Note 18
Share-based payment arrangements

The Company has three principal share-based payment plans, as more fully described in the respective sections below. Compensation cost for equity-settled awards is recorded in “Total cost of sales” and in “Selling, general and administrative expenses” and totaled $54 million, $61 million and $73 million in 2016, 2015 and 2014, respectively. Compensation cost for cash-settled awards is recorded in “Selling, general and administrative expenses” and is disclosed in the “WARs”, “LTIP” and “Other share-based payments” sections of this note. The total tax benefit recognized in 2016, 2015 and 2014 was not significant.

At December 31, 2016, the Company had the ability to issue up to 94 million new shares out of contingent capital in connection with share-based payment arrangements. In addition, 29 million shares (of the 76 million shares held by the Company as treasury stock at December 31, 2016) could be used to settle share-based payment arrangements (the remaining shares of treasury stock are held for cancellation – see Note 19).

As the primary trading market for the shares of ABB Ltd is the SIX Swiss Exchange (on which the shares are traded in Swiss francs) and substantially all the share-based payment arrangements with employees are based on the Swiss franc share or have strike prices set in Swiss francs, certain data disclosed below related to the instruments granted under share-based payment arrangements are presented in Swiss francs.

MIP

Under the MIP, the Company offers options and cash-settled WARs to key employees for no consideration.

The options granted under the MIP allow participants to purchase shares of ABB Ltd at predetermined prices. Participants may sell the options rather than exercise the right to purchase shares. Equivalent warrants are listed by a third-party bank on the SIX Swiss Exchange, which facilitates pricing and transferability of instruments granted under this plan. The options entitle the holder to request that the third-party bank purchase such options at the market price of equivalent listed warrants related to that MIP launch. If the participant elects to sell the options, the instruments will thereafter be held by a third party and, consequently, the Company’s obligation to deliver shares will be toward this third party. Each WAR gives the participant the right to receive, in cash, the market price of an equivalent listed warrant on the date of exercise of the WAR. Participants may exercise or sell options and exercise WARs after the vesting period, which is three years from the date of grant. Vesting restrictions can be waived in certain circumstances such as death or disability. All options and WARs expire six years from the date of grant.

Options

The fair value of each option is estimated on the date of grant using a lattice model that uses the assumptions noted in the table below. Expected volatilities are based on implied volatilities from equivalent listed warrants on ABB Ltd shares. The expected term of the options granted is the contractual six-year life of each option, based on the fact that after the vesting period, a participant can elect to sell the option rather than exercise the right to purchase shares, thereby also realizing the time value of the options. The risk-free rate is based on a six-year Swiss franc interest rate, reflecting the six-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous comparable MIP launches.

 

2016

2015

2014

Expected volatility

19%

17%

18%

Dividend yield

4.9%

3.2%

2.9%

Expected term

6 years

6 years

6 years

Risk-free interest rate

-0.5%

-0.3%

0.2%

Presented below is a summary of the activity related to options under the MIP:

 

Number of instruments
(in millions)

Number of shares
(in millions)(1)

Weighted-average exercise price (in Swiss francs)(2)

Weighted-average remaining contractual term (in years)

Aggregate intrinsic value (in millions of Swiss francs)(3)

(1)

Information presented reflects the number of shares of ABB Ltd that can be received upon exercise, as warrants and options have a conversion ratio of 5:1.

(2)

Information presented reflects the exercise price per share of ABB Ltd.

(3)

Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price per share of ABB Ltd.

(4)

The cash received upon exercise amounted to approximately $120 million. The shares were delivered out of treasury stock.

