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 ABB 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 an equitable 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 ABB’s compensation principles. Hostettler, Kramarsch & Partner AG (hkp), an independent consultant specializing in performance management and compensation, provides advice to the GNCC in the area of remuneration. 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 while 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 2013 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 ABB performance objectives, and a long-term variable component designed to reward the creation of shareholder value and the executive’s commitment to the company.

The main components of executive compensation in 2013 are summarized in the following chart and described in detail below:

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Base salary

Cash

Paid monthly

Competitive in relevant 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 ABB objectives, with a cap on the payout for over performance

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

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 until the end of the vesting period

 

 

 

(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.

Performance considerations in each component of remuneration

Performance considerations in each component of remuneration (graphic)

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

Annual base salary

The base salary for members of the EC is set taking into account positions of comparable 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 the ABB Supplementary Insurance Plans (the regulations are available at www.abbvorsorge.ch). The compensation of EC members also includes social security contributions and other benefits, as outlined in the table in section 2.3 of this Remuneration report. 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 ABB 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 Board determines the short-term ABB performance objectives taking into account the recommendation of the GNCC.

The 2013 ABB metrics, shown in the table below, were aligned with ABB’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 and major acquisitions.

(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 impact of interest, taxes and restructuring-related activities. 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 2013, ABB had a target to increase the proportion of countries that have improved their NPS compared to the previous year.

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 2013, the payout was 100 percent of the target short-term variable compensation, reflecting the company’s performance.

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.

Under the terms and conditions of the plan, the Board 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. The Board also decides whether to award LTIPs to new participants or change the size of an LTIP award to an existing participant for up to six months after the launch of a plan. These Board decisions are made taking into account the recommendation of the GNCC.

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. EPS was adopted as the performance measure in the performance component of the LTIP in 2012, replacing relative total shareholder return used in previous launches of LTIP.

(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.

Payout % of reference number of shares under the performance component
Payout % of performance component (line chart)

The payout is based on ABB’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 2013, the percentages were 67 percent for the current CEO and 42 percent for the other members of the EC. As shown in the chart on the right, the payout can range from zero to 200 percent of the reference number of shares granted under the performance component. The payout at the end of the three-year period, if any, will be made in cash.

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 below).

Historical payout of performance component

Historical payout of performance component (graphic)

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 at the end of the vesting period, generally three years from grant date, subject to fulfillment of the vesting conditions.

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 Board allocates shares from this pool to each individual EC member, based on an assessment of their individual performance in the previous calendar year.

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 (related to revenue growth, Operational EBITDA, P/E ratio, free cash flow, conversion ratio and share-price development) and non-financial measures (related to customer satisfaction, integrity, and health and safety).

Based on its assessment of ABB’s performance in the period 2010–2012 (particularly its NPS development and cash flow generation), the Board increased the size of the retention component in the 2013 LTIP by 5 percent in aggregate for all EC participants.

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

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 members of the EC 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.

EC compensation in 2013

The tables in this section provide an overview of the total compensation of members of the EC in 2013, comprising cash compensation and share-based compensation. Cash compensation included the base salary, accrued short-term variable compensation for 2013, pension benefits, as well as other benefits comprising mainly social security and health insurance contributions. Share-based compensation includes grants under the LTIP and other share-based awards. The performance component of LTIPs is valued at grant 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. 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 2013, fixed compensation represented 27 percent of the CEO’s remuneration and an average of 32 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.

For the EC, the total cash-based compensation was 29.0 million Swiss francs in 2013 compared with 30.3 million Swiss francs in 2012, while the value at grant of the conditional LTIP award compensation was 13.1 million Swiss francs in 2013 compared with 13.4 million Swiss francs in 2012. The difference in compensation is mainly attributable to changes in the composition of the EC during 2013.

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Name

Base
salary

Short-term
variable
compen- sation(1)

Pension
benefits

Other
benefits(2)

2013
Total cash-based compen- sation

Estimated value of share-based grants under the LTIP in 2013(3)

Estimated value of replacement and special share-based grants in 2013(3)

2013
Total (incl. conditional share-based grants)

 

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(1)

The table above shows accruals related to the short-term variable compensation for the year 2013 for all EC members, except for Prith Banerjee, who received, in May 2013, a pro-rata short-term variable compensation payment covering his period of service as an EC member in 2013. For all other EC members, the short-term variable compensation will be paid in 2014, after the publication of the financial results. In March 2013, the current and former EC members received the 2012 short-term variable compensation payments totaling CHF 12,641,252. 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 EC 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 EC), if the objectives are exceeded.

(2)

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

(3)

At the day of vesting (June 5, 2016) the value of the share-based awards granted under the LTIP may vary from the above numbers due to changes in ABB’s share price and the outcome of the performance (earnings per share) parameter. The LTIP is also subject to service conditions, while the other share-based awards are subject to service and/or other conditions. 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 performance component of the LTIP, the Monte Carlo simulation model.

(4)

The above compensation figures for Ulrich Spiesshofer represent compensation for the period January 1 to September 14, 2013, in his capacity as Head of the Discrete Automation and Motion division and thereafter for his role as Chief Executive Officer. His annual base salary as CEO is CHF 1,600,000.

(5)

Jean-Christophe Deslarzes received a replacement share grant of 144,802 shares for foregone benefits with his previous employer, representing a grant date fair value of CHF 3,381,127. Of the total, 78,983 shares vest on November 15, 2016, while 65,819 shares vest on November 15, 2018.

