We are asking our shareholders to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this proxy statement. Although this is an advisory vote, and therefore not binding on our Board of Directors, the Board and the Compensation and Organization Committee will review and consider the voting results when making future decisions regarding our executive compensation programs.
This say-on-pay vote is required under U.S. law, and we consider it to be a matter of good corporate governance. This vote takes place annually and the next advisory vote to approve the Company’s executive compensation will occur at the 2020 annual general meeting.
As we explain in the Compensation Discussion and Analysis that follows, our executive compensation programs are designed to attract, motivate, reward and retain our named executive officers, who are critical to the success of our Company. Our programs reward our named executive officers for achieving specific annual, long-term and strategic goals, and also for increasing shareholder value.
The Compensation and Organization Committee continually reviews the compensation programs for named executive officers to ensure that they achieve the desired goals of aligning our executive compensation structure with our shareholders’ interests and current market practices. All Committee members are independent directors committed to applying sound governance practices to compensation decisions.
We strongly encourage you to review the Compensation Discussion and Analysis that follows. It contains information about the extensive processes the Committee follows, and the factors it considers, when establishing performance and pay targets and approving actual payments from our short- and long-term performance-based incentive plans. The Committee’s process includes reviewing a variety of reports and analyses such as market survey data, compensation tally sheets, compensation at peer companies, and reports from proxy advisory firms. The Compensation Discussion and Analysis also describes the structure of our compensation programs and the 2018 compensation of our named executive officers.
We believe that our executive compensation design and strategy is a critical factor in motivating our executives to seek innovative solutions that contribute to Eaton’s continued success. We are therefore asking shareholders to approve the following advisory resolution at the 2019 annual general meeting:
“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s proxy statement for the 2019 annual general meeting of shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2018 Summary Compensation Table and the other related tables and disclosure.”
The Compensation and Organization Committee of the Board of Directors in 2018 consisted of five independent non-employee directors and is supported by our human resources department. As discussed below, the Committee also may retain one or more independent compensation consultants to assist it.
The Committee is responsible for handling a variety of organizational and compensation matters pertaining to Eaton’s leadership, including those shown in the table below. The Committee’s charter is available on our website at http://www.eaton.com/governance.
The Committee retained Meridian Compensation Partners as its independent executive compensation consultant to support the Committee’s oversight and management of our executive compensation programs. The consultant’s duties include helping the Committee validate our executive compensation plans and programs through periodic comprehensive studies. The consultant performed a variety of work for the Committee, including assessing Eaton’s executive compensation programs relative to market trends and best-in-class governance practices, providing independent feedback on our analytical work, and assisting the Committee in its review and discussion of material agenda items and its decision-making about our executive compensation programs and individual compensation opportunities. The consultant also coordinated and supported the annual performance appraisal for Mr. Arnold. The Committee used this appraisal as one of several factors in determining his payout under our short-term incentive plan for 2018 and also considered it in determining whether to adjust his base salary or his short- and long-term incentive targets for the next year.
The Committee’s written policies require the Company to obtain its review and approval before awarding any material consulting assignment to a firm that the Committee already has engaged. This policy ensures that the Committee’s consultants are well positioned to provide independent and impartial advice on executive compensation and governance matters.
We target total compensation to be within the median range of compensation paid by similarly sized industrial companies. We continually monitor and assess the competitive retention and recruiting pressures in the industries and markets where we compete for executive talent. As a result, the Committee periodically has exercised its judgment to set target compensation levels of certain executives above the market median to foster retention.
Several analyses play a role in the Committee’s Total Compensation Analysis and Annual Planning Process:
In preparing our comparison for 2018, we used the survey results for “industrial” companies (as categorized by the survey vendors), whether publicly or privately held, with revenues between $10 billion and $50 billion. The group contains between 100 and 120 companies in which the revenue range is approximately one-half to two times our revenue. We believe this comparator group adequately represents the market in which we compete for talent. The companies participating in each survey vary, and we are not able to determine which of the companies reported data for each position and each component of pay.
In July of each year, the Committee evaluates pay relative to external market data to validate the individual compensation opportunities that were established in February, and also considers whether we are setting appropriate performance criteria. This process involves collecting and reviewing peer group information and third-party survey data and analyzing it as described below.
The compensation peer group does not replace Eaton’s strategic peer group that is used by the Board in setting the Company’s strategic plan. The publicly traded companies in the strategic peer group continue to serve as the relative peer group for purposes of comparing total shareholder return as it relates to Eaton’s long-term performance based incentive plan. The strategic peers were chosen based on their industry segment, among other considerations, so that the overall revenue of each segment would approximate Eaton’s revenues for each segment (Aerospace, Electrical, Hydraulics, Vehicle) versus overall revenue for the entire enterprise. The revenue of many companies in the strategic peer group is smaller than Eaton’s and given that there is a correlation between the revenue size of a company and the pay it delivers, the Committee determined that the strategic peer group would not serve as an appropriate peer group for purposes of setting pay. Therefore, with input from its consultant, the Committee chose the companies listed in the following table as the compensation peer group.
