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A Guardian exclusive has reported ministers are planning to close legal loopholes surrounding bans on water boss bonuses, after legislation brought in last year was reportedly ‘outwitted’ and failing firms continue to pay millions to executives.

Attempted ban

The previous environment secretary Steve Reed attempted to ban failing water companies from paying bonuses to chief executives and chief financial officers. However, the legislation passed in the Water (Special Measures) Act last year only referred to “performance-related” bonuses from specific regulated companies.

MPs have said the loopholes allowed companies to get around the bonus ban by labelling payments differently or paying bosses through linked companies, allowing some bosses who have had their bonuses banned for presiding over pollution and water outages to be paid anyway.

Companies exploiting the loopholes

Thames Water had its bonuses banned after being deemed a failing company, however continued with plans to pay its top staff millions in “retention payments” from a controversial high-interest loan that was meant to be used to keep the firm afloat. This is currently allowed as these are labelled as non-performance-related bonuses.

Yorkshire Water was also banned from paying its bosses bonuses this year, but its chief executive, Nicola Shaw, received £1.3m in an offshore parent company over two years. The boss of South East Water, David Hinton, is on track for £400,000 in bonus pay by 2030 despite tens of thousands of people in Tunbridge Wells having had their water cut off for weeks.

Wessex Water’s former boss Colin Skellett received a £170,000 bonus in the same year as the bonus ban on the utility. The payment was labelled as a bonus, but was allowed because it was made by a parent company.

Mike Martin, the Liberal Democrat MP for Tunbridge Wells, where failures by South East Water meant his constituents were without water for weeks, said Hinton should “obviously” not get his bonus. He said “It is outrageous these loopholes haven’t already been closed”.

Was the government really “outwitted”?

In light of bonuses continuing to be paid, Reed was accused of being “outwitted” by the water companies.

The Guardian reports that Emma Reynolds, his successor, is expected to bring forward stronger measures to close the loophole in the interim period when the current regulator, Ofwat, is handing over to a new “super-regulator”. This will be part of a new water bill expected in the king’s speech in May.

“We have warned the water companies to operate within the spirit as well as the letter of the law,” a Department for Environment, Food and Rural Affairs source said, “but it appears they haven’t, so we will need to look at a further crackdown”.

However, Feargal Sharkey, the water campaigner and former frontman of the Undertones, argues the bonus loopholes were evident before the legislation was even passed.

He said: “The loophole was obvious from the beginning. The water companies were never going to operate within the spirit of the law. They have always tested the limits of the law. They have misled governments and polluted the environment, so they were never going to do the right thing. I was not surprised at all. They were warned before the Water (Special Measures) Act became law that this would happen.”

New plans underway

Sources reportedly told the Guardian that water CEOs would not be allowed to be paid bonuses via parent companies under new plans. Reynolds has already directed Ofwat to tighten the criteria for what constitutes a “failing” company, and will end the practice of performance bonuses being relabelled as other types of bonuses to get around the ban.

An Ofwat spokesperson said £4m in bonuses had been blocked this financial year despite the loopholes, and the regulator was consulting on changes to the ban. Ofwat has previously said it also expected companies to act within the spirit of the law. Last year, it said it was considering forcing water companies to disclose all pay to bosses from related companies after the Guardian’s reporting.