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.
, 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.
Ends
Notes to editors
- 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.