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Compensation
Peer
Group
|
|
3M Company
|
ABB Ltd.
|
Caterpillar, Inc.
|
Cummins
|
Danaher Corporation
|
Deere & Company
|
Dover Corporation
|
Emerson Electric Company
|
Halliburton Company
|
Honeywell International Inc.
|
Illinois Tool Works Inc.
|
Ingersoll-Rand Plc
|
International Paper Company
|
Johnson Controls Inc.
|
Lear Corporation
|
Northrop Grumman Corporation
|
PACCAR Inc.
|
Parker-Hannifin Corporation
|
Raytheon Company
|
Rockwell Automation, Inc.
|
Stanley Black & Decker Inc.
|
Union Pacific Corporation
|
United Technologies Corporation
|
Whirlpool Corporation
|
Peer
Pay
Analysis
— Each year we provide the Committee with an analysis that includes the compensation reported by each publicly traded peer in its annual proxy statement and market survey data for positions that are equivalent to positions held by our named executive officers. The Committee uses this analysis in reviewing and establishing our stretch incentive plan goals and in answering whether our compensation targets are appropriate relative to market comparators. In 2018, this review of survey and peer proxy data confirmed that Eaton’s compensation opportunities were aligned with the external data points.
COMPONENTS OF COMPENSATION
In this section, we describe the main components of our compensation, including the metrics we use for our performance-based incentives.
OVERVIEW OF OUR PRIMARY COMPENSATION COMPONENTS
Component
|
|
|
Description
|
Form/Timing of Payout
|
Base salary
|
Levels reflect job responsibilities and market competition
|
Paid in cash throughout the year
|
Short-term
incentive
|
|
Executive
Incentive
Compensation
Plan
(EIC)
– Cash incentive tied to the following performance metrics:
|
Paid in cash after the year has ended and performance has been measured
|
|
|
Adjusted Earnings Per Share (EPS) and Cash Flow Return on Gross Capital (CFR) goals as well as business unit and individual performance criteria
|
Executives can choose to defer payments under our Deferred Incentive Compensation Plan II
|
Long-term
incentives
|
Executive
Strategic
Incentive
Program
(ESIP)
- Long-term performance -based incentive tied to:
|
|
|
|
50% Performance-
Based Long-Term Incentive (ESIP)
|
Tied to Relative Total Shareholder Return
ESIP opportunities are denominated in performance share units (PSUs) and settled in Eaton ordinary shares
Value realization depends on our stock performance
|
Awards are distributed in Eaton ordinary shares after the 3-year award period has ended and performance has been measured
|
|
|
25% RSUs
25% stock options
|
Restricted Share Units (RSUs) and stock options
Value realization depends on our stock performance
|
Vesting in approximately equal installments over 3 years
|
Other
performance
and
retention
grants
|
Restricted share units are granted on rare occasions to foster engagement and retention
May be tied to achievement of performance objectives
Value realization depends on our stock performance
|
Vesting periods range from 3 to 10 years
|
Base Salary
We pay a competitive base salary to our executive officers in recognition of their job responsibilities. In general, the Committee sets base salaries at approximately the market median as described under “Total Compensation Analysis and Planning Process” on page 28. On occasion, the Committee may set an executive’s base salary above the reported market median to foster retention and/or recognize superior performance. Executives must demonstrate consistently effective individual performance in order to be eligible for a base salary increase. In making salary adjustments, the Committee considers the executive’s base salary and total compensation relative to the market median and other factors
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such as individual performance against business plans, initiative, leadership, experience, knowledge, and success in building organizational capability.
2018
BASE SALARY
During the 2018 Total Compensation Analysis and Planning Process, the Committee reviewed each executive’s base salary relative to the market data as described under “Total Compensation Analysis and Planning Process,” as well as the executive’s individual performance over the prior year. After discussing these items, the Committee determined it was appropriate to deliver base salary increases on July 1, 2018, to the named executive officers as shown in the following table. Mr. Arnold became CEO in 2016 and since that time, the Committee has provided salary increases that are intended to align his base pay with a market competitive level.
Executive
|
Increase %
|
New Base Salary
|
C. Arnold
|
9.00%
|
$1,250,000
|
R. Fearon
|
4.00%
|
$965,328
|
R. Advaithi
|
4.00%
|
$787,405
|
U. Yadav
|
5.00%
|
$687,960
|
R. Eubanks
|
4.00%
|
$569,015
|
Short-Term Performance-Based Compensation
We establish a competitive annual cash incentive opportunity for each named executive officer which is intended to align with the market median short-term incentive target (expressed as a percentage of base salary) as determined in our annual market analysis. The Committee determines target opportunities for each executive in February during its Total Compensation Analysis and Planning Process.
