Executive Committee remuneration

Governance and principles

The Board and GNCC have direct oversight of compensation policy at ABB. The GNCC is responsible for developing the general remuneration principles and practices of the ABB Group and for recommending them to the full Board, which takes the final decisions.

The Board and GNCC are actively involved in the continuous development of ABB’s executive remuneration system to reflect a remuneration philosophy that is based on the following principles:

  • Market orientation – ABB conducts regular benchmarking reviews to ensure compensation is at a level that will attract and retain top talent.
  • Performance – ABB ensures that performance drives all compensation elements. Performance metrics include financial objectives, individual performance and behavior, as well as the share price performance.
  • Shareholder value – ABB’s compensation elements focus on rewarding the delivery of outstanding and sustainable results without inappropriate risk taking.
  • Retention – ABB grants a portion of its compensation through long-term oriented elements to attract and retain the key talent that ABB needs to drive its success globally.

The GNCC acts on behalf of the Board in regularly reviewing the remuneration philosophy and structure, and in reviewing and approving specific proposals on executive compensation to ensure that they are consistent with the Group’s compensation principles. In 2012, the GNCC hired Hostettler, Kramarsch & Partner (hkp), an independent consultant specializing in performance management and compensation, to provide advice on remuneration. At the GNCC’s request, the firm helped to redesign the Long-Term Incentive Plan described below in this Remuneration report. Hkp has no other mandate with ABB.

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. The Hay methodology goes beyond job titles and company size in assessing positions. It considers the know-how required to do the job, the problem-solving complexities involved, as well as the accountability for results and the freedom to act to achieve results. This approach provides a meaningful, transparent and consistent basis for comparing remuneration levels at ABB with those of equivalent jobs at other companies that have been evaluated using the same criteria. The Board primarily uses Hay’s data from the European market to set EC compensation, which is targeted to be above the median values for the market.

Every year, the Board reviews the CEO’s performance and decides on any change in compensation. The CEO reviews the performance of other members of the EC and makes recommendations to the GNCC on their individual remuneration. The full Board takes the final decisions on compensation for all EC members, none of whom participates in the deliberations on their remuneration.

Information on the meetings held by the GNCC in 2012 can be found in the Corporate governance report.

Components of EC compensation

Compensation elements and performance considerations

The compensation of EC members currently consists of the following elements: a base salary and benefits, a short-term variable component dependent on annual Group performance objectives, and a long-term variable component designed to reward the creation of shareholder value and an executive’s commitment to the company.

The main components of executive compensation are summarized in the following chart and described in detail below:

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Base salary

Cash

Paid monthly

Competitive in respect to labor markets

Annual revisions, if any, partly based on performance

Short-term variable compensation

Cash

Conditional annual payment

Payout depends on performance in previous year against predefined Group objectives, with a cap on the payout for over-performance

Long-term variable compensation
(Long-Term Incentive Plan 2012)

Cash and shares

Performance component:

Conditional grant made annually

Payout is in cash and depends on ABB’s weighted cumulative earnings per share over a three-year period

Retention component:

Conditional grant made annually

Payout is in shares (70%) and cash (30%) and requires the executive to remain at ABB for a three-year period from grant

 

 

 

(Executives can elect to receive 100% in shares)

In addition, members of the EC are required to build up a holding of ABB shares that is equivalent to a multiple of their base salary, to ensure that their interests are aligned with those of shareholders. Since 2010, the requirement has been five times base salary for the CEO and four times base salary for the other members of the EC. New members of the EC should aim to reach these multiples within four years of their appointment. These required shareholding amounts are reviewed annually, based on salary and expected share price developments.

The chart below illustrates how performance considerations are reflected in each component of executive remuneration.

Performance considerations in each component of remuneration
Performance considerations in all components of pay (graphic)

Annual base salary

The base salary for members of the EC is set with reference to positions of equivalent responsibility outside ABB, as determined using the Hay methodology described above. It is reviewed annually principally on the basis of Hay’s annual Top Executive Compensation in Europe survey. When considering changes in base salary, the executive’s performance during the preceding year against individual objectives is taken into account. Under its mandate with ABB, Hay also conducts job evaluations.

Benefits

Members of the EC receive pension benefits, payable into the Swiss ABB Pension Fund and ABB Supplementary Insurance Plan (the regulations are available at www.abbvorsorge.ch). The current level of pension benefits was set in 2006 on the basis of results from a survey of pension conditions for Swiss-based executives at Adecco, Ciba, Dow, Nestlé, Novartis, Roche, Serono, Syngenta and Sulzer that ABB commissioned from Towers Watson, a consultant. The survey was repeated in 2010 and a new benchmarking exercise will be conducted in 2013. Towers Watson also provides actuarial services to ABB, and pension advisory services in connection with mergers and acquisitions transactions.

