ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

Long-term variable compensationAn important principle of executive compensation at ABB isthat it should encourage the creation of value for the company’sshareholders and enable EC members to participatein the company’s success. The company’s Long-Term IncentivePlan (LTIP) is the principal mechanism through whichmembers of the EC and certain other executives are encouragedto create value for shareholders. Awarded annually,LTIPs comprise a performance component and a retentioncomponent whose proportions in relation to the base salaryare explained below.Payout % of performancecomponent200%100%Performance componentThe performance component of the plan is designed toreward participants for increasing earnings per share (5) (EPS)over a three-year period. EPS was adopted as the performancemeasure in the performance component of the LTIPin 2012.EPS replaces relative total shareholder return (TSR),which was the performance measure used in previous LTIPs.EPS growth (based on net income excluding acquisitions)is one of the financial targets of ABB’s 2015 strategy and istherefore better aligned with published goals than relativeTSR, which is the percentage change in ABB’s share priceplus dividends over a three-year period, compared with peers.The payout of this part of the plan occurs after threeyears, based on the Group’s weighted cumulative EPS performanceagainst predefined objectives. The weighted cumulativeEPS is calculated as 33 percent of EPS in the first yearplus 67 percent of EPS in the second year plus 100 percentof EPS in the third year. There is no payout if the lower thresholdis not reached and payout is capped if performanceexceeds the upper threshold. The payout factors are shownin the chart on the right.At each launch, participants are allocated a referencenumber of shares that is linked to a percentage of their basesalary. In 2012, the percentages were 100 percent for theCEO and 42 percent for the other members of the EC. Thepayout at the end of the three-year period, if any, will bemade in cash.Under the terms and conditions of the plan, the GNCCdecides whether EC members who leave the company beforethe end of the three-year period forfeit the unvested award,or receive all or a portion of such awards.0%Lowerthreshold(no payout)On targetUpperthreshold(maximumpayout)Weightedcumulativeearningsper share(5)Earnings per share is defined in the terms of the LTIP as diluted earnings per shareattributable to ABB shareholders calculated using income from continuing operations, netof tax, unless the Board decides to calculate using net income for a particular year.ABB Annual Report 2012 | Remuneration report 35