Investors at Thames Water, Yorkshire Water, and Dŵr Cymru Welsh Water will be forced to pick up the tab for executive bonuses after the regulator determined that the sector had awarded “undeserved” extra payments, worth £6.8m.
Ofwat said on Thursday it had used new powers to ensure that bonuses at the three companies were paid by shareholders and bondholders – rather than through customer bills – because the payments had not “adequately reflected overall company performance issues”.
Water companies have faced public anger and political backlash in recent years over leaks and sewage overflows as they have also come under increasing financial strain.
Nine water companies will not be allowed to use customer funds to pay bonuses worth £6.8m. Six voluntarily said that shareholders would pay, but Ofwat had to use its powers directly in the cases of bonuses worth £1.5m from Thames, Yorkshire and Welsh.
Thames, which is trying to agree an emergency funding package worth £3bn, tried to pay bonuses worth £770,000 to its chief executive and chief financial officer without any explanation of why they were justified, Ofwat said.
Chris Weston, chief executive at Thames, who joined in January, was handed a £195,000 bonus for his first few months in the job, according to the company’s annual report.
Yorkshire’s bonus payments were £616,000, including £321,000 for its chief executive, Nicola Shaw, and Welsh’s were £163,000, including £91,000 for its boss, Peter Perry.
Ofwat said separately that it had “elevated concern” about the financial resilience of South Staffs Water and Wessex Water. Thames, South East and Southern remained the least resilient water companies. Underlining the state of the industry, 10 of the 16 water companies in England and Wales are on Ofwat’s financial watch list.
The new bonus rules were proposed last year under the Conservative government. Ofwat, which regulates water companies in England and Wales, can currently only shift the burden on to shareholders and bondholders, but it will gain new powers to block bonuses in a bill that is going through parliament.
David Black, Ofwat’s chief executive, said: “In stopping customers from paying for undeserved bonuses that do not properly reflect performance we are looking to sharpen executive mindsets and push companies to improve their performance and culture of accountability.
“While we are starting to see companies take some positive steps, they need to do more to rebuild public trust.”
The bonuses will be recovered through Ofwat reducing the amount that the three companies can charge on household and business water bills.
For Thames, the move will effectively add to the £3.25bn it is seeking to raise from new equity investors – on top of the £3bn in emergency debt funding – as its current shareholders have said they will not put in more money. Weston and Thames’s finance boss, Alastair Cochran, have already received the bonus money.
The costs at Yorkshire will be borne by its Hong Kong and Singapore investor owners; Welsh Water, controlled by the Welsh government, is financed by bondholders.
The other companies who agreed to use shareholder funds to pay executive bonuses were Anglian, Severn Trent, South West, Southern, United Utilities and Wessex.
The biggest payers of “unjustified” bonuses were United Utilities at £1.4m and Severn Trent at £2.6m, Ofwat said. However, they escaped mandatory action because the bonuses are paid by holding companies rather than by the regulated subsidiaries.
James Wallace, chief executive of River Action, an anti-pollution campaign group, said: “It is about time Ofwat put an end to water company chief executives enriching themselves at the expense of hard-pressed bill payers. It is long overdue to confront the corporate greed plaguing water companies – businesses that have consistently failed to safeguard our rivers, seas, and lakes.”
While households will not have to pay for the bonuses directly, bills will rise when Ofwat next month makes its final decision on what companies are allowed to charge customers over the next five years.
Tim Farron, the Liberal Democrats’ environment spokesperson, said there should be a ban on bonuses for water companies while sewage pollution continues. He said the regulator was “utterly unfit for purpose”.
“Customers have been forced to watch whilst filthy sewage wrecks their local environment as they pay through the nose for the pleasure,” he added.