Outstanding at January 1, 2016

399.1

79.8

20.51

 

 

Granted

79.0

15.8

21.50

 

 

Exercised(4)

(36.9)

(7.4)

15.75

 

 

Forfeited

(12.9)

(2.6)

20.47

 

 

Expired

(36.9)

(7.3)

22.52

 

 

Outstanding at December 31, 2016

391.4

78.3

20.98

3.4

75

 

 

 

 

 

 

Vested and expected to vest at December 31, 2016

386.9

77.4

20.97

3.4

75

Exercisable at December 31, 2016

186.8

37.4

21.32

2.0

41

At December 31, 2016, there was $50 million of total unrecognized compensation cost related to non-vested options granted under the MIP. That cost is expected to be recognized over a weighted-average period of 2.1 years. The weighted-average grant-date fair value (per instrument) of options granted during 2016, 2015 and 2014 was 0.47 Swiss francs, 0.39 Swiss francs and 0.49 Swiss francs, respectively. In 2016 and 2015 the aggregate intrinsic value (on the date of exercise) of instruments exercised was $27 million and $10 million, respectively, while in 2014 it was not significant.

Presented below is a summary, by launch, related to instruments outstanding at December 31, 2016:

Exercise price (in Swiss francs)(1)

Number of instruments
(in millions)

Number of shares
(in millions)(2)

Weighted-average remaining contractual term (in years)

(1)

Information presented reflects the exercise price per share of ABB Ltd.

(2)

Information presented reflects the number of shares of ABB Ltd that can be received upon exercise.

25.50

42.8

8.6

0.4

15.75

21.2

4.2

1.4

17.50

14.5

2.9

1.4

21.50

81.2

16.3

2.4

21.00

73.0

14.6

3.7

19.50

80.2

16.0

4.6

21.50

78.5

15.7

5.7

Total number of instruments and shares

391.4

78.3

3.4

WARs

As each WAR gives the holder the right to receive cash equal to the market price of the equivalent listed warrant on date of exercise, the Company records a liability based upon the fair value of outstanding WARs at each period end, accreted on a straight-line basis over the three-year vesting period. In “Selling, general and administrative expenses”, the Company recorded an expense of $14 million in 2016, as a result of changes in both the fair value and vested portion of the outstanding WARs. The amount recorded in 2015 and 2014 was not significant. To hedge its exposure to fluctuations in the fair value of outstanding WARs, the Company purchased cash-settled call options, which entitle the Company to receive amounts equivalent to its obligations under the outstanding WARs. The cash-settled call options are recorded as derivatives measured at fair value (see Note 5), with subsequent changes in fair value recorded in earnings to the extent that they offset the change in fair value of the liability for the WARs. In 2016, 2015 and 2014 the amounts recorded in “Selling, general and administrative expenses” related to the cash-settled call options was not significant.

The aggregate fair value of outstanding WARs was $23 million and $13 million at December 31, 2016 and 2015, respectively. The fair value of WARs was determined based upon the trading price of equivalent warrants listed on the SIX Swiss Exchange.

Presented below is a summary of the activity related to WARs:

Number of WARs (in millions)

Outstanding at January 1, 2016

55.2

Granted

9.3

Exercised

(13.3)

Forfeited

(0.2)

Expired

(3.7)

Outstanding at December 31, 2016

47.3

 

 

Exercisable at December 31, 2016

19.5

The aggregate fair value at date of grant of WARs granted in 2016, 2015 and 2014 was not significant. In 2016 and 2015, share-based liabilities of $7 million and $9 million, respectively, were paid upon exercise of WARs by participants. In 2014, the amount paid was not significant.

ESAP

The employee share acquisition plan (ESAP) is an employee stock-option plan with a savings feature. Employees save over a twelve-month period, by way of regular payroll deductions. At the end of the savings period, employees choose whether to exercise their stock options using their savings plus interest, if any, to buy ABB Ltd shares (American Depositary Shares (ADS) in the case of employees in the United States and Canada – each ADS representing one registered share of the Company) at the exercise price set at the grant date, or have their savings returned with any interest. The savings are accumulated in bank accounts held by a third-party trustee on behalf of the participants and earn interest, where applicable. Employees can withdraw from the ESAP at any time during the savings period and will be entitled to a refund of their accumulated savings.