Metrics,
Goals
and
Results
— In February 2018, the Committee established EPS and CFR goals based on its review of market analyses, our annual profit plan as approved by the Board of Directors, external research reports, and analyses of peer group data. The Committee also considered EPS growth rate guidance for us and our strategic peers as a key starting point for setting aggressive performance objectives for our short-term incentive plan. The short-term objectives historically have been tied to EPS and CFR metrics. The EPS metric measures earnings growth, while the CFR objective is an internal measure of return on capital. We and the Committee believe these are appropriate metrics because of their link to shareholder value creation. The Committee believes that the target level EPS and CRF goals established at the beginning of 2018 were demanding but attainable.
The following table shows the 2018 goals and our actual results for the year after adjusting for the impact of an arbitration decision (which is a liability that we assumed in the transaction to acquire Cooper Industries, plc). EPS and CFR results were $5.39 and 18.1%, respectively. The results generated a calculated payout above 140% of target but management recommended and the Committee determined it was appropriate to reduce the calculated payout to 115% of target.
2018 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS
2018 SHORT-TERM INCENTIVE AWARDS
In February 2018, in addition to establishing EIC Plan performance objectives, the Committee also established an individual target award opportunity for each executive that reflected the market median target annual incentive opportunity as determined in our annual market analysis as described on page 28. At the end of the award period, the Committee considered the following items in determining individual payouts:
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■
The Company’s actual performance relative to EPS and CFR performance objectives and the Committee’s decision to reduce the payout to 115% of target as described above.
■
Business unit and individual performance factors that are based on the achievement of the performance criteria described below:
■
Financial
Goals
:
Achieving the Company’s annual financial plan, as well as the annual financial plan for the executive’s business unit.
■
Growth
Goals
:
Building our brand; outgrowing the markets in which we operate; introducing new products and services.
■
Operational
Excellence
: Workplace safety and emissions reduction; advancements in quality; supply chain improvement; and operational efficiency/productivity.
■
Building
Organizational
Capacity
:
Reinforcing our ethical standards; attracting and developing talent; developing a diverse and inclusive organization; promoting a learning culture.
The following table illustrates each named executive officer’s 2018 award opportunity and his or her actual EIC award relative to that opportunity. Participants in our EIC Plan must be employed on the last day of the award period, which was December 31, 2018, to be eligible for an award. Business unit and individual performance factors shown below are rounded to the nearest whole percentage. Each named executive officer’s short-term incentive award is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Executive
|
EIC
Target as a
% of Salary
|
EIC
Target
$
|
|
EPS and CFR
Results
|
|
Business Unit
/Individual
Performance
Factor
|
|
Award
|
Award as
% of Target
|
C. Arnold
|
150%
|
$1,800,000
|
x
|
115%
|
x
|
110%
|
=
|
$2,277,000
|
127%
|
R. Fearon
|
100%
|
$946,764
|
x
|
115%
|
x
|
105%
|
=
|
$1,143,218
|
121%
|
R. Advaithi
|
100%
|
$772,262
|
x
|
115%
|
x
|
97%
|
=
|
$861,459
|
112%
|
U. Yadav
|
100%
|
$671,580
|
x
|
115%
|
x
|
115%
|
=
|
$883,531
|
132%
|
R. Eubanks
|
78%
|
$435,297
|
x
|
115%
|
x
|
104%
|
=
|
$515,108
|
118%
|
Long-Term Incentive Compensation
The Committee establishes a target long-term incentive opportunity for each executive that is intended to align with the market median values as determined in our annual market analysis. We provide long-term incentive compensation to our executive officers in two components that generally are weighted as follows:
■
50%
in
Performance
Share
Units:
Relative TSR serves as the performance criteria for the performance-based ESIP periods which are three years in length. ESIP opportunities are denominated in performance share units and the number of share units earned by executives will depend on the rank of our total return to shareholders against that of a TSR Peer Group. The value realized by executives will depend on share price appreciation or depreciation over the award period; thereby providing a direct link to shareholder value creation.
■
50%
in
Time
Based
Equity
Awards:
The named executive officers receive approximately an equal mix of stock options and RSUs which also provide a link to external performance. Time-based equity vests over a minimum of a three-year period and exeuctives must be employed on the vesting date in order for shares to vest.
We believe that this “portfolio approach” to structuring long-term incentives provides an appropriate balance that focuses executives on both an external and internal measure of our success. In limited circumstances, the Committee provides retention restricted share unit grants to foster engagement and retention. The Committee’s independent compensation consultant has confirmed that this approach is appropriate to delivering long-term compensation and is consistent with market practices. No named executive officers received retention grants in 2018.
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Equity
Grant
Practices
—
We typically grant equity-based awards in February. The Committee has the authority to fix the date and all terms and conditions of equity grants to executive officers and other employees under our various stock plans, all of which have been approved by our shareholders. Our equity program adheres to the following best practices:
■
Equity-based awards generally vest over, or upon the conclusion of, at least a three-year period and is contingent upon continued service with us over the vesting period (except in the case of a divestment of a business or upon an employee's death, disability, or retirement).
