Executive bonuses in privatised firms that provide public services have been under scrutiny for many years. It’s a divisive topic that often makes headlines in the national press – and, every time it does, there is an emotive tug-of-war at play. On one side is a more progressive, transparent movement focused on the inequality of excessive pay. On the other is a drive for discretionary and flexible reward to ensure businesses remain competitive.
Only rarely does the UK Government step in. The recent case of Thames Water was one such instance – with central government telling bosses that they were “rewarding themselves for failure.”
This intervention raises questions:
- Are checks and balances needed to ensure boards and remuneration committees adopt a remuneration policy that balances bottom-line performance with wider ESG metrics?
- Could a certain level of regulation leave businesses unable to retain their top talent and expertise or remain competitive in the market?
- If internal self-scrutiny is not achievable, what role should the Government play in capping or restricting bonuses?
Here we consider these questions, using the Thames Water saga as an example.
The Thames Water timeline
- In the past 18 months, Thames Water has faced significant financial challenges. In June 2023, former Chief Executive Sarah Bentley resigned after less than three years in the job, during which time she had doubled her salary to £1.5m.
- In November 2024, regulator Ofwat revealed Thames Water was planning to use customer cash to pay bonuses and ruled that was not “justified.”
- In December 2024, Chief Executive Chris Weston commented: “we need to attract talent to this company… If we don’t offer competitive packages, people will not come and work at Thames.”
- In February 2025, the company secured a £3bn emergency loan to avoid renationalisation. The company announced plans to pay bosses £770,000 in bonuses against a backdrop of customer bills rising by up to 59%.
- In May 2025, Thames Water “paused” its bonus scheme for senior execs under pressure from the Government, which commented that “rewarding themselves for failure is clearly not acceptable.”
Fall-out from the Thames Water saga
Under new Ofwat rules enforced by the Water (Special Measures) Act 2025, six water companies – Thames Water, Yorkshire Water, Anglian Water, Wessex Water, United Utilities and Southern Water – have been told that they cannot issue bonuses for the financial year 2024/25.
The new rules prevent executive bonuses from being paid if a water company does not meet environmental or consumer standards, does not meet financial resilience requirements, or is convicted of a criminal offence. If they adhere to the rules, companies can offer rewards for the 2025/26 financial year.
These new rules also come into force against a background of pre-existing negotiations between Ofwat and the water companies, who have been pushing for greater flexibility to increase the price cap from April 2025. The stand-off, and the national outcry, points to the need for organisations in regulated industries to consider a wider range of performance metrics before issuing bonuses.
The argument for regulation and intervention
In regulated industries like water, one of the key arguments for increased regulation is aligning executive bonuses and pay with the public interest in a more transparent way.
Organisations like Thames Water are in a position where they effectively enjoy a natural monopoly with little requirement to compete for customers. Measures that increase accountability and make sure money is spent on critical infrastructure, even if this reduces shareholders’ dividends, can increase public trust.
There is also some consideration for forcing environmental and social impact into reward. Concerns around water quality and sewage discharge was a live topic with Thames Water and a key reason for the resignation of Sarah Bentley in 2023. Theoretically, better regulation would ensure greater investment and more genuine impact in these areas.
The business case against regulation
The counterargument centres primarily on talent retention. By enforcing caps and restrictions on pay and reward, the fear is that most skilled executives will simply leave and go elsewhere.
Water companies such as Thames need skilled executives. They rely on leaders who can manage business costs, drive innovation, and meet environmental targets, despite the complexities of managing services running (in some cases) on Victorian infrastructure. Their core value lies in their experience to pre-empt issues and skills to fix them.
In a geopolitical sense, two other key questions arise: Would Welsh Water (serving three million people) require the same kind of regulation as Thames Water (serving 16 million)? And, secondly, is there a danger that greater red tape could turn crucial services like utilities into political pawns far more susceptible to election cycles and party politics?
Is there a hybrid solution to the executive bonus problem?
To avoid further red tape, company boards and remuneration committees will need to convince the UK Government that they can deliver financial performance aligned with ESG metrics. How might they do this?
- Strong governance: Policies that combine ESG and financial metrics to pre-empt and avoid Government intervention.
- Build clarity on base vs variable pay ratio: This includes spelling out the role bonuses play in the remuneration package and how they are structured to be adaptable to changing needs.
- Consider metrics for Long-Term Incentive Plans (LTIPs): Align bonuses with public impact, such as sewage discharge reduction or increased customer satisfaction, rather than a restructure that resulted in £18.5m paid to senior executives. These metrics could be weighted to ensure both elements influence pay and performance, and measured and rewarded over time. This approach allows a greater focus on areas that do not drive immediate financial return, like maintenance and investment.
If the Thames Water episode has shown us one thing, it is that business leaders need to sit up and look carefully at executive bonuses and pay. Future Governments could impose bonus caps (like the EU did on banking in 2014), ban bonuses outright for underperformance (as in Thames Water) or name and shame companies and officials for excessive and unjustifiable rewards. Action in some form is required because the alternative could leave executives red-faced.
