Structure of EC Compensation

Overall positioning of compensation

The compensation of EC members consists of an annual base salary, standard benefits, a short-term variable component based on annual performance objectives and a long-term variable component based on long-term performance.

The Board considers several factors when reviewing and setting the individual target compensation of each EC member:

  • market value of the role (external benchmark);
  • individual profile of the incumbent in terms of experience and skillset;
  • individual performance and potential;
  • affordability for the company.

All EC and other senior positions of ABB have been evaluated using the job evaluation methodology of the Hay Group, which is used by more than 10,000 companies around the world. This approach provides a meaningful, transparent and consistent basis for evaluating roles and for comparing compensation levels with those of equivalent jobs at other companies.

The primary source of data to assess the EC compensation is the General Pan-European Market of Hay’s annual survey “Top Executive Compensation in Europe”. The EC compensation is benchmarked against the median to upper quartile values. We also use Hay’s data on Swiss and U.S. peers as well as a global industry peer group (see Exhibit 6).

Exhibit 6: Compensation benchmarks

Reference

Composition

Rationale

(1)

The peers for the purpose of benchmarking compensation design are: Siemens, Schneider Electric, Legrand, Alstom, Atlas Copco, CNH Industrial, ThyssenKrupp, BAE systems, Rolls Royce, Linde, BASF, EADS, Schindler, Novartis, Nestlé, Holcim, General Electric, 3M, Honeywell, Caterpillar, Emerson Electric, Eaton, Danaher and United Technologies.

 

 

 

Main benchmark

Hay General Pan-European Market

360 largest European companies of the FT Europe 500 listing

Continuity and stability of data points

 

 

 

References to stress-test main benchmark

Global Industry Group

Peer companies(1) selected based on business, geographic presence and size

Specific peer group to benchmark compensation design

Swiss market

SMI and SMIM companies that are included in Hay’s General Pan-European Market data

Comparison with other multinational Swiss companies

U.S. market

U.S. peers of similar size and industry

Comparison with other multinational U.S. companies

The compensation that is ultimately paid depends on the performance of the Group and of the individual members of the EC.

Compensation structure – overview

Our compensation structure is linked to our strategy and, as illustrated in Exhibits 7 and 17, a significant portion of total compensation depends directly on performance achievement. Our fully performance-oriented Long-Term Incentive Plan (LTIP) and the high shareholding requirement are aligned to shareholder interests.

Exhibit 7: Structure of EC compensation 2017

Compensation structure

Fixed compensation – annual base salary and benefits

Short-term variable compensation

Long-term variable compensation

Shareholding requirement

Purpose and link to strategy

Compensates EC members for the role

Rewards annual company and individual performance. Drives annual strategy implementation

Encourages creation of long-term, sustainable value for shareholders, and delivery of long-term strategic goals

Aligns individual’s personal wealth at risk directly to the ABB share price

Operation

Cash salary, benefits in kind, and pension contribution

Annual awards, payable in cash after a 1-year performance period

Annual awards in shares which vest after 3 years subject to performance conditions

Individuals required to hold ABB shares

Opportunity/exposure value (as % salary)

Based on scope of responsibilities, individual experience and skillset

CEO Target: 150%
Maximum: 225%
EC: Target: 100%
Maximum: 150%

CEO Target at grant: 200%
EC Target at grant: 107%

CEO wealth at risk: 500%
EC wealth at risk: 400%

Time period

Delivered in year

1 year

3 years

Total EC tenure

Performance measures

Changes to base salary takes into account the executive’s performance in the preceding year and potential for the future

Group objectives: Revenue, Op. EBITA %, Op. net income, OCF, Cost Savings, Service Orders. Individual objectives

Net operating income (50%)
EPS (50%)

Direct link to ABB share price

Fixed compensation – annual base salary and benefits

Purpose and link to strategy

  • Compensates the EC members for the role.

Operation

  • Fixed annual base salary and benefits.
  • Benefits consist mainly of retirement, insurance and healthcare plans that are designed to provide a reasonable level of support for the employees and their dependents in case of retirement, disability or death.
  • Benefit plans vary in line with the local competitive and legal environment and are, at a minimum, in accordance with the legal requirements of the respective country.
  • EC members may also be provided with certain benefits according to competitive local market practice. Tax equalization is provided for EC members resident outside Switzerland to the extent that they are not able to claim a tax credit in their country of residence for income taxes they paid in Switzerland.

Opportunity level

  • Annual base salary based on the scope of responsibilities, individual experience and skillset.
  • The monetary value of benefits is disclosed in Exhibit 23: EC compensation 2017.

Performance measures

  • When considering changes in base salary, the executive’s performance during the preceding year against individual objectives as well as potential for the future are taken into account.

Short-term variable compensation

Purpose and link to strategy

  • The short-term variable compensation is designed to reward EC members for the Group’s results and their individual performance over a time horizon of one year. It allows the EC members to participate in the company’s success while being rewarded for their individual contributions.

Operation

  • Annual cash awards are based on performance assessment over the given year.

Opportunity level

Exhibit 8: Opportunity level (% salary)

 

Target

Maximum

CEO

150%

225%

EC

100%

150%

Performance measures

Group objectives (see Exhibit 9) are set in connection with the annual performance management process and are mainly group financial result oriented.

