Yousaf defends £1m Scottish Water bonuses after tap water 'fails'

The Scottish Government's public sector pay policy rules have maintained a suspension of performance related bonuses for over seven years.

READ MORE: Nearly £1m in bonuses paid out to three Scottish Water execs

State-owned Scottish Water, is included amongst the list of bodies, including Scottish Government's core directorates, its associated departments, agencies and corporations that the pay policy applies to. Other state-owned firms such as CalMac and Ferguson Marine are not included on the list.

The Scottish Government has confirmed that ministers have approved the bonus payments and revealed Scottish Water had a longstanding exemption from the rules.

The depth of the bonuses shocked some union leaders, in the midst of a pay dispute with Scottish Water and has led to new calls for a rethink of the public sector pay rules.

At First Minister's Questions, Humza Yousaf defended the payments while Scottish Water has been ordered to carry out an emergency clean-up of tap water supplies after they were found to pose a "potential danger to human health".

The Drinking Water Quality Regulator for Scotland (DWQR), has served an enforcement notice on the state-owned company after uncovering a maintenance backlog.

Documents showed Scottish Water had been failing to meet minimum public health standards, demanded in law, for more than a year.

The company has until the end of November to provide the regulator with a plan to resolve the problem.

Scottish Water acknowledged the enforcement notice and said it had "actions in place to address the issues raised in the fastest possible time".

It said the notice refers to water in storage tanks for use when there is a water main burst.

They said that customers "continue to receive a supply of very high-quality drinking water".

Scottish Water serves 2.6 million households supplying more than 1.5 billion litres of water and treating in excess of 1 billion litres of used and surface water daily.

Scottish Labour Glasgow MSP Pauline McNeill, the shadow justice secretary said the bonuses were made despite sewage spillage failures in the past year.

"What's gone wrong here that a public sector body is paying public sector executives, who seem to be a law unto themselves vast amounts of money, where there are existing failures and customers have been asked to pay even more for the infrastructure," she asked.

Mr Yousaf said that the criteria for paying bonuses to Scottish Water executive members are agreed by ministers and insisted they were aligned with public sector pay rules, which state that "we need to attract and retain highly experienced personnel to run vital public services".

He added: "Her characterisation of Scottish Water is deeply, deeply unfair.

He said: "When it comes to the bonus element of any remuneration package, bonuses are only paid in the event of outperformance of demand targets that are verified by independent regulators."

Scottish Conservatives' Central Scotland MSP Stephen Kerr referred to the regulator's enforcement notice and said: "The First Minister is accountable for Scottish Water. So what is the First Minister going to do to ensure that this enforcement notice is carried out and this backlog is properly dealt with."

Mr Yousaf said the government would ensure Scottish Water would invest significant amounts of money over the coming period and was due to invest £4.5bn between 2021 and 2026.

READ MORE: Scottish Water pay row sparks call for ScotGov rules rethink

He added: "In terms of the enforcement notice, it is my full expectation that Scottish Water will comply."

Net new borrowing by Scottish Water from the Scottish Government was planned to be to the tune of £196m in 2023/24 to carry out its activities.

Scottish Water operates under an annual borrowing limit set by the Scottish Government. The annual borrowing limit controls the amount by which Scottish Water can increase externally sourced finance.

As at March 31, 2023, government loans totalled £4.5 billion.

It comes as Scottish Water customers have seen their bills rise by over 9% in the last two years. They increased by 5% from April 2023 after a 4.2% hike in 2022.

A series of rolling strikes was due to start this week over a pay dispute which could impact domestic water and sewage services.

According to the Scottish Government's pay rules the suspension of bonuses allows public bodies to maximise the resources available to them to "address fair pay issues and pay restoration".

It said that the suspension applies to all non-consolidated performance payments and is normally based on performance in the preceding year.

It says: "If any pay awards are implemented or daily fees are introduced without approval, or increased beyond that for which approval had been obtained previously, the sponsor director will be required to explain the matter to the remuneration group. This could result in punitive action being taken by the Scottish Government, such as the recovery of any overpayments, the capping of future increases or a governance review of the public body."

Scottish Water financial papers state that they maintain and operate a "simple remuneration structure made up of base salary and benefits, an annual outperformance incentive plan (AOIP) and a single long-term incentive plan (LTIP), which provide a clear link between pay and Scottish Water’s key strategic priorities."

It says the overall remuneration policy aims are to "attract, develop, motivate and retain highly talented people at all levels of the organisation" and to "incentivise and reward good individual and corporate performance as well as out-performance".

It says: "The aim is to pay a base salary that is competitive, but appropriate for a public corporation. Incentive pay is earned for exceeding demanding targets, with the required degree of out-performance reviewed on an annual basis."

Scottish Water said it subscribes to the remuneration database of the global business consultants Korn and uses this as required to "review the remuneration of comparator organisations and industry in general against its own."

The Scottish Government said Scottish Water's longstanding exemption over the Public Sector Pay Policy is in "recognition of its operating model and the need to retain staff in competition with the private sector". It said the arrangement has been in place since 2011.

It said the framework for bonus payments has to be approved by Scottish Ministers. The current framework was approved in advance of the 2021-27 regulatory period.

The Scottish Government said it was satisfied that the correct process has been followed by the Scottish Water board.

Scottish Water said it had operated incentive schemes for all employees since a single set of terms and conditions was established for the company in 2004.

It said that executive pay and performance incentives are in line with arrangements approved by the Scottish Water board and the Scottish Government.

It said the incentive plan (bonus) is for all employees at all levels and is driven by out-performance of clear business targets.

A Scottish Water spokesman said: “Our executive pay and performance related bonuses are, as stated in Parliament, within Scottish Government public pay sector policy arrangements and are aimed at ensuring we have the right people leading the organisation and meeting our ministerial objectives and performance targets.

“We have invested more than £2bn in waste water infrastructure in a decade, are investing £500m more to help take the quality of Scotland's waterways from 87% to 92% in line with targets.”