, bonus targets were set below the level of the performance commitment levels set at PR19 final determinations with no explanation as to why this was appropriate. In a small number of other cases no target was stated at all for particular metrics.

Ofwat will apply its recovery mechanism from next year, in relation to 2023-24 awards, to block customers from paying for inappropriate executive bonuses and it will continue to report on its review of bonuses annually.

Ofwat CEO, David Black, said:

"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.

“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."

One company (Hafren Dyfrdwy) did not provide sufficient information on the remuneration of its executives for Ofwat to be able to assess its PRP decisions against the guidance. Ofwat has therefore not included it in the report. The regulator said it will engage directly with the company with respect to its 2022-23 reporting.

Click here to download the full report Protecting customer interests on performance-related executive pay: 2022-23 assessment