Executive Committee compensation

Principles and governance

The Board considers the Group’s compensation system to be an important factor in attracting, motivating and retaining people with the talent necessary to strengthen the company’s position as a global leader in power and automation.

The system therefore aims to provide compensation that is competitive in local labor markets and encourages employees to deliver outstanding results. At the same time, a balance between fixed and variable compensation and between short- and long-term incentives is designed to align the interests of employees with those of other stakeholders and ensure that performance is sustainable.

For several years, executive compensation at ABB has been based on the principles that it should be market oriented and competitive, drive performance and reward the creation of shareholder value. Benchmarking ensured that compensation was at a level that would attract and retain the key talent that ABB needs to drive its success globally, and performance metrics including financial objectives, individual performance and behavior, and the evolution of the share price, determined the compensation levels in 2014.

In addition, compensation elements were focused on rewarding the delivery of outstanding and sustainable results without inappropriate risk taking.

Alignment of strategy, performance and compensation

The Board defines the ultimate direction of the business of ABB and regularly reviews progress on the strategy. Based on these reviews, the Board sets annual budgets and performance targets, and ensures that the company’s compensation arrangements support implementation of the strategy and reflect performance (see Chart 1).

Chart 1: Cycle of alignment by the Board of strategy, performance and compensation

To effectively align strategy, performance and compensation, the target setting and review processes are directly linked to the financial and budget processes.

 

 

 

 

 

 

 

 

 

 

 

 

Business cycle

 

Business reviews and forward planning

 

 

Annual results

Quarter results

Quarter results

Quarter results

External engagement on compensation governance

 

Stakeholder roadshow

Regular update and review of external benchmarks and compensation trends including dialogue with external stakeholders and evaluation of feedback

 

Performance cycle

 

Performance review

Setting of objectives for short-term variable compensation

3 year look-back assessment and setting of objectives for LTIP

 

Annual performance development appraisal of individuals

Compensation decisions

 

 

Annual salary review

Short-term variable compensation payout

 

Annual grant of LTIP awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan

 

 

 

 

 

 

 

 

Dec

The Board and its Compensation Committee (CC) have direct oversight of compensation principles and of executive compensation at ABB. The CC is responsible for developing the general compensation principles and practices of ABB and for recommending them to the full Board, which takes the final decisions (see Table 4 below).

The Board’s responsibility for compensation governance

The Board sets the compensation principles for ABB and the compensation of members of the Executive Committee (EC). It ensures that strategy, performance and compensation are aligned.

The Board and CC drive and steer the continuous development of ABB’s executive compensation system to ensure that it attracts, motivates and retains people with the talent necessary to strengthen the company’s position as a global leader in power and automation.

The CC, on behalf of the Board, regularly reviews the compensation policy and structure, and recommends to the Board specific proposals on executive compensation to ensure that they are consistent with ABB’s compensation principles.

Information on the meetings held in 2014 by the CC and its predecessor, the GNCC, can be found in section Meetings and attendance of the Corporate governance report.

Annual reviews

Each year, the Board reviews the CEO’s performance while the CEO reviews the performance of other EC members and makes recommendations to the CC on their individual compensation. For 2014, the full Board took the final decisions on compensation for all EC members, none of whom participated in the deliberations on their own compensation.

The Board also sets the ABB annual objectives that determine short-term variable compensation, taking into account the recommendations of the CC.

The Board sets the overall grant size of the Long-Term Incentive Plan (LTIP), the principal mechanism through which ABB encourages executives to create shareholder value over the long term, and approves the individual grants made to the CEO and other EC members.

Table 4: The Board decides on EC compensation
Executive Committee compensation – The Board decides on EC compensation (graphic)Executive Committee compensation – The Board decides on EC compensation (graphic)

Compensation levels for the CEO are proposed by the CC, while those of the other EC members are proposed by the CEO. The Board is responsible for all approvals.

Benchmarks

ABB uses benchmarks and third-party consultants to evaluate positions throughout the company; assess the competitiveness of EC compensation levels; analyze market trends with regard to executive compensation design and mix; and provide advice on compensation.

All senior positions in ABB have been evaluated using a consistent methodology developed by the Hay Group, whose job evaluation system is used by more than 10,000 companies around the world. This approach provides a meaningful, transparent and consistent basis for comparing compensation levels at ABB with those of equivalent jobs at other companies that have been evaluated using the same criteria.

