Executive Committee compensation

Compensation principles

The Board considers the Group’s compensation system an important factor in attracting, motivating and retaining people with the talent necessary to strengthen ABB’s position as a global leader in power and automation.

The revised EC compensation system, which was first described in the 2014 Compensation report, creates a framework to provide competitive compensation and to encourage employees to deliver outstanding results while rewarding Group and individual performance in a balanced way. At the same time, a balance between fixed and variable compensation and between short- and long-term incentives is designed to align the interests of EC members with those of other stakeholders. The objective is to ensure that their performance is sustainable without excessive risk taking.

The system is designed to support the achievement of financial targets and improvements in key operations, and to drive the leadership behaviors required for focused change. To help achieve these goals, the Board has developed ABB’s key principles of EC compensation, described below:

Linked and balanced

Compensation is linked to the Next Level strategy and performance through ambitious individual and Group objectives, robust performance monitoring and a sound balance between Group and individual performance.


Annual base salaries of EC members are set between the market median and upper quartile in order to attract suitable talent.

Performance driven

Ambitious objectives are set in ABB’s planning processes, and variable pay is aimed at the upper quartile level when these objectives are met.

Comprehensive KPIs

All performance metrics support the development of earnings per share and cash return on invested capital, and cover financial, operational, change and behavioral performance.

Market tested

Compensation mix and levels are tested annually against benchmarks that include selected ABB peers and appropriate markets in which ABB operates.

Compensation governance


Alignment of strategy, performance and compensation

The Board defines the ultimate direction of the business of ABB and regularly reviews progress on the strategy. Based on these reviews, the Board sets annual budgets and performance targets, and ensures that the company’s compensation arrangements support implementation of the strategy and reflect performance (see Exhibit 5).

Exhibit 5: Annual review of the business and performance cycle
Executive Committee compensation – Annual review of the business and performance cycle (graphic)Executive Committee compensation – Annual review of the business and performance cycle (graphic)

*AR — annual results; QR — quarterly results
To effectively align strategy, performance and compensation, the target setting and review processes are directly linked to the financial and budget processes.

The Board and CC have direct oversight of compensation principles and EC compensation at ABB. The CC is responsible for developing the general compensation principles and practices of ABB and for recommending them to the full Board, which takes the final decisions (see Exhibit 6).

Exhibit 6: Approval process for EC compensation
Executive Committee compensation – Approval process for EC compensation (graphic)Executive Committee compensation – Approval process for EC compensation (graphic)

Shareholders decide the maximum aggregate compensation for the EC, while the Board decides the compensation of individual EC members.

The CC recommends to the Board specific proposals on EC compensation that are consistent with ABB’s compensation principles and practices.


ABB uses benchmarks and third-party consultants to evaluate positions throughout the company, assess the competitiveness of EC compensation levels, and to analyze market trends with regard to EC compensation design and mix. In 2015, Hostettler & Company (HCM), an independent consultant specializing in performance management and compensation, provided advice to the CC in the area of compensation. HCM has no other mandate with ABB.

All EC and other senior positions in ABB have been evaluated using a consistent methodology of the Hay Group, whose job evaluation system is used by more than 10,000 companies around the world. This approach provides a meaningful, transparent and consistent basis for comparing compensation levels at ABB with those of equivalent jobs at other companies that have been evaluated using the same criteria.

The Board primarily uses the General Pan-European Market data in Hay’s annual Top Executive Compensation in Europe survey to set EC compensation, which is targeted to be above the median values for the market. Other references include Hay’s data on the Swiss and European industry markets and on US peers (see Exhibit 7).

Exhibit 7: List of benchmarks and peer groups, and the rationale for their use







Main benchmark

General Pan-European Market

360 largest European companies of the FT Europe 500 listing

Stable data points




References to stress-test main benchmark

Global Industry Group

Peer companies selected considering business, geographic presence and size

Peer comparison
Specific enough to benchmark compensation design

Swiss market

SMI and SMIM companies that are included in Hay’s General Pan-European Market data

Comparison with other Swiss companies

US market

US peers of similar size and industry

As information

Share ownership requirements

The Board aims to align EC members’ interests with those of shareholders. To maintain focus on the long-term success of the company, EC members are required to build up a holding of ABB shares that is equivalent to a multiple of their base salary (see Exhibit 8).

Exhibit 8: Share ownership requirements for EC members

Chief Executive Officer

5 × base salary

Other EC members

4 × base salary

Only shares owned by an EC member and the member’s spouse are included in the share ownership calculation. Vested and unvested options are not considered for this purpose.

