Dear Shareholders,
On behalf of the Board of Directors and the Com-pensation Committee, I am pleased to present the compensation report (‘the Report’) for 2019.
Our Committee’s focus remains to ensure that the compensation structure at ABB drives value cre-ation for our shareholders, a motivating package for our executives and strives for best-practice corporate governance standards.
I appreciated the opportunity to meet with many of our shareholders to discuss compensation mat-ters last year. During these meetings we discussed changes that could be made to our compensation structure to increase its shareholder alignment, market competitiveness and performance driven culture. Furthermore, we discussed ways in which we could simplify the presentation of the Report to create greater clarity for you, our stakeholders.
As such, we have made changes to our com-pensation structure, with a particular focus on the short-term incentive (STI) plan, and have restructured the Report to clearly differentiate between our compensation policies and their implementation.
Compensation policy changes
Over recent years, ABB has steadily increased the performance orientation of its compensa-tion structure, with a special focus on variable compensation. The main consideration in making these changes has been to provide a performance linkage in every pay component while ensuring that total compensation levels remain market competitive. These changes have been carefully phased to allow for the same principles to be cas-caded throughout the organization.
In this context, and in the light of feedback from shareholders and other stakeholders, our STI structure has been revised for 2020. The result is a better alignment with the new ABB operating model and an enhanced focus on operational delivery.
The new plan, called the Annual Incentive Plan (AIP), is designed to create focus on key prior-ities. This will be achieved with a limited num-ber of measures linked to specific Business or functional needs. It has a common Group return
measure (ROCE) to help create a greater focus on profitability and the efficiency with which capi-tal is used, tailored measures to better align with Business or functional priorities and an individu-al component which, for individu-all Executive Committee (EC) members, will include safety performance.
Note that, for 2020, the limited number of mea-sures applied to the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) will feature a free cash flow metric that includes the impact of non-operational charges, in order to reflect full accountability for cash performance and greater shareholder alignment.
This AIP approach complements the recent re-design of the Long Term Incentive Plan (LTIP), where the previous two-component LTIP was merged into a single performance share grant, designed to make it simpler and completely performance-oriented. The LTIP has two equal-ly weighted performance measures, nameequal-ly an average Earnings Per Share (EPS) measure in line with our Company strategy, and a relative Total Shareholder Return (TSR) measure to bring in the market competition perspective.
For LTIP grants made as from 2019, the applica-tion of malus and clawback has been expanded from illegal activities to also cover a serious finan-cial misstatement of the Group’s accounts. This is designed to give the Board greater discretion to adjust the vesting of awards in line with Business and shareholder interests, and is more closely aligned to market practice. The Committee was also given the ability to suspend the payment of awards if it is likely that the Board could deter-mine that the malus or clawback provisions may potentially apply (e.g. if the employee is subject to an external investigation), in line with leading market practice.
As a reminder, ABB’s executive shareholding re-quirement, already one of the highest in the mar-ket, was also recently strengthened to require our EC members to retain any shares vesting from our LTIPs until their respective requirement is met.
Finally, we have taken the opportunity to review the compensation package for the CEO position, and adjusted the target short-term opportunity from 150 percent to 100 percent of annual base salary, and target long-term opportunity from
200 percent to 150 percent of annual base salary, to more closely represent competitive market practice.
The revised compensation structure for the EC from 2020, its purpose and links to our strategy, are set out in the table below.
Compensation structure Purpose and link to
strategy Compensates 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 may vest after 3 years subject to performance conditions
Individuals required to hold ABB shares
Opportunity level
Target at grant: 150%
Vesting: 0–300%
EC Target at grant: 100%
Vesting: 0–200%
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 annual base salary takes into account the Op. net income, OFCF (55–60%);
All: individual objectives (20%)
Relative TSR (50%)
Average EPS (50%) Direct link to ABB share price
Compensation policy implementation in 2019 and 2020
CEO compensation
The Committee considered very carefully the com-pensation packages for both the newly appointed CEO, Björn Rosengren, and the interim CEO, Peter Voser, following the departure of the former CEO, Ulrich Spiesshofer, in 2019.
