A British water company that regulators barred from paying bonuses because of sewage spills raised its chief executive's base salary by 14 percent, an illustration of how a restriction aimed at one form of executive reward can be met while total pay still rises.
Ruth Jefferson's base salary at Wessex Water increased in October from 590,000 pounds to 670,000 pounds before other benefits, according to company accounts published this month and reported by the Guardian. Including other elements, her pay packet reached 791,000 pounds. The increase was far above the 3.5 percent given to the company's workers, and left her on 18 times the pay of the median Wessex Water employee.
Why the bonus ban did not bind
For readers outside the UK, the relevant regulator is Ofwat, which oversees the water and sewerage companies of England and Wales. Water is supplied by regional monopolies: households cannot switch provider, so the regulator, rather than competition, sets the limits on prices and, more recently, on executive reward.
That reward became politically charged as untreated sewage discharges into British rivers and seas turned into a sustained public controversy. The response included powers to block bonuses at companies that fail environmental and operational standards, and Wessex Water was among the companies caught by them.
The gap this case exposes is a structural one rather than a loophole peculiar to one company. A ban written to target performance-related bonuses does not constrain base salary. A company subject to it can comply fully with the restriction and still increase an executive's total earnings, simply by moving the money into the part of the package the rules leave alone. Fixed pay also has a compounding quality that bonuses lack: a bonus is reassessed annually, while a raised salary becomes the permanent base for every future increase and typically for pension contributions as well.
The wider argument over water-sector pay
Union criticism was blunt. The company faced accusations that the public is "sick of obscene pay" and that bosses are "feathering own nests."
Behind the rhetoric sits a genuine governance question that applies well beyond this one utility. Regulated monopolies do not face the market test that normally justifies large executive packages, since customers cannot leave. Where the regulator restricts one component of pay, boards retain discretion over the others, and the restriction's practical effect depends on whether boards choose to observe its purpose or only its wording.
Wessex Water is owned by YTL Corporation of Malaysia, one of several British water companies in overseas ownership, a pattern that has itself drawn scrutiny as the sector's environmental and financial performance has come under sustained attack.
For investors in regulated utilities generally, the episode is a reminder that pay restrictions imposed by a regulator are a weaker constraint than they first appear, and that the reputational cost of testing them tends to be borne by the whole sector rather than the individual company.
