Three water firms have been directly blocked from using customer money to pay bonuses collectively worth £1.6m.
While some firms voluntarily used shareholder money to fund boss bonuses, Thames Water, Yorkshire Water and Dwr Cymru Welsh Water were reprimanded by the regulator Ofwat for using customer funds.
Ofwat said that any “undeserved” bonuses should be borne by owners and lenders to the companies.
David Black, chief executive of Ofwat, said that water firms “need to do more to rebuild public trust”.
He said that by stopping customers from “paying for undeserved bonuses”, it was looking “to sharpen executive mindsets” and to push firms to improve their cultures of performance and accountability.
Ofwat said any bonuses paid out of customer funds would be deducted from future customer bills.
The regulator itself has often been criticised, with the Environment Secretary Steve Reed previously saying he believed the problems in the sector as a whole were ones of “regulation and governance”.
The government has set up the Independent Water Commission, chaired by former deputy Bank of England governor Sir Jon Cunliffe, to fix the sector and could lead to the regulator Ofwat being scrapped.
That review is not due to report back until June next year.
When questioned by the BBC’s Today programme on why the public should trust Ofwat, Mr Black said Ofwat had changed the way it regulates the industry.
“We have stepped in to protect customers’ interests, we will continue to do so. The announcement today in terms of blocking chief executive bonuses from being recovered from customers is part of that,” he said.
Ofwat’s new powers prevent bonuses being funded from customer bills if the company is judged to have missed environmental or performance targets.
Thames Water chief executive Chris Weston, who was hired in January to try to turn around the fortunes of a company drowning in debts, was awarded a bonus of £195,000 for his first three months at the company, taking his total pay for the period to £437,000.
It is not clear whether the bonus has in fact been paid out, but the regulator’s rules now mean it cannot be paid by the operating company, and must be borne by the company owners.
Thames Water declined to comment, while a Dwr Cymru spokesperson said the firm would “take the necessary action as outlined in Ofwat’s report”.
It admitted that its performance was “not as good” as expected, but that its bonuses reflected “other elements of good performance including strong customer service and financial performance”.
The BBC has approached Yorkshire Water for comment.
Other companies – including debt-laden Southern Water – have already said shareholders rather than customers would pay bonuses to executives.
But the problem for Thames is that it effectively has no shareholders.
Earlier this year, Thames Water owners refused to follow through with a promised cash injection for the troubled company after Ofwat indicated it was not prepared to accept requests for bill rises of 44% above inflation over the next five years.
In a preliminary decision, Ofwat said it would allow bill rises of 21% above inflation, which the shareholders did not accept.
They walked away, effectively leaving the company under the control of its lenders.
On Thursday, the environment secretary said it was “disgraceful” that half of water firms had given out “unjustifiable” and “unmerited” bonuses.
He said the introduction of “urgent legislation” was so that such bonus culture can “never happen again”.
