UK Bans Six Water Companies From Paying Bonuses to Bosses
(Bloomberg) -- The UK has banned six water companies from paying bonuses to senior executives to try to force companies to do more to tackle pollution.
Regulator Ofwat has powers to stop “unjustified” payments for poor environmental and customer performance as part of new legislation that comes into come into force Friday, it said in a statement. Bosses at Thames Water, Yorkshire Water, Anglian Water, Wessex Water, United Utilities and Southern Water are not permitted to receive bonuses with immediate effect, the Department for Environment, Food and Rural Affairs said.
The sector is facing widespread public anger over sewage leaks into rivers and lakes throughout Britain. Decades of underinvestment mean that leaks are still getting worse and the government and Ofwat are under pressure to act. Stopping payouts of bonuses is meant to address the public perception that company bosses are rewarded even if a firm is pumping sewage into waterways illegally.
“Companies that do meet Ofwat’s standards will still be eligible to pay executives bonuses – a powerful incentive for them to deliver immediate environmental improvements, better customer outcomes, and improve financial resilience,” Defra said in a statement.
The ban has been backdated to apply to any bonuses relating to the financial year from April 2024, but there are a few potential loopholes left open. It’s still possible for companies to increase executive pay to bypass the rules. The ban won’t apply to executive’s share awards, that could in theory mean they still receive dividends.
Speaking on the morning broadcast round, Environment Secretary Steve Reed said that it wouldn’t be “right” for the government or the regulator to go as far as capping private sector salaries and water companies would be “extremely foolish” to try to circumvent the bonus ban.
While Ofwat is wasting no time in using its new powers, the sector still needs to be attractive for investors. Companies have been approved to spend over £104 billion ($141 billion) to cut sewage discharges and several of them need new equity to fund these investments.
The investment will be ring-fenced for new pipes and treatment works, not shareholder payouts, according to the government.
The most prominent company seeking new investors is the country’s biggest supplier - Thames Water - which suffered a major blow this week after infrastructure investor giant KKR & Co. pulled out of a rescue deal, leaving the utility to work with its senior creditors.
Public anger has been further fueled by bill increases of as much as 47% in April while water companies have awarded over £112 million in bonuses and incentives over the last decade, according to government figures.
More change is coming for the industry. In what promises to be the biggest overhaul since privatization, former Bank of England Deputy Governor Jon Cunliffe is reviewing the sector. Earlier this week, the interim findings of his review stated that the regulator needs to take a more supervisory role that would allow it to be more reactive and possibly intervene earlier when issues arise. Ofwat currently relies heavily on “comparability” — or benchmarking water companies against one another to assess efficiency and justify customer bills.
If a company pays a bonus while banned, Ofwat can direct the company to claw back the money.
(Updates with minister’s comments in 6th paragraph)
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