UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section
PROXY STATEMENT PURSUANT TO SECTION 14(a)
of the Securities Exchange Act of OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No. )
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Eaton Corporation plc
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OUR VISION | To improve the quality of life and theenvironment through the use of powermanagement technologies and services. | ||
LEADERSHIP ATTRIBUTES | Our culture and what we value arerepresented in the attributes of allEaton employees. | ||
■ | Ethical:We are ethical. We play by the rules and act with integrity. | ||
■ | Passionate:We are passionate. We care deeply about what we do.We set high expectations and we perform. | ||
■ | Accountable:We are accountable. We seek responsibility and take ownership. We do what we say. | ||
■ | Efficient:We are efficient. We value speed and simplicity. | ||
■ | Transparent:We are transparent. We say what we think. We make itokay to disagree. | ||
■ | Learn:We learn. We are curious, adaptable and willing to teach whatwe know. | ||
Notice of Eaton Corporation plc'splc’s Annual General Meeting
MEETING AGENDA:
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| Approving the appointment of Ernst & Young LLP as independent auditor for 2018 and authorizing the Audit Committee of the Board of Directors to set its remuneration; | |||
3. | Approving, on an advisory basis, the Company’s executive compensation; | |||
4. | Approving a proposal to grant the Board authority to issue shares under Irish law; | |||
5. | Approving a proposal to grant the Board authority to opt-out of preemption rights under Irish law; | |||
6. | Authorizing the Company and any subsidiary of the Company to make overseas market purchases of Company shares; and | |||
7. | Transacting any other business that may properly come before the meeting. |
Eaton House30 Pembroke RoadDublin 4, Ireland
February 29, 2016
Electing the 14 director nominees named in the proxy statement;
Approving a proposal to amend the Company’s (A) Articles of Association to make certain administrative amendments and (B) Memorandum of Association to make certain administrative amendments;
Approving a proposal to amend the Company’s Articles of Association to clarify the Board's sole authority to determine its size within the fixed limits in the Articles of Association;
Approving the appointment of Ernst & Young LLP as independent auditor for 2016 and authorizing the Audit Committee of the Board of Directors to set its remuneration;
Approving, on an advisory basis, the Company’s executive compensation;
Authorizing the Company and any subsidiary of the Company to make overseas market purchases of Company shares; and
Transacting any other business that may properly come before the meeting.
Proposals 1, 2, 3, 4 5 and 6 are ordinary resolutions requiring a simple majority of the votes cast at the meeting. Proposals 2A, 2B and 3 areProposal 5 is a special resolutionsresolution requiring at least 75% of the votes cast at the meeting. Each of these proposalsproposal is more fully described in this proxy statement.
Also during the meeting, management will present Eaton’s Irish Statutory Accounts for the fiscal year ended December 31, 20152017 along with the related directors’ and auditor’s reports.
Online proxy delivery and voting: As permitted by the Securities and Exchange Commission, we are making this proxy statement, the Company’s annual report to shareholders and our Irish statutory accounts available to our shareholders electronically via the Internet. We believe electronic delivery expedites your receipt of materials, reduces the environmental impact of our annual general meeting and reduces costs significantly. The Notice Regarding Internet Availability of Proxy Materials (the “Notice”) contains instructions on how you can access the proxy materials and how to vote online. If you received the Notice by mail, you will not receive a printed copy of the proxy materials unless you request one in accordance with the instructions provided in the Notice. The Notice has been mailed to shareholders on or about March 18, 2016 and provides instructions on how you may access and review the proxy materials on the Internet and how to vote.
If you hold your shares in your broker’s name and wish to vote in person at the annual general meeting, you must contact your broker and request a legal proxy. See page 7569 for additional information.
By order of the Board of Directors,
ThomasE.Moran
Senior Vice President and Secretary
March 18, 2016
16, 2018
YOUR VOTE IS IMPORTANT. WE ENCOURAGE YOU TO VOTE.