■
The aggregate number of shares or share units underlying options or related to other awards that may be granted to any employee during any three consecutive calendar year period may not exceed 2,400,000 under our 2015 Stock Plan.
■
No more than 5% of the total number of shares authorized for delivery under the Plan may vest within less than one year after the grant date (except for awards granted to non-employee directors, in the event of a change of control of the Company, in the event of a divestment of a business or upon an employee’s death, disability, or retirement).
■
We set the strike price for all of our stock options at the fair market value of our shares on the date of the grant. Our current shareholder-approved stock plans define “fair market value” as the “closing price” as quoted on the New York Stock Exchange on the date of the grant.
More information about the long-term incentives granted in 2018 begins on page 35.
PERFORMANCE BASED LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2018
2016-2018
ESIP Performance
Criteria:
The Committee adopted relative TSR as the performance criteria for the 2016-2018 ESIP period. Prior to 2016, awards were determined based on company Adjusted EPS growth and CFR goals. In setting the Adjusted EPS growth and CFR goals for the prior periods, the Board would evaluate our Strategic Plan projections and analysts’ estimates of peer company performance; however, the impact of changes in end market growth rates had a disproportionate impact on actual versus forecasted results. Therefore, the Committee chose TSR as the metric to alleviate the increasingly difficult market calibration issues and to introduce a stronger sense of relative peer performance. The change also eliminated any concern about the use of overlapping criteria in our annual EIC Plan and our long-term ESIP program. We and the Committee believe a short-term plan with an earnings growth and return on assets orientation (via the EPS and CFR goals) complemented by a TSR-driven long-term plan is an effective combination that will enhance shareholder value.
The 2016-2018 ESIP was designed such that our TSR rank among a TSR Peer Group would determine an adjustment factor which could range from 0% to 200%. Ranking in between the threshold, target and maximum performance levels results in linear interpolation of the percentage earned.
Additionally, if our TSR was positive but ranked the lowest among the peer group, the maximum payout that could be earned was 25% of target. If our TSR was the highest when compared to that of the peer companies, but was negative, then the maximum payout that could be earned was 100% of target. Consistent with our historical practice, awards under this plan design were capped at 200% of target.
The TSR Peer Group for the 2016-2018 award period included nineteen companies, thirteen of whom were direct peers in either the Electrical, Hydraulics, Aerospace or Vehicle segments. The number of directly competitive peers in each segment roughly equated to the percentage of that segment’s revenue as a percent of total Eaton revenues at the beginning of the award period. The remaining six peers are indirect but relevant peers.
2016-2018
ESIP
Awards —
Awards for the 2016-2018 award period were determined based on our TSR ranking among the TSR Peer Group. For ESIP TSR calculation purposes, our stock price at the beginning of the award period was $46.94 and our stock price at the end of the award period was $68.66, adjusted to reflect dividend reinvestments over the period. This resulted in TSR of 46.26%, an absolute ranking among the peers at nine out of twenty, and a percentile ranking at the 57.89th percentile. This percentile ranking resulted in a performance adjustment factor of 115.79% of target. The results are shown in the following tables.
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Company Name
|
TSR
|
Relative Ranking
|
Adjustment Factor
|
Deere & Company
|
108.79%
|
100.00%
|
|
Allison Transmission Holdings Inc.
|
78.71%
|
94.74%
|
|
Ingersoll-Rand plc
|
75.36%
|
89.47%
|
|
Cummins Inc.
|
66.23%
|
84.21%
|
|
Parker-Hannifin Corporation
|
62.51%
|
78.95%
|
|
Rockwell Automation
|
56.57%
|
73.68%
|
|
Dover Corporation
|
53.53%
|
68.42%
|
|
Woodward, Inc.
|
52.98%
|
63.16%
|
|
Eaton
Corporation
|
46.26%
|
57.89%
|
115.79%
|
Illinois Tool Works, Inc.
|
46.11%
|
52.63%
|
|
Honeywell International Inc.
|
42.64%
|
47.37%
|
|
Emerson Electric Co.
|
37.55%
|
42.11%
|
|
Moog Inc.
|
29.05%
|
36.84%
|
|
Schneider Electric SE
|
24.89%
|
31.58%
|
|
Siemens Aktiengesellschaft
|
19.73%
|
26.32%
|
|
ABB Ltd.
|
19.36%
|
21.05%
|
|
United Technologies Corporation
|
19.01%
|
15.79%
|
|
Hubbell, Inc.
|
6.00%
|
10.53%
|
|
Legrand SA
|
0.51%
|
5.26%
|
|
BorgWarner Inc.
|
-16.07%
|
0.00%
|
|
|
Threshold
|
Target
|
|
|
|
Maximum
|
Actual
Results
|
|
Relative
Ranking
|
TRS is positive but ranks the lowest among the peers
|
50
th
Percentile
|
|
57.89
th
Percentile
|
|
100
th
Percentile
|
Adjustment
Factor
|
25%
|
100%
|
|
115.79%
|
|
200%
|
Final awards were determined by multiplying the target number of performance share units by the calculated performance factor of 115.79% and rounding up to the nearest whole share. The earned number of performance share units vested on February 26, 2019 and will be reported in the Options Exercised and Stock Vested Table in our next proxy statement. Dividend equivalents were also paid in cash based on the aggregate dividend paid over the period ($7.32) and the final number of share units that were earned.