The compensation of EC members also includes social security contributions and other benefits, as outlined in the table under Acquisition Integration Execution Plan (see below). The Board has decided to provide tax equalization 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 have paid in Switzerland.

Short-term variable compensation

Payment of the short-term variable component is conditional on the fulfillment of predefined annual objectives that are specific, quantifiable and challenging. Short-term variable compensation for members of the EC and most other senior managers throughout the company is based on Group performance objectives. For some managers with regional or country-level responsibilities, short-term variable compensation is based on related objectives adapted to ABB’s goals in these markets. The CEO recommends the Group performance objectives to the GNCC, which may make or request amendments before it submits a proposal to the Board. The Board takes the final decision.

The 2012 objectives, shown in the table below, were Group-wide metrics that were aligned with the Group’s 2015 strategic targets that have been communicated to shareholders.

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Objective(1)

Weighting

(1)

The financial objectives exclude the impact of currency fluctuations.

(2)

See definition in Note 23 to ABB’s Consolidated Financial Statements.

(3)

Operating cash flow is defined as net cash provided by operating activities, reversing the impact of interest and taxes. Operational EBIT is defined as Operational EBITDA before excluding depreciation and amortization.

(4)

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 2012, ABB had a target to increase the number of countries that have improved their NPS score.

Orders received

12.5%

Revenues

12.5%

Operational EBITDA(2)

25%

Ratio of operating cash flow to operational EBIT(3)

25%

Net Promoter Score (NPS)(4)

10%

Cost savings

15%

The payout for fully achieving the predefined annual objectives is 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 results in a lower payout, or none at all if performance is below a certain threshold. If the objectives are exceeded, the Board has the discretion to approve a payout that is 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). For 2012, the Board exercised its discretion and awarded a 10 percent higher payout, reflecting the company’s performance against the objectives.

Long-term variable compensation

An important principle of executive compensation at ABB is that it should encourage the creation of value for the company’s shareholders and enable EC members to participate in the company’s success. The company’s Long-Term Incentive Plan (LTIP) is the principal mechanism through which members of the EC and certain other executives are encouraged to create value for shareholders. Awarded annually, LTIPs comprise a performance component and a retention component whose proportions in relation to the base salary are explained below.

Performance component

The performance component of the plan is designed to reward participants for increasing earnings per share(5) (EPS) over a three-year period. EPS was adopted as the performance measure in the performance component of the LTIP in 2012.

(5) 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.

EPS replaces relative total shareholder return (TSR), which was the performance measure used in previous LTIPs. EPS growth (based on net income excluding acquisitions) is one of the financial targets of ABB’s 2015 strategy and is therefore better aligned with published goals than relative TSR, which is the percentage change in ABB’s share price plus dividends over a three-year period, compared with peers.

Payout % of performance component
Payout % of performance component (line chart)

The payout of this part of the plan occurs after three years, based on the Group’s weighted cumulative EPS performance against predefined objectives. The weighted cumulative EPS 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 if performance exceeds the upper threshold. The payout factors are shown in the chart on the right.

At each launch, participants are allocated a reference number of shares that is linked to a percentage of their base salary. In 2012, the percentages were 100 percent for the CEO and 42 percent for the other members of the EC. The payout at the end of the three-year period, if any, will be made in cash.

Under the terms and conditions of the plan, the GNCC decides whether EC members who leave the company before the end of the three-year period forfeit the unvested award, or receive all or a portion of such awards.

Historical payout of performance component
Historical payout of performance component (graphic)

Historical payout of performance component

Of the LTIPs launched since 2006 that have also vested, the only one whose performance component has paid out is the 2007 launch, under which participants, upon vesting, were entitled to receive 92 percent of the performance shares that they had been conditionally granted (see chart above).

Retention component

The second component of the LTIP is designed to retain executives at ABB. Members of the EC are conditionally granted shares, which are awarded after three further years of service to the company.

The reference grant size for the CEO is equivalent to 100 percent of base salary. The other EC members receive a grant from a pool whose reference size is equivalent to 65 percent of their combined base salaries. The CEO recommends to the Board how to allocate shares from this pool to each individual EC member, based on an assessment of their individual performance in the previous calendar year, and the Board takes the final decision.

