About 30 years too late, many might say, here comes Ofwat with details on how it will “crack down”, as it puts it, on executive pay in the English water sector. Since the regulator’s new powers to interfere on boardroom pay don’t kick in until next year, this year’s assessment can be considered an explainer on how a new offside rule will work.
And the news from the video assistant referee is that Severn Trent, South West Water and Portsmouth Water committed offences that “did not meet our expectations”, says Ofwat, because either short- or long-term incentives were insufficiently aligned to good outcomes for customers or the environment. Does that mean the executives would have faced the humiliation of returning their dodgy rewards?
Well, no, Ofwat isn’t quite saying that. The regulator’s powers of intervention are limited to ensuring customers do not pay for misaligned bonuses, but it seems there’s nothing to stop shareholders from picking up the tab. How the distinction would be made is unclear. But, in principle at least, it appears Ofwat could intervene to “ban” a bonus only for the owners to say they’ll pay it anyway out of their pocket by taking, say, less in dividends than they would otherwise have done.
For example, Severn Trent paid £261.3m in dividends last year. Would its shareholders have been happy with £259m if the remuneration committee said it was essential that chief executive Liv Garfield got her £2.3m variable pay in full? The answer, whether you like it or not, is probably “yes” since Severn Trent in recent years has been at, or near, the top of comparative (a crucial word in this context) tables for financial and environmental performance.
The other big obstacle to serious reform can be called the bankers’ bonus cap problem: Ofwat’s powers cover only the variable performance-related element in pay packets, not fixed salaries. In the case of the bankers, salaries were brazenly hiked in about 2013, as everybody apart from naive EU officials predicted at the time.
It would be harder for water companies to pull the same trick, but only because the outrage would be deafening. But therein lies the real reason why executives at six water companies waived their bonuses last year: with storm overflows overflowing, and the state of the waterways on the front page of newspapers, they knew public opinion would not stand more of the same given the underinvestment and dividend-extraction since privatisation. But that is a story of public pressure, not regulatory intervention, making a small difference.
None of which is to say Ofwat’s new interest in bonuses is pointless. It will indeed be enlightening to see remuneration committees forced to explain how performance targets can be called “stretching” if they merely describe a regulatory obligation. But, please, let’s not call this exercise a “crackdown”. It is a modest increase in regulatory scrutiny and small advance for transparency.
The far more important regulatory reform is Ofwat’s new power to prevent the payment of dividends to shareholders if performance for customers and the environment isn’t up to scratch. The interpretation of that new licence condition is the one to watch.