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 2018.
I appreciated the opportunity to meet many of our shareholders to discuss compensation matters during 2018. During these meetings we discussed the changes made to our compensation structure to increase its performance orientation, and also took the opportunity to seek feedback from numerous stakeholders on additional disclosures they would like to see. This Compensation Report has been enhanced to reflect the feedback received. Our Committee’s focus remains to ensure that the compensation structure at ABB drives value creation for our shareholders, a motivating package for our executives and strives for best-practice corporate governance standards.
Performance and pay outcomes in 2018
In 2018, ABB continued to implement its strategy, which included a portfolio focus on digital industries through divestment of Power Grids, and the simplification of its business model and structure. The execution of the strategy has influenced the 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 2018–2019 term was in line with the amount approved at the 2018 Annual General Meeting.
Aggregate Executive Committee (EC) compensation was 15 percent lower in 2018 than in 2017, which was influenced by a reduction in the value of short-term incentive awards received, long-term incentive awards granted and replacement share grants.
There were no increases to annual base salary for Executive Committee members in 2018.
Short-term incentives, formulated to drive the achievement of challenging annual performance targets, reflected an average achievement award of 85 percent for the entire EC, compared to 95 percent in 2017.
The 2015 launch of the Long Term Incentive Plan (LTIP) vested in 2018, with the performance component, measured against EPS, vesting at 61 percent (out of a maximum of 200 percent), while the net income component vested fully.
Changes in Compensation Structure in 2018
ABB continues to increase the performance orientation of its compensation system to better align it to the Company’s strategy, market practice and inputs received from shareholders and other stakeholders.
The main considerations in making the changes have been to ensure that there is a performance linkage in every pay component, and that total compensation levels remain competitive within market benchmarks as we increase the performance orientation. These changes have been carefully phased, to allow for the same principles to be cascaded throughout the organization.
Note that the final implementation of the strategic changes to our compensation system have now been completed and there are currently no planned further adjustments.
A major part of the strategic change was to the LTIP, where the previous two-component LTIP has been merged into a single performance share grant, designed to make it simpler and more performance-oriented. The LTIP now has two, equally weighted, performance measures. Firstly, 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.
This LTIP redesign completes the transition made since 2015 from an LTIP system that was half based on a retention component (with net-income threshold) and half based on an EPS scale. Through these changes the target value of the LTIP (and hence the value of the total package) for EC members has remained broadly unchanged, but the maximum award is now two times the target award across the entire LTIP, reflecting its increased performance orientation. Previously, the two times maximum only applied to the EPS component. This increase in upside reflects a symmetrical increase in downside and ensures that the overall value of the package remains competitive.
During 2018, revisions were also made to the design of the short-term variable compensation elements, targeted at streamlining the weighting of Group versus team/individual metrics to a consistent 35 percent (Group)/65 percent (team/individual) for all EC members (except for the CEO, who remains at 80 percent/20 percent). Team and individual metrics are predominantly clear, quantifiable goals including financial targets relating to an executive’s area of responsibility.
ABB’s executive shareholding requirement, already one of the highest in the market, has been strengthened by requiring our EC members to retain any shares vesting from our LTIPs until their respective requirement is met.
During the reporting year, our Committee has listened carefully to many of our shareholders, and the main themes of this feedback has been to continue the evolution of the performance orientation of ABB’s compensation system while increasing the transparency of our disclosure.
In terms of disclosure, we have, in line with our commitment to improved transparency, disclosed our LTIP peer group in this Compensation Report and – in response to feedback from shareholders – given further transparency to both short-term and long-term performance measures and targets.
During 2018, the Compensation Committee performed its regular activities, including recommending performance targets to the Board at the beginning of the year, which impacts variable pay, 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). You will find further information on our activities and on ABB’s compensation system and governance in the following pages.
At the AGM in May 2019, you will be asked to vote on the maximum aggregate compensation for the Board for its 2019–2020 term and on the maximum aggregate compensation for the EC for 2020. The proposed increase in maximum aggregate EC compensation reflects the impact of the transition to the previously announced new organizational structure which, for 2020, leads to the addition of one EC member. Beyond 2020, the number of EC members is expected to decrease due to the elimination of the legacy matrix structure, which is in turn expected to lead to a reduction in the maximum aggregate compensation requested for approval by shareholders. This Compensation Report will also be submitted for a non-binding, consultative vote by shareholders.
We encourage and pursue an open and regular dialogue with our stakeholders. Your constructive input 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 supportive feedback regarding our compensation framework.
David E. Constable
Chairman of the Compensation Committee
Zurich, March 27, 2019