The fair value of each option is estimated on the date of grant using the same option valuation model as described under the MIP, using the assumptions noted in the table below. The expected term of the option granted has been determined to be the contractual one-year life of each option, at the end of which the options vest and the participants are required to decide whether to exercise their options or have their savings returned with interest. The risk-free rate is based on one-year Swiss franc interest rates, reflecting the one-year contractual life of the options. In estimating forfeitures, the Company has used the data from previous ESAP launches.

 

2016

2015

2014

Expected volatility

20%

20%

18%

Dividend yield

3.7%

3.9%

3.1%

Expected term

1 year

1 year

1 year

Risk-free interest rate

-0.7%

-0.8%

-0.1%

Presented below is a summary of activity under the ESAP:

 

Number
of shares
(in millions)(1)

Weighted-average exercise price (in Swiss francs)(2)

Weighted-
average remaining contractual term (in years)

Aggregate intrinsic value (in millions of Swiss francs)(2),(3)

(1)

Includes shares represented by ADS.

(2)

Information presented for ADS is based on equivalent Swiss franc denominated awards.

(3)

Computed using the closing price, in Swiss francs, of ABB Ltd shares on the SIX Swiss Exchange and the exercise price of each option in Swiss francs.

(4)

The cash received upon exercise was approximately $50 million and the corresponding tax benefit was not significant. The shares were delivered out of treasury stock.

Outstanding at January 1, 2016

3.7

18.78

 

 

Granted

3.4

20.12

 

 

Forfeited

(0.2)

18.84

 

 

Exercised(4)

(2.6)

18.78

 

 

Not exercised (savings returned plus interest)

(0.9)

18.78

 

 

Outstanding at December 31, 2016

3.4

20.12

0.8

4.7

 

 

 

 

 

Vested and expected to vest at December 31, 2016

3.3

20.12

0.8

4.5

Exercisable at December 31, 2016

The exercise prices per ABB Ltd share and per ADS of 20.12 Swiss francs and $20.52, respectively, for the 2016 grant, 18.78 Swiss francs and $19.10, respectively, for the 2015 grant, and 20.97 Swiss francs and $21.81, respectively, for the 2014 grant were determined using the closing price of the ABB Ltd share on the SIX Swiss Exchange and ADS on the New York Stock Exchange on the respective grant dates.

At December 31, 2016, the total unrecognized compensation cost related to non-vested options granted under the ESAP was not significant. The weighted-average grant-date fair value (per option) of options granted during 2016, 2015 and 2014 was 1.24 Swiss francs, 1.07 Swiss francs and 1.19 Swiss francs, respectively. The total intrinsic value (on the date of exercise) of options exercised in 2016, 2015 and 2014 was not significant.

LTIP

The Company has a long-term incentive plan (LTIP) for members of its Executive Committee and selected other senior executives (Eligible Participants), as defined in the terms of the LTIP. The LTIP involves annual conditional grants of the Company’s stock to such Eligible Participants that are subject to certain conditions.

The 2016 and 2015 LTIP launches are each composed of two performance components: (i) a component which is based on the achievement of a consolidated net income threshold and (ii) a component which is based on the Company’s earnings per share performance. The 2014 launch under the LTIP is composed of two components: (i) a performance component based on the Company’s earnings per share performance and (ii) a retention component.

For shares to vest under the threshold net income component of the 2016 and 2015 LTIP launches, the Company’s consolidated net income has to reach a certain level set by the Board of Directors at the launch of the LTIP. The shares will not vest if this threshold is not achieved and will vest at 100 percent if this threshold is equaled or exceeded. In addition, the Eligible Participant has to fulfill the service condition as defined in the terms and conditions of the LTIP.

For the earnings per share performance component of the 2016, 2015 and 2014 LTIP launches, the actual number of shares that will vest at a future date is dependent on (i) the Company’s weighted cumulative earnings per share performance over three financial years, beginning with the year of launch, and (ii) the fulfillment of the service condition as defined in the terms and conditions of the LTIP. The cumulative earnings per share performance is weighted as follows: 33 percent of the first year’s result, 67 percent of the second year’s result and 100 percent of the third year’s result. The actual number of shares that ultimately vest will vary depending on the weighted cumulative earnings per share outcome, interpolated between a lower threshold (no shares vest) and an upper threshold (the number of shares vesting is capped at 200 percent of the conditional grant).

