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Ofwat has confirmed measures intended to block water company bosses from claiming unwarranted bonus payments.
The regulator has confirmed plans to implement an end-of-period reconciliation mechanism which would allow it to adjust a company’s revenue allowance if it does not meet Ofwat’s expectations, particularly around financial and environmental objectives.
Ofwat said that this would ensure that customers do not end up funding performance-related pay for under-performing companies.
David Black, Ofwat chief executive, 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.”
Under the new measures, water companies must be able to demonstrably link performance-related pay with delivery targets for customer service, water quality or pollution incidents. Remuneration decisions should be based on stretching targets linked to upper quartile company performance and bonuses only awarded when certain thresholds are met.
Water companies will ultimately remain responsible for setting performance related pay but they need to demonstrate greater accountability.
Ofwat’s consultation response document adds: “Whilst this mechanism provides additional protection by enabling us to step in to ensure customers are protected and do not fund performance-related pay where a company does not meet the expectations we have set out, we do not consider that this equates to stepping into the decision-making role.
“Instead we are providing additional protection for customers and oversight, which we consider is both appropriate and proportionate in circumstances where companies have not met our or wider stakeholder expectations to date.
“In that vein, we do not think it would be appropriate to “pre-approve” performance-related pay decisions in advance of them being made.”
Ofwat will report later in the year on its assessment for 2022-23, and calculate adjustments in relation to decisions made for the 2023-24 financial year onwards.
The measures put forward will apply for the remainder of the current asset management period (AMP7) and into AMP8. The regulator will decide at the end of each five-year period as part of the reconciliation process how much revenue will be disallowed through the recovery mechanism.
In response to a consultation on the plans, Ofwat received more than 25,000 responses from the general public and which supported further action on executive pay. This was the largest response to a consultation the regulator has received.
The regulator has also 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.
Several bosses publicly declared they would forgo a bonus this year in light of public sentiment towards performance. This included Thames, South West, Welsh and Yorkshire.
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