Ofwat CEO David Black has written to the regulated water and wastewater companies warning them that Ofwat’s board is “deeply concerned that, generally, companies have not taken sufficient action to respond to the measures we have taken to date.”
Ofwat CEO David Black has written to the regulated water and wastewater companies warning them that Ofwat’s board is “deeply concerned that, generally, companies have not taken sufficient action to respond to the measures we have taken to date.”
David Black told the chairs of water company remuneration committees he was writing in the context where “the performance of the sector as a whole continues to be called into question” - including through a sector-wide investigation into companies' compliance with their statutory and licence obligations in relation to wastewater treatment works and a parallel Environment Agency investigation.
The letter, which was copied to company board chairs, raises the issue of performance related executive pay and Ofwat’s expectation that performance related executive pay should demonstrate “a substantial link to stretching performance delivery for customers.”
The Ofwat Chief also referred to his previous letter in February 2022 which had highlighted that “high levels of scrutiny and concern around water company performance risked eroding trust and confidence in the sector” which he linked with the water companies’ approach to decisions on performance related pay for 2021-22.
“Water companies are appointed monopolies established to provide an essential service and executive remuneration should reflect this privileged status,” he said.
Clear demonstration of "erosion of trust among customers"
The letter also refers to events over the summer, when customers experienced temporary use bans alongside disruption from burst water mains and ongoing leakage. Together with deep concerns about sewage discharges into the environment, these had “clearly demonstrated the erosion of trust amongst customers and stakeholders when levels of performance are not seen to relate to the awards being received by executives, which customers are ultimately paying for,” the letter says.
Black told the water company committee chairs that Ofwat was following up on specific issues arising from 2021-22 remuneration committee decisions with relevant companies.
Ofwat wanted to be clear that the regulator expects companies “to much better account for overall performance in making decisions on performance-related elements of executive pay.”
The regulator “would also expect remuneration committees to take account of any identified shortcomings and outstanding processes in exercising their judgement on executive remuneration in the round”, he continued.
Water companies must respond on how they account for overall performance in decisions on performance related pay
He acknowledged that not every company was starting from the same position. However, in anticipation of decisions to come for the 2022-23 performance year and for the rest of PR19, Ofwat is asking for the water companies to respond on how they account for overall performance for customers and the environment in decisions on performance related elements of executive pay.
Ofwat is also seeking an explanation as to how they intend to develop their approach both to policy and decision-making to ensure the issues are “appropriately into account.”
“It needs to be clear that these concerns are recognised and what is going to change as a result”, the letter says.
The Ofwat CEO concluded by reminding the committee chairs you that the regulator is “considering other mechanisms” to reinforce expectations in this area, including disallowing the recovery of performance related pay from customers as part of reconciliation at PR24. This would be in the event of companies being “unable to demonstrate their decisions have reflected Ofwat’s expectations, including by reference to overall performance.
The water companies have been asked to respond to the regulator by Friday, 6 January 2023.
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