The utility firm has faced scrutiny in recent years over water leaks, sewage discharges and the state of its finances. It received the government loan to stave off collapse.
The prime minister’s spokesperson commented that bosses at the firm were “rewarding themselves for failure”, as the retention bonus scheme was set to amount to 50% of senior bosses’ pay packets. This could have led to them getting £1m on top of their usual take-home pay.
For Duncan Brown, principal associate at the Institute of Employment Studies, the bonus furore showcases issues with how executive pay is managed at the firm.
He explained that initially changing the bonus scheme to be non-performance related, to avoid regulations, breached other corporate governance guidelines and will impact on employee trust levels, which is critical to organisational performance.
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Brown told HR magazine: “If this doesn't make UK employees totally cynical about exec rewards, what will? Words fail me.”
He suggested that a new model of executive remuneration, supported by the High Pay Centre and The Purposeful Company, would enfranchise all employees in shared success.
He added: “It would make executive reward genuinely long-term and performance-related.”
“More rigorous scrutiny and restrictions on excessive executive pay should be considered in the government's forthcoming legislation on corporate governance, if they are serious about creating a fairer economy.
“Restraints of the pay of Thames Water executives should have come far sooner, but credit for the government to acting.”
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Charles Cotton, senior pay and reward adviser at the CIPD, highlighted that it’s not only employees who might lose trust in an organisation if executive pay is out of step with other remuneration packages.
He told HR magazine: “When senior executives receive pay packages that customers, investors and employees consider excessive and out of step with how other employees’ performance is rewarded and recognised, it can undermine public trust in the organisation and damage employee morale and motivation.”
Executive pay should be aligned with organisational purpose, culture and sustainable delivery of long-term goals, Cotton added, emphasising that employers should be transparent around pay, and communicate in a way that all stakeholders understand.
He said: “Employers should use their annual reports and internal comms to clearly explain how they link pay to their people management strategies, corporate culture and broader ESG requirements.
“A good way to link pay and performance fairly is for the employer to be open and transparent about what it needs from its employees in terms of skills, abilities, experiences, behaviours, and achievements.”
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Maintaining fair differentials between executives and the rest of the workforce is critical for good outcomes, said Sarah Lardner, director of business innovation at consultancy Innecto Reward Consulting.
Lardner continued: “Linking executive bonuses to overall company success – for example, through improved customer satisfaction, safety or ESG metrics – fosters a shared sense of purpose and fate for employees.”
Firms with poor performance shouldn’t pay out with bonuses, Lardner added, agreeing that the furore over Thames Water shows how critical it is to get pay levels right. Employers can protect themselves with clawback clauses for misrepresented metrics or failures, she said, and they can introduce clear thresholds for when bonuses can be paid.
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The Thames Water situation “highlights that executive compensation is a highly visible signal of a company's values,” Lardner continued.
“Avoiding similar situations requires a transparent, data-driven and stakeholder-inclusive approach where executive success is inextricably linked to the organisation's holistic health and societal contribution.”
