Will the ban on water industry bonuses get flushed away?

Preventing failing company bosses from receiving millions in payouts will be a popular move – but James Moore detects a possible blockage in the pipeline

“The era of profiting from pollution ends today,” declared environment secretary Steve Reed, taking aim at our deeply dysfunctional water industry.

Big talk – and it was backed up with a ban on bonuses for 10 top bosses as a result of the scandalous level of sewage pollution consumers have had to put up with.

Over the last 10 years, execs at the nine biggest water companies have had their wallets fattened by a combined £112m for running regional monopolies – badly. In just the last year, they’ve pocketed nearly £8m.

No wonder people are cross. If you want an example of why monopolies are a thoroughly bad thing, you’ve got it here. If you want a case study of why bosses’ bonuses make people blow a gasket, you’ve also got it here.

The nearly 2,500 “sewage events” recorded over the 12 months can in part be traced to profoundly misaligned incentives. And also, it should be said, to Ofwat’s continued failure to properly regulate the sector. If these companies received effective oversight, the current mess would not have been allowed to happen.

But back to the government’s order, which will hit executives at the stricken Thames Water, Yorkshire Water, Anglian Water, Wessex Water, United Utilities, and Southern Water where it hurts: in the pocket.

“While it is for water companies to set their own remuneration, new standards published by Ofwat that come into force today mean bonuses will not be permitted to be handed out in specific cases when a water company fails to meet core environmental standards,” the government said.

Future bans will be imposed if a water boss “presides over serious pollution offences, fails to meet basic financial resilience standards (e.g. meet minimum credit rating requirements), fails to meet core consumer standards (e.g. failure to operate and maintain sewage networks, is convicted of a criminal offence”.

This will be a popular move from a government that needs to find a few winners. However – and you can call me a cynic if you want – there is a potential problem here.

Remember the EU’s bankers bonus cap, limiting payments to 100 per cent of salary, or twice that with shareholder approval?

The net result of that rule, since jettisoned by the UK, was that affected institutions sharply increased the base salaries of their leading rainmakers. Some of them actually found they were really quite keen on having (much) larger pots of guaranteed money coming to them.

Executive pay is a multi-headed hydra. Cut off one of those heads – the bonus, in this case – and the others (basic pay, benefits, pensions) typically get bigger. I wouldn’t be at all surprised to see some of the water companies attempting to push through big increases in basic pay for their execs, or more likely still, quietly increasing benefits and especially pension contributions. This will merit close attention.

Campaigners from Surfers Against Sewage are calling for transformational reform of the water industry (Matt Alexander Media Assignments/PA) (PA Wire)

Water bosses being handed fat pay rises will, of course, go down like a cup of cold sewage and generate an overflowing storm drain of controversy. But, given the tin ear the water industry has turned to its critics in the past, would anyone be all that surprised if one or two of these companies tried this? I wouldn’t.

You can, nonetheless, file the bonus ban under “easy win” for Mr Reed, who was out tub thumping on TV on the back of the announcement. He puffed out his chest, made himself look big and tough, and talked about promises being delivered.

It might be me, but isn’t it just a little bit early for him to be saying that? Yes, he’s had a good start on this one. I’m not denying that. But turning the water industry into something that works for both consumers and investors is a much tougher nut to crack.

Reed touted a £104bn pot of private investment – “the largest ever since privatisation” – which, we are told, will be ring-fenced “to cut sewage discharges by nearly half over the next five years”, as opposed to being used for “shareholder payouts”.

Things that make you go hmm. The money is certainly welcome. It is much needed. But what you have to remember is that private investors are not charities. They don’t pump money into companies without the prospect of a return. They will require payouts at some point otherwise the money will dry up quicker than the water pouring out of a leaky Thames Water pipe on a hot summer’s day.

The other thing to remember, with the water industry being in such a godawful mess, is that it’s going to take some smart people to fix it. Preferably new people, untainted by previous scandal. These people tend to demand very high salaries.

If their incentives are properly aligned with the delivery of the services these companies are supposed to provide, it ought to be possible to deliver something that hasn’t happened to date: an industry that works for all its stakeholders.

But Mr Reed, and a beefed up Ofwat, still have work to do on that front.