Under the retention component of the 2014 LTIP launch, each Eligible Participant was conditionally granted an individually defined maximum number of shares which fully vest at the end of the respective vesting periods (if the participant remains an Eligible Participant until the end of such period).

Under the threshold net income component of the 2016 and 2015 LTIP launches, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in shares rather than in cash. For the 2016 and 2015 LTIP launches, under the earnings per share performance component, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in shares rather than in cash, while for the 2014 LTIP launch an Eligible Participant receives, in cash, 100 percent of the value of the shares that have vested. Under the retention component of the 2014 LTIP launch, an Eligible Participant receives 70 percent of the shares that have vested in the form of shares and 30 percent of the value of the shares that have vested in cash, with the possibility to elect to also receive the 30 percent portion in shares rather than in cash.

Presented below is a summary of activity under the LTIP:

 

Number of Shares Conditionally Granted

Weighted-average grant-date fair value per share (Swiss francs)

 

Equity & Cash or choice of 100% Equity Settlement(1)
(in millions)

Only Cash
Settlement(2)
(in millions)

Total
(in millions)

(1)

Shares that, subject to vesting, the Eligible Participant can elect to receive 100 percent in the form of shares.

(2)

Shares that, subject to vesting, the Eligible Participant can only receive in cash.

Nonvested at January 1, 2016

2.1

0.7

2.8

20.96

Granted

1.0

1.0

20.77

Vested

(0.5)

(0.2)

(0.7)

20.93

Forfeited

(0.2)

(0.2)

20.95

Nonvested at December 31, 2016

2.6

0.3

2.9

20.89

Equity-settled awards are recorded in the “Capital stock and additional paid-in capital” component of stockholders’ equity, with compensation cost recorded in “Selling, general and administrative expenses” over the vesting period (which is from grant date to the end of the vesting period) based on the grant-date fair value of the shares. Cash-settled awards are recorded as a liability, remeasured at fair value at each reporting date for the percentage vested, with changes in the liability recorded in “Selling, general and administrative expenses”.

At December 31, 2016, there was $19 million of total unrecognized compensation cost related to equity-settled awards under the LTIP. That cost is expected to be recognized over a weighted-average period of 2 years. The compensation cost recorded in 2016, 2015 and 2014 for cash-settled awards was not significant.

The aggregate fair value, at the dates of grant, of shares granted in 2016, 2015 and 2014 was $22 million, $23 million and $22 million, respectively. The total grant-date fair value of shares that vested during 2016, 2015 and 2014 was $15 million, $12 million and $15 million, respectively. The weighted-average grant-date fair value (per share) of shares granted during 2016, 2015 and 2014 was 20.77 Swiss francs, 21.54 Swiss francs and 20.35 Swiss francs, respectively.

For the net income threshold component of the 2016 and 2015 LTIP launches, the fair value of the granted shares is based on the probability of reaching the threshold as well as on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards. For the earnings per share component of the LTIP launches, the fair value of granted shares is based on the market price of the ABB Ltd share at grant date for equity-settled awards and at each reporting date for cash-settled awards, as well as the probable outcome of the earnings per share achievement that would result in the vesting of the highest number of shares, as computed using a Monte Carlo simulation model. The main inputs to this model are the Company’s and external financial analysts’ revenue growth rates and Operational EBITA margin expectations. For the retention component under the 2014 LTIP launch, the fair value of granted shares for equity-settled awards is based on the market price of the ABB Ltd share on grant date and the fair value of granted shares for cash-settled awards is based on the market price of the ABB Ltd share at each reporting date.

Other share-based payments

The Company has other minor share-based payment arrangements with certain employees. The compensation cost related to these arrangements in 2016, 2015 and 2014 was not significant.