Awards earned by our named executive officers for the 2016-2018 ESIP Period are shown below. Ms. Advaithi was employed with us on the last day of the performance period and was eligible for an award per the terms of our ESIP and in keeping with our disclosure of Potential Payments Upon Termination that begins on page 49.
Executive
|
2016-2018
Target
|
Target Units
(based on
$50.74 in 2016)
|
Earned Share
Units
(based on
115.79% payout)
|
Value of Award
at Vesting
(based on $80.49
on 2/26/2019)
|
Accumulated
Dividends
(based on $7.32)
|
Total Award +
Dividend
Equivalents
|
C. Arnold
|
$2,500,000
|
49,280
|
57,062
|
$4,592,920
|
$417,694
|
$5,010,614
|
R. Fearon
|
$1,500,000
|
29,570
|
34,240
|
$2,755,978
|
$250,637
|
$3,006,615
|
R. Advaithi
|
$1,000,000
|
19,715
|
22,828
|
$1,837,426
|
$167,101
|
$2,004,527
|
U. Yadav
|
$900,000
|
17,740
|
20,542
|
$1,653,426
|
$150,367
|
$1,803,793
|
R. Eubanks
|
$500,000
|
9,860
|
11,417
|
$918,954
|
$83,572
|
$1,002,526
|
Performance
Restricted
Share
Units
Granted
in
2016 —
In February 2016, the Committee granted a one-time, performance-based long-term incentive opportunity to the executives who were named executive officers at the end of 2015. At the time, we were experiencing a period of softening in our end markets and were anticipating the retirement
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of our former CEO later that year. The Committee recognized that the efforts of the new leadership team would be particularly critical to pursuing profitability and our competitive advantage during periods of decline while managing a significant leadership transition. Therefore, the Committee granted performance share units that would vest after three years subject to the attainment of certain restructuring plan savings objectives. Specifically, the company must have achieved at least 80% of the publicly announced three-year restructuring plan savings of $418 million prior to the end of the period in order to earn any award. If less than 80% of the goal was achieved, no shares would be earned and the performance share units would be forfeited. If at least 80% but less than 100% of the goal was achieved, executives would earn 80% of the performance share units granted. If 100% or more of the goal was achieved, executives may earn 100% of the performance share units. Actual cumulative savings was $518 million and executives who were employed with Eaton on February 26, 2019 earned 100% of their awards.
|
Threshold
|
Minimum Cumulative
Savings Needed to
Earn Any Award
|
|
Maximum
|
|
Restructuring Plan
Savings Objective
|
Cumulative
Restructuring
Savings
|
Objective
|
<$334 Million
|
$334 Million
|
$418
Million
|
>$418 Million
|
$518
Million
|
Payout Potential as % of Target
|
0%
|
80%
|
100%
|
100%
|
100%
|
Earned performance share units settled in our ordinary shares and accumulated dividends were paid in cash based on the earned number of shares and the aggregate dividend paid to our shareholders over the three-year period. Earned awards vested on February 26, 2019. Dividend equivalents were also paid in cash based on the aggregate dividend paid over the period ($7.32) and the final number of share units that were earned.
Executive
|
Target Units
|
Earned Share Units
(based on 100%)
|
Value of
Award at Vesting
(based on $80.49
on 2/26/2019)
|
Accumulated
Dividends
(based on $7.32)
|
Total Value
of Award + Dividend
Equivalents
|
C. Arnold
|
25,650
|
25,650
|
$2,064,569
|
$187,758
|
$2,252,327
|
R. Fearon
|
25,650
|
25,650
|
$2,064,569
|
$187,758
|
$2,252,327
|
U. Yadav
|
8,320
|
8,320
|
$669,677
|
$60,902
|
$730,579
|
Ms. Advaithi was not employed on the vesting date and did not earn an award. Mr. Eubanks was not a named executive officer at the end of 2015 and did not receive a performance restricted share unit grant. However, he did receive a retention grant of 6,120 restricted share units that cliff vested on February 22, 2019.
Long-Term Incentives Granted in 2018
Establishment
of
Performance
Criteria
for
the
2018-2020
ESIP —
Awards for the 2018-2020 ESIP award period will be determined based on our TSR relative to that of the TSR Peer Group as described below. TSR is calculated by taking the total of share price appreciation and dividends (assuming immediate reinvestment of dividends) over the three-year period compared to our share price at the beginning of the period. Our TSR rank among the TSR Peer Group will determine an adjustment factor which can range from 0% to 200%, such that executives will earn an award if our TSR ranks as follows:
■
Threshold: awards earned at no more than 25% of target if our TSR is the lowest among the peer group and is positive.