YOUR VOTE IS IMPORTANT. WE ENCOURAGE YOU TO VOTE. |
If possible, please vote your shares using the Internet instructions found in the Notice. Alternatively, you may request a printed copy of the proxy materials and mark, sign, date and mail your proxy form in the postage-paid envelope that will be provided. Voting by any of these methods will not limit your right to vote in person at the annual general meeting.Under New York Stock Exchange rules, if you hold your shares in “street” name through a brokerage account, your brokerwill NOT be able to vote your shares on non-routine matters being considered at the annual general meeting unless you have given instructions to your broker prior to the meeting on how to vote your shares. Proposals 1 and 3 are not considered routine matters under New York Stock Exchange rules. This means that you must give specific voting instructions to your broker on how to vote your shares so that your vote can be counted. |
If possible, please vote your shares using the Internet instructions found in the Notice. Alternatively, you may request a printed copy of the proxy materials and mark, sign, date and mail your proxy form in the postage-paid envelope that will be provided. Voting by any of these methods will not limit your right to vote in person at the annual general meeting. UnderNewYorkStockExchangerules,ifyouholdyoursharesin“street”namethroughabrokerageaccount,yourbrokerwillNOTbeabletovoteyoursharesonnon-routinemattersbeingconsideredattheannualgeneralmeetingunlessyouhavegiveninstructionstoyourbrokerpriortothemeetingonhowtovoteyourshares.Proposals1,2,3,5and6arenotconsideredroutinemattersunderNewYorkStockExchangerules.Thismeansthatyoumustgivespecificvotinginstructionstoyourbrokeronhowtovoteyoursharessothatyourvotecanbecounted.
Date: | April 25, 2018 |
Time: | 8:00 a.m. local time |
Location: | Eaton House |
30 Pembroke Road | |
Dublin 4, Ireland | |
Record date:February 26, 2018 Online proxy delivery and voting:As permitted by the Securities and Exchange Commission, we are making this proxy statement, the Company’s annual report to shareholders and our Irish statutory accounts available to our shareholders electronically via the Internet. We believe electronic delivery expedites your receipt of materials, reduces the environmental impact of our annual general meeting and reduces costs significantly. The Notice Regarding Internet Availability of Proxy Materials (the “Notice”) contains instructions on how you can access the proxy materials and how to vote online. If you received the Notice by mail, you will not receive a printed copy of the proxy materials unless you request one in accordance with the instructions provided in the Notice. The Notice has been mailed to shareholders commencing on March 16, 2018 and provides instructions on how you may access and review the proxy materials on the Internet and how to vote. |
Important Notice Regarding the Availability of Proxy Materials for the Annual General Meeting of Shareholders to be held on April 27, 2016:25, 2018: This proxy statement, the Company’s 20152017 Annual Report to Shareholders and our Irish Statutory Accounts for the year ended December 31, 20152017 are available atwww.proxyvote.comwww.proxyvote.com..
Proxy Summary | 1 | |
Proposal 1: |
Communicating with the Board |
Mailings to Shareholders in the Same Household |
EATON2018 Proxy Statement and Notice of Meeting |
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EATON 2016 Proxy Statement and Notice of Meeting
This summary is intended to provideprovides an overview of the items that you will find elsewhere in this proxy statement. As this is only a summary, weWe encourage you to read the entire proxy statement for more information about these topics before voting.
This proxy statement, the accompanying proxy form, Eaton’s annual report for the year ended December 31, 20152017 and our Irish Statutory Accounts for the year ended December 31, 20152017 will be made available or sent to shareholders commencing on or about March 18, 2016.16, 2018.
Throughout this proxy statement, all references to our Board of Directors (or its committees) or officers for periods prior to November 30, 2012, are references to the Board of Directors (or its committees) or officers of Eaton Corporation, our predecessor. Similarly, all references to the Company for such periods refer to Eaton Corporation.
