Letter from the Chairman of the Compensation Committee
On behalf of the Board of Directors and the Compensation Committee, I am pleased to present the Compensation Report for 2017.
This year, I was honored to become Chairman of the Compensation Committee when Michel de Rosen stepped down from the position. All of us are very grateful to Michel for his contributions and thank him for his dedicated service to the committee. My focus will be to continue to ensure that the compensation structure at ABB reflects best-practice standards and to maintain a dialogue with our shareholders on compensation matters.
Performance and pay outcomes in 2017
In 2017, ABB continued to implement its Next Level strategy (NLS) into its 3rd stage. The successful execution of the strategy supported the company’s steady performance, which has been reflected in compensation outcomes.
Starting with the Board, there have been no changes in the structure of fees payable to Board members for the roles they perform. The aggregate Board compensation for the 2017-2018 term was in line with the amount approved at the 2017 Annual General Meeting.
Aggregate Executive Committee (EC) compensation was 5.4 percent higher in 2017 than in 2016, principally due to the one-time share grant to the incoming CFO to compensate him for benefits foregone from his previous employer. Short-term incentives, formulated to drive the achievement of challenging annual performance targets, reflected an average achievement payout of 95.6 percent for the entire EC. The 2014 launch of the Long-Term Incentive Plan (LTIP) vested in 2017, with the performance component, measured against EPS, vesting at 37 percent while the retention component vested fully, conditional on continued employment. The Committee recognized the need for increased performance orientation and transparency and has conducted a comprehensive review of the LTIP for implementation starting from the 2018 grant. The Compensation Report explains in greater detail how the 2017 results impacted the variable incentive payments to the Executive Committee members.
On the fixed compensation elements of the EC, I am pleased to report that in 2017 we completed the final implementation stage of the pension system that was revised by the Board in 2015 after a thorough review of the level of pension benefits in the context of total compensation. The staged inclusion of the members was a deliberate decision taken in 2015 to allow for changes in EC composition as we implemented the NLS. No further adjustments to the system are planned.
2018 Compensation outlook
ABB continues to increase the performance orientation of its compensation system to better align it to the Company’s NLS and to best-market practices and inputs received from shareholders and other stakeholders. The key developments since September 2014 when our NLS was first announced, are highlighted in section Shareholdings of EC members. In 2017, the Committee’s work was focused on a comprehensive review of the LTIP to make it simpler, more performance-oriented and more transparent.
Starting from 2018, our present two-component LTIP will be merged into a single performance share unit grant. Besides being simpler, it will be more performance-oriented by having two equally weighted performance measures. First an EPS measure in line with our Company strategy, and secondly, a relative Total Shareholder Return (TSR) measure to bring in the market competition perspective. We will increase transparency and disclose the composition of the peer group for the relative TSR assessment in the next Compensation report following the initial grant.
Furthermore, ABB’s executive shareholding requirement, already one of the highest in the market, will be further strengthened by requiring our EC members not to dispose any shares vesting from our LTIPs until their respective requirement is met. You will find a detailed description of the changes to our policy in section Shareholdings of EC members.
In the course of the reporting year, the Compensation Committee performed its regular activities, including recommending performance targets to the Board at the beginning of the year which impacts variable pay, reviewing and recommending performance assessments of 2016, recommending the compensation of ABB’s Board, CEO and EC members, formulating the Compensation Report, and preparing the “say-on-pay” vote at the Annual General Meeting (AGM). The compensation Committee has also carried out a self assessment of its own effectiveness. You will find further information on our activities and on ABB´s compensation system and governance in the following pages.
At the AGM in March 2018, you will also be asked to vote on the maximum aggregate compensation for the Board for its 2018–2019 term and on the maximum aggregate compensation for the Executive Committee for 2019. This Compensation report will be submitted for a non-binding, consultative vote by shareholders.
We encourage and pursue an open and regular dialogue with our stakeholders. Your feedback is highly valued and appreciated as we continue to improve the compensation system.
On behalf of ABB, the Compensation Committee and the Board, I thank you for your continued trust in ABB and for your consistently constructive and supportive feedback regarding our compensation framework.
David E. Constable
Chairman of the Compensation Committee
Zurich, February 22, 2018