The government is to close loopholes which allow bosses of failing water companies to continue to receive large bonuses despite a ban passed last year, it can be revealed.
Bosses of companies that illegally dumped sewage into England’s rivers and seas and presided over water shortages which left thousands of people in misery have still been paid millions in bonuses despite the ban.
The previous environment secretary Steve Reed attempted to ban failing water companies from paying bonuses to chief executives and chief financial officers. However, the legislation passed in the Water (Special Measures) Act last year only referred to “performance-related” bonuses from specific regulated companies.
MPs have said the loopholes allowed companies to get around the bonus ban by labelling payments differently or paying bosses through linked companies.
This means some bosses who have had their bonuses banned for presiding over pollution and water outages have been paid anyway. Thames Water had its bonuses banned after being deemed a failing company, but still plans to pay its top staff millions in “retention payments” from a controversial high-interest loan that was meant to be used to keep the firm afloat. This is now allowed as these are labelled as non-performance-related bonuses.
Yorkshire Water was also banned from paying its bosses bonuses this year, but its chief executive, Nicola Shaw, netted £1.3m in an offshore parent company over two years. The boss of South East Water, David Hinton, is on track for £400,000 in bonus pay by 2030 despite tens of thousands of people in Tunbridge Wells having had their water cut off for weeks.
Wessex Water’s former boss Colin Skellett received a £170,000 bonus in the same year as the bonus ban on the utility. The payment was labelled as a bonus, but was allowed because it was made by a parent company.
As a result of bonuses still being paid, Reed was accused of being “outwitted” by the water companies.
Emma Reynolds, his successor, is expected to bring forward tough measures to close the loophole in the interim period when the current regulator, Ofwat, is handing over to a new “super-regulator”. This will be part of a new water bill expected in the king’s speech in May.
“We have warned the water companies to operate within the spirit as well as the letter of the law,” a Department for Environment, Food and Rural Affairs source said, “but it appears they haven’t, so we will need to look at a further crackdown”.
Sources told the Guardian that under new plans, water CEOs would not be allowed to be paid bonuses via parent companies. Reynolds has already directed Ofwat to tighten the criteria for what constitutes a “failing” company, and will end the practice of performance bonuses being relabelled as other types of bonuses to get around the ban.
The water minister, Emma Hardy, said: “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. Ofwat has exposed serious transparency failings across the water sector, and we are therefore tightening transparency rules to shut down any attempt to dodge the bonus ban.”
Feargal Sharkey said the loopholes were obvious in last year’s legislation. Photograph: James McCauley/Rex/Shutterstock
Feargal Sharkey, the water campaigner and former frontman of the Undertones, said the bonus loopholes were evident before the legislation was passed.
He said: “The loophole was obvious from the beginning. The water companies were never going to operate within the spirit of the law. 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. I was not surprised at all. They were warned before the Water (Special Measures) Act became law that this would happen.”
Mike Martin, the Liberal Democrat MP for Tunbridge Wells, where failures by South East Water meant his constituents were without water for weeks, said Hinton should “obviously” not get his bonus. He said “It is outrageous these loopholes haven’t already been closed”.
An Ofwat spokesperson said £4m in bonuses had been blocked this financial year despite the loopholes. They said the regulator was consulting on changes to the ban. Ofwat has previously said it expected companies to act within the spirit of the law. Last year, it said it was considering forcing water companies to disclose all pay to bosses from related companies after the Guardian’s reporting.