■
Target: awards earned at 100% of target if our TSR ranks in the middle of the TSR Peer Group. Additionally, if our TSR is the highest when compared to that of the TSR Peer Group, but is negative, then the maximum payout that can be earned is 100% of target.
■
Maximum: awards earned at 200% of target if our TSR ranks the highest among the TSR Peer Group and is positive.
|
Threshold
|
Target
|
Maximum
|
Relative
Ranking
|
TSR is positive but ranks the lowest among the peer group
|
50
th
Percentile
|
100
th
Percentile
|
Adjustment
Factor
|
25%
|
100%
|
200%
|
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The payout between threshold and maximum will be interpolated based on the rank of our TSR among the peer companies.
The TSR Peer Group for the 2018-2020 award period includes twenty companies, fourteen of whom are direct peers in either the Electrical, Hydraulics, Aerospace or Vehicle segments. The number of directly competitive peers in each segment roughly equates to the percentage of that segment’s revenue as a percent of total Eaton revenues. The remaining six peers are indirect but relevant peers. The companies included in the TSR Peer Group are:
Direct Peers:
ABB, Ltd., Allison Transmission Holdings, Inc., American Axle & Manufacturing, Inc., BorgWarner, Inc., Cummins Inc., Emerson Electric Co., Hubbell Inc., Legrand S.A., Moog Inc., Parker-Hannifin Corporation, Rockwell Automation, Inc., Schneider Electric SE, Siemens AG, and Woodward, Inc.
Indirect Peers:
Deere & Company, Dover Corporation, Honeywell International Inc., Illinois Tool Works Inc., Ingersoll-Rand plc, and United Technologies Corporation.
Performance
Share
Units
Granted
for
the
2018-2020
ESIP —
In February 2018, the Committee established total long-term incentive opportunities, expressed as a cash value, for each executive. Targets are intended to align with the market median long-term incentive value as determined during our annual market analysis described on page 28. Half of the long-term incentive target was converted to a number of performance share units based on the 30-day average closing price of our ordinary shares at the beginning of the award period. At the end of the award period, the number of performance share units will be adjusted up or down based on achievement of our TSR rank relative to that of the peers as previously described. The adjusted number of share units, if any, will be distributed to participants in the form of our ordinary shares. An accumulated dividend equivalent covering the performance period will be paid in cash based on the number of share units actually earned.
RSUs
Granted
in
2018 —
In February 2018, the Committee approved RSU grants that represented approximately 25% of each named executive officer’s target long-term incentive opportunity. These RSUs vest in approximately equal installments over three years, subject to continued employment with us. We pay dividend equivalents on the earned number of RSUs at the time the shares vest.
Stock
Options
Granted
in
2018 —
Stock options make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2018 will vest in substantially equal installments over three years, subject to the executive’s continued employment with us, and have a strike price equal to the closing price of our ordinary shares on the date of the grant.
2018
Long-Term
Incentive
Grants
—
Each named executive officer’s target long-term incentive opportunity and mix of grant types is shown below. The target amounts shown below differ from the amounts reported in the Summary Compensation Table, which reports the grant date fair value determined in accordance with ASC Topic 718.
Executive
|
ESIP Target ($)
(50% of LTI)
|
RSU Target ($)
(25% of LTI)
|
Stock Option Target ($)
(25% of LTI)
|
Target Total
Long-Term Incentive ($)
|
C. Arnold
|
$4,062,500
|
$2,031,250
|
$2,031,250
|
$8,125,000
|
R. Fearon
|
$1,500,000
|
$750,000
|
$750,000
|
$3,000,000
|
R. Advaithi
|
$1,000,000
|
$500,000
|
$500,000
|
$2,000,000
|
U. Yadav
|
$900,000
|
$450,000
|
$450,000
|
$1,800,000
|
R. Eubanks
|
$625,000
|
$312,500
|
$312,500
|
$1,250,000
|
HEALTH AND WELFARE, RETIREMENT AND OTHER BENEFIT PLANS
Health and Welfare Benefits and Retirement Income Plans
We provide our executive officers with the same health and welfare and retirement income benefit programs that we provide to our other salaried employees in the United States, with certain exceptions described below. Our named executive officers may choose to participate in our 401(k) plan and receive Company matching contributions, which are reported as “Other Compensation” in the Summary Compensation Table. We provide 401(k) matching contributions that comply with Internal Revenue Code limits.
