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 review-ing and settreview-ing the individual target compensa-tion 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 ap-proach provides a meaningful, transparent and consistent basis for evaluating roles and for com-paring compensation levels with those of equiva-lent jobs at other companies.
The primary source of data to assess the EC com-pensation is the General Pan-European Market of Hay’s annual survey “Top Executive Compensa-tion in Europe”. The EC compensaCompensa-tion is bench-marked against the median to upper quartile val-ues. 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 indi-vidual members of the EC.
Compensation structure – overview
Our compensation structure is linked to our strat-egy and, as illustrated in Exhibits 7 and 17, a sig-nificant portion of total compensation depends directly on performance achievement. Our fully performance-oriented LTIP plan and the high shareholding requirement are aligned to share-holder 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 pro-vide a reasonable level of support for the em-ployees and their dependents in case of retire-ment, disability or death.
• Benefit plans vary in line with the local competi-tive and legal environment and are, at a mini-mum, 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 re-sponsibilities, 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 Exhibit 6: Compensation benchmarks
References to stress-test main benchmark Global industry
Swiss market SMI and SMIM companies that (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.
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year against individual objectives as well as po-tential for the future are taken into account.
Short-term variable compensation Purpose and link to strategy
• The short-term variable compensation is de-signed 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 indi-vidual 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 connec-tion with the annual performance management process and are mainly group financial result ori-ented.
Individual objectives vary by EC member. For Divi-sion and Regional Presidents, the majority are quantifiable objectives, based on financial and op-erational 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
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 (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.
Exhibit 7: Structure of EC compensation 2018
Compensation structure Purpose and link to strategy Compensates
EC members for the role Rewards annual company 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, 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
EPS (50%) Direct link to ABB share price
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Examples of quantitative individual metrics in-clude items such as Divisional or Regional Reve-nue, Operational EBITA Margin, Operating Cash flow, Service Orders, or Demand Orders. Qualita-tive individual metrics include items such as key project delivery, talent management succession planning, and functional effectiveness.
For each performance objective (group and indi-vidual), a target is set corresponding to the ex-pected 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 mem-bers are quantitative in nature.
Exhibit 10: Weighting and composition of objectives for EC members for 2018
CEO
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%
(1) CFO, CHRO and General Counsel.
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 percent-age 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 de-creased by the Board by up to 12.5 percent.
• The number of shares to be granted is deter-mined by dividing the reference value by the av-erage 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 condi-tions, 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 per-formance measures section below).
• Delivery is 65 percent in shares and the remain-der in cash, in orremain-der 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 activ-ity. This means that the Board of Directors may decide not to pay any unpaid or unvested incen-tive compensation (malus), or may seek to re-cover incentive compensation that has been paid in the past (clawback).
Performance measures TSR
• Achievement against this measure is deter-mined by ABB’s Total Shareholder Return (TSR) performance against a defined peer group.
• The constituents of the peer group and the ap-propriate 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 evalua-tion is performed by an independent third party.
EPS
• Achievement against this measure is deter-mined 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 at-tributable to ABB shareholders, calculated using Income from continuing operations, net of taxes, unless the Board elects to calculate using Net In-come for a particular year’.
• Appropriate threshold (zero), target (100 percent) and maximum (200 percent) award points are re-viewed by the CC on an annual basis.
• Performance points are set using an ‘outside-in’
view, taking into account the growth
expecta-66 A B B A N N UA L R EP O R T 2 01 8 03 CO M P EN S AT I O N R EP O R T
tions, risk profile, investment levels and profitabil-ity 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 compo-nents – 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 signifi-cantly 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 own-ership calculation. Vested and unvested stock options are not considered for this purpose.
• The CC reviews the status of EC share owner-ship on an annual basis. It also reviews the re-quired shareholding amounts annually, based on salary and expected share price developments.
• Two thirds of the EC members have achieved and exceeded their share ownership require-ment. 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.