The CC reviews the status of EC share ownership on an annual basis. It also reviews the required shareholding amounts annually, based on salary and expected share price developments. As the level of the shareholding requirement is high relative to market practice, the Board has determined that members of the EC should generally aim to reach these multiples within five years of their appointment.

Key contractual provisions

Notice and 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 EC members no longer include a provision extending compensation for up to 12 additional months if their employment is terminated by ABB and they do not find alternative employment within the notice period that pays at least 70 percent of their compensation. In accordance with Swiss law and ABB’s Articles of Incorporation, the contracts for the other EC members were amended in 2015 to exclude this provision.

Non-compete agreements have been agreed with EC members for a period of 12 months after their employment. Compensation for such agreements, if any, may not exceed the EC member’s last total annual compensation.

Malus and clawback

Any long-term incentive compensation paid to members of the EC is subject to malus and clawback rules if a plan participant has been involved in illegal activity. This means that the Board of Directors may decide not to pay any unpaid or unvested incentive compensation (malus), or may seek to recover incentive compensation that has been paid in the past (clawback).

Clauses on changes of control

In accordance with Swiss law, EC members do not receive golden parachutes or other special benefits in the event of a change of control.

Credits and loans

No credits and loans may be granted to a member of the EC.

Components of EC Compensation

The compensation of EC members consists of a base salary and benefits, a short-term variable component dependent on annual performance objectives, and a long-term variable component, also linked to performance (see Exhibit 9).

The Board considers individual performance, experience, potential and the prevailing market conditions and benchmarks when setting each member’s compensation.

The components of EC compensation can vary in size. Exhibit 10 shows the relative proportions of the components under minimum, target and maximum scenarios.

Exhibit 10: Compensation components under various scenarios
Executive Committee compensation – Compensation components under various scenarios (graphic)Executive Committee compensation – Compensation components under various scenarios (graphic)

Fixed compensation – Annual base salary and benefits

The base salary paid to EC members is fixed and reviewed annually. The compensation of EC members also includes benefits, including those related to pensions and social security. Tax equalization is provided 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 paid in Switzerland.

Variable compensation

Short-term variable compensation

As of 2015, short-term variable compensation for each EC member is based on a balance between the Group’s results and the member’s individual performance. It reflects the Board’s aim to:

  • align incentives more closely to the role of each EC member in implementing the Next Level strategy in his or her areas of responsibility;
  • strengthen rewards for outstanding individual performance; and
  • achieve a better balance in compensation between company and individual performance.

Group objectives are aligned with the strategic targets of our Next Level strategy that have been communicated to shareholders and have a weighting of 80 percent for the CEO and 65 percent for the other EC members.

Individual objectives are aligned with each executive’s responsibilities. They include metrics that help the management to assess whether the results are achieved in a sustainable way, with the appropriate processes and changes required to deliver the intended long-term results. Individual objectives have a weighting of 20 percent for the CEO and 35 percent for other EC members (see Exhibit 11).

Exhibit 11: Short-term variable compensation objectives and weighting







Other EC

Group objectives

4–6 parameters (eg, orders received, revenues, operational EBITA, operating cash flow)



Individual objectives
(tailored to function and responsibilities)

May include:

  • Additional financial objectives
  • Operational execution metrics
  • Goals under change programs
  • Leadership objectives



Exhibit 12: Payout of short-term variable compensation
Executive Committee compensation – Payout of short-term variable compensation (graphic)Executive Committee compensation – Payout of short-term variable compensation (graphic)

Payout of short-term variable compensation, if any, is proportional to the calculated performance up to the level at which it is capped.

Group and individual objectives are specific and challenging. Fully achieving the objectives (“on target” in Exhibit 12) results in a payout equivalent to 150 percent of the base salary for the CEO and 100 percent of the base salary for other members.

Performance that is below these objectives results in a lower payout, or none at all if performance is below a certain threshold for each of the objectives. If the performance targets are exceeded, the payout will be proportional to the degree of performance achieved, but only up to the level at which it is capped (150 percent), as shown in Exhibit 12. Previously, the size of the payout for exceeding the objectives was at the Board’s discretion up to the cap.

Long-term variable compensation as of 2015

Long-term variable compensation for EC members comprises annual conditional share grants under the Long Term Incentive Plan (LTIP), which is aimed at driving shareholder value creation in a sustainable manner. It rewards the achievement of predefined performance goals over a three-year vesting period.