This year there are six proposals on the agenda. Adoption of Proposals 1, 2, 3, 4 5 and 6 requires the affirmative vote of a majority of ordinary shares represented at the meeting byin person or by proxy. Adoption of Proposals 2A, 2B and 3Proposal 5 requires the affirmative vote of at least 75% of ordinary shares represented at the meeting in person or by proxy.
Proposals | Board Voting Recommendations | Page | ||
Proposal 1 | ✓FOR each nominee |
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Proposal 2 | ✓FOR |
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Proposal 3 |
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Proposal4 | ✓ FOR | 62 | ||
Proposal5 | ✓ FOR | 63 | ||
Proposal 6 | ✓FOR |
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EATON2018 Proxy Statement and Notice of Meeting | 1 |
BOARD AND GOVERNANCE FACTS
In addition to executive compensation practices that strongly link pay and performance, Eaton'sEaton’s Code of Ethics and Board of Directors Governance Policies help to ensure that we "do“do business right."” For more information about our Governancegovernance programs and Board of Directors, see Proposal 1 beginning on page 5.6.
Board and Governance Information | 2015 |
| Board and Governance Information | 2015 | 2017 |
| Board and Governance Information | 2017 |
Size of Board | 14 |
| Independent Directors Meet without Management Present | Yes | 12 |
| Independent Directors Meet without Management Present | Yes |
Average Age of Directors | 62.6 |
| Director Stock Ownership Guidelines (Readopted in 2015) | Yes | 63.4 |
| Director Stock Ownership Guidelines | Yes |
Number of Independent Directors | 11 |
| Mandatory Retirement Age | Yes | 10 |
| Mandatory Retirement Age | Yes |
Board Meetings Held in 2015 (average director attendance 95%) | 5 |
| Board Orientation and Continuing Education Program | Yes | ||||
Board Meetings Held in 2017 (average director attendance 95%) | 4 |
| Board Orientation and Continuing Education Program | Yes | ||||
Annual Election of Directors | Yes |
| Code of Ethics for Directors, Officers and Employees | Yes | Yes |
| Code of Ethics for Directors, Officers and Employees | Yes |
Majority Voting For Directors | Yes |
| Succession Planning and Implementation Process | Yes | Yes |
| Succession Planning | Yes |
Lead Independent Director | Yes |
| Comprehensive Sustainability Program | Yes | Yes |
| Comprehensive Sustainability Program | Yes |
EATON 2016 Proxy Statement and Notice of Meeting 1
EATON2018 Proxy Statement and Notice of Meeting | 2 |
Each director nominee is elected annually by a majority of votes cast. For more information about our nominees, see page 5pages 6 through 10 of this proxy statement.
| Board Committee Memberships |
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Name | Age | Director Since | Independent | Audit | Compensation & Organization | Executive* | Finance | Governance | Other Public Company Boards |
Craig Arnold | 55 | 2015 |
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Todd M. Bluedorn | 52 | 2010 | ✓ | ■ |
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Christopher M. Connor | 59 | 2006 | ✓ |
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Michael J. Critelli | 67 | 1998 | ✓ | ■ |
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Alexander M. Cutler | 64 | 1993 |
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Richard H. Fearon | 60 | 2015 |
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Charles E. Golden | 69 | 2007 | ✓ |
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Linda A. Hill | 59 | 2012 | ✓ |
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Arthur E. Johnson | 69 | 2009 | ✓ |
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Ned C. Lautenbach | 72 | 1997 | ✓ |
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Deborah L. McCoy | 61 | 2000 | ✓ | ■ |
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Gregory R. Page | 64 | 2003 | ✓ | ● |
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Sandra Pianalto | 61 | 2014 | ✓ |
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Gerald B. Smith | 65 | 2012 | ✓ | ■ |
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* Mr. Cutler has been a member of the Executive Committee for the full 12-month term and serves as Committee Chair. | ■ Member | ● Chair |
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Name | Age | Director Since | Independent | Audit | Compensation & Organization | Executive* | Finance | Governance | Other Public Company Boards |
Craig Arnold | 57 | 2015 |
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Todd M. Bluedorn | 54 | 2010 | ✓ |
