Compensation highlights

New regulation in 2014

ABB’s compensation report has been revised and expanded compared with previous years to address feedback from stakeholders and to reflect new regulation that requires, starting in 2015, shareholders of publicly listed companies in Switzerland to vote on compensation for the Board of Directors and executive management.

The report has been prepared in accordance with applicable regulations, including the Swiss Code of Obligations, the Swiss Ordinance against Excessive Remuneration in Listed Companies Limited by Shares, and the rules of the stock markets where ABB’s shares are listed in Switzerland, Sweden and the U.S. The report also fully adheres to the Swiss Code of Best Practice for Corporate Governance.

Key facts 2014

Table 1: Overview of total compensation (in CHF)

 

 

Board term

2014–2015

2013–2014

For a breakdown of total Board compensation by individual and component see table 3 and table 9. For EC compensation by individual and component see table 10 and table 11.

Board of Directors

3,630,000

3,500,000

 

 

 

Calendar year

2014

2013

Executive Committee

38,699,707

48,651,862

For the 2014–2015 term of office, aggregate Board compensation increased by 3.7 percent, the first increase in seven years.

The EC’s total compensation was lower in 2014 than in 2013, due to the absence of special share grants in 2014, changes in the composition of the EC in 2013, and a below-target payout on short-term variable compensation of 85.8 percent in 2014 compared with 100 percent in 2013.

Revised compensation principles for 2015

Based on the Next Level strategy launched in September 2014 and on the feedback received from stakeholders since the last AGM, the Board has revised the compensation principles. As of 2015, those principles are:

Linked and balanced

Compensation linked to the Next Level strategy and performance through ambitious objectives, robust performance monitoring and a sound balance between Group and individual performance

Competitive

Annual base salaries of top management set between market median and upper quartile in order to attract suitable talent

Performance driven

Ambitious targets set in the Group’s planning processes, and variable pay aimed at upper quartile when these objectives are achieved

Comprehensive KPIs

All performance metrics support development of earnings per share and cash return on invested capital; and cover financial, operational, change and behavioral performance

Market tested

Compensation mix and levels tested annually against benchmarks that include selected ABB peers and appropriate markets

Principal refinements in ABB’s executive compensation system as of 2015

The Board has also refined various elements of EC compensation as of 2015, including:

  • a more comprehensive set of key performance indicators to drive the execution of the strategy and the creation of shareholder value;
  • in short-term variable compensation, a better balance between an individual’s and the Group’s performance. In addition, the Board will no longer have discretion over the size of the payout where the Group targets are exceeded; and
  • in long-term variable compensation, stronger performance considerations including more emphasis on the earnings-per-share development and the addition of a net income objective threshold as a vesting condition.

Components of EC compensation in 2015

ABB’s compensation structure is designed to be competitive in local labor markets, and to encourage executives to deliver outstanding results. Also, EC compensation is designed to be balanced in terms of fixed versus variable compensation and in terms of short- versus long-term incentives:

 

Fixed compensation

Variable compensation

 

Base salary

Short-term

Long-term

Purpose

Compensates executives based on their responsibilities, experience and skillset

Rewards performance against specific KPIs

Encourages creation of long-term, sustainable value for the shareholders

Performance influencing grant size or payout

Individual performance and behavior

Financial and non-financial corporate and individual performance

Corporate (also vs peers) and individual performance

Delivery

Cash

Cash

Shares and cash

Votes at 2015 AGM

At the AGM in April 2015, ABB’s shareholders will vote on maximum aggregate compensation to the Board for the term of office running from the AGM in 2015 until the AGM in 2016, and on maximum aggregate EC compensation for the calendar year 2016. In addition, shareholders will have a non-binding vote on the 2014 compensation report (see Chart 7).

In order to provide shareholders with information for these votes, this report includes a compensation outlook, in addition to the review of compensation in 2014. The report has three sections presenting:

  • the principles, governance and levels of Board and EC compensation in 2014;
  • the main changes to compensation governance and EC compensation as of 2015; and
  • tables of Board and EC compensation and share/option ownership in 2014 and 2013.