In 2014, the Board primarily used the General Pan-European Market data in Hay’s annual Top Executive Compensation in Europe survey to set EC compensation, which was targeted to be above the median values for the market. Other indicators considered included Hay’s data on the Swiss and European industry markets and on U.S. peers.

Hostettler & Company (HCM), an independent consultant specializing in performance management and compensation, provides advice to the CC in the area of compensation. HCM has no other mandate with ABB.

Components of EC compensation

ABB aims for total EC compensation to be competitive, as well as balanced in terms of fixed versus variable compensation and in terms of short- versus long-term incentives. It also aims to reflect performance considerations in each component of executive compensation, as shown in Chart 2. The objective is to encourage outstanding performance that delivers sustainable results without excessive risk taking.

In addition to the benchmarks mentioned above, the Board considered individual performance, experience, potential and the prevailing conditions in the market, when setting each EC member’s compensation.

The main components of executive compensation in 2014 were unchanged from the previous year and consisted of: cash compensation including base salary, short-term variable compensation, pension and other benefits; and share-based compensation in the form of grants under the LTIP.

Fixed compensation – Annual base salary and benefits

The base salary for members of the EC is set taking into account positions of comparable responsibility outside ABB. When considering changes in base salary, the executive’s performance during the preceding year against individual objectives is taken into account.

Members of the EC received pension benefits, paid into the Swiss ABB Pension Fund and the ABB Supplementary Insurance Plans (the regulations are available at www.abbvorsorge.ch), except for one member who is covered under the plans of ABB Inc. in the U.S. The compensation of EC members also included social security contributions and other benefits, as outlined in Table 10. Tax equalization was provided for EC members resident outside Switzerland to the extent that they were not able to claim a tax credit in their country of residence for income taxes they paid in Switzerland.

Chart 2: Linkage of EC compensation components to performance

The compensation of EC members consists of a base salary and benefits, a short-term variable component dependent on annual performance objectives, and a long-term variable component.

 

 

 

 

 

 

 

 

 

Fixed compensation

Variable compensation

 

 

 

 

Base salary

Benefits

Short-term variable
compensation

Long-Term Incentive Plan

Performance component

Long-Term Incentive Plan

Retention component

 

 

 

 

 

 

 

Performance period

 

Previous 1 year

 

Next 1 year

Next 3 years

Previous 1 year and 3 years

Performance measures affecting allocation

 

Individual
objectives

 

 

 


Size of EC grant: ABB performance in previous 3 years Size of individual grant: performance in previous year

Performance measures affecting payout

 

 

 

ABB financial and non-financial objectives

Earnings per share

 

Payment

 

Cash

Cash-based

Cash

Cash

Shares and cash

 

Variable compensation

Short-term variable compensation

Payment of the short-term variable component of compensation for 2014 was conditional on the fulfillment of predefined ABB performance objectives that were specific, quantifiable and challenging. The 2014 objectives, shown in Table 5, were aligned with strategic targets that had been communicated to shareholders.

Fully achieving the objectives would have resulted in a payout equivalent to 150 percent of the base salary for the CEO and 100 percent of the base salary for other members of the EC. Underperformance would have resulted in a lower payout, or none at all if performance had been below the defined threshold for each of the objectives. If the objectives had been exceeded, the Board would have had the authority to approve a payout that was up to 50 percent higher, representing up to 225 percent of the base salary for the CEO and 150 percent of the base salary for other members of the EC.

Long-term variable compensation

An important principle of executive compensation at ABB is that it should encourage EC members to drive the creation of long-term value for the company’s shareholders in a sustainable way. Granted annually, LTIPs are the principal mechanism through which this is achieved.

Under the terms and conditions of the LTIP, the Board decides whether EC members who leave the company before the end of the three-year period forfeit the unvested grant, or receive all or a portion of such grants. The Board also decides whether to grant LTIPs to new participants or change the size of an LTIP grant to an existing participant for up to six months after the launch of a plan, if the existing participant’s responsibilities change. These Board decisions are made taking into account the recommendations of the CC.

Continuity in 2014

Executive compensation in 2014 consisted of a base salary and benefits, a short-term variable component and a long-term variable component. Neither the components of executive compensation nor the EC structure changed in 2014 compared with the previous year.

The LTIP granted in 2014 comprised a performance component and a retention component. Their proportions in relation to the base salary are explained in Section Level of EC compensation.

