The Guardian has learned that plans to tighten regulations mean that water companies that produce wastewater can no longer justify the high salaries of their chief executives with “top marks” in the Environment Agency’s rankings.

The heads of companies responsible for the “reckless” discharge of wastewater can justify their high salaries with top marks, while companies responsible for the disposal of wastewater can call themselves “industry leaders”.

Each year, the regulator awards each company a star rating. One star is the lowest rating and means the company needs urgent improvement. The highest rating is four stars, which comes with the designation of “industry leader”.

Companies are judged on seven criteria, including their drought resilience and their transparency about wastewater spills. If they score well on some of these criteria, they can get top marks, even if they have dumped large amounts of human waste into England’s rivers and seas.

The planned reforms would mean that to meet the new maximum score, companies would not be able to score low on wastewater discharges. The Guardian has learned that this benchmark will also be tightened, making it harder to score well.

Sources at the EA say a review of the rules will add at least one additional star rating so that no company that leaks wastewater can call itself an “industry leader” at the top of the rankings, thus avoiding scrutiny and justifying high CEO salaries.

According to the sources, there is discontent within the agency that the “top performers” were boasting about their position and using it as an excuse for high salaries. There is also frustration that this gives companies good PR and a way to divert attention from their failures because they are not a “lost cause” with a one-star rating. According to the sources, the rankings were “very bad” for everyone on them and even the best employees behaved badly, which was not reflected in the star ratings.

Severn Trent has used the company’s four-star rating to justify the salary and bonus of its chief executive, Liv Garfield. This year, Garfield received a salary of £3.2 million, including a bonus of £584,000, despite the company being fined £2 million for discharging 260 million litres of wastewater into the River Trent. Garfield’s salary rose 2.1% year-on-year, taking her total take-home pay during her time as Severn boss to more than £28 million.

United Utilities also received a four-star rating in 2023, marking the company as an “industry leader.” This may come as a surprise to locals, as they were banned from swimming in the sea this summer due to sewage pollution at eight beaches. The company was also found to be dumping human waste into Windermere in the Lake District. Harmful blue-green algae have been observed in the waters and have been linked to pollution incidents.

Water industry sources said this discrepancy was because current regulations measure companies’ performance based on the length of sewer networks, but many pollution incidents originated from sewage treatment plants or sewage pumping stations. The regulations also do not currently cover storm overflows, river and coastal quality, net zero or nutrient neutrality.

Charles Watson, founder of the campaign group River Action, said the system needed to be changed: “The Environment Agency’s current performance rating system is simply ridiculous. The fact that water companies that consistently cause major pollution incidents are still given a four-star environmental performance rating is simply unbelievable.”

“I wonder what the local community around Lake Windermere, who have seen their iconic lake repeatedly turn bright green due to toxic algal blooms caused by United Utilities’ failing sewerage infrastructure, have to say about UU’s top valuation. Furthermore, it is simply unethical that already ridiculously overpaid CEOs like those at Severn Trent use these flawed metrics to justify an even greater overpayment.”

Giles Bristow, chief executive of Surfers Against Sewage, said: “With notorious polluters receiving top marks for their environmental performance, it is clear that these ratings are as questionable as the sewage that the water industry dumps into our rivers and seas. We fully support the Environment Agency’s review of these ratings. This is another example of a fundamentally broken system.”

An EA spokesperson said a four-star rating does not mean a company is performing “perfectly” and confirmed it is considering tightening standards by 2025. He added: “We regularly tighten standards to drive better performance and have made it very clear that we expect all companies to achieve and maintain better environmental performance.”

“More broadly, we continue to strengthen our regulation of the industry, including through stricter EPA (environmental performance assessment) criteria, quadrupling inspections of water utilities by March of next year and hiring 500 additional staff to hold water utilities accountable.”

A United Utilities spokesperson said: “We are delighted to have once again achieved the top rating of four stars. However, we are not resting on our laurels and remain fully focused on implementing performance improvements to protect and improve the environment for the benefit of all our stakeholders.”

Severn Trent has been contacted for comment.