Compensation of the Executive Committee in 2018

Exhibit 13: Total compensation of EC members (in CHF million)

 

2018

2017

For an overview of compensation by individual and component, please refer to Exhibit 24 and Exhibit 25 in “Compensation and share ownership tables” below.

Base salaries

9.9

10.0

Pension benefits

4.7

4.7

Other benefits

5.5

5.1

Total fixed compensation

20.1

19.8

Short-term variable compensation

9.1

10.4

Long-term variable compensation

10.6

13.8

Replacement share grant

0.0

2.6

Total variable compensation

19.7

26.8

 

 

 

Total compensation

39.8

46.6

Overall positioning of compensation

The ratio of fixed to variable components in any given year depends on the performance of the individuals and of the Company against predefined performance objectives.

In 2018, as shown in Exhibit 14 below, the CEO’s variable compensation represented 61 percent of his total compensation (previous year: 65 percent) and an average of 46 percent for the other EC members (previous year: 55 percent). This again illustrates the significant emphasis placed on performance-related compensation.

EC members received total compensation of CHF 39.8 million in 2018 compared with CHF 46.6 million in 2017, as presented in Exhibits 23 and 24. The change in total compensation in 2018 was principally due to the lower grant fair value of the 2018 LTIP, the non-repeating one-time replacement share grant for the CFO in 2017, representing compensation for foregone benefits from his previous employer and the lower short-term Incentive (STI) achievement level.

At the 2017 AGM, the shareholders approved a maximum aggregate compensation amount of CHF 52 million for the EC for the year 2018. The EC compensation for 2018 amounted to CHF 39.8 million and is within the approved amount.

Exhibit 14: Ratios of fixed and variable compensation components of EC members in 2018
Ratios of fixed and variable compensation components of EC members in 2018 (graphic)

Base Salary

There were no increases to base salary for Executive Committee members in 2018.

2018 short-term variable compensation

2018 has been another strong year for revenues in ABB. Revenues, with a weight of 25 percent, were broadly in line with the challenging target set by the Board, with significant contributions from the Robotics and Motion and Industrial Automation Divisions. The award under this parameter amounted to 99.3 percent of target.

Operating cash flow, with a weighting of 30 percent, was below target. The award under this parameter accordingly amounted to 56.6 percent of target.

The Group continued to deliver very strong operational cost savings, which were well above target. The cost savings parameter, weighted at 10 percent, achieved a maximum 150.0 percent award.

Exhibit 15: Compensation components under various scenarios
Compensation components under various scenarios (graphic)

(1) Note: the grant is conditional. At vesting, the award can vary from zero to 200% of the grant depending on how well the performance criteria of the LTIP are met.

Operational EBITA margin, with a weighting of 15 percent, and operational net income, with a weighting of 20 percent, were below targets for both measures. The award under the Operational EBITA margin parameter was 81.1 percent and the award of the operational net income parameter was 82.6 percent.

The combined achievement of these performance measures resulted in a 85.5 percent (2017: 91.9 percent) achievement level for the group scorecard in 2018.

With respect to individual/team objectives for each EC member, the achievement ranges between 35 percent and 112 percent of target, reflecting the financial results of their respective areas of responsibility as well as their achievements on operational performance, strategic initiatives and leadership performance.

The overall average award of short-term incentives for the entire EC was 85.1 percent of target, with a range from 52.3 percent (lowest achievement) to 102.4 percent of target (highest achievement), which reflected, for some executives, the material weakness in controls as outlined in the Report of management on internal control over financial reporting of the Annual Report. See Exhibit 16.

Exhibit 16: ‘At a Glance’ table of 2018
STI variable compensation

 

2018
(% of target)

2017
(% of target)

Group Objectives

85.5%

91.9%

Individual objectives

 

 

EC (range of outcomes):

35.0–112.0%

74.9–122.4%

Overall Average:

87.6%

99.5%

Overall outcome

 

 

EC (range of outcomes):

52.3–102.4%

80.9–107.2%

Overall Average:

85.1%

95.4%

2018 long-term variable compensation

The estimated value of the share-based grants to EC members under the 2018 LTIP award was CHF 10.6 million, compared with CHF 13.8 million in 2017.

The 2018 LTIP comprises of two equally weighted performance factors, a three year average EPS and relative Total Shareholder Return (TSR), designed to be fully aligned with our Strategy, which focuses on EPS delivery and attractive shareholder returns, both on an absolute and relative basis.

Exhibit 17: 2018 LTIP Targets
EPS award curve for the 2018 LTIP
EPS award curve for the 2018 LTIP (line chart)

Threshold point: no award; target point: 100% award; maximum point: capped at 200% award; linear award between points.
The actual EPS target is not disclosed for reasons of commercial sensitivity.

TSR award curve for the 2018 LTIP
TSR award curve for the 2018 LTIP (line chart)

Threshold point: TSR performance within the lower (0–25%) quartile: no award.
Target point: TSR performance at the median performing company: 100% award.
Maximum point: TSR performance within the upper (75–100%) quartile: 200% award.
Linear award between points.

The companies approved by the Board to determine ABB’s relative TSR performance for the 2018 LTIP were: 3M, Danaher, Eaton, Emerson Electric, Honeywell Intl., United Technologies, General Electric, Rockwell, Rolls Royce, Schneider Electric, Siemens, ThyssenKrupp, Legrand, Yokogawa and Mitsubishi Electric. These were selected to provide an appropriate and very challenging set of peers, and influenced the payment point setting accordingly (see Exhibit 17 above).

The 2018 LTIP award curves are illustrated in the charts above.

2015 LTIP outcome

The 2015 LTIP was comprised of two measures – P1 (net income) and P2 (cumulative weighted EPS) measures, that further strengthened the performance orientation of the LTIP.

The net income measure fully vested at 100 per cent. The cumulative weighted EPS measure vested at 61 percent (previous year: 37 percent) out of a potential 200 percent.

Historical vesting outcomes

The historic vesting percentages for the prior four years are shown in the table below.

Exhibit 18: LTIP historical actual vesting percentage(1)

 

Plan Year of Award

 

2012

2013

2014

2015

(1)

Average of P1 (e.g. net income) and P2 (EPS) components

Vesting in % of target award
(target award)

80.4%

77.2%

74.8%

80.5%

Vesting in % of maximum award (max. potential award)

57.4%

55.1%

53.4%

53.7%