Exhibit 9: Group objectives and weighting in 2017

Objective

Weighting

Nature of assessment

Revenues

20%

Income realized from executing and fulfilling customer orders, before any costs or expenses are deducted

Operational EBITA margin

15%

Operational EBITA margin is Operational EBITA (as defined in Note 23 to the Consolidated Financial Statements) as a percentage of Operational revenues, which is total revenues adjusted for foreign exchange/ commodity timing differences in total revenues

Operational net income

10%

Operational net income is calculated as net income attributable to ABB adjusted for the after-tax effect of acquisition-related amortization, restructuring and restructuring-related expenses, non-operational pension cost, changes in retained obligations of divested businesses, changes in pre-acquisition estimates, gains and losses from sale of businesses, acquisition-related expenses and certain non-operational items, foreign exchange/commodity timing differences in income from operations

Operating cash flow (OCF)

30%

Operating cash flow is defined as the net cash provided by operating activities, reversing the cash impact of interest, taxes and restructuring-related activities

Cost savings

15%

Savings generated from ABB group-wide cost reduction programs covering Supply Chain Management, Operational Excellence and White Collar Productivity that have direct impact on the Group’s Operational EBITA

Service Orders

10%

Orders received relating to the service business

Individual objectives are set as part of the annual performance management process and support the implementation of the NLS in the respective area of responsibility of each EC member. They include metrics that help the management assess whether the results are achieved in a sustainable way in four different categories: financial performance, operational performance, strategic initiatives and leadership performance.

For each performance objective (group and individual), a target is set corresponding to the expected level of performance that will generate a 100 percent payout. Further, a minimum level of performance, below which there is no payout (threshold) and a maximum level of performance, above which the payout is capped at 150 percent of the target (cap), are also defined. The payout percentages for achievements between the threshold, the target and the cap are determined by linear interpolations between these points.

Exhibit 10: Weight of Group and individual objectives for EC members for 2017

 

CEO

Division and region presidents

Corporate Officers(1)

(1)

CFO, CHRO and General Counsel.

Group objectives

80%

35%

50%

Individual objectives

20%

65%
(divisional/regional and personal objectives)

50%
(functional and personal objectives)

Long-term variable compensation

Purpose and link to strategy

Aimed at driving long-term shareholder value creation in a sustainable manner. It rewards the achievement of predefined performance goals over a three-year vesting period.

Operation

  • Annual conditional share grant under the LTIP.
  • Two equally weighted performance components, one tied to ABB’s net operating income and one to ABB’s EPS.
  • Reference value defined as a percentage of base salary.

Exhibit 11: Reference value (% of annual base salary)

 

Net operating income component (P1)

EPS
component (P2)

Total

CEO

100%

100%

200%

EC

53.5%

53.5%

107%

  • The reference value for the grant size of the net operating income component for the CEO as an individual and the other EC members as a pool may be increased or decreased by the Board by up to 25 percent.
  • Number of shares granted is determined by dividing reference value by average share price in the 20 days prior to grant.
  • Award vests after three years subject to achievement of performance conditions, defined prior to grant.
  • Delivery is 70 percent in shares and the remainder in cash, with the possibility to elect to receive 100 percent in shares.
  • Subject to malus and clawback rules if a plan participant has been involved in any illegal activity. This means that the Board of Directors may decide not to pay any unpaid or unvested incentive compensation (malus), or may seek to recover incentive compensation that has been paid in the past (clawback).

Performance measures

  • Net operating income – payout vs. performance The actual achievement level is determined by comparing ABB’s average income from continuing operations, net of tax, relative to budget, over three financial years beginning with the year in which the award was granted. The Board determines an appropriate threshold below which there will be no payout as well as a maximum above which payout will be capped at 150 percent.
  • EPS – payout vs. performance Weighted cumulative earnings per share – performance targets are set using an outside-in view, taking into account the growth expectations, risk profile, investment levels and profitability levels that are typical for the industry. This outside-in approach in setting EPS objectives for the LTIP is provided by external advisors and assumes that investors expect a risk-adjusted return on their investment, which is based on market value (and not book value) and translates such expected returns over a three-year period into EPS targets. The weighted cumulative EPS result is calculated as the addition of the EPS in the first financial year (weighted at 33 percent) plus the EPS in the second financial year (weighted at 67 percent) plus the EPS in the third financial year (weighted at 100 percent). This formula gives more weight to the EPS achieved in the later years of the vesting period. There is no payout if the lower EPS threshold is not reached and the payout is capped at 200 percent if EPS performance exceeds the predefined payout cap.

Shareholding requirement

Purpose and link to strategy

  • To align EC members’ interests with those of shareholders in order to maintain focus on the long-term success of the company.

Operation

  • EC members are required to build up a holding of ABB shares that is equivalent to a multiple of their annual base salary (see Exhibit 12).
  • These shareholding requirements are significantly above market practice and result in a wealth at risk for each EC member which is aligned with shareholder interests (see Exhibit 27).

Exhibit 12: Shareholding requirement level

CEO

5 × annual base salary

Other EC members

4 × annual base salary

  • Only shares owned by an EC member and the member’s spouse are included in the share ownership calculation. Vested and unvested stock options are not considered for this purpose.
  • The CC reviews the status of EC share ownership on an annual basis. It also reviews the required shareholding amounts annually, based on salary and expected share price developments. As the level of the shareholding requirement is high relative to market practice, the Board has determined that members of the EC should generally aim to reach these multiples within five years of their appointment.

Notice period, severance provisions and non-competition clauses

Operation

Employment contracts for EC members include a notice period of 12 months, during which they are entitled to their base salary, benefits and short-term variable compensation. In accordance with Swiss law and ABB’s Articles of Incorporation, the contracts for the EC members do not allow for any severance payment.

Non-compete agreements have been entered into with the CEO and all EC members for a period of 12 months after their employment. Compensation for such agreements, if any, may not exceed the EC member’s last total annual compensation.