Chart 3: Alignment with shareholders by linking payout of performance component to EPS development
Executive Committee compensation – Alignment with shareholders by linking payout of performance component to EPS development (graphic)Executive Committee compensation – Alignment with shareholders by linking payout of performance component to EPS development (graphic)

The LTIP rewards participants for increasing EPS over a three-year period. The payout of the performance component is based on ABB’s weighted cumulative EPS performance against predefined objectives.

Performance component

The performance component of the plan is designed to reward participants for increasing earnings per share(1) (EPS) over a three-year period.

The payout is based on ABB’s weighted cumulative EPS performance against predefined objectives. This EPS objective is primarily based on an investor’s perspective and is derived taking into account the growth expectations, risk profiles, investment levels and profitability levels that are typical for the industry (ie, outside-in view). The EPS target-setting process 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. The weighted cumulative EPS result is calculated as 33 percent of EPS in the first year plus 67 percent of EPS in the second year plus 100 percent of EPS in the third year. There is no payout if the lower threshold is not reached and payout is capped at 200 percent of the reference number of shares conditionally granted if performance exceeds the upper threshold. The payout percentages are shown in Chart 3. The payout at the end of the three-year period, if any, will be made in cash.

(1)Earnings per share is defined in the terms of the LTIP as diluted earnings per share attributable to ABB shareholders calculated using Income from continuing operations, net of tax, unless the Board decides to calculate using Net income for a particular year.

Retention component

This component of the LTIP granted in 2014 aimed to retain executives at ABB. Members of the EC were conditionally granted shares, which are delivered at the end of the vesting period generally three years from grant date, subject to fulfillment of the vesting conditions, which required them to be employed by ABB as of the vesting date.

Upon vesting, EC members will receive 70 percent of the payout in shares and the remainder in cash, unless they elect to receive 100 percent in shares.

Share delivery under LTIP

Shares under our LTIP are typically delivered from treasury shares. Our contingent share capital, together with our treasury shares, is used to cover our obligations in connection with our share plans, including our conditional share grants under the LTIP. In addition, the Board has determined that any dilution of shareholders in connection with LTIP share deliveries shall not exceed 1 percent annually.

Vesting in 2014 of performance component of 2011 LTIP

There was no payout for the performance component of the 2011 LTIP that vested in 2014. This was the last LTIP in which the value created for the company’s shareholders was measured in terms of total shareholder return, which is the percentage change in the value of the ABB share plus dividends over a three-year period relative to a specific group of peers. EPS was adopted as the relevant measure for the performance component of LTIP launches beginning in 2012.

Level of EC compensation

Overview

There were no changes to the composition of the EC during 2014, nor to the design and mix of compensation. Due mainly to factors in 2013 that were not repeated in 2014, total EC compensation was lower in 2014 than in the previous year. For a breakdown of compensation by individual and component in each of these years, see Table 10 and Table 11.

Total cash-based compensation was 25.8 million Swiss francs in 2014 compared with 29.0 million Swiss francs in 2013. The difference is mainly attributable to ABB not achieving the target performance in some of the 2014 objectives for short-term variable compensation.

Share-based compensation was 12.9 million Swiss francs in 2014 compared with 19.7 million Swiss francs in 2013. The difference is mainly attributable to the absence of special share-based grants in 2014 and changes in the composition of the EC during 2013.

In 2014, fixed compensation represented 33 percent of the CEO’s compensation and an average of 46 percent for the other EC members. The ratio of fixed to variable components in any given year will depend on the performance of the individuals and of the company against predefined ABB performance objectives.

Base salary and benefits

The base salary and benefits are fixed elements of the annual EC compensation packages, while the other components are variable. The benefits consist primarily of pension contributions. Other benefits comprise mainly social security and health insurance contributions.

Short-term variable compensation

Although the company exceeded the short-term objectives for orders, cost savings and Net Promoter Score (NPS) set by the Board, it was below target but above threshold on revenues, operational EBITDA and operating cash flow (see Table 5). This resulted in a payout of 85.8 percent of the target short-term compensation, compared with 100 percent in 2013.

On or above target

Above threshold and below target


Below threshold

 

(1)

The financial objectives exclude the impact of currency fluctuations, major acquisitions and divestments, and the impact of discontinued operations where appropriate.

(2)

See definition in “Note 23 Operating segment and geographic data” to ABB’s Consolidated Financial Statements.

