Government bonuses in privatised corporations that present public companies have been underneath scrutiny for a few years. It’s a divisive matter that always makes headlines within the nationwide press – and, each time it does, there’s an emotive tug-of-war at play. On one aspect is a extra progressive, clear motion targeted on the inequality of extreme pay. On the opposite is a drive for discretionary and versatile reward to make sure companies stay aggressive.
Solely hardly ever does the UK Authorities step in. The current case of Thames Water was one such occasion – with central authorities telling bosses that they had been “rewarding themselves for failure.”
This intervention raises questions:
- Are checks and balances wanted to make sure boards and remuneration committees undertake a remuneration coverage that balances bottom-line efficiency with wider ESG metrics?
- Might a sure stage of regulation depart companies unable to retain their high expertise and experience or stay aggressive out there?
- If inside self-scrutiny isn’t achievable, what position ought to the Authorities play in capping or limiting bonuses?
Right here we contemplate these questions, utilizing the Thames Water saga for instance.
The Thames Water timeline
- Prior to now 18 months, Thames Water has confronted important monetary challenges. In June 2023, former Chief Government Sarah Bentley resigned after lower than three years within the job, throughout which era she had doubled her wage to £1.5m.
- In November 2024, regulator Ofwat revealed Thames Water was planning to make use of buyer money to pay bonuses and dominated that was not “justified.”
- In December 2024, Chief Government Chris Weston commented: “we have to appeal to expertise to this firm… If we don’t supply aggressive packages, folks won’t come and work at Thames.”
- In February 2025, the corporate secured a £3bn emergency mortgage to keep away from renationalisation. The corporate introduced plans to pay bosses £770,000 in bonuses in opposition to a backdrop of buyer payments rising by as much as 59%.
- In Could 2025, Thames Water “paused” its bonus scheme for senior execs underneath strain from the Authorities, which commented that “rewarding themselves for failure is clearly not acceptable.”
Fall-out from the Thames Water saga
Below new Ofwat guidelines enforced by the Water (Particular Measures) Act 2025, six water firms – Thames Water, Yorkshire Water, Anglian Water, Wessex Water, United Utilities and Southern Water – have been advised that they can not subject bonuses for the monetary yr 2024/25.
The brand new guidelines forestall government bonuses from being paid if a water firm doesn’t meet environmental or client requirements, doesn’t meet monetary resilience necessities, or is convicted of a legal offence. In the event that they adhere to the principles, firms can supply rewards for the 2025/26 monetary yr.
These new guidelines additionally come into power in opposition to a background of pre-existing negotiations between Ofwat and the water firms, who’ve been pushing for larger flexibility to extend the value cap from April 2025. The stand-off, and the nationwide outcry, factors to the necessity for organisations in regulated industries to think about a wider vary of efficiency metrics earlier than issuing bonuses.
The argument for regulation and intervention
In regulated industries like water, one of many key arguments for elevated regulation is aligning government bonuses and pay with the general public curiosity in a extra clear method.
Organisations like Thames Water are ready the place they successfully take pleasure in a pure monopoly with little requirement to compete for patrons. Measures that improve accountability and ensure cash is spent on important infrastructure, even when this reduces shareholders’ dividends, can improve public belief.
There may be additionally some consideration for forcing environmental and social affect into reward. Issues round water high quality and sewage discharge was a stay matter with Thames Water and a key motive for the resignation of Sarah Bentley in 2023. Theoretically, higher regulation would guarantee larger funding and extra real affect in these areas.
The enterprise case in opposition to regulation
The counterargument centres totally on expertise retention. By implementing caps and restrictions on pay and reward, the worry is that almost all expert executives will merely depart and go elsewhere.
Water firms reminiscent of Thames want expert executives. They depend on leaders who can handle enterprise prices, drive innovation, and meet environmental targets, regardless of the complexities of managing companies working (in some circumstances) on Victorian infrastructure. Their core worth lies of their expertise to pre-empt points and expertise to repair them.
In a geopolitical sense, two different key questions come up: Would Welsh Water (serving three million folks) require the identical form of regulation as Thames Water (serving 16 million)? And, secondly, is there a hazard that larger pink tape might flip essential companies like utilities into political pawns much more prone to election cycles and get together politics?
Is there a hybrid resolution to the chief bonus drawback?
To keep away from additional pink tape, firm boards and remuneration committees might want to persuade the UK Authorities that they’ll ship monetary efficiency aligned with ESG metrics. How would possibly they do that?
- Sturdy governance: Insurance policies that mix ESG and monetary metrics to pre-empt and keep away from Authorities intervention.
- Construct readability on base vs variable pay ratio: This contains spelling out the position bonuses play within the remuneration package deal and the way they’re structured to be adaptable to altering wants.
- Contemplate metrics for Lengthy-Time period Incentive Plans (LTIPs): Align bonuses with public affect, reminiscent of sewage discharge discount or elevated buyer satisfaction, slightly than a restructure that resulted in £18.5m paid to senior executives. These metrics could possibly be weighted to make sure each components affect pay and efficiency, and measured and rewarded over time. This method permits a larger deal with areas that don’t drive instant monetary return, like upkeep and funding.
If the Thames Water episode has proven us one factor, it’s that enterprise leaders want to sit down up and look rigorously at government bonuses and pay. Future Governments might impose bonus caps (just like the EU did on banking in 2014), ban bonuses outright for underperformance (as in Thames Water) or title and disgrace firms and officers for extreme and unjustifiable rewards. Motion in some type is required as a result of the choice might depart executives red-faced.