(6)

Diane de Saint Victor received a special retention share grant of 150,000 shares representing a grant date fair value of CHF 3,142,500. The shares vest on December 31, 2015.

(7)

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 2013. All AED amounts were converted into Swiss francs at a rate of CHF 0.2422914 per AED.

(8)

On May 16, 2013, Greg Scheu received a special bonus of CHF 168,750, which was settled in shares (7,942 shares).

Ulrich Spiesshofer (appointed CEO as of September 15, 2013)(4)

1,097,346

1,336,375

247,293

232,225

2,913,239

2,859,135

5,772,374

Eric Elzvik
(joined the EC on February 1, 2013)

779,173

779,167

238,437

228,478

2,025,255

981,672

3,006,927

Jean-Christophe Deslarzes (joined ABB on November 15, 2013)(5)

107,938

108,611

20,557

26,576

263,682

991,307

3,381,127

4,636,116

Diane de Saint Victor(6)

1,000,001

1,000,000

283,181

196,137

2,479,319

1,154,907

3,142,500

6,776,726

Frank Duggan(7)

666,322

676,257

322,308

634,447

2,299,334

910,437

3,209,771

Greg Scheu(8)

731,259

742,500

251,428

341,149

2,066,336

881,952

2,948,288

Pekka Tiitinen (joined the EC on September 15, 2013)

206,508

206,111

55,892

49,545

518,056

801,222

1,319,278

Tarak Mehta

760,424

766,500

230,159

363,814

2,120,897

910,437

3,031,334

Veli-Matti Reinikkala

770,006

770,000

270,799

204,648

2,015,453

585,598

2,601,051

Bernhard Jucker

965,842

969,000

287,455

239,366

2,461,663

1,246,516

3,708,179

Claudio Facchin (joined the EC on December 1, 2013)

58,334

58,334

19,373

3,790

139,831

816,396

956,227

Total current Executive Committee members

7,143,153

7,412,855

2,226,882

2,520,175

19,303,065

12,139,579

6,523,627

37,966,271

 

 

 

 

 

 

 

 

 

Joe Hogan
(CEO until September 15, 2013)

1,423,758

2,135,625

207,007

948,293

4,714,683

4,714,683

Michel Demaré
(CFO until January 31, 2013)

100,001

100,000

23,154

9,618

232,773

232,773

Gary Steel (EC member until November 15, 2013)

704,376

704,375

255,253

202,724

1,866,728

1,866,728

Prith Banerjee
(EC member until May 31, 2013)

291,667

218,750

101,173

233,192

844,782

844,782

Brice Koch (EC member until November 30, 2013)

773,285

776,050

221,812

249,888

2,021,035

1,005,590

3,026,625

Total former Executive Committee members

3,293,087

3,934,800

808,399

1,643,715

9,680,001

1,005,590

10,685,591

 

 

 

 

 

 

 

 

 

Total

10,436,240

11,347,655

3,035,281

4,163,890

28,983,066

13,145,169

6,523,627

48,651,862

Furthermore, in 2013, certain former EC members received contractual compensation for the period after leaving the EC, as shown in the table below. The compensation included the base salary, accrued short-term variable compensation for 2013, pension benefits, as well as other benefits comprising mainly social security and health insurance contributions. The compensation is shown gross (i.e. before deduction of employee’s social insurance and pension contributions).

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Name

Base salary

Short-term variable compensation(1)

Pension
benefits

Other
benefits(2)

2013
Total cash-based compensation

 

(CHF)

(CHF)

(CHF)

(CHF)

(CHF)

(1)

The short-term variable compensation will be paid in 2014, after the publication of the financial results.

(2)

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

(3)

The above compensation figures of Joe Hogan represent compensation for the period September 16 to December 31, 2013, during which he was acting as a Senior Adviser to the ABB Board.

(4)

The above compensation figures of Michel Demaré, Gary Steel and Brice Koch represent contractual compensation for the period following their departure from the EC to December 31, 2013.

Joe Hogan
(CEO until September 15, 2013)(3)

586,253

879,375

85,239

323,314

1,874,181

Michel Demaré
(CFO until January 31, 2013)(4)

1,100,006

1,100,000

255,549

428,053

2,883,608

Gary Steel
(EC member until November 15, 2013)(4)

100,626

100,625

36,465

14,276

251,992

Brice Koch
(EC member until November 30, 2013)(4)

70,551

70,550

20,174

34,447

195,722

Total

1,857,436

2,150,550

397,427

800,090

5,205,503

Details of the share-based compensation granted to members of the EC during 2013 are provided in a table of their shareholdings in section "ABB shareholdings of membersof the Board and EC". Consistent with past practice, no loans or guarantees were granted to members of the EC in 2013.

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. Nine members of the EC participated in the 10th annual launch of the plan. EC members who participated in that launch are each entitled to acquire up to 440 ABB shares at 22.90 Swiss francs per share, the market share price at the start of that launch. In addition, to mark the 10-year anniversary of ESAP, for every 10 shares purchased at the end of the 10th ESAP, each participant will receive one ABB share for free.

Members of the EC cannot participate in the Management Incentive Plan (MIP). Any MIP instruments – warrants, options and warrant appreciation rights (WARs) – held by EC members at December 31, 2013 (and disclosed under ABB shareholdings of members of the Board and EC), 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 Share-based payment arrangements” to ABB’s Consolidated Financial Statements contained in the Financial review of ABB Group section of this Annual Report.