Starting with the 2012 LTIP, 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 over the three years preceding the launch of the plan. The assessment considers ABB’s performance against its peers according to financial metrics and non-financial measures related to customer satisfaction, integrity, and health and safety.

Following its assessment of ABB’s performance in the period 2009–2011, the Board increased the size of the retention component in the 2012 LTIP by 20 percent for the CEO and by 10 percent in aggregate for the rest of the EC.

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

Under the terms and conditions of the plan, the GNCC decides whether EC members who leave the company before the end of the three-year period forfeit the unvested award, or receive all or a portion of such awards.

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. The Board has decided that, starting January 1, 2013, contracts for new members of the EC will 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.

Acquisition Integration Execution Plan

In the past three years, ABB has invested more than $10 billion in connection with acquisitions as part of its strategy to grow the business profitably and create value for ABB shareholders. The focus has been on companies that fill geographic, end-market or product gaps.

Strict financial criteria are applied to the investments, and the financial objectives are expected to be achieved through a combination of cost and growth synergies. Delivering these synergies depends on the successful integration of the new businesses with those of ABB.

To this end, the Board has established a one-time Acquisition Integration Execution Plan (AIEP) whose goal is to maximize the return on the recent acquisitions of Baldor, Thomas & Betts and Ventyx, and to foster the collaborative behavior required to make the benefits sustainable.

The plan has two parts. The first is intended to reward the achievement of predefined objectives for 2013 related to revenues, operational EBITDA, and customer and employee retention and development, at each of the three acquisitions. Each business accounts for one-third of the first part of the plan. The second part is intended to accelerate collaboration between ABB’s business, technical, functional and local experts, a step which the Board considers vital not only to integrating the acquisitions but also to providing customers with the kind of service and experience that will enable the company to meet the ambitious goals of its 2015 strategy.

The plan was launched in the fourth quarter of 2012 for members of the EC who are expected to be in their positions throughout 2013, excluding the CEO who will participate in the assessment of participants. In addition, Michel Demaré, whose departure from ABB was announced in October 2012, and Eric Elzvik, who joined the EC in February 2013, are not participants in the plan.

The plan consists of conditionally granted shares (capped at a maximum of 768,286 shares). The payout, if any, will occur in 2014 and will be made in shares (70 percent) and cash (30 percent), although participants can elect to receive 100 percent in shares.

EC compensation in 2012

ABB discloses the compensation elements for each member of the EC, going beyond the requirements of the Swiss Code of Obligations.

The table in this section provides an overview of the total compensation of members of the EC in 2012, comprising cash compensation and the estimated value of the conditional grants awarded under the AIEP and under the three-year
LTIP launched in 2012. Cash compensation includes the base salary, the short-term variable compensation for 2012 and pension benefits, as well as the amounts paid by the company to cover other benefits comprising mainly social security contributions. The performance components of LTIPs and the AIEP are valued at grant using the ABB share price and Monte Carlo modeling, an accepted simulation method under U.S. GAAP (the accounting standard used by ABB). The compensation is shown gross (before deduction of employee’s social security and pension contributions).

The base salary and benefits are fixed elements of the annual compensation packages, while the other components are variable. In 2012, fixed compensation represented 27 percent of the CEO’s remuneration and an average of 34 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 Group performance objectives.

The total of base salary and benefits, short-term variable compensation and LTIP awards was 42.5 million Swiss francs in 2012 compared with 37.8 million Swiss francs in 2011 for individuals who were members of the EC at the end of the respective year. This change reflects the addition of one member to the EC as well as the higher award level under the 2012 LTIP. The conditional award in 2012 under the one-time AIEP resulted in an additional 8.4 million Swiss francs, bringing their total compensation to 50.9 million Swiss francs in 2012.

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Name

Base
salary

Short-term
variable
compen- sation(1)

Pension
benefits

Other
benefits(2)

Estimated value of share-based awards granted under the LTI Plan in 2012(3)

2012
Subtotal

Estimated value of share-based awards granted under the one-time AIEP in 2012(3)

2012
Total

 

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(1)

The table above shows accruals related to the short-term variable compensation for the year 2012 for all Executive Committee members, except for Peter Leupp, who received in July 2012 a pro-rata short-term variable compensation payment covering the period of his service as an EC member. For all other Executive Committee members, the short-term variable compensation will be paid in 2013, after the publication of the financial results. In March 2012, the current and former Executive Committee members received the 2011 short-term variable compensation payments totaling CHF 12,102,149. Short-term variable compensation is linked to the objectives defined in the ABB Group’s scorecard. Upon full achievement of these objectives, the short-term variable compensation of the CEO corresponds to 150 percent of his base salary, while for all other Executive Committee members it represents 100 percent of their respective base salary. The Board has the discretion to approve a payout that is 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 Executive Committee), if the objectives are exceeded. For 2012, the Board exercised its discretion and awarded a 10 percent higher payout, reflecting the Company’s performance against the objectives.