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In place of typical Company-paid group term life insurance, we provide all executive officers and approximately 600 other employees who were hired prior to January 1, 2016 with Company-paid life insurance coverage under two separate policies. The aggregate value of the two policies is approximately equal to an executive’s annual base salary, and this level of coverage is consistent with the level of coverage provided to other non-union U.S. salaried employees through our group term life policy. The majority of the executives’ life insurance (base salary minus $50,000) is covered under an executive-owned individual whole-life policy, with the remaining $50,000 of insurance covered under our group term life policy. The value of the Company-paid premium for the whole life policy is imputed as income to each covered executive. We decided to provide this executive life insurance arrangement to allow each executive to have a paid-up policy at retirement that would mirror Company-provided post-retirement group term life insurance, but with less post-retirement tax complexity for both the executive and the Company. Employees who were hired on or after January 1, 2016 are provided coverage approximately equal to one time base salary under our group term life policy.
Other Retirement and Compensation Arrangements
The 2018 Pension Benefits table on page 47 reports retirement benefits for Mr. Arnold and the other named executive officers. Certain provisions of the Internal Revenue Code limit the annual benefits that may be paid from a tax-qualified retirement plan. As permitted under the Code, the Board of Directors has authorized plans under which payment will be made for any benefits that may exceed those limits. If these nonqualified benefits accrued before 2005, executives may choose a lump sum payment or an annuity (unless otherwise determined by the Committee), except that if there is a change of control of the Company, they will be paid at the time of the event (unless otherwise determined by the Board of Directors) in a lump sum. These benefits that accrued after January 1, 2005 will be paid in the form of a single sum at retirement.
In response to market practices and to enhance our ability to attract and retain key executives, the Board of Directors also adopted plans that provide supplemental annual retirement income to certain executives whom we hire mid-career, because they do not have the opportunity to accumulate significant credited service with us under our tax-qualified retirement income or nonqualified restoration plans. These supplemental plans deliver a benefit if the executive either retires at 55 or older with at least 10 years of service, or at 65 or older regardless of the years of service. No new participants have been added to this plan since 2011.
The tax-qualified pension plans that we maintain for our U.S. salaried and non-union employees define the term compensation to include base salary, overtime pay, pay premiums and awards under any short-term variable pay or incentive compensation plans (including amounts deferred for receipt at a later date). We use this same definition for calculating pension benefits under the nonqualified executive retirement income arrangements described in the preceding paragraph. These qualified and nonqualified retirement income plans are the only compensation or benefit plans or programs that we provide to executive officers that consider base salary and earned annual incentive awards in the calculation of the executives’ account balances. Long-term incentives, including cash and amounts realized upon the exercise of stock options and/or vesting other equity-based awards are not factored into these calculations.
Deferral Plans
We provide our executives with opportunities to defer the receipt of their earned and otherwise payable awards under our short- and long-term cash incentive plans. Our deferral plans do not allow executives to defer the receipt of their share-based awards. We offer these deferral arrangements so that our executives have a competitive opportunity to accumulate additional retirement assets and a means to meet our share ownership guidelines.
Personal Benefits
We provide our executive officers with limited personal benefits such as reimbursement for financial and estate planning and tax preparation. Personal benefits are treated as taxable income to the executive.
Employment Contracts and Change of Control Agreements
We do not provide our executive officers with employment contracts; however, we do enter into Change of Control Agreements with each executive officer. The agreements do not contain tax gross-up provisions, but do contain double-trigger severance provisions and restrictive covenants. These agreements provide benefits if an executive’s employment is terminated or materially changed for certain reasons following a change of control. We believe that these agreements are in the best interest of our shareholders because they help ensure that we will have the continued dedication and focus of key executives in the event of a change of control of the Company. Details of our Change of
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Control Agreements may be found in the narrative discussion accompanying the Potential Payments Upon Termination beginning on page 49.
Limited Tax Protection for Relocation and Foreign Assignments
We and the Committee believe that tax protection is appropriate in very limited circumstances to avoid the potential for the value of a benefit to be reduced as a result of tax requirements that are beyond an executive’s control. Specifically, we provide tax protection for our employees under our relocation and foreign assignment policies so that they are able to make decisions to accept new assignments without concern that relocating would be a disadvantage from a tax standpoint.
Use of Our Aircraft
We own, operate, and maintain Company aircraft to enhance the ability of our executive officers and other corporate and business leaders to conduct business in an effective manner. This principle guides how the aircraft are used. Our stringent aircraft use policy ensures that the primary use of this mode of transportation is to satisfy business needs and that all aircraft use is accounted for at all times and in accordance with applicable laws. The Board of Directors has directed Mr. Arnold to use our aircraft for his business and personal travel, whenever feasible, to ensure his personal security and enhance his productivity. Our aircraft policy does not permit other executives to use Company-owned aircraft for personal use without the advance approval of the Chief Executive Officer. No named executive officers receive tax protection on the imputed income for personal use of Company-owned aircraft.
