Water companies have found a way around the government's bonus ban, leading to higher overall pay for top executives, according to a new analysis. The Water (Special Measures) Act 2025, which aimed to block bonuses for polluting water bosses, has instead prompted a rise in fixed salaries, allowances, and retention payments. This has resulted in a 1.5% increase in total pay packets for chief executives and chief financial officers across England and Wales, reaching £25.3m for the year, as reported by the Guardian.
Bonus Ban Backfires: Pay Rises Instead
The Labour government, which came to power in 2024, promised to "ban the payment of bonuses to polluting water bosses until they have cleaned up their filth." However, the legislation only gave Ofwat, the regulator for England and Wales, powers to block performance-related bonuses. It did not address other forms of compensation, such as salary increases or retention payments. Consequently, companies have exploited this loophole, with many opting to boost fixed pay to retain executives.
This pattern mirrors the aftermath of the 2008 financial crisis, when banks circumvented EU bonus caps by introducing "role-based allowances." As Nils Pratley notes in his analysis, "We would see the waterbed principle in action: when you push down in one area of remuneration, such as the performance-related stuff, another tends to go up." Executives have traded uncertain bonuses for guaranteed salary hikes, often preferring the stability.
Thames Water's Controversial Payments
Thames Water, the industry's most troubled firm, has been at the center of the controversy. Its chief financial officer, Steve Buck, who earned £591,000 in the financial year to March, received a delayed £1m signing fee at the end of July. The company also "entered into 14 agreements" to resolve potential claims related to retention payments that were paused after political backlash a year ago.
The government has expressed outrage, with a spokesperson for the Department for Environment, Food and Rural Affairs stating, "It is unacceptable that one of the worst-performing water companies is handing out huge payments to its executives when it should be focusing on improving performance and rebuilding public trust." However, critics argue that ministers should have anticipated such tactics.
Ofwat's Limited Powers
The core issue is that Ofwat can only use the powers granted by parliament. As Pratley points out, "Restricting bonuses is not the same as restricting overall pay." The regulator has no formal authority to block salary increases or retention bonuses, leaving the door open for companies to circumvent the spirit of the law.
Helen Campbell, interim executive director of Ofwat, has voiced concerns that customers' trust is eroded when remuneration committees make decisions that "give the appearance of circumventing the rule" or lack transparency. Yet, without stronger legal backing, the regulator's hands are tied.
Future Review and Public Control
The government and Ofwat are now reviewing whether to strengthen the rules. A review is due in the autumn, potentially leading to reforms under the prime minister's vision of "greater public control." However, given the industry's track record, skepticism remains. As Pratley concludes, "On past experience, however, believe it when you see it."
This situation highlights the challenges of regulating executive pay in privatized utilities, where companies have shown creativity in finding loopholes. The onus is on policymakers to close these gaps if they truly intend to curb excessive compensation in the water sector.
