Ofwat demands companies give better justification of executive bonuses

Ofwat has indicated that it might not be able to approve customer funding of executive bonuses from next year, unless water companies improve how they demonstrate performance related pay (PRP) is deserved.

In its 2022-23 assessment of PRP, Ofwat compared bonus payouts to its newly stated expectations that customer-funded PRP is dependent on stretching delivery for customers and the environment, and overall performance. From next year, the regulator will be able to use a new recovery mechanism to ensure customers do not fund PRP where a company does not meet these expectations.

For the 2022-23 year, Ofwat said no company provided a metric-by-metric explanation setting out why each target was used and how it was stretching. It observed: "If a company does not explain this in future years, it will be difficult for them to demonstrate that our expectations regarding stretching targets are being met.”

Similarly: “Companies need to go further in explaining how overall performance has been taken into account when making PRP decisions. If a company does not demonstrate how it has taken account of overall performance in future years, it will be difficult for us to conclude that a company has met our expectations.”

Regarding specific companies, Ofwat reported Severn Trent, South West Water and Portsmouth Water did not meet the expectation for 60% alignment of PRP to delivery for customers and the environment over the short and/or long term, but that all three had committed to making changes for 2023-24. All other companies met the expectation, with Welsh Water, Bristol, Thames and Southern praised for exceeding this expectation with 80% alignment to delivery for customers and the environment. “We would like to see more companies aspire to a higher weighting,” Ofwat commented.

Ofwat also welcomed the fact that the chiefs of six firms – Welsh, Southern, Thames, South West, Yorkshire and Portsmouth had waived their PRP payments (and in some cases other executive directors had as well). And that at five other companies, shareholders rather than customers would fund all or part of PRP payments for 2022-23.