It started before the election. Against a background of growing fury about the conduct of the water companies, Labour promised to end the injustice of their executives getting bonuses while sewage was dumped in England’s rivers and seas.
In March 2024, Steve Reed, the then shadow environment secretary, said: “Since the last election the water bosses have paid themselves £25m in bonuses. Labour will ban the payment of bonuses to polluting water bosses until they have cleaned up their filth.”
The policy became a significant part of the election campaign two months later. The manifesto promised: “We will give regulators new powers to block the payment of bonuses to executives who pollute our waterways.”
Once in power, Labour went straight into action. One of the first big laws it passed was the Water (Special Measures) Act 2025. The legislation contains provisions to ban performance-related payments to senior executives of water companies that repeatedly pollute England’s waterways with sewage. Reed, now environment secretary, described it as a means to end the “undeserved” payments.
Under the act, the government banned six water firms including Thames Water from awarding bonuses for this financial year after seven major pollution incidents.
However, it was not long before flaws in this plan began to emerge. Thames Water has faced particular challenges this year, with regular discussions over its possible collapse, even as customers’ bills soar to pay for infrastructure. In February, as the legislation was going through parliament, a court ruled that Thames could proceed with a controversial £3bn loan from a group of creditors, at a 9.75% interest rate, in order to stabilise the company.
In May, the chair of Thames, Adrian Montague, told MPs on the environment, food and rural affairs (Efra) committee that bosses were in line for “substantial” bonuses linked to the loan, on the insistence of creditors. The company needed to pay the bonuses, he said, “because we have to keep staff. It is a very competitive marketplace out there … If we are unable to pay bonuses, people will come knocking and try to pick out of us the best staff we have. That is not in customers’ interests.”
Soon afterwards, the Department for Environment, Food and Rural Affairs announced plans to use the act to block Thames bosses taking bonuses. A week later, Reed appeared in front of the same committee, telling MPs that the bonuses had been withdrawn.
At the same hearing Montague conceded in a letter that he may have misspoken when he said the bonuses were insisted upon by creditors. Reed told the committee that Thames Water had “appeared to be attempting to circumvent that ban, calling their bonuses something different so they can continue to pay them”. Thames responded, saying that rather than having been withdrawn, the bonuses were paused.
But in July the Guardian revealed that Thames had already paid bonuses totalling £2.46m to 21 managers on 30 April, and was refusing to claw the money back. Although it had paused the bonus scheme, or management retention plan (MRP), it did not promise that the next tranches would not also be paid, with the managers due to receive the same sum again in December and a further £10.8m collectively next June.
Under the Water (Special Measures) Act, the only bonuses that can be stopped to those at the very top of the company, such as the chief executive, the chief financial officer and the chair. Chris Weston, the chief executive of Thames Water, has voluntarily declined his 300% bonus, because, he said, it would have been a “distraction”.
The water campaigner and former Undertones frontman, Feargal Sharkey, campaigned with Keir Starmer during the general election. But Sharkey has been left unimpressed by the bonus ban.
He said: “Driving forward eye-catching policies designed to do nothing more than grab headlines is no way to fix the biggest problem facing this country in the 21st century, the government has been outwitted and outmanoeuvred by the water companies.”
Was the Thames package designed to circumvent the rules? Documents it released to the Efra committee show that when designing the payments package, the company hired top consultants and law firms including Rothschild & Co, Linklaters and Mercer to help it come up with a retention programme that was legally sound and would get past regulators.
During Thames board meetings set up to discuss the bonuses, members asked “if any pressure to waive bonus would be a risk generally or under the water (special measures) bill”, according to the documents
The board was told the bonuses were in line with the specifications of the legislation: “The [remuneration] committee requested to reconfirm whether the MRP was consistent with the Water (Special Measures) Act and related Ofwat consultation and it was confirmed that the MRP was a retention payment rather than a bonus, and had no performance-related element. As such, it was not restricted by the Water (Special Measures) Act.”
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Thames Water and its lawyers and advisers believe they could pay its chief executive and chief financial officer under the scheme if they wanted, because they are retention payments. If this loophole remains open, any water company that breaches pollution rules could continue to pay out millions in bonuses to their executives, as long as the payments are not labelled performance related.
In a letter to the Efra committee in July, Reed would not directly answer whether these bonuses would be banned. He said: “Should Ofwat determine Thames Water have breached the performance-related payments rule, then I expect them to take appropriate enforcement action.” A Defra spokesperson followed up and said: “It is for companies to follow these new rules and help rebuild trust with their customers.”
Water companies can also get round the bonus ban by hiking the pay of executives to make up for the lack of compensation. The Guardian revealed this week that Southern Water has nearly doubled its chief executive Lawrence Gosden’s annual pay package to £1.4m. Southern has already been allowed to increase average bills by 53% over the next five years and is appealing to the Competition and Markets Authority to charge more.
Ofwat says it may bring forward a planned review of the bonus ban, currently set for 2027, to look at the scope of the rules and see whether the net needs to be widened. The regulator added that executive salaries were a matter for the water companies, but said it expected them to be appropriate when taking bonus bans and company performance into account.
A Defra spokesperson said: “Undeserved bonuses for water company bosses have now been banned as part of the government’s plan to clean up our rivers, lakes and seas for good. Any instances of companies trying to circumvent the new rules are completely unacceptable.
“The government will leave no stone unturned against any bosses being made these outrageous payments.”
Southern Water said the rise in its chief executive’s salary was not an attempt to evade the bonus ban but part of a “long-term incentive plan” as part of an effort to turnaround the company. It added that the payments were “common industry practice”.
A Thames Water spokesperson said: “The company’s CEO is not party to the MRP and has received no payments. None of the retention payments have been funded by customers. Full details of the plan have been shared with our economic regulator and the Efra committee.”