Sewage-spilling water companies will no longer be able to justify high chief executive pay by getting “top marks” in the Environment Agency’s rankings, under plans to tighten rules, the Guardian understands.

Bosses presiding over companies found to “recklessly” discharge sewage have been able to justify their large pay packets because of being awarded the top rating, while companies that preside over sewage spills can call themselves “industry leaders”.

The regulator gives each company a star rating each year. One star is the lowest mark and means the company is urgently in need of improvement, while the highest mark is four stars, which comes with the accolade of being an “industry leader”.

Companies are judged on seven metrics including drought resilience and transparency over sewage spills: if they score highly on some of these, they can get top marks even if they have spilled large amounts of human waste into England’s rivers and seas.

The reforms being considered would mean that to achieve the new highest score, companies would not be able to have a low score for sewage discharges. This metric will also be tightened, the Guardian understands, so it is harder to achieve a good score.

Sources at the EA say it plans to add at least one extra star rating in an overhaul of the rules, so no company found to be spilling sewage will be able to call itself an “industry leader” at the top of the league table and therefore escape scrutiny and justify high CEO pay.

There is unhappiness within the agency, according to the sources, that those at the “top of the league table” boasted of their position and used it as an excuse for high pay. There is also frustration that it gets the companies good PR, allowing them to take attention off their spills because they are not a “basket case” with a one-star rating. According to the sources it was a “very poor league table for anyone in it” and even the best performers were behaving poorly, which was not reflected in the star ratings.

Severn Trent has used the company’s four-star rating to justify the pay packet and bonus of Liv Garfield, its chief executive. This year, Garfield was awarded a £3.2m pay deal, including a £584,000 bonus, despite the company being fined £2m for spilling 260m litres of sewage into the River Trent. Garfield’s year-on-year pay increased by 2.1%, bringing her total take-home pay during her time as Severn boss to more than £28m.

United Utilities also received a four-star rating in 2023, marking the company as an “industry leader”. This may surprise local people, who were told not to swim in the sea at eight beaches that summer due to sewage pollution. The company was also found to be leaking human waste into Windermere in the Lake District. Noxious blue-green algae was seen across its waters, which has been linked to pollution incidents.

Water industry sources said this discrepancy was because the current rules measured company performance by length of sewer networks, but that many pollution incidents were from sewage treatment works or sewage pumping stations. The rules also do not currently cover storm overflows, river and coastal quality, net zero, or nutrient neutrality.

Charles Watson, the founder of the campaign group River Action, said the system needed to change: “The current Environment Agency performance rating system is simply farcical. For water companies who are consistently causing major pollution incidents to somehow receive a top four-star environmental performance rating simply beggars belief.

“I wonder what the local community around Lake Windermere, who have witnessed their iconic lake repeatedly turn bright green due to poisonous algal blooms caused by United Utilities’ failing sewage infrastructure, has to say about UU’s top of the league rating? Also, for already ridiculously overpaid CEOs, such as at Severn Trent, to be using these flawed metrics to justify being even more overpaid is simply downright immoral.”

Giles Bristow, the chief executive of Surfers Against Sewage, said: “With prolific polluters achieving top marks for environmental performance it’s clear these ratings are as suspect as the effluent the water industry is dumping into our rivers and seas. We fully support the Environment Agency reviewing these ratings. This is yet another example of a fundamentally broken system.”

An EA spokesperson said a four-star rating did not mean a company was a “perfect performer” and confirmed it was looking at tightening standards by 2025. They added: “We frequently tighten standards to drive better performance and made very clear that we expect all companies to achieve and sustain better environmental performance.

“More broadly, we continue to strengthen our regulation of the industry, including tightening EPA [environmental performance assessment] metrics, quadrupling water company inspections by March next year and recruiting 500 additional staff to hold water companies to account.”

A United Utilities spokesperson said: “We are pleased to have again attained a top four-star rating. We are not complacent though, and we remain fully focused on delivering performance improvements to protect and enhance the environment for the benefit of all our stakeholders.”

Severn Trent has been contacted for comment.