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).

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 LTIP plan and the high shareholding requirement are aligned to shareholder interests.

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 skill set
  • The monetary value of benefits is disclosed in Exhibit 24: EC compensation 2018.

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.

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, Lafarge 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

Exhibit 7: Structure of EC compensation 2018

Compensation structure

Fixed compensation – annual base salary and benefits

Short-term variable compensation

Long-term variable compensation

Wealth at Risk/Share Ownership

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 level (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%
Max vesting: 400%
EC
Target at grant: 100%
Max vesting: 200%

CEO wealth at risk: 500% (net)
EC wealth at risk: 400% (net)

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,
Individual objectives

Relative TSR (50%)
EPS (50%)

Direct link to ABB share price

Short-term variable compensation

Purpose and link to strategy

  • The short-term variable compensation is designed to reward EC members both 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 overall company’s success while also 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.

Individual objectives vary by EC member. For Division and Regional Presidents, the majority are quantifiable objectives, based on financial and operational metrics for their area of responsibility; for the CEO and Corporate Officers, they are typically strategic objectives set by the Board.

Exhibit 9: Group objectives and weighting in 2018

Objective

Weighting

Nature of assessment

(1)

Adjustments include: the after-tax effect of acquisition-related amortization, restructuring and restructuring-related expenses, non-operational pension cost (credit), changes in obligations related to divested businesses, changes in pre-acquisition estimates, gains and losses from sale of businesses, acquisition- and divestment-related expenses and integration costs, and certain other non-operational items, foreign exchange/commodity timing differences in income from operations.

Revenues

25%

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

20%

Operational net income is calculated as net income attributable to ABB after adjustments(1)

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

10%

Savings generated from ABB group-wide cost reduction programs including supply chain management and operational excellence that have direct impact on the Group’s operational EBITA

Examples of quantitative individual metrics include items such as Divisional or Regional Revenue, Operational EBITA Margin, Operating Cash flow, Service Orders, or Demand Orders. Qualitative individual metrics include items such as key project delivery, talent management succession planning, and functional effectiveness.

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

The relative weighting and composition of Group and Individual objectives are shown in Exhibit 10 below. The majority of objectives for all EC members are quantitative in nature.

Exhibit 10: Weight of Group and individual objectives for EC members for 2018

 

CEO

Division and Region Presidents

Corporate Officers(1)

(1)

CFO, CHRO and General Counsel.

Group objectives

80%

35%

35%

Individual objectives

20%

65%

65%

Typical composition of objectives:

 

 

Qualitative

20%

0–20%

15–45%

Quantitative

80%

80–100%

55–85%

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 period.

Operation

  • Annual Conditional Grant under the LTIP.
  • Reference grant values are defined as a percentage of base salary.

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

 

EPS measure

TSR measure

Total

CEO

100%

100%

200%

EC

50%

50%

100%

  • The reference value for the grant size for EC members as a pool may be increased or decreased by the Board by up to 12.5 percent.
  • The number of shares to be granted is determined by dividing the reference value by the average share price over the period 20 trading days prior, and 20 trading days after, the date of publication of ABB’s full year financial results. Settlement of the LTIP is three years after grant, subject to achievement of performance conditions, defined prior to grant.
  • The actual settlement value of awards will vary between zero and 200 percent of the reference grant according to achievement against two equally weighted performance measures, one tied to ABB’s EPS and one to ABB’s TSR (see performance measures section below).
  • Delivery is 65 percent in shares and the remainder in cash, in order to facilitate the settlement of appropriate taxes, 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

TSR

  • Achievement against this measure is determined by ABB’s Total Shareholder Return (TSR) performance against a defined peer group.
  • The constituents of the peer group and the appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are reviewed by the CC on an annual basis.
  • The TSR calculations are made for the reference period beginning in the year of the Conditional Grant and ending three years later. The evaluation is performed by an independent third party.

EPS

  • Achievement against this measure is determined by ABB’s average Earnings Per Share (EPS) over a three year period.
  • The average EPS result is calculated from the EPS for each of the three relevant years, divided by three.
  • EPS is defined as ‘Diluted earnings per share attributable to ABB shareholders, calculated using Income from continuing operations, net of taxes, unless the Board elects to calculate using Net Income for a particular year’.
  • Appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are reviewed by the CC on an annual basis.
  • Performance points 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 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.

Total Wealth at Risk

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.
  • Wealth at Risk is broadly defined as two components – namely personal share ownership and unvested shares arising from the Company’s share grants, e.g. LTIP’s.

Share Ownership Programme

  • EC members are required to retain all shares vested from the Company’s LTIP programs and any other share based compensation until his or her share ownership requirement is met.
  • The share ownership requirement is equivalent to a multiple of their annual base salary, net of tax (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.

Exhibit 12: Share ownership requirement

CEO

5 × annual base salary, net of tax

Other EC members

4 × annual base salary, net of tax

  • 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.
  • Two thirds of the EC members have achieved and exceeded their share ownership requirement. See Exhibits 28 and 29 for further details.

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.