Ofwat imposes performance-related pay prohibitions

(by Verity Mitchell)

Ofwat has published a performance-related executive pay (PRP) assessment for 2024-5. This is the first year in which Ofwat has had the legislative powers to both prohibit PRP and apply the PRP cost recovery mechanism. The PRP Prohibition Rule is focused on whether a water company should pay PRP or not, and the recovery mechanism is focused on when customers should fund PRP.

PRP is prohibited when a company has: breached a principal statutory duty; received a one star rating by the Environment Agency (EA); had a category 1 pollution incident reported by environmental regulators; breached its licence; or been convicted of a criminal offence.

Six water companies – Anglian Water, Southern Water, Thames Water, United Utilities Water, Wessex Water and Yorkshire Water – triggered the PRP Prohibition Rule for a variety of performance failures, mostly involving pollution (see below). As a result, more than £4m of potential annual bonuses and other PRP to the relevant directors have been prohibited.

The recovery mechanism has been in place for two years. It focuses on expectations of overall performance, including the delivery of stretching targets. In 2023-24, Ofwat confirmed that £6.8m of PRP payments made by nine water companies did not meet its expectations and should not be funded by customers. Of those, six companies stated that the costs of PRP were not borne by the regulated company. Ofwat adjusted the payments of the remaining three companies to stop customers funding a total of £1.5m in PRP payments.

In the year to March 2025, five water companies failed to meet Ofwat’s expectations under the recovery mechanism. Ofwat judged that £2.4m of PRP payments should not be funded by customers because of poor environmental and operational performance or criminal convictions. Most of the companies accordingly did not charge customers for this remuneration. 

Bonus ban details by company:

• Anglian Water triggered the bonus ban rule with a category 1 pollution incident reported in the EA’s Environmental Performance Assessment (EPA). This was before Anglian Water's new CFO had started at the company so only the CEO did not receive any bonuses or other PRP from Anglian Water, its parent company or other associated companies. 

  
  

• Southern Water had a category 1 pollution incident in 2024 recorded in the EPA. Neither the CEO nor CFO received an annual bonus from parent or group companies. 

  
  

• Thames Water triggered three standards in the rule: seven category 1 pollution incidents, breaching its licence to hold a sufficient credit rating, and a one-star ("poor performing") EPA score. No bonus or other PRP was paid to the CEO or former CFO, nor did they receive PRP from the parent or group companies. Thames Water has said it has currently "paused" its management retention plan which Ofwat said was a scheme that lacked transparency, relative to the prohibition of other more-clearly defined PRP that was captured by its prohibition rules.

  
  

• The EA recorded in the EPA a category 1 pollution incident for United Utilities in 2024. As a result, the company prohibited payment of annual bonuses to the CEO and CFO. Both directors are also participants in a three-year Long-Term Plan bonus scheme which started in 2024. Under Ofwat’s rule, assuming United Utilities Water does not trigger the rule again within the three-year period, bonuses should be reduced by a third to reflect the year when PRP was prohibited.

  
  

• Wessex Water was convicted in November 2024 for a sewage pumping station failure which killed more than 2,000 fish and resulted in the company paying a fine of £500,000. As a serious criminal conviction, this triggered the rule. The CEO was not in post at the time of the incident (2018), but the director of finance was a member of the regulated company board. While this would have meant the director's PRP would be prohibited, Wessex Water decided not to pay any executive bonuses as the company did not achieve three-quarters or more of its customer and environmental targets in 2024-25.

  
  

• Yorkshire Water triggered the rule twice – first, for a category 1 pollution incident in 2024 that was recorded in the EPA, and second, for breaching its section 94 duty under the Water Industry Act 1991 in March 2025. Ofwat found it had breached this by failing effectually to provide drainage and deal with the contents of its sewers. The breach was severe enough to warrant a penalty and was found to be ongoing during the CEO and CFO's tenure at the company. This triggered the "consumer matters" standard of the PRP Prohibition Rule. The CEO and CFO waived their annual bonuses for 2024-25 and the company has already reduced by a third a three-year scheme for both directors which began in April 2024.