(3)

Operating cash flow is defined as net cash provided by operating activities, reversing the cash impact of interest, taxes, restructuring-related activities and one-time pension contributions.

(4)

Net Promoter Score (NPS) is a metric based on dividing customers into three categories: Promoters, Passives, and Detractors. This is achieved by asking customers in a one-question survey whether they would recommend ABB to a colleague. In 2014, ABB had a target to increase the proportion of countries that have improved their NPS compared to the previous year.

 

Short-term variable compensation payout is dependent on performance.

Table 5: Group-wide 2014 objectives and performance for short-term variable compensation

Objective(1)

Weighting

Performance

Orders received

12.5%

Revenues

12.5%

Operational EBITDA(2)

25%

Operating cash flow(3)

25%

Cost savings

15%

Net Promoter Score(4)

10%

Long-term variable compensation

Performance component

At the launch of the 2014 LTIP, participants were allocated a reference number of conditionally granted shares for the performance component that was equivalent to 67 percent of base salary for the CEO (compared with 100 percent for the previous CEO in 2012) and 42 percent for the other members of the EC.

The performance component of LTIP is valued at the grant date using the ABB share price and Monte Carlo modeling, a mathematical technique that calculates a range of outcomes and the probability that they will occur. The model is an accepted simulation method under U.S. generally accepted accounting principles (U.S. GAAP – the accounting standard used by ABB).

Retention component

For the retention component in 2014, the reference grant size for the CEO was equivalent to 100 percent of base salary. The other EC members received a grant from a pool whose reference size was equivalent to 65 percent of their combined base salaries.

The reference grant size for the CEO and the pool for the other EC members for any particular launch can each be increased or decreased by the Board by up to 25 percent, based on an assessment of ABB’s performance against its peers over the three years preceding the launch of the plan. In 2014, the Board assessed ABB’s 2011–2013 performance on: revenue growth, cash return on invested capital, EBITDA margin, share price development, share price to earnings ratio, NPS development, integrity and safety performance.

Based on the strong NPS development, revenue growth and cash return ratios identified in the assessment, and on a significant improvement in integrity processes, the Board increased the reference grant size of the retention component in the 2014 LTIP launch by 22 percent in aggregate for all EC participants.

The Board allocated shares from this pool to each individual EC member, based on an assessment of their individual performance in 2013. The number of shares conditionally granted to EC members under LTIP during 2014 is included in Table 14.

Other compensation

Members of the EC are eligible to participate in the Employee Share Acquisition Plan (ESAP), a savings plan based on stock options, which is open to employees around the world. Seven members of the EC participated in the 11th annual launch of the plan. EC members who participated in that launch are each entitled to acquire up to 480 ABB shares at 20.97 Swiss francs per share, the market share price at the start of that launch.

For a more detailed description of ESAP, please refer to “Note 18 Share-based payment arrangements” to ABB’s Consolidated Financial Statements contained in the Financial review of ABB Group section of this Annual Report.

Compensation of former EC members

Furthermore, in 2014, certain former EC members received contractual compensation for the period after leaving the EC. The compensation included the base salary, benefits and short-term variable compensation for 2014. The compensation is shown gross (ie, before deduction of employee’s social insurance and pension contributions) in Table 12. Compensation to former EC members in 2013 is shown in Table 13.

Share ownership and severance provisions

Share ownership requirement

To further strengthen the alignment of executives’ interests with those of shareholders, EC members are required to build up a holding of ABB shares that is equivalent to a multiple of their base salary, as set out in Table 6.

Table 6: Share ownership requirements for EC members

 

 

Chief Executive Officer

5 × base salary

Other EC members

4 × base salary

Only shares owned by an EC member and the member’s spouse are included in the share ownership calculation. Vested and unvested options are excluded.

As the level of the shareholding requirement is high relative to market practice, the Board has determined that members of the EC should aim to reach these multiples within five years of their appointment. 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.

Notice and severance provisions

Employment contracts for EC members contain notice periods of 12 months, during which they are entitled to compensation comprising their base salary, benefits and short-term variable compensation. Since January 1, 2013, contracts for new EC members no longer include a provision extending compensation for up to 12 additional months if their employment is terminated by ABB and if they do not find alternative employment within the notice period that pays at least 70 percent of their compensation. In accordance with Swiss law and ABB’s Articles of Incorporation, the contracts for the other EC members will be amended in 2015 to exclude this provision.