Compensation governance

Shareholders’ engagement

Shareholders have been given a greater say on compensation matters in recent years. They approve the Articles of Incorporation that outline the principles of compensation, including the requirement for shareholders each year to approve the maximum aggregate compensation amounts of the Board and the EC. The provisions of the Articles of Incorporation on compensation can be found on ABB’s Corporate governance website www.abb.com/about/corporate-governance and are summarized below:

  • Compensation Committee (Articles 28 to 31): The CC is composed of a minimum of three members who are elected individually by the shareholders at the AGM for a period of one year. The CC supports the Board in establishing and reviewing the compensation strategy, principles and programs, in preparing the proposals to the AGM on compensation matters and in determining the compensation of the Board and of the EC. The responsibilities of the CC are defined in more detail in the ABB Ltd Board Regulations & Corporate Governance Guidelines, which are available on ABB’s Corporate governance website.
  • Compensation principles (Article 33): Compensation of the members of the Board consists of fixed compensation only. Compensation of the members of the EC consists of fixed and variable compensation. Variable compensation may comprise short-term and long-term elements. Compensation may be paid in cash, shares or other benefits.
  • “Say-on-pay” votes (Article 34): Shareholders approve the maximum aggregate amount of compensation of the Board for the following Board term and of the EC for the following financial year.
  • Supplementary amount for new EC members (Article 35): If the maximum approved aggregate compensation amount is not sufficient to also cover the compensation of newly promoted/hired EC members, up to 30 percent of the last approved maximum aggregate amount shall be available as a supplementary amount to cover the compensation of such new EC members.
  • Credits (Article 37): Credits may not be granted to members of the Board or of the EC.

Shareholders also have a consultative vote on the prior year’s Compensation report at the AGM. The Compensation report describes the compensation principles and programs as well as the governance framework related to the compensation of the Board and EC. The report also provides details of the compensation awarded to the members of the Board and of the EC in the prior calendar year.

The Compensation report is written in accordance with the Ordinance against Excessive Remuneration in Stock Listed Corporations (Ordinance), the standard relating to information on Corporate Governance of the SIX Swiss Exchange, the rules of the stock markets of Sweden and the United States where ABB’s shares are also listed, and the principles of the Swiss Code of Best Practice for Corporate Governance of economiesuisse.

Authority levels in compensation matters

The CC acts in an advisory capacity while the Board retains the decision authority on compensation matters, except for the maximum aggregate compensation amounts of the Board and of the EC, which are subject to the approval of shareholders at the AGM. The authority levels of the different bodies on compensation matters are detailed in Exhibit 2.

Proposal

Recommendation

Approval

Exhibit 2: Authority levels in compensation matters

 

 

CEO

CC

Board

 

AGM

Compensation policy including incentive plans

 

 

 

Maximum aggregate compensation amount EC

 

 

CEO compensation

 

 

 

Individual compensation EC members

 

 

Performance target setting and assessment CEO

 

 

 

Performance target setting and assessment EC

 

 

Shareholding requirements CEO and EC

 

 

Maximum aggregate compensation amount Board

 

 

 

Individual compensation of Board members

 

Consultative vote

Compensation report

 

 

 

Activities of the CC in 2016

The CC meets as often as business requires but at least four times a year. In 2016, the CC held six meetings and performed the activities described in Exhibit 3. Details on meeting attendance of the individual CC members are provided in the Corporate governance report.

Exhibit 3: CC activities during 2016

Performance: items relating to past performance cycle

Individual performance assessment of CEO and EC members

Performance assessment for short-term variable compensation

Look-back assessment of ABB’s performance over past three years

Payout of long-term variable compensation

Performance: items relating to upcoming performance cycle

Setting of performance targets for short-term variable compensation

Setting of performance targets for long-term variable compensation

Quarterly updates on status of various performance plans

EC compensation review and planning

Review of EC compensation (incentive structure, levels and mix) relative to external benchmarks

Recommendation of individual compensation of EC members

Review of pensions and benefits

Review of shareholding level of each EC member

Board compensation

Comparison of compensation levels against external benchmarks

Recommendation of individual compensation of Board members

Compliance and regulatory

Preparation of Compensation report for publication

Preparation of maximum aggregate compensation amount of EC to be submitted to AGM vote

Preparation of maximum aggregate compensation amount of Board to be submitted to AGM vote

The Chairman of the CC reports to the full Board after each CC meeting. The minutes of the meetings are available to the members of the Board. As a general rule, the CEO, the Chief Human Resources Officer (CHRO) and the Head of Compensation and Benefits attend the CC meetings in an advisory capacity. The Chairman of the CC may decide to invite other executives as appropriate. Executives do not attend the meetings or the parts of the meetings in which their own compensation and/or performance are being discussed.

The CC may decide to consult an external advisor for compensation matters. In 2016, Hostettler & Company (HCM) and PricewaterhouseCoopers (PwC) were mandated to provide services related to executive compensation matters. HCM has no other mandate with ABB. Apart from its CC advisory role, PwC also provides human resources, tax and advisory services to ABB. In addition, support and expertise are provided to the CC by internal compensation experts such as the CHRO and the Head of Compensation and Benefits.