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Christopher M. Connor | 61 | 2006 | ✓ |
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Michael J. Critelli | 69 | 1998 | ✓ |
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Richard H. Fearon | 62 | 2015 |
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Charles E. Golden | 71 | 2007 | ✓ |
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Arthur E. Johnson | 71 | 2009 | ✓ |
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Deborah L. McCoy | 63 | 2000 | ✓ | ■ |
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Gregory R. Page | 66 | 2003 | ✓ | ■ |
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Sandra Pianalto | 63 | 2014 | ✓ | ■ |
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Gerald B. Smith | 67 | 2012 | ✓ |
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Dorothy C. Thompson | 57 | 2016 | ✓ | ■ |
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* Mr. Arnold was a member of the Executive Committee for all of 2017 and serves as Committee Chair. Each of the non-employee directors serves a four-month term. | ■ Member | Chair |
EATON 2016 Proxy Statement and Notice of Meeting 2
EATON2018 Proxy Statement and Notice of Meeting | 3 |
CEO CompensationPay for Performance Culture
Our executive compensation programs reflect the belief that the amount earned by our executives must, to a significant extent, depend on achieving rigorous Company, business unit and Cumulative Shareholder Returns
The following chart illustrates Mr. Cutler’s compensationindividual performance objectives designed to enhance shareholder value. This illustration shows the payouts as a percentage of target under our performance-based annual and cumulativelong-term incentive programs and total return to shareholders over his tenure as the Company’s Chairman and Chief Executive Officerlast five years. As described on page 25, in 2015, we changed the length of Eaton Corporation. our performance-based long-term award periods from four to three years. As a result, two long-term performance periods ended on December 31, 2017. Awards for each period were earned at 25% of target.
The table clearly illustrates the correlation between pay and the performance we are delivering to our shareholders.
CUMULATIVETOTAL SHAREHOLDER RETURNS vs. TOTAL DIRECT COMPENSATION
Cumulative Total Shareholder Returns
RETURN AND PERFORMANCE-BASED INCENTIVE PLAN PAYOUTS
The peer group represents an equal weighted index of ABB, Ltd., Danaher Corporation, Dover Corporation, Emerson Electric Co., Honeywell International, Inc., Illinois Tool Works, Inc., Ingersoll-Rand plc, Legrand S.A., Parker Hannifin Corporation, Rockwell Automation, Schneider Electric SE, Siemens AG, and United Technologies Corporation.
Total direct compensation is the sum of the annual base salary, short-term incentive award earned in each respective year, performance-based long-term cash incentive (ESIP) award earned for the award period ending in each respective year, and grant date value of stock and option awards granted in each respective year. There was no payment under the ESIP plan in 2012. 2013 total compensation includes a $15.6 million payout from the 2010-2013 ESIP. This ESIP payment resulted from exceeding the maximum EPS growth and CFR goals of 30% and 15.1%, respectively, and from an increase in our stock price of 123% over the four-year period that began on January 1, 2010 and ended on December 31, 2013.
2015 total compensation includes payouts from the ESIP period that matured on December 31, 2015 and because the form of our performance-based long term incentives changed, grants for the period that began on January 1, 2015. The $10.98 million is the amount that would have been reported for 2015 if the form of ESIP had not changed. Please refer for “Adjustments to Compensation Programs For 2015” on page 33 for more information about this change.
EATON 2016 Proxy Statement and Notice of Meeting 3
EATON2018 Proxy Statement and Notice of Meeting | 4 |
We design our executive compensation plans and programs to help us attract, motivate, reward, and retain highly qualified executives who are capable of creating and sustaining value for our shareholders over the long term. We endorse compensation actions that fairly reflect company performance as well as the responsibilities and personal performance of individual executives.
Executive Compensation Program Highlights
Our executive compensation programs are intended to align the interests of our executives with those of our stakeholders and are structured to reflect best practices. Some features of our programs are included in the following chart.
