Shareholdings of EC members

The EC members collectively owned less than 1 percent of ABB’s total shares outstanding at December 31, 2017.

At December 31, 2017, members of the EC held ABB shares and conditional rights to receive shares, as shown in Exhibit 27. Their holdings at December 31, 2016, are shown in Exhibit 28.

Members of the EC cannot participate in the Management Incentive Plan (MIP). Any MIP instruments held by EC members were awarded to them as part of the compensation they received in previous roles they held at ABB. For a more detailed description of MIP, please refer to “Note 18 Share-based payment arrangements” to ABB’s Consolidated Financial Statements contained in the section titled “Financial review of ABB Group” of this Annual Report.

Except as described in Exhibits 27 and 28, no member of the EC and no person closely linked to a member of the EC held any shares of ABB or options on ABB shares at December 31, 2017 and 2016.

Exhibit 17: Detailed summary of Compensation structure over time.

Compensation area

Status in 2014

Evolution over the last 3 years

Going forward from 2018

(1)

For the CEO, this will be based on the recommendation of the Chairman of the Board.

(2)

Cumulative weighted EPS: 33 percent of EPS year 1 + 66 percent of EPS year 2 + 100 percent of EPS year 3; EPS target is based on external investors’ expectations.

(3)

This is a simple average EPS over years 1 to 3; the EPS target continues to be based on external investors’ expectations.

Annual base salary

  • Benchmarked against Hay Group’s Pan-European Top Executive Market, with consideration given to Hay’s data on Swiss and U.S. peers as well as a global industry peer group. Annual salary increases are approved by the Board based on the CEO’s assessment of the individual EC member’s performance and potential(1)
  • Remained consistent with same benchmarks
  • Announced clear statement that annual base salaries of the EC will be benchmarked between the market median and upper quartile in order to attract suitable talent
  • Clarified the use of the Swiss and U.S. market benchmarks as well as the Global industry group for benchmarking compensation design
  • Stronger emphasis placed on assessment of performance and potential
  • Pay levels are assessed annually against market competitive benchmarking using the peer groups described in Exhibit 6
  • No changes envisaged
  • Disclosure of Global industry group (already in this report). See Exhibit 6 footnote (1)

Short-term variable compen­sation

  • Payout solely dependent on the achievement of Company performance objectives
  • Board had authority to approve a higher than target payout if an objective was exceeded
  • Significant performance alignment introduced with objectives set in financial, operational, change and leadership areas in line with NLS
  • Payout dependent on achievement of both Company and Individual/Team performance with balance between Group and Individual/Team shifted from 100%/0% to 65%/35% to 35%/65% (Corporate EC members to 50%/50%)
  • CEO from 100%/0% to 80%/20%
  • A mathematical computation replaces the Board “discretion” for payout computation if an objective exceeds target
  • Strong performance alignment continues; stronger emphasis on earnings and operational excellence
  • Payout dependent on achievement of both Company and Individual/Team performance
  • Balance between Group and Individual/Team will be consistently 35%/65% for all EC members and 80%/20% for the CEO
  • Individual objectives are set as part of the annual performance management process and support the implementation of the NLS in the respective areas of responsibility of each EC member
  • Opportunity levels will be as follows:
    • 0% payout at or below threshold
    • 100% payout at target
    • 150% payout at or above maximum
    Payout is interpolated for achievement in between points

Long-term variable compen­sation

  • LTIP comprises a retention component (with no vesting performance measure) and a performance component (vesting assessed on a cumulative weighted EPS(2) measure)
  • Balance is approximately 60% retention and 40% performance
  • Retention component was share-settled for 70% and cash-settled for 30% (to assist in meeting tax payment obligations) with an option for a 100% share-settlement. Performance component was cash-settled only
  • Board had authority to vary the pool size of the retention component by +/- 25% based on a look-back assessment of how ABB performed on various disclosed measures against a set of peers
  • Board had authority, based on CEO recommendation, to vary individual grant size to reflect personal performance and contribution to the Company(1)
  • A two-tier performance was introduced with vesting of the P1 component based on a Net Operating Income measure and the P2 component on a cumulative weighted EPS(2) measure; the Net Operating Income measure further evolved in 2017 from a binary “threshold” criteria (pay or no pay) to a payout based on a payout curve for various achievement levels
  • Balance shifted to 50% P1 and 50% P2
  • Both P1 and P2 components were share-settled for 70% and cash-settled for 30% (to assist in meeting tax payment obligations) with an option for a 100% share-settlement
  • “Look-back” assessment removed to reinforce forward-looking incentive with assessment at vesting
  • Performance alignment to the NLS will further be strengthened
  • A single, simplified performance driven LTIP will be introduced with two equally weighted performance measures to assess vesting payout:
    • average EPS(3) to focus on the Company’s strategic plan; and
    • relative Total Shareholder Return (TSR) against a peer group
  • Inclusion of TSR element gives specific focus on an external market perspective
  • Composition of peer group for relative TSR assessment will be disclosed in the next Compensation report following the initial grant
  • The opportunity levels under the LTIP will be as follows:
    • 0% payout at or below threshold
    • 100% payout at target
    • 200% payout at or above maximum
  • Payout will be interpolated for achievements in between points
  • Payout will be share-settled for 65% and cash-settled for 35% (cash settlement increased to 35% to be more in line with tax rates). Option for 100% share-settlement remains unchanged

Share ownership require­ments

Our share ownership requirements have been significantly above market practice:

  • 5 years of annual gross base salary for the CEO and 4 years for EC members
  • Expected to reach requirement within 5 years of EC tenure and review is based on expected share price developments
  • No changes made

Remains above market practice. The following ownership requirements will be enforced:

  • 5 years of annual net base salary for the CEO and 4 years for EC members (based on a 35% tax rate)
  • No disposal of shares vesting from the Company’s LTIP programs until the ownership requirements are met