Recommendation 25

HM Government Acknowledged

environmental performance and penalises companies when they fall short. This should be reflected in the returns to investors and in performance related pay incentives applicable to senior executives. As part of the 2019 price review, Ofwat set out its expectation that policies for both short and long-term performance related executive pay should demonstrate a substantial link to stretching performance delivery for customers, including environmental performance. Water companies are monopoly providers of an essential public service, so it is vital that customers and other stakeholders are able to understand how companies make decisions on executive pay, and how this is linked to underlying performance. Ofwat also set out its expectation that companies’ remuneration committees should ensure there is ongoing rigorous challenge as to how companies apply their remuneration policies, that targets should remain appropriate and stretching throughout the 2020–25 period, and that only truly stretching performance should be rewarded. These expectations were reflected in Ofwat’s updated board leadership, transparency and governance principles which have applied since 1 April 2019. Companies’ licences now require them to ensure that the board’s leadership and approach to transparency and governance engenders trust in the company and ensures accountability for its actions. Against this background, where a company underperforms, including breaching permit conditions, this should be reflected in the awards made. On 18th February 2022, Ofwat wrote to the chairs of company remuneration committees to underscore its expectations against the backdrop of ongoing public concern on environmental issues. Ofwat will continue to examine this issue and consider whether further steps are required, as we monitor delivery and company decision-making over the Price Review 19 period.