20152017 EXECUTIVE COMPENSATION PRACTICES
WhatWeDo: | WhatWeDon’tDo: | |||||
✓ | Focus on long-term compensation using a balanced portfolio of compensation elements such as cash and equity, and deliver rewards based on sustained performance over time | |||||
✓ | Stock ownership requirements for executives (6X base salary for CEO) | |||||
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Caps in our short- and long-term incentive plans, which prevent unintended windfalls ✓ Compensation recovery policy (clawbacks) ✓ Use of targeted performance metrics to align pay with performance | ✗ | No employment contracts with any salaried U.S. employees, including named executive officers ✗ No hedging or pledging of our shares ✗ No dividend or dividend equivalent payments on unearned performance-based grants ✗ No use of the same metrics in short- and long-term incentive plans | ||||
✗ | No repricing of stock options and no discounted stock options ✗ No tax gross-ups | |||||
SAY ON PAY 2015 ADVISORY VOTE AND SHAREHOLDER ENGAGEMENTSay On Pay 2017 Advisory Vote
The Board of Directors is committed to understanding the views of our shareholders by providing an opportunity to endorse our executive compensation through an advisory, non-binding vote. In 2015,2017, our shareholders approved our executives’ compensation by a vote of 93%94%.
After carefully considering these voting results and a comprehensive assessment Additionally, 90% of Eaton’sshares voted were in favor of holding the advisory vote on executive compensation programs, the Committee decided to make certain adjustments to our executive compensation programs, including changes to the form and length of our performance-based long-term incentive program. These and the other changes that were implemented in 2015 are summarized on page 33.an annual basis.
The Committee will continue to review our compensation programs each year in light of the annual “say-on-pay” voting results.
EATON 2016 Proxy Statement and Notice of Meeting 4
EATON2018 Proxy Statement and Notice of Meeting | 5 |
Our Board of Directors is currently comprised of 1412 members, all of whom serve for a term of one year or until a respective successor is elected and has been qualified. However, Alexander M. Cutler, our Chairman, has announced his retirement from the Board in May 2016 in connection with his retirement as Eaton’s Chief Executive Officer. After Mr. Cutler’s retirement, the Board will consist of 13 members. All nominees are currently Eaton directors who were elected by shareholders at the 20152017 annual general meeting, except Craig Arnold and Richard H. Fearon, who were elected by the Board of Directors effective September 1, 2015.meeting.
If any of the nominees becomes unable or declinedeclines to serve, the individuals named as proxies in the enclosed proxy form will have the authority to vote for any substitutes who may be nominated in accordance with our Articles of Association. However, we have no reason to believe that this will occur.
Craig Arnold
Craig Arnold is Director Qualifications:Mr. Arnold’s years of senior management and executive leadership experience at Eaton provide important insight into the Company to the benefit of the Board of Directors. Mr. Arnold has gained detailed knowledge of Eaton’s businesses, customers, end markets, sales and marketing, technology innovation and new product development, supply chains, manufacturing operations, talent development, policies and internal functions through his service in a wide range of management roles with the Industrial Sector, and as President and Chief Operating Officer of the Company. Further, he possesses significant corporate governance knowledge developed by current and past service on the boards of other publicly traded companies, most notably for Medtronic plc, a publicly traded company domiciled in Ireland. |
DirectorSince2015 Age | |
Todd M. Bluedorn Chairman and Chief Executive Officer, Lennox International Inc. Todd M. Bluedorn is Chairman and Chief Executive Officer of Lennox International Inc., a global provider of climate control solutions for heating, air conditioning and refrigeration markets. Prior to joining Lennox International in 2007, Mr. Bluedorn served in numerous senior management positions for United Technologies Corporation since 1995, including President, Americas — Otis Elevator Company; President, North America — Commercial Heating, Ventilation and Air Conditioning for Carrier Corporation; and President, Hamilton Sundstrand Industrial. He is Director Qualifications:Mr. Bluedorn has executive leadership experience in original equipment and aftermarket business and distributor/dealer-based commercial channels. He also has senior leadership experience with two major industrial corporations. His experience with industrial companies in responding to dynamic market conditions benefits Eaton as a global manufacturing company with product distribution through numerous commercial channels. | Director Since 2010 Age
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EATON2018 Proxy Statement and Notice of Meeting | 6 |
