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21
Nov
Ofwat stops customers paying for Yorkshire Water executive bonuses
Householders will not have to foot the £616,000 bill for Yorkshire Water bosses’ bonuses this year, thanks to new rules introduced by water industry regulator Ofwat.
From 2023-24, water companies must now show that executive bonuses are sufficiently linked to company performance.
Ofwat has said it will use its new powers to step in and directly block Yorkshire Water and two other water companies – Thames Water and Dŵr Cymru Welsh Water – from allowing customers to pay £1.5m of bonuses.
The bonus amounts
Of this sum, Yorkshire Water's bonuses come to £616,000, consisting of £371,000 for chief executive officer Nicola Shaw, and £245,000 for chief financial officer Paul Inman.
Ofwat has determined that these bonuses, and those at the other two companies named, do not adequately reflect overall company performance. In these cases, Ofwat will adjust costs for the companies in question so they cannot recover it from customers.
In addition to these three companies, six others will also not be able to use customer money to fund bonuses. These six have voluntarily decided not to push this cost of bonuses on to their customers, and will require their shareholders to pay them instead.
Had this not been the case, Ofwat said it would have intervened, just as it did in the cases of Yorkshire Water, Thames Water and Dŵr Cymru Welsh Water.
Bonuses at these nine companies amount to £6.8 million, or 73% of the total across the sector.
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.
The bill is currently awaiting its third reading in the House of Lords, before being passed on to the House of Commons.
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.
Yorkshire Water's response
Vanda Murray, chair of Yorkshire Water, told the Stray Ferret:
Ofwat's executive remuneration report has outlined changes in the way executives should be paid. Our board and remuneration committee understand the strength of feeling about rewarding executives and believe it is important to reward performance to attract and retain the right calibre of talent to drive forward our improvement plans at a hugely difficult time for the sector.
We reflected hard on the performance of the business through various metrics at the end of 23/24. These metrics included environmental performance, but also important measures such as customer service and leakage, where the business delivered well.
The outcome against the performance measures was a 61.2% bonus of the maximum allowance, which was reduced by the independent remuneration committee to 42.2% (a reduction of around a third) to take into account the company’s environmental performance not being where we wanted it to be.
Nevertheless, Ofwat has made a clear statement today and we will be reflecting on their comments.
Fewer dividends paid out
Ofwat has today also published its latest annual Monitoring Financial Resilience (MFR) report, covering the 2023-24 financial year.
Ofwat claims its efforts have resulted in water companies paying out £400 million less in dividends, a reduction of almost a third (£1 billion, compared with £1.4 billion).
The MFR report categorises Yorkshire Water, which supplies water to 5 million households and 140,000 businesses across the region, as being one of seven water companies of ‘elevated concern’.
The news comes just a month after Ofwat ordered Yorkshire Water to pay back £36 million to customers through lower bills after missing key targets. In its water company performance report, Ofwat upgraded the company from "lagging behind" to “average”, but said it still required “sustained improvement”.
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