REG - Water Services Auth - 73% of bonuses will not be paid for by customers

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21/11/2024 08:15

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RNS Number : 1398N  Water Services Regulation Authority  21 November 2024

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
(https://www.ofwat.gov.uk/publication/protecting-customer-interests-on-performance-related-executive-pay-2023-24-assessment/)

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
(https://www.ofwat.gov.uk/publication/monitoring-financial-resilience-report-2023-24/)

8.   Download charts and underlying data
(https://www.ofwat.gov.uk/publication/monitoring-financial-resilience-report-2023-24-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                                                                  Active                                                                          Thames Water*

 Company action is being taken or is required, and/or commitments have been       Higher priority for our monitoring and engagement. Additional information and
 made to strengthen long term financial resilience.                               reporting on improvements, and at a senior level in Ofwat, as required.
                                                                                  South East Water and Southern Water
 Elevated Concern                                                                 Targeted                                                                        Affinity Water, Northumbrian Water, Portsmouth Water, South Staffs Water ⬆,

                                                                               SES Water ⬇, Yorkshire Water,
                                                                                                                                                                  and Wessex Water ⬆

 We have identified some concerns or potential concerns with the company's long   More frequent or targeted monitoring including engagement, with a requirement
 term financial resilience that may require action to address.                    for the company to provide additional information where appropriate.
 Standard                                                                         Routine                                                                         Anglian Water, Dŵr Cymru Welsh Water,

                                                                               Hafren Dyfrdwy, Severn Trent,
                                                                                                                                                                  South West Water and United Utilities.

 No specific concerns with the financial resilience of the company that we are    Company is subject to ongoing monitoring, including through standard
 aware of at this time. No specific company action expected to be required at     regulatory reporting and engagement.
 this time.

 

*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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