EATON 2016 Proxy Statement and Notice of Meeting 5
Christopher M. Connor Retired Chairman and Chief Executive Christopher M. Connor is the retired Chairman and Chief Executive Director Qualifications:As |
Lead Director Age
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Michael J. Critelli Retired Chairman and Chief Executive Officer, Michael J. Critelli Director Qualifications:Mr. Critelli has extensive experience in risk management, cybersecurity, industry-wide leadership in transportation, logistics, online and social media marketing and communications issues. In addition to broad business experience gained while leading a global Fortune 500 company, he is a thought leader on transportation strategy and regulatory reform, as well as innovative approaches to healthcare. His background and experience are valuable to our Board as it oversees management’s efforts to develop and maintain talent, assess and evaluate enterprise risk management and cybersecurity issues, and navigate the regulatory environment. |
Director since 1998 Age |
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EATON 2016 Proxy Statement and Notice of Meeting 6
Richard H. Fearon Vice Chairman and Chief Financial and Planning Officer, Eaton Corporation Richard H. Fearon has served as Chief Financial and Planning Officer of Eaton since April 2002 and Vice Chairman since January 2009. He is responsible for the accounting, control, corporate development, information systems, internal audit, investor relations, strategic planning, tax and treasury functions of Eaton. Prior to Eaton, Mr. Fearon worked at several large diversified companies, including Transamerica Corporation, NatSteel Limited and The Walt Disney Company. He currently is the lead director for PolyOne Director Qualifications: Mr. Fearon’s years of experience as |
Director since 2015 Age | |
EATON2018 Proxy Statement and Notice of Meeting | 7 |
Charles E. Golden Retired Executive Vice President and Chief Financial Officer, Eli Lilly and Company Charles E. Golden served as Executive Vice President and Chief Financial Officer and a director of Eli Lilly and Company, an international developer, manufacturer and seller of pharmaceutical products, from 1996 until his retirement in 2006. Prior to joining Eli Lilly, he had been associated with General Motors Corporation since 1970, where he held a number of positions, including Corporate Vice President, Chairman and Managing Director of the Vauxhall Motors subsidiary and Corporate Treasurer. He is currently on the board of Hill-Rom Holdings, Inc. and was a past director of Unilever NV/PLC. Director Qualifications:Mr. Golden has a comprehensive knowledge of both U.S. and international financial accounting standards. He has extensive experience in financial statement preparation, accounting, corporate finance, risk management and investor relations both in the U.S. and internationally. His broad financial expertise enables him to provide expert guidance and oversight |
Director since 2007 Age |
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EATON 2016 Proxy Statement and Notice of Meeting 7
Arthur E. Johnson Retired Senior Vice President, Corporate Strategic Development, Lockheed Martin Corporation
Arthur E. Johnson is the retired Senior Vice President, Corporate Strategic Development of Lockheed Martin Corporation, a manufacturer of advanced technology systems, products and services. Mr. Johnson was elected a Vice President of Lockheed Martin Corporation and named President of Lockheed Martin Federal Systems in 1996. He was named President and Chief Operating Officer of Lockheed Martin’s Information and Services Sector in 1997 and Senior Vice President, Corporate Strategic Development in 1999. Mr. Johnson currently is a director of Booz Allen Hamilton and during the past five years was a director of AGL Resources, Inc. Director Qualifications:Mr. Johnson’s role in strategic development with a leading company in the defense industry has given him an understanding of doing business with governments, strategic planning, regulatory compliance, and legislative and public policy matters. His knowledge of the global aerospace and defense industry are of particular benefit to our Board in connection with these businesses. Mr. Johnson’s service as lead director of a New York Stock Exchange listed company, as well as his service on other boards, provides Eaton with valuable corporate governance expertise, which is of particular benefit to Eaton in his role as Chair of the Governance Committee. |
Director since 2009 Age
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Deborah L. McCoy Independent aviation safety consultant
Deborah L. McCoy is an independent aviation safety consultant. She retired from Continental Airlines, Inc. in 2005, where she had served as Senior Vice President, Flight Operations since 1999. During part of 2005, Ms. McCoy also briefly served as the Chief Executive Officer of DJ Air Group, a start-up commercial airline company.