(2)

Other benefits comprise payments related to social security, health insurance, children’s education, transportation, tax advice and certain other items.

(3)

The estimated value of the share-based awards is subject to performance and other parameters (e. g. earnings per share) and may therefore vary in value from the above numbers at the date of vesting, January 3, 2014 (AIEP) and May 31, 2015 (LTI Plan). The above amounts have been calculated using the market value of the ABB share on the day of grant and, in the case of the AIEP and the performance component of the LTI Plan, the Monte Carlo simulation model.

(4)

Frank Duggan received 20 percent of his base salary in AED and 80 percent in EUR at a fixed AED/EUR exchange rate for the period January to December 2012. All AED payments were converted into Swiss francs at a rate of 0.2491288 per AED.

(5)

The above compensation figures for Peter Leupp include contractual payments for the period March 1, 2012 to July 31, 2012, but exclude payments to him, after his retirement from the Executive Committee, in his capacity as director of ABB in China and of ABB Limited, India.

Joe Hogan

2,010,011

3,316,500

284,870

431,284

4,115,136

10,157,801

10,157,801

Michel Demaré

1,200,007

1,320,000

271,450

377,968

3,169,425

3,169,425

Gary Steel

805,002

885,500

286,938

172,054

851,003

3,000,497

896,656

3,897,153

Ulrich Spiesshofer

865,673

962,500

235,680

164,948

1,363,655

3,592,456

974,623

4,567,079

Diane de Saint Victor

791,993

880,000

273,583

138,762

899,193

2,983,531

891,085

3,874,616

Bernhard Jucker

950,004

1,045,000

280,372

179,220

1,067,784

3,522,380

1,058,174

4,580,554

Veli-Matti Reinikkala

770,006

847,000

263,892

145,236

865,483

2,891,617

857,673

3,749,290

Brice Koch

816,669

913,000

234,425

212,479

1,099,345

3,275,918

924,511

4,200,429

Tarak Mehta

718,837

803,000

222,181

369,734

820,512

2,934,264

813,119

3,747,383

Frank Duggan(4)

641,963

697,279

313,377

405,734

820,512

2,878,865

835,403

3,714,268

Greg Scheu (joined on May 1, 2012)

450,002

495,000

161,816

42,727

713,574

1,863,119

751,851

2,614,970

Prith Banerjee
(joined ABB on May 7, 2012)

456,523

500,914

137,742

401,148

740,017

2,236,344

389,860

2,626,204

Total Executive Committee members as of Dec. 31, 2012

10,476,690

12,665,693

2,966,326

3,041,294

13,356,214

42,506,217

8,392,955

50,899,172

 

 

 

 

 

 

 

 

 

Peter Leupp (retired from the EC
on March 1, 2012)(5)

496,694

291,960

167,900

206,794

1,163,348

1,163,348

Total former Executive Committee members as of Dec. 31, 2012

496,694

291,960

167,900

206,794

1,163,348

1,163,348

 

 

 

 

 

 

 

 

 

Total

10,973,384

12,957,653

3,134,226

3,248,088

13,356,214

43,669,565

8,392,955

52,062,520

Details of the share-based compensation granted to members of the EC during 2012 are provided in a table of their shareholdings under "EC ownership of ABB shares and options" in section "ABB shareholdings of members of the Board and EC". Consistent with past practice, no loans or guarantees were granted to members of the EC in 2012.

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. In addition to the above awards, seven members of the EC participated in the ninth annual launch of the plan. EC members who participated in that launch are each entitled to acquire up to 580 ABB shares, except for one who is entitled to acquire up to 570 shares, at 17.08 Swiss francs per share, the market share price at the start of that launch.

Members of the EC cannot participate in the Management Incentive Plan (MIP). Any MIP instruments held by EC members (and disclosed under "EC ownership of ABB shares and options" in section "ABB shareholdings of members of the Board and EC" of this Remuneration report) were awarded to them as part of the compensation they received in earlier roles that they held in ABB.

For a more detailed description of ESAP and MIP, please refer to Note 18 to ABB’s Consolidated Financial Statements contained in the Financial review section of this Annual Report.