New rules on bonuses are “beginning to bite”, the regulator Ofwat has said as it detailed how nine water companies would “not be using customers’ money” to fund a total of £6.8m of payments to executives. Really? Who is being bitten?
Not the executives because, as Ofwat’s careful phrasing indicated, they will still get their lolly. It’s just that the cash and incentive shares will come from the bucket marked “shareholders’ funds”, or, in the case of Dŵr Cymru Welsh Water, from somewhere else because the firm doesn’t have shareholders.
From the point of view of the recipients of the bonuses, the watchdog’s bite makes no difference. Even Thames Water, as deep in the mire as it is possible to be, somehow concluded that bonuses of £770,000 between the chief executive and finance director were in order.
It is still important to send a signal about aligning short- and long-term incentives with the interests of customers, Ofwat might argue. And, OK, one can agree that it’s better that the regulator these days offers an opinion on which bonuses are deserved and which remuneration committees have bothered to explain their thinking to the outside world. But, ultimately, it’s all a dance.
Look at Severn Trent, where the “unjustified” bonuses totalled £2.6m in a year in which the company received a criminal conviction as a result of a prosecution by the Environment Agency. The shareholders aren’t giving up much by having the sum paid from the holding company, rather than the regulated entity overseen by Ofwat. The company distributed dividends of £301.6m last year; nobody would have noticed if the figure had been £299m.
Thus the Labour government’s plan to give Ofwat powers to prohibit bonuses altogether is a more interesting development. There will be a ban unless executives meet “high standards when it comes to protecting the environment, their consumers, financial resilience and criminal liability,” the environment secretary, Steve Reed, said in September.
That is a stiffer policy but, again, do not underestimate companies’ powers of circumnavigation. When financial regulators imposed a cap on bankers’ bonuses after the great financial crash, the banks reacted in an entirely predictable way by whacking up salaries. Since Ofwat will still only have powers over variable pay, as opposed to fixed salaries, there is nothing to stop water companies trying the same trick. Extra regulatory scrutiny, plus howls of public outrage, exert some pressure at the margin – but that is all.
None of which is to deny that Ofwat’s increased powers in other areas are more meaningful: the power to stop the payment of dividends if they would threaten the company’s financial resilience has genuinely had an impact. And we wait to see if Reed, either before or after his new Water Commission reports, is capable of turning the Environment Agency into a well-resourced and feared enforcer.
But on bonuses and pay, do not hold your breath. One suspects the waterbed effect will apply: when you push down on one area, another goes up.