Ofwat has outlined new plans to ensure customers do not fund executive bonus payments where they have not been sufficiently earned through the company’s performance for customers and the environment. Ofwat will regularly review all executive director bonus payments and where the regulator’s expectations have not been met, customers will no longer pick up the bill.
In new proposed guidance published today, Ofwat expects water company remuneration committees to take full account of performance for customers and the environment, and performance overall, when deciding whether to award bonuses to senior executives. Company policies and decisions on bonus payments will need to align to the expectations set out in the published guidance.
Water companies will remain responsible for setting performance related pay but in their role as a monopoly provider of essential public services, they need to demonstrate greater accountability. This recovery mechanism will apply new regulatory scrutiny to Board room and remuneration committee decision-making.
Ofwat’s review of company decisions on pay awards will be based on a wide range of criteria, including environmental performance, delivery for customers, overall financial health, and compliance issues – all factors which Ofwat expect companies to consider themselves. The proposals are the latest step in Ofwat’s programme of work to link Board-level financial decision making to company performance.
Earlier this month (20 March) Ofwat announced new licence conditions prohibiting water companies from paying dividends to investors if their financial resilience is at risk. Those new powers will also allow the regulator to take enforcement action against water companies that do not link dividend payments to performance.
David Black, Ofwat Chief Executive, said:
“In too many cases, bonuses paid do not reflect the reality of company performance. Customer trust is damaged when executive bonuses are not aligned to water company performance for customers and the environment.
“We said that if companies did not address this we would take action, and that is exactly what we are doing. Alongside our new rules on dividend payments, this is part of our ongoing work to make companies more accountable for their actions.”
Ofwat is consulting on the new mechanism in proposed guidance to companies. The consultation closes on 1 May 2023.
Notes:
- Ofwat is setting out its proposed guidance relating to the performance related executive pay (PRP) recovery mechanism that it intends to apply, as outlined in the PR24 final methodology. Under this mechanism, Ofwat will be able to adjust revenue allowances, so that customers do not fund PRP awards if a company is unable to demonstrate that their decisions reflect the regulator’s expectations.
- This mechanism will apply both to the remainder of the 2020-25 period with adjustments made at PR24, and for the 2025-30 period.
- On 20 March, Ofwat announced new powers that will enable it to stop the payment of dividends if they would risk the company’s financial resilience, and take enforcement action against water companies that don’t link dividend payments to performance. The change will require company boards to take account of their performance – for customers and the environment – when deciding whether to make dividend payments. It will also require companies to maintain a higher level of overall financial health.