Government Announces Crackdown on Water Company Bonus Loopholes
The government is preparing to close significant loopholes that have allowed executives at failing water companies to continue receiving substantial bonus payments, despite legislation passed last year intended to prevent such rewards. This development comes after revelations that water bosses have exploited technicalities in the Water (Special Measures) Act to maintain their lucrative compensation packages.
How Water Companies Circumvented the Bonus Ban
Last year's legislation, championed by former environment secretary Steve Reed, aimed to prohibit failing water companies from paying performance-related bonuses to chief executives and chief financial officers. However, the law contained critical weaknesses that companies have since exploited through various methods.
Companies have employed three primary strategies to bypass the restrictions:
- Relabelling performance bonuses as other types of payments, such as "retention payments"
- Routing compensation through parent companies or offshore entities
- Exploiting narrow definitions of what constitutes a "failing" company
Notable Cases of Bonus Payments Despite Bans
Several prominent examples illustrate how water companies have continued rewarding executives despite poor performance and environmental violations.
Thames Water, which has been deemed a failing company and had its bonuses officially banned, still plans to pay top staff millions in "retention payments" funded through a controversial high-interest loan. These payments are permitted because they are classified as non-performance-related bonuses.
Yorkshire Water, similarly banned from paying executive bonuses this year, saw its chief executive Nicola Shaw receive £1.3 million through an offshore parent company over two years.
South East Water boss David Hinton remains on track to collect £400,000 in bonus payments by 2030, despite the company's failures that left tens of thousands of residents in Tunbridge Wells without water for extended periods.
Wessex Water's former chief executive Colin Skellett received a £170,000 bonus in the same year the utility faced bonus restrictions, with the payment allowed because it originated from a parent company.
Political Response and Regulatory Action
The continued bonus payments have prompted accusations that water companies have "outwitted" the government and regulators. Current Environment Secretary Emma Reynolds is expected to introduce tougher measures to close these loopholes during the transition period as the current regulator, Ofwat, prepares to hand over to a new "super-regulator."
These measures will likely form part of a new water bill anticipated in the King's Speech this May. Reynolds has already directed Ofwat to tighten criteria for defining failing companies and will end the practice of relabelling performance bonuses to circumvent restrictions.
Water Minister Emma Hardy emphasised the principle behind the crackdown: "It seems simple to me that bonuses should reflect performance, and if performance is not good enough, people should not get a bonus. It is not just about the letter of the law, but about the spirit of the law."
Campaigner Criticism and Industry Response
Water campaigner and former Undertones frontman Feargal Sharkey expressed little surprise at the developments, noting that the loopholes were evident before the legislation passed. "The water companies were never going to operate within the spirit of the law," Sharkey stated. "They have always tested the limits of the law. They have misled governments and polluted the environment, so they were never going to do the right thing."
Liberal Democrat MP Mike Martin, whose Tunbridge Wells constituents suffered through water shortages, called the situation "outrageous" and questioned why loopholes hadn't been closed sooner.
An Ofwat spokesperson noted that despite the loopholes, £4 million in bonuses had been blocked this financial year. The regulator is currently consulting on changes to the bonus ban and has previously indicated it would consider forcing water companies to disclose all executive payments from related companies.
The Department for Environment, Food and Rural Affairs issued a stern warning: "We have warned the water companies to operate within the spirit as well as the letter of the law, but it appears they haven't, so we will need to look at a further crackdown."