Director Qualifications:Ms. McCoy has extensive experience in the commercial aerospace markets and brings an understanding of aircraft design and performance, global airline operations and the strategic issues and direction of the aerospace industry. In addition, Ms. McCoy has extensive experience in safety initiatives, Federal regulatory compliance, labor relations, talent management, and risk analysis and mitigation. All of these attributes are of benefit to Eaton’s Board in its oversight role across the enterprise. |
Director since 2000 Age
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EATON 2016 Proxy Statement and Notice of Meeting 8
EATON2018 Proxy Statement and Notice of Meeting | 8 |
Gregory R. Page Retired Chairman and Chief Executive
Gregory R. Page is the retired Chairman and Chief Executive
Director Qualifications: As |
Director since 2003 Age |
Sandra Pianalto Retired President and Chief Executive Officer of the Federal Reserve Bank of Cleveland
Sandra Pianalto served as President and Chief Executive Officer of the Federal Reserve Bank of Cleveland from February 2003 until her retirement in June 2014. She joined the Bank in 1983 as an economist in the research
Director Qualifications:Ms. Pianalto has extensive experience in monetary policy and financial services, and brings to Eaton wide-ranging leadership and operating skills through her former roles with the Federal Reserve Bank of Cleveland. As Chief Executive Officer of the Bank, she developed expertise in economic research, management of financial institutions, and payment services to banks and the U.S. Treasury. Ms. Pianalto’s comprehensive experience qualifies her to provide substantial guidance and oversight to the Board |
Director since 2014 Age
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EATON2018 Proxy Statement and Notice of Meeting | 9 |
EATON 2016 Proxy Statement and Notice of Meeting 9
Gerald B. Smith Chairman and Chief Executive Officer, Smith Graham & Co., and former lead independent director of Cooper Industries plc
Gerald B. Smith was a director of Cooper Industries plc from 2000 until 2012 and served as lead independent director of Cooper Industries plc since 2007. Mr. Smith joined the Board effective upon the close of the Cooper acquisition. He is Chairman and Chief Executive Officer of Smith Graham & Co., an investment management firm that he founded in 1990. Prior to launching Smith Graham, he served as Senior Vice President and Director of Fixed Income for Underwood Neuhaus & Company. He is a member of the Board of Trustees and chair of the Investment Oversight Committee for The Charles Schwab Family of Funds. Mr. Smith also serves as a director and chair of the Investment Committee of the New York Life Insurance Company. In the past five years, Mr. Smith was a director of ONEOK Inc. and ONEOK Partners MLP. He serves as Chairman of the Texas Southern University Foundation and a director of the Federal Reserve Bank of Dallas. He is a former director of the Federal Reserve Bank of Dallas, Houston
Director Qualifications: Mr. Smith has expertise in finance, portfolio management and marketing through executive positions in the financial services industry, including being founder, Chairman and |
Director since 2012 Age
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Dorothy C. Thompson Retired Chief Executive, Drax Group Dorothy C. Thompson CBE is the retired Chief Executive and director of Drax Group plc, a U.K.-based power retail and generation company. She was appointed CEO of Drax Group plc in September 2005 and to the company’s Board of Directors in October 2005. Prior to joining Drax, Ms. Thompson was vice president of InterGen NV, an independent power-company jointly owned by Shell and Bechtel. She joined InterGen in 1998 from PowerGen plc where she was assistant group treasurer. In addition to her leadership at Drax, she is a member of the Board of Directors of the Court of the Bank of England and was a director of Johnson Matthey Plc until 2016. Director Qualifications: As the retired Chief Executive of Drax, Ms. Thompson has unique insight into the sourcing, generation and supply of sustainable and renewable energy. She also brings to the Board vast experience in all aspects of finance as well as an international business perspective. | Director since 2016 Age 57 | |
EATON2018 Proxy Statement and Notice of Meeting | 10 |
The Governance Committee of the Board, composed entirely of directors who meet the independence standards of
the Board of Directors and the New York Stock Exchange, is responsible for overseeing the process of nominating individuals to stand for election as directors. The Governance Committee charter is available on our website at http://www.eaton.com/governance.
