Aligning remuneration to business strategy

Our remuneration policy has been designed in order to promote the long-term success of the company.

The following table provides a summary of how our incentive framework aligns with our business strategy and the results that it delivers. Many of the performance measures are key performance indicators (KPIs) for the regulatory period 2015–20.

Alignment to strategyLink to strategic objectivesA long-term approach to creating value
Annual bonus
Underlying operating profitKey measure of shareholder value.
Customer service in year
  • Service incentive mechanism – qualitative
Delivering the best service to customers is a strategic objective.
  • Service incentive mechanism – quantitative
Ofwat can apply financial incentives or penalties depending on our customer service performance. 
Maintaining and enhancing services for customersDelivering the best service to customers is a strategic objective.
  • Wholesale outcome delivery incentive (ODI) composite
There is a direct financial impact on the company of Ofwat incentives and penalties for delivery/non-delivery of customer promises.
  • Time, cost and quality of the capital programme (TCQi)
Keeping tight control of our capital programmes ensures we can provide a reliable service to our customers at the lowest sustainable cost. 
Corporate responsibility
  • Dow Jones Sustainability Index
Ensures that we manage our business in a responsible manner. 
Personal 
Compulsory deferral of bonusDeferral of part of bonus into shares aligns the interests of executive directors and shareholders.
Long Term Plan (LTP)  
Relative total shareholder return (TSR)Direct measure of delivery of shareholder returns, rewarding management for the outperformance of a comparator group of companies.
Sustainable dividendsDirect measure of return to shareholders through dividend payments, whilst focusing on the creation of strong earnings that ensure the sustainability of dividends.
Customer service excellenceThis is fundamental to delivering our vision of becoming the best UK water and wastewater company, providing great service to our customers. This measure has a direct financial impact on the company as Ofwat can apply financial incentives or penalties depending on our customer service performance.
Additional two-year holding periodEnsures continued alignment with shareholder interests and provides an additional period over which malus can be applied.
Shareholding guidelinesIt is important that a significant investment is made by each executive director in the shares of the company to provide alignment with shareholder interests.✓ 

Key:

Best service to customers

Lowest sustainable cost

Responsible manner

A significant proportion of executive directors' pay is performance-linked, long-term and remains 'at risk' (i.e. subject to clawback and malus provisions for a period over which the committee can recover sums paid or withhold vesting):

Fixed vs performance-linked (%)(1)

Fixed vs performance-linked

Fixed 33%

Performance-linked 67%

Short term vs long term (%)(1)

Short term vs long term

Short-term 50%

Long-term 50%

  1. Based on maximum payout scenario for executive directors. Fixed consists of base salary, benefits and pension. Performance-linked consists of the Long Term Plan (LTP) and annual bonus. Short-term consists of fixed remuneration plus annual bonus paid as cash. Long-term consists of LTP plus annual bonus deferred into shares under the Deferred Bonus Plan (DBP).

Pay at risk

Year 1

Bonus performance assessed

Year 2

Cash bonus paid

Year 3

LTP awards performance assessed

Year 4

Deferred bonus vests

Year 5

LTP awards vest

Annual bonus – cash

Performance period

Annual bonus – shares

Performance period

Long Term Plan (LTP)

Performance period

Subject to reduction provisions (clawback)

Subject to withholding provisions (malus)

Further details on what triggers clawback or malus are set out on Directors' remuneration policy (abridged).