The former “retention” and “performance” components of LTIP have evolved into two performance components:

  • a P1 component which is tied to ABB’s achievement of a threshold net income in the financial year prior to the end of the vesting period, and
  • a P2 component which is tied to the achieved weighted cumulative earnings-per-share (EPS) over the vesting period.

The P1 and P2 components are equally weighted in terms of the target fair value at grant, whereas in LTIP grants prior to 2015 the “retention” component has a heavier weighting compared to the “performance” component (approximately 60:40 weighting).

Determination of conditional grant size in shares

The numbers of shares conditionally granted in an LTIP launch is determined as follows:

  • A reference value for the LTIP is first established as a multiple of the CEO and EC members’ annual base salary. In 2015, the multiples were 200 percent for the CEO and 107 percent for the other EC members. As the P1 and P2 components are equally weighted, the reference value of these components for the CEO and the other EC members for the 2015 LTIP were as follows:


P1 component

P2 component










  • The reference value of the P1 component for the CEO as an individual and the other EC members as a pool may be increased or decreased by the Board by up to 25 percent. The increase or decrease is based on the Board’s assessment of ABB’s performance over the three financial years preceding the grant, both in absolute terms and relative to a peer group comprising Alstom, Eaton, Emerson, GE, Honeywell, Legrand, Schneider and Siemens. The Board then allocates from this pool to the individual EC members (other than the CEO) based on an assessment of their individual performance as recommended by the CEO.
  • The conditional grant size in numbers of shares is then finally determined for each EC member by reference to the average closing prices of ABB shares over the 20 trading days following the Board’s decision to launch an LTIP grant.

Determination of payout percentages at vesting

To vest at the end of the three-year vesting period, the following performance conditions must be met:

  • For the P1 component, ABB has to achieve the threshold net income level set by the Board at the launch of the LTIP. The component will not vest if this threshold is not achieved and will vest at 100 percent if this threshold is equalled or exceeded.
  • For the P2 component, the percentage of shares that may vest (the payout percentage) is based on ABB’s EPS performance against an EPS objective set by the Board at the launch of the LTIP. This EPS objective is based on an outside-in view, taking into account the growth expectations, risk profile, investment levels and profitability levels that are typical for the industry. This outside-in approach in setting EPS objectives for the LTIP assumes that investors expect a risk-adjusted return on their investment, which is based on market value (and not book value) and translates such expected returns over a three-year period into EPS targets. The weighted cumulative EPS result is calculated as 33 percent of the EPS in the first financial year plus 67 percent in the second financial year plus 100 percent in the third financial year. There is no payout if the lower threshold is not reached and payout is capped at 200 percent of the conditionally granted shares if performance exceeds the upper threshold. The payout percentages are shown in Exhibit 13.
Exhibit 13: Alignment with shareholders by linking payout of P2 component to EPS development
Executive Committee compensation – Alignment with shareholders by linking payoutExecutive Committee compensation – Alignment with shareholders by linking payout

The LTIP rewards participants for increasing EPS over a three-year period. The payout of the P2 component is based on ABB’s weighted cumulative EPS performance against predefined objectives.

The ABB share price and Monte Carlo modeling are used to value the P2 share grant at grant date. The model is a mathematical technique that calculates a range of outcomes and the probability that they will occur. It is an accepted simulation method under US generally accepted accounting principles (US GAAP – the accounting standard used by ABB).

To further strengthen the alignment of EC members’ interests with those of shareholders, both P1 and P2 components are settled in shares (70 percent) and cash (30 percent), although participants can elect to receive 100 percent in shares. This is a change from previous grants, in which the “performance” component was fully settled in cash.

Level and development of EC compensation in 2015


The distribution of EC compensation by component in 2015 is set out in Exhibits 14 and 15. As shown in Exhibit 14, there is an appropriate balance of components, with a significant emphasis on performance-related compensation through both the short-term and long-term variable components.

The ratio of fixed to variable components in any given year depends on the performance of the individuals and of the company against predefined ABB performance objectives. In 2015, variable compensation represented 69 percent of the CEO’s compensation and an average of 55 percent for the other EC members.

EC members received a total compensation of CHF 45.5 million in 2015 compared with CHF 38.7 million in 2014. This is principally due to the addition of one EC member and to the higher performance-based payout on short-term variable compensation. The other main factor was the higher grant reference value of the P2 component of the long-term incentive plan for the CEO in 2015, compared with the reduced value he was awarded for his first full year in office. EC membership was subsequently reduced in January 2016 to the same size as in 2014 as part of the organizational realignment under the second stage of the Next Level strategy.