The Committee has set the target total direct compensation for the newly appointed CEO nearly 22 percent lower than for the former CEO. This is derived by a reduction in target short-term and target long-term incentive opportunity, to more closely represent competitive market practice.
The interim CEO, Peter Voser, receives a monthly payment equivalent to the same annual base salary and annual target STI as the former CEO.
He does not receive any long-term incentive (LTI) grants or benefits, except legally required pension and social security contributions. This compensation is in addition to his fees as Chair-man, given he is currently performing both roles.
The terms of departure of the former CEO, Ulrich Spiesshofer, were as per his contractual arrangements. Further details are set out in the Implementation section of the Report.
Other appointments and departures The terms of departure from ABB of other EC members, including the General Counsel (GC) and Chief Human Resources Officer (CHRO), were as per their respective contractual arrangements.
The Total Target Direct Compensation (TTDC) of replacement roles onto the EC in 2019 has, in each case, been lower than their respective predecessors.
Compensation outcomes
There were no changes in the fees for Board members for the roles they perform. The aggre-gate Board compensation for the 2019–2020 term was in line with the amount approved at the 2019 Annual General Meeting.
Aggregate EC compensation was 29 percent higher in 2019 than in 2018, mainly influenced by the change in EC composition, which led to over-lapping payments for the CEO, CHRO and GC and replacement cash and share awards to the incom-ing GC.
Four of the eleven EC members received a salary adjustment in 2019, which ranged from 1.9 percent to 11.1 percent, the latter being for an exceptional performance and market adjustment.
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The STI in 2019, formulated to drive the achieve-ment of challenging annual performance targets, reflected an average achievement award of 94.7 percent for the EC, compared to 85.1 percent in 2018. The range of outcomes from individ-ual objectives ranged from 58.6 percent to 111.3 percent of target, reflecting the differen-tial achievement levels against the performance targets.
The 2016 grant under the Long-Term Incentive Plan (LTIP) vested in 2019. The performance component, measured against demanding EPS targets, vested at 85 percent (out of a maximum of 200 percent), while the net income component vested fully, resulting in a weighted achievement of 92.5 percent of the target award.
Disclosure and governance
During the reporting year, our Committee lis-tened carefully to ideas and suggestions from our shareholders, and the main themes of this feed-back have been used to continue the evolution of ABB’s compensation system as described above, and to increase the clarity of our disclosures in the Report.
In terms of disclosures, we have provided an overview of the compensation structure and its links to our strategy in this letter and we have also restructured the Report to clearly differentiate between our compensation policies and their implementation.
Under the new Executive Committee Compensa-tion Policy, we have updated the descripCompensa-tion of our benchmarking comparators in the Compet-itive positioning of compensation section, and have outlined the changes to the compensation structure for the new CEO, the new approaches adopted for our STI plan, and the changes to our LTIPs. The new Implementation of Executive Compensation Policy section includes an exhibit with an enhanced tabular presentation of the STI outcomes, an advance disclosure on the STI measures for the CEO, the terms of appointment
of the new CEO, and the terms of departure of the former CEO.
During 2019, in addition to reviewing the terms of appointment and departure for members of the EC, the Compensation Committee performed its regular activities, including recommending performance targets to the Board which impact variable compensation, recommending the compensation of ABB’s Board, CEO and EC mem-bers, 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 com-pensation system and governance in the following pages.
At the AGM in March 2020, you will be asked to vote on the maximum aggregate compensation for the Board for its 2020–2021 term and on the maximum aggregate compensation for the EC for 2021. As signaled in last year’s Report, the number of EC members has decreased due to the elimination of the legacy matrix structure, which has led to a reduction in the maximum aggregate compensation requested for approval by share-holders. 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 all of our stakeholders. Your con-structive 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 sup-portive feedback regarding our compensation framework.
David E. Constable
Chairman of the Compensation Committee Zurich, February 25, 2020