EXECUTIVE COMPENSATION POLICIES AND GUIDELINES
Share Ownership Guidelines
We expect all of our executive officers and certain other high-level key executives to hold a number of our shares with a value equal to a pre-determined multiple of their base salary. These multiples, as shown below, represent the minimum guidelines and are consistent with trends we have seen in the competitive market. Each executive must own a minimum of 20% of the required shares outright. Executives are expected to hold shares that vest and shares acquired upon the exercise of stock options until these requirements are met. In addition, executives are expected to reach these guidelines within five years of appointment to a new position and are expected to satisfy them for the duration of their employment with the Company.
Position
|
Minimum Guideline
|
Chairman and Chief Executive Officer
|
6 times base salary
|
Vice Chairman, Chief Financial and Planning Officer
|
4 times base salary
|
President and Chief Operating Officer Electrical or Industrial Sector
|
4 times base salary
|
Other Officers
|
2-3 times base salary
|
General Managers and other ESIP participants
|
1 times base salary
|
The Committee reviews each executive officer’s share ownership relative to these levels each February. As of the date this proxy was filed, each of the named executive officers exceeded his ownership and holding requirements.
Anti-Hedging and Pledging
We have a policy that prohibits directors and officers, including the named executive officers, from engaging in financial hedging of their investment risk in our shares and from pledging our shares as collateral for a loan.
Clawback Policy
The Board of Directors has adopted a formal policy stating that, if an executive engaged in any fraud, misconduct or other bad-faith action that, directly or indirectly, caused or partially caused the need for a material accounting restatement for any periods as to which a performance-based award was paid or credited to the executive during the 12-month period following the first public issuance of the incorrect financial statement, such award shall be subject to reduction, cancellation or reimbursement to the Company at the Board’s discretion. The clawback policy covers any executive who participates in our ESIP or any successor plans. Our incentive compensation plans, stock plans and deferral plans all include the provisions of this policy. This policy may be found on our website at
http://www.eaton.com/governance
.
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Tax and Accounting Considerations
We carefully monitor and comply with any changes in the laws, regulations, accounting standards and related interpretive guidance that impact our executive compensation plans and programs. Tax and accounting considerations have never played a central role in the process of determining the compensation or benefit plans and programs that are provided to our executives. Instead, the Committee consistently has structured our executive compensation program in a manner intended to ensure that it is competitive in the marketplace for executive talent and provides incentives and rewards that focus our executives on reaching desired internal and external performance levels. Once the appropriate programs and plans are identified, we administer and account for them in accordance with applicable requirements. The Tax Cuts and Jobs Act enacted in December 2017 repealed the performance-based exception to section 162(m) and limits deductible compensation paid to covered employees to $1 million.
RELATIONSHIP BETWEEN COMPENSATION PLANS AND RISK
Each year, the Committee and management conduct a comprehensive review of our executive and broad-based compensation programs to determine whether any of our compensation programs, either individually or in the aggregate, would encourage employees to undertake excessive risks that are reasonably likely to have a material adverse impact on the Company.
Compensation and Organization Committee Annual Risk Assessment
After reviewing an inventory of our 2018 broad-based variable pay and sales commission plans, which included the number of participants in each plan, the participants’ levels within the organization, the target and maximum payment potential, performance criteria under each plan, and the type of plan (for example, management-by-objective and goal sharing), the Committee concluded that none of the broad-based programs would likely give rise to a material risk.
The Committee also applied a risk assessment to the short- and long-term incentive plans that are described in this CD&A. This analysis included, but was not limited to, (a) whether performance goals were balanced and potential payments were reasonable based on potential achievement of those goals at the threshold, target and maximum levels; (b) whether there is a balance between short- and long-term incentive opportunities and that pay is not overly weighted toward annual incentive opportunities; and, (c) how our performance objectives and target award opportunities compared to the objectives and target awards underlying our peers’ incentive programs.
Our Executive Compensation Strategies and Programs Are Structured to Reduce Risk
The Committee and management also concluded that our executive compensation strategy and programs are structured in the best interest of the Company and its stakeholders and do not create a material risk due to a variety of mitigating factors, such as:
●
An emphasis on long-term compensation that utilizes a balanced portfolio of compensation elements and delivers rewards based on sustained performance over time;
●
The Committee’s sole power to set performance objectives for our incentive plans. In our short-term plan, this includes CFR and adjusted EPS objectives and qualitative goals such as leadership development, growth, operational excellence, and building organizational capacity. We believe these items contribute to increased shareholder value;
●
Our long-term performance plan (ESIP) focuses on relative TSR. This creates a focus on driving sustained performance over multiple award periods that mitigates the potential for executives to take excessive risks to drive one-time, short-term performance spikes in any one period;
●
The use of equity awards to foster retention and align our executives’ interests with those of our shareholders;
●
Capping the potential payouts under the short- and long-term incentive plans to eliminate the potential for windfalls;
●
A clawback policy that allows us to recover compensation in the case of a material restatement of financial results and/or employee misconduct;
●
Share ownership guidelines; and
●
A broad array of benefit programs that offer employees and executives an opportunity to build meaningful retirement assets throughout their careers.
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