Exhibit 14: Split of fixed and variable compensation components 2015
Executive Committee compensation – Split of fixed and variable compensation components 2015 (graphic)Executive Committee compensation – Split of fixed and variable compensation components 2015 (graphic)

Exhibit 15: Total compensation of EC members (in CHF million)






For an overview of compensation by individual and component in each of these years, see Exhibit 20 and Exhibit 21 in the Compensation and share ownership tables section.

Base salaries



Pension benefits



Other benefits



Total fixed compensation






Short-term variable compensation



Long-term variable compensation



Total variable compensation



Total compensation



Base salary and benefits

The base salaries of EC members rose in aggregate by 7.6 percent, mainly representing the addition of one member to the EC on January 1, 2015 (see Exhibit 20).

In 2015, the Board commissioned Towers Watson to survey pension conditions of top executives in a group of 50 companies, representative of the Hay Group’s General Pan-European Market, which the Board had consistently used as benchmarks in setting the level of EC compensation. The survey showed that the retirement benefits of EC members were below the median of the group. This resulted in adjustments to pension benefits that will be made over time. These are in line with the compensation strategy and will keep the EC members in the targeted range in terms of total compensation benchmarks. The increase in aggregate pension benefits for the EC in 2015 is partly due to certain contributions made in respect of 2014 and also due to the adjustment to the CEO’s pension arrangements in the second half of 2015 following the pension review.

EC members also received other benefits, which may include payments related to social security, health insurance, children’s education and other items.

Short-term variable compensation

Payment of the short-term variable component of compensation was conditional on the fulfillment of predefined Group-wide and individual performance objectives.

As highlighted in Exhibit 16, the company exceeded the Group-wide objectives for cost savings and customer satisfaction (as measured by the use of the Net Promoter Score). On the other targets (orders received, revenues, operational EBITA and operating cash flow), the Group’s performance, while not achieving the set targets, was considerably above threshold. This resulted in an overall achievement of 101.3 percent.

For 2015, there is a 16 percentage point difference between the highest and lowest payout of the short-term variable compensation of EC members. This reflects the performance of each EC member against their individual objectives, which is in line with the changes made to the compensation system to render it more differentiating, balancing corporate and individual performance.

On or above target

Above threshold and below target

Below threshold



The financial objectives exclude the impact of currency fluctuations, major acquisitions and divestments, and the impact of discontinued operations where appropriate.


See definition in “Note 23 Operating segment and geographic data” to ABB’s Consolidated Financial Statements.


Operating cash flow is defined as net cash provided by operating activities, reversing the cash impact of interest, taxes, restructuring-related activities and one-time pension contributions.


Net Promoter Score (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 2015, ABB had a target for countries and businesses to improve their NPS compared to the previous year.

Exhibit 16: Group-wide 2015 objectives and performance for short-term variable compensation




Orders received




Operational EBITA(2)


Operating cash flow(3)


Cost savings


Net Promoter Score(4)


Long-term variable compensation

In 2015, the estimated value of the share-based grants under the LTIP was CHF 14.4 million compared with CHF 12.9 million in 2014. This difference was mainly due to the grant to the additional EC member and an increase of the CEO’s allocation of conditionally granted shares under the P2 component of LTIP from 67 percent of base salary to 100 percent after completion of his first year in office.

To determine the size of the P1 component granted in 2015, the Board assessed ABB’s 2012–2014 performance based on: revenue growth, cash return on invested capital, operational EBITDA margin, share price development, share price to earnings ratio, NPS development, integrity and safety performance. This resulted in an aggregate increase of 6 percent in the reference grant size of the P1 component for all EC participants. This was below the 22 percent increase in the retention component for the previous year’s launch.

Vesting in 2015 of performance component of 2012 LTIP

The payout for the performance component of the 2012 LTIP that vested in 2015 was 51 percent. The payout was based on the EPS achieved during the plan’s three-year vesting period. EPS was adopted as the relevant measure for the performance component of LTIP launches beginning in 2012.

Other compensation

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. Seven members of the EC participated in the 12th annual launch of the plan in 2015. EC members who participated will, upon vesting, each be entitled to acquire up to 530 ABB shares at CHF 18.78 per share, the market share price at the start of that launch.

For a more detailed description of ESAP, 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.

Compensation of former EC members

Furthermore, in 2015, some former EC members received contractual compensation for the period after leaving the EC, as shown in footnote 5 of Exhibit 20.