The Governance Committee will consider any director candidates recommended by our shareholders, consistent with the process used for all candidates. To learn how to submit a shareholder recommendation, see below under “Shareholder Recommendations of Director Candidates.”
The Governance Committee chair reviews all potential director candidates in consultation with the Chairman, typically with the assistance of a professional search firm retained by the Committee. The Committee decides whether to recommend one or more candidates to the Board of Directors for nomination. Candidates who are ultimately nominated by the Board stand for election by the shareholders at the annual general meeting. Between annual general meetings, nominees may also be elected by the Board itself. Directors Craig Arnold and Richard H. Fearon were elected by the Board effective September 1, 2015. Messrs. Arnold and Fearon were identified as director candidates by the Chairman and other Company directors as part of the Company’s succession planning.
Director Qualifications and Board Diversity
The Board of Directors recognizes the value of nominating director candidates who bring diverse opinions, perspectives, skills, experiences, backgrounds, and orientations to Board deliberations. The Governance Committee uses a rigorous process for identifying and evaluating director nominees. In order to be recommended by the Governance Committee, a candidate must have the following minimum qualifications, as described in the Board of Directors Governance Policies: personal ability, integrity, intelligence, relevant business background, independence, expertise in areas of importance to our objectives, and a commitment to our corporate mission. In addition, the Governance Committee looks for individuals with specific qualifications so that the Board as a whole has diversity in experience, international perspective, background, expertise, skills, age, gender, and ethnicity. These specific qualifications may vary from year to year, depending upon the composition of the Board at that time.
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The Governance Committee is responsible for ensuring that director qualifications are met and Board balance and diversity objectives are considered during its review of director candidates. The Committee annually evaluates the extent to which these goals are satisfied as part of its yearly assessment of the skills and experience of each of the current directors using a director skills matrix and a director evaluation process.
The director evaluation process includes self-evaluation, peer evaluationinput from the Chairman and CEO, and input from the chairs of each Board committee. A self-evaluation is designed to elicit each director’s thoughts about his or her contibutions in light of the needs of the Board and the Company. The evaluation is focused on opportunities for further improvement in effectiveness, indication of preferences in future Board committee rotation, identification of board matter educational priorities, and requests for Company specific orientation information. The director evaluation process is typically conducted during the October and February Governance Committee and Board meetings. At the conclusion of the evaluation process, the Chair of the Governance Committee provides specific feedback to the individual directors relative to further performance improvement, educational opportunities, and other counsel.
Upon completion of the skills matrix and the evaluation process, the Governance Committee identifies areas of director knowledge and experience that may benefit the Board in the future and uses that information as part of the director search and nomination effort.
The Board of Directors Governance Policies are available on our website at http://www.eaton.com/governance.
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Shareholder Recommendations of Director Candidates
The Governance Committee will consider director candidates who are recommended to it in writing by any Eaton shareholder. In accordance withshareholder who submits a recommendation by following the procedures required under our Articles of Association for nominating director candidates. Accordingly, any shareholder wishing to recommend an individual as a nominee for election at the 20172019 annual general meeting of shareholders should send a signed letter of recommