Outlook for 2018: continuing to increase performance orientation of ABB’s compensation system
Over recent years, ABB has progressively increased the performance orientation of its compensation system while better aligning it to the Company’s NLS and including inputs from shareholders and other stakeholders.
In Exhibit 17 we detail the key developments to remuneration since our NLS was announced in September 2014, leading to the changes the Board plans to implement in 2018.
The main considerations in making the changes over the years have been to ensure that:
- There is a performance linkage in every pay component.
- Total compensation levels remain competitive within market benchmarks as we increase the performance orientation.
- The improvements are carefully phased to allow for similar changes following the same principles to be cascaded throughout the organization.
The initial focus of these changes was on base compensation, in order to put more emphasis on the executive’s performance and potential appraisal. Next, for short-term incentives, personal accountability was enhanced by increasing the weight of individual and own team scorecards to 65 percent. More recently, the focus has shifted to performance orientation of long-term incentives, as we moved from having a retention component, weighted at approximately 60 percent in 2014, to the new 100 percent performance oriented LTIP.
Highlights for the 2018 improvements are:
- No changes to the structure of fixed pay. The changes to the system of pension contributions have now been completed and there are no further adjustments to the system of pensions planned.
- There are minor revisions to the design of the short-term variable compensation elements since they have been progressively reviewed and improved over the last three years. The changes for 2018 are targeted at streamlining the weighting of Group metrics versus individual/team metrics to a consistent 35 percent/65 percent for all EC members (except for the CEO, who remains at 80 percent/20 percent).
- A comprehensive review of our LTIP was undertaken in 2017, leading to the changes the Board now plans to implement in 2018. These changes make our LTIP simpler and easier to communicate. With a single plan and two performance measures of EPS and relative Total Shareholder Return (TSR), our LTIP is now fully aligned with our NLS, which focuses on EPS delivery and attractive shareholder returns, both on an absolute and relative basis. In line with our commitment to improved transparency, we will disclose our LTIP peer group in our 2018 compensation report, after the revised plan is launched. These changes have been introduced so that the fair value of total compensation for EC members is kept at the same level.
- The share ownership requirement for the EC remains among the highest in the market. We are now requiring that EC members retain all shares vested from the Company’s LTIP programs until his or her share ownership requirement is met. This arrangement is more stringent and transparent, compared to the previous requirement where an EC member was expected to reach his or her share ownership within 5 years of EC tenure based on an expected ABB share price development. We have also clarified the basis of the shareholding requirement as being a multiple of annual base salary, net of tax.