Bonuses for water bosses in England could be banned this year for companies that spill sewage, break the law or mismanage their finances, Ofwat has announced.

The regulator has launched a consultation into draft criteria under which it would ban bonuses being paid to chief executives. Sources at Ofwat told the Guardian they are near-certain to ban some water CEO bonuses this year.

New powers under the Water (Special Measures) Act mean the regulator can ban bonuses of water company executives under criteria of Ofwat’s choosing, subject to consultation.

However, campaigners have said the proposed measures are not fit for purpose. Ofwat said bonuses will be banned if water companies are given a one-star rating by the Environment Agency. But under this criteria, no bonuses would have been blocked in the 2023-24 financial year as every water company achieved a more than one star rating.

Environmental campaigners have said the EA’s rankings scheme is not functioning properly, as it potentially gives companies who illegally dump sewage full marks.

Under the rankings, companies are judged on seven metrics including drought resilience and transparency: if they score highly on some of these, they can get top marks, whether or not they have also had high levels of sewage spills.

Feargal Sharkey, water campaigner and former Undertones frontman, said that the EPA rating is not a good enough measure of environmental performance.

He said: “The last time anyone had a one-star rating it was Southern Water in 2021, yet these companies continue to illegally dump sewage – how bad do you have to be? They are basing their bonus rules on a failed environmental scheme which has been in place for 15 years and has not stopped companies from sewage dumping.”

Bonuses for water company bosses in England and Wales rose to £9.1m last year. More than a third of that total was at Severn Trent, which was fined £2m the same year for “reckless” pollution but lifted its bonuses to £3.36m.

The other criteria for banning bonuses are if a company is fined for a principal statutory consumer duty, if it breaches its licence requirement to hold a sufficient credit rating and/or subsequently fails to comply with a enforcement order or undertaking, or if it is convicted of any criminal offences.

Companies have said they can circumvent bonus bans by increasing executive pay.

James Wallace, CEO of River Action, said: “The idea that limiting executive performance-related pay will reduce pollution is laughable. Water company bosses will simply increase their multimillion-pound salaries to side-step new rules. The only way to bring about rapid and radical improvements in this corrupted industry is to end the privatisation experiment and for the government to enforce the law.”

Ofwat said: “We know that public trust in the water sector is at an all-time low, and believe it is in the public interest to apply the rule as soon as possible. We have proposed to implement our new rule for bonuses paid from 1 April 2024 onwards.”

Water UK, which represents the water companies, declined to comment.