Letter from the Chairman of the Compensation Committee

Highlights

  • Continuity in Executive Committee (EC) composition and compensation structure in 2014
  • EC compensation governance and structure revised as of 2015 – in wake of new corporate strategy, stakeholder feedback and regulation – to increase performance orientation

Dear shareholder,

It is my pleasure as chairman of the Board’s Compensation Committee (CC) to have this opportunity to present our work, and in particular to draw your attention to highlights of the 2014 Compensation Report and changes to executive compensation taking effect in 2015. Your active interest and feedback have been most valuable in shaping the new Executive Committee (EC) compensation model.

My colleagues on the CC are Michael Treschow and Ying Yeh; the three of us were elected by you to serve on the Committee at the 2014 Annual General Meeting (AGM). Our primary role is to oversee the company’s compensation policy and the implementation of executive compensation programs. The Committee exists in its current form since the Board’s decision in April 2014 to split the Governance, Nomination and Compensation Committee into two separate committees – the CC and the Governance and Nomination Committee (GNC).

One of the tasks we undertook in 2014 was to review the compensation of Board members in the light of this reorganization and of current Board compensation at major Swiss companies. This resulted in the first increase in total Board compensation in seven years.

Continuity in EC composition and compensation structure in 2014

The composition of the EC remained the same throughout 2014 and the Board made no changes to the design and mix of EC compensation. However, due to the absence of special share-based grants in 2014 and to numerous changes in the composition of the EC in 2013, total EC compensation was 20 percent lower in 2014 than in the previous year. Short-term variable compensation was also lower for 2014, reflecting company profitability and cash flows in that year that were below the performance objectives set by the Board.

ABB and the landscape in which the company operates have evolved in ways that shape the executive compensation package that shareholders will vote on at the next AGM in April 2015. To provide some background for the vote, let me outline how ABB’s environment has changed, how the Board has revised EC compensation and why we believe the changes are in the interest of shareholders.

Alignment of compensation with recently announced Next Level strategy

First, ABB launched its Next Level strategy in September 2014, with the goal of accelerating sustainable value creation over the years 2015 to 2020, as explained in the Chairman and CEO letter. This strategy builds on the company’s strong positions in its core business areas of power and automation, and on the focus areas of profitable growth, relentless execution and business-led collaboration.

Second, close interaction with stakeholders provided valuable feedback on the design, mix and levels of EC compensation. We consider this type of dialogue important to gather views on our current and developing compensation practices to ensure they continue to be aligned with the long-term interests of our shareholders.

Third, changes to Swiss law expanded the rights of shareholders in publicly listed companies, giving them a binding vote on Board and executive compensation.

Strengthening ABB’s performance culture

The CC’s main task in 2014 was therefore to adapt the executive compensation system so that it is better aligned with the interests of shareholders and supports the Next Level strategy’s goals. Additionally, the CC sought to ensure that our compensation report provides the information and transparency that shareholders expect. I believe that the changes made to our compensation system will further strengthen ABB’s performance culture, and that the revised report will better enable shareholders to exercise their new rights.

The revised executive compensation system, which takes effect in 2015, is designed to improve business speed, agility and customer focus. It places a greater emphasis on an individual’s targets in order to drive and reward outstanding performance, and to achieve a balance between an individual’s and ABB’s company-wide objectives. In addition, it broadens the set of targets used to measure performance to include objectives directly related to those of the Next Level strategy such as strengthening competitiveness, driving organic growth and lowering risk.

Furthermore, we have refined ABB’s long-term variable compensation plan based on the feedback from stakeholders on the design and mix of our EC compensation. The weighting of the component that is linked to earnings-per-share performance has been increased and we have added a net income vesting criterion to the other component.

We are confident that the changes made to executive compensation align well both with the changing environment in which ABB operates and with the company’s Next Level strategy. My CC colleagues and I hope that this report meets your expectations and we look forward to continuing our dialogue with you.

Michel de Rosen
Chairman of the Compensation Committee
Zurich, March 5, 2015