Ofwat said new rules on water company bonuses and dividend payouts to shareholders were “beginning to bite” in their first full year since being introduced.
In blocking the awards, Ofwat will instead adjust costs for the companies so that they cannot recover it from customers.
It revealed that Thames Water – which is more than £16bn in debt and at the centre of growing public outrage over pollution and rising bills – planned to use customer cash to pay £770,000 in bonuses to Chris Weston, the chief executive, and Alastair Cochran, the chief financial officer.
Action was also taken against £616,000 worth of payouts for top bosses at Yorkshire Water and £163,000 of bonuses at Dwr Cymru Welsh Water.
Steve Reed, the Environment Secretary, said: “It is disgraceful that half of water companies have given out unjustifiable and unmerited bonuses.
“That is why this Government is introducing urgent legislation to ban the payment of unfair bonuses to polluting water bosses so payouts of this kind can never happen again.
“But there are deeper issues that need long-term solutions, which is why we have launched the largest review of the sector since privatisation.”