Thames Water overhauls bonus structure

Thames Water has unveiled a new bonus structure, with top executives able to earn up to 240% of their salaries for hitting certain targets.

That is down from the current maximum level of 320%, which Thames’ annual report says demonstrates “remuneration restraint throughout the turnaround period”.

Despite the decrease, union leaders and consumer groups have called out the disparity between executive pay and Thames’ performance.

Gary Carter, GMB national officer, said: “These reductions in bonuses don’t go far enough. Thames Water is failing customers, failing the environment and senior executives shouldn’t be getting anything.”

He added: “The workforce is the one thing that has kept Thames’s head above water.

“These are the people who deserve bonuses, not senior executives who have brought Thames Water to the brink of collapse.”

Unison assistant general secretary Jon Richards added: “The firm’s failure to invest sufficiently in infrastructure means millions of litres of water a day are being lost. There should be no rewards for such poor performance.”

Meanwhile, Mike Keil, senior director of policy, research and campaigns at CCW, said: “Our research shows that people want to see evidence that bonuses have been earned through water companies delivering on their commitments to customers and the environment.

“It’s very hard to justify bonuses of this magnitude to customers given the extent of the challenges faced by Thames Water and its continued poor performance across so many areas.”

Under the new Performance-Related Pay Plan, Thames employees will be renumerated for hitting targets relating to customer satisfaction, environmental performance and financial resilience (see full breakdown below).

The measures and targets for the financial year 2023/24:

Employees will receive 65% of the maximum bonus opportunity for hitting their targets, which will increase to the full amount if they hit or exceed a “stretch” target.

Thames has also removed the minimum threshold for target-based bonusses, meaning performance-related pay can still be paid out even if targets are missed. Its annual report adds: “This enables the company to continue to motivate colleagues to deliver performance improvement when absolute targets are missed due to circumstances outside their control.”

The new bonus structure has been devised following an internal review which deemed the current variable pay programmes at Thames as not “fit-for-purpose”. Thames claims the new way of calculating bonus payments is simpler and fairer.

The annual report adds that the pay review was sparked by Ofwat’s recently outlined expectations for executive pay, increasing public scrutiny on the water sector and the need to motivate and retain staff.

The report adds: “The committee is acutely conscious of the fact that Thames Water is a business in turnaround and that it is critical that our remuneration arrangements enable the company to attract, retain and motivate the talent it requires to deliver our ambitious turnaround plan.

“This provides an additional challenge to the committee, as it needs to balance the expectations of paying for performance in-line with our customers’ and regulators expectations, with paying for performance improvements against an eight-year turnaround plan which is critical to the future, long-term success of Thames Water.”

It continues: “The purpose of variable pay is to motivate and incentivise the executive directors and other senior colleagues to deliver ongoing performance improvement in-line with the expectations of our customers, stakeholders and shareholders.”

The new bonus framework takes immediate effect for the financial year 2023/24 and is open to all Thames employees in bands C-E, plus the executive directors.

In the past financial year, Thames employees received £739,000 in bonus payments under the outgoing performance-related pay mechanisms.

That is significantly less than the £2.1 million paid out in performance-related pay during 2021/22. The decrease is largely attributed to the executive team waiving their bonus payments this year.

As well as unveiling its new bonus framework, Thames also confirmed that investors have agreed to inject an additional £750 million into the company.

The investors have also acknowledged that an extra £2.5 billion of fresh equity support will be needed for the second half of the decade.

It follows two weeks of speculation about the future of the UK’s largest water company, including the possibility of the special administration regime being used.

The company’s 2022/23 financial results also show revenue grew by 4% to £2.3 billion but EBITDA dropped 3% to £1.1 billion. The company also pointed out that its gearing level of 77.4% was at its lowest for 10 years, having fallen 3.2 percentage points in the past year.