Outlook: changes to compensation system for 2017

In reviewing the EC compensation system and taking into account the feedback received by shareholders and other stakeholders, the Board decided to make a number of changes that will be implemented for 2017.

The successful implementation of Stage 3 of the Next Level Strategy will depend to a large extent on the leadership capabilities of our executives. Driving the culture of ownership and entrepreneurship throughout the organization is critical, and to support this goal the Board has decided to strengthen the link between individual performance and variable compensation. A stronger emphasis will be put on the individual performance in the short-term variable compensation as of 2017, while the LTIP will continue to depend fully on Group performance. The combination of Group objectives in the LTIP and of individual and Group objectives in the short-term variable compensation provides a balance designed to generate and reward optimal performance of both the Group and the individual EC members.

Short-term variable compensation

The short-term variable compensation will reward Group performance (between 35 and 50 percent weight) and individual performance (between 50 and 65 percent weight) as described in Exhibit 16. The individual performance includes regional objectives for the Region Presidents, divisional objectives for the Division Presidents and functional objectives for the Corporate Officers, i.e. the CFO, CHRO and General Counsel.

Exhibit 16: Weight of Group and individual objectives for EC members

 

CEO (no change)

Division and region presidents

Corporate Officers (CFO, CHRO, General Counsel)

Group objectives

80%

35%

50%

Individual objectives

20%

65%
(divisional/regional and personal objectives)

50%
(functional and personal objectives)

The other parameters of the short-term variable compensation, such as the target setting and the maximum payout factor, remain unchanged.

Long-term variable compensation

The LTIP will continue to be built around two performance components. While P2 (cumulated EPS) remains unchanged, P1 will be modified as follows:

  • The net income threshold will be replaced by a payout curve in order to remove the binary character of the payout. A net income target will be determined, corresponding to a 100 percent payout, as well as a threshold amount below which there is no payout, and an amount above which the payout is capped at 150 percent. Achievement levels between the threshold, the target and the cap will be calculated by linear interpolations. Net income performance will be measured as an average of each year’s performance over the three-year vesting period.
  • To further reinforce the forward looking performance nature of the above modification, the Board will no longer conduct an assessment of ABB’s past performance (over the three financial years preceding the grant) in order to determine an adjustment to the grant size pool. The Board, however, based on the recommendations of the CEO for the EC members and its own assessment of the CEO, may still vary the grant size of individual EC members to reflect their individual performance and contributions to the company.

In summary, half of the fair value at grant of the LTIP will be based on the achievement of the cumulative EPS target over the three-year vesting period and half on the achievement of the net income target measured over the three-year vesting period.