Water companies set bonus targets below performance pledges

Water companies have been called out for setting bonus targets below performance commitment levels.

Ofwat’s annual assessment of performance-related pay (PRP) concludes that all companies need to improve the way that bonuses are calculated and awarded.

It adds that in some cases targets used to calculate bonus payments for water company bosses were set below performance commitment levels outlined in PR19 final determinations “with no explanation as to why this was appropriate”.

In other cases, Ofwat says bonus targets are entirely unrelated to performance commitments.

The assessment adds that “in a small number of other cases no target was stated at all for particular metrics”.

“We expect the targets applied to performance related executive pay metrics to be stretching so that executive directors are not rewarded for meeting targets which could be construed as reflecting poor performance, save in exceptional circumstances (such as to provide appropriate incentives where companies are in turnaround),” the assessment adds.

“While it is for each remuneration committee to determine which metrics are most appropriate, we expect each company to provide a clear explanation of how the targets used are stretching.”

It continues: “Often companies provided only high-level statements about the targets used and in a small number of cases no target was stated at all for particular metrics.

“In cases where a company used targets which were set as part of its final determination for the 2019 price review, we considered these as being stretching. However, in some cases companies used the same measures as those used at its final determination, but with less stretching targets and without explaining why those targets should nevertheless be considered stretching.

“In many other cases, companies used measures different to those used at its final determination, again without providing any explanation of why the targets were used and how they could be considered stretching.”

Earlier this year Ofwat outlined expectations for executive pay, which stipulates that moving forwards bonuses for water company bosses will be more aligned with performance on environmental commitments and customer service.

Following poor performance this year, bosses at six water companies waived their bonuses. They include Portsmouth, Southern, South West, Thames, Yorkshire and Welsh.

Ofwat chief executive 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.”

Ofwat is currently in the process of assessing the remuneration policies which companies have included in their PR24 business plans and which will apply from 2025-26 onwards.

The regulator said it will consider “whether those policies meet the expectations set out in our final methodology, including on the alignment of the PRP framework to delivery (sic) for customers and the environment, the use of stretching targets and consideration of overall performance”.

Lord Hollick – who chairs the House of Lords Industry and Regulators Committee – previously told Utility Week that decisions over executive pay should be taken out of water companies’ hands.

Hollick’s comments reflect recommendations made in the committee’s recent report, The affluent and the effluent: cleaning up failures in water and sewage regulation, which called for closer links between water company performance and executive pay.