For immediate release: Thursday 21 November 2024
73% of bonus payments will not be paid for by customers, says Ofwat
· Nine water companies will not be using customers' money to fund bonuses after new Ofwat rules on exec bonuses come into force
· Ofwat's powers over exec bonuses to be further strengthened under the government's Water (Special Measures) Bill
· With the sector on the cusp of an unprecedented investment programme, Ofwat will continue to hold companies to account to deliver the actions they have committed to
Ofwat has today announced that new rules on exec bonuses and on dividends are beginning to bite in their first full year of operation, in 2023-24 financial year. These rules require water companies to demonstrate that executive bonuses are sufficiently linked to company performance.
Nine companies will not be able to use customer money to fund bonuses. This means that in the first year in which Ofwat's new rule on exec pay has been applied, bonuses amounting to £6.8m (73% of the overall total) will now be impacted in this way.
Of the £6.8m, Ofwat will use its new powers to step in and directly block three water companies from allowing customers to pay £1.5m of bonuses, which apply to: Thames Water, Yorkshire Water, and Dŵr Cymru Welsh Water. Ofwat has determined these companies have not adequately reflected overall company performance issues in their bonus payments. In these cases, Ofwat will adjust costs for the companies in question so they cannot recover it from customers.
For the further £5.2m of the remuneration payments, water companies have voluntarily decided not to push this cost on to their customers. Instead, shareholders at the six companies will pay. Had this not been the case we would have acted to ensure these were not funded by customers.
The Water (Special Measures) Bill that is being brought by the Government extends Ofwat's current powers. Rather than preventing company directors' bonuses being funded by customers, it would allow Ofwat to prohibit performance-related pay entirely in certain circumstances.
David Black, Chief Executive of Ofwat, 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.
"Our new rules on exec pay and dividends link both to company performance. Through these new rules, our enforcement action and our incentive regime, which has imposed £430 million in performance penalties since 2020, we are challenging companies to deliver improvements for both customers and the environment.
"We will take forward further action under powers to regulate exec pay proposed in the government's Water (Special Measures) Bill."
Ofwat set to support companies through unprecedented investment period
Ofwat has today also published its latest annual Monitoring Financial Resilience (MFR) report, covering the 2023-24 financial year.
The findings show Ofwat has been making progress to ensure that any dividends paid by water companies reflect company performance and do not threaten their financial resilience.
This has included introducing a change to water company's licences which came into effect in May 2023.
Year-on-year, companies have paid out £400million less in dividends, a reduction of almost a third (£1billion vs £1.4billion). This is due to a range of reasons, with a much clearer link now between dividends and performance. Thames Water, South East Water and Southern Water are also subject to cash lock-up measures which prohibits them from paying dividends without consent.
Noting that £4.6billion of new equity has been invested into the sector since 2020, with more committed in the next asset management period which starts next year, the MFR report places the 16 regulated companies into one of three categories.
In total, six companies are categorised as Standard (the routine level of monitoring), seven are classified in the Elevated Concern category, with three companies in the Action Required category (see table in Notes to editors). The categorisations set out the level of monitoring and engagement that Ofwat will carry out in the year ahead.
Overall, the position is reflective of many factors, including their historical financing choice and where companies are in the current investment cycle, the scale and nature of their programmes of proposed work in the upcoming asset management period - and the resulting financing requirements that these place upon water companies.
The sector is on the cusp of a significant challenge and opportunity in the form of an unprecedented £88billion package of investment proposed at PR24. This means it is increasingly important all companies maintain robust and steady financial health as this enables them to invest for the future and bounce back from any short-term difficulties that may arise.
ENDS
Notes to editors
Executive pay
1. The total of performance related executive renumeration which was received by executives of regulated water companies in the last financial year was £9.3million.
2. The three companies which Ofwat took intervening action against are:
a. Thames Water CEO and CFO payments: £770,000
b. Yorkshire Water CEO and CFO payments: £616,000
c. Dŵr Cymru Welsh Water CEO and CFO payments: £163,000
3. The executive pay report can be viewed here
4. All financial figures relating to executive pay have been rounded to one decimal point in this press notice
Monitoring Financial Resilience report
5. The MFR report is part of Ofwat's ongoing monitoring and review of companies (and increased company reporting requirements), better enables engagement with them - crucially, at an earlier point where there is potential risk.
6. This engagement is wide-ranging and allows Ofwat to input views, encourage appropriate actions and decision making, increase company accountability and request additional specific information. It also allows Ofwat to seek commitments, review for licence compliance, provide guidance, and more widely strengthen regulatory protections and expectations if appropriate.
7. Read our full Monitoring Financial Resilience Report 2023-24
8. Download charts and underlying data
9. The following table shows the MFR categorisation for all 16 companies:
| Financial resilience status | Monitoring and engagement approach | Company (alphabetical) |
| Action Required
Company action is being taken or is required, and/or commitments have been made to strengthen long term financial resilience. | Active
Higher priority for our monitoring and engagement. Additional information and reporting on improvements, and at a senior level in Ofwat, as required. | Thames Water* |
| South East Water and Southern Water | ||
| Elevated Concern
We have identified some concerns or potential concerns with the company's long term financial resilience that may require action to address. | Targeted
More frequent or targeted monitoring including engagement, with a requirement for the company to provide additional information where appropriate. | Affinity Water, Northumbrian Water, Portsmouth Water, South Staffs Water ⬆, SES Water ⬇, Yorkshire Water, |
| Standard
No specific concerns with the financial resilience of the company that we are aware of at this time. No specific company action expected to be required at this time. | Routine
Company is subject to ongoing monitoring, including through standard regulatory reporting and engagement. | Anglian Water, Dŵr Cymru Welsh Water, |
*Thames Water is shown distinctly in the Action Required category reflecting the extensive level of our engagement with the company on its financial matters, and the unprecedented level of oversight, including through our appointment of an Independent Monitor following downgrades to the company's credit ratings to below investment grade.
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