WQW0005

Supplementary written evidence submitted by Ofwat

I am writing to inform you about a report published by Ofwat today, setting out our assessment of 2022-23 performance related executive pay, as part of our effort to drive up standards of governance in the water industry.

Six companies set out in their annual reports that their CEO and, in some cases other executive directors, decided to waive their entitlement to PRP payments for that year. Five other companies set out that shareholders rather than customers would fund all or part of PRP payments for 2022-23. We do acknowledge Dŵr Cymru for the leading edge 80% alignment of their bonus to delivery for customers and the environment.

Today we've published our assessment of how performance related pay (PRP) awarded to water company executives during 2022-23 was aligned to delivery for customers and the environment, and overall company performance. The report looks at the 16 largest companies in England and Wales and is the latest step we have taken as we crack down on inappropriate pay outs in the sector. We have introduced a performance related pay recovery mechanism, in relation to 2023-24 pay onwards, to ensure that shareholders, not customers, will pay for water company executive bonuses where they do not meet expectations. The report highlights progress made in this last year before our new mechanism applies, and outlines further steps which companies should take before remuneration committees make pay decisions for 2023- 24 onwards.

Our assessment revealed that improvement is needed across all companies:

• Companies need to do more to explain how the targets they have used for the measures which determine PRP decisions are stretching.
• Companies need to go further in explaining how overall performance has been taken into account when making PRP decisions.
• PRP frameworks at most companies meet our current expectations regarding alignment to delivery for customers and the environment. Our assessment of 2022-23 PRP decisions has revealed a small number of companies where this is not the case but the companies concerned have committed to changes from next year.

In the report, we are clear that it is important stakeholders are able to see the standards to which executive directors are being held in relation to performance related pay, and how remuneration committees have taken account of the overall performance of the company. If they do not do this, it will be difficult for us to conclude that a company has met our expectations in future years.

More details about the report are here.

Ahead of Ofwat's evidence session on 22nd November, I wanted to draw this update to your attention, and I look forward to answering further questions about it then. We'd be grateful if you could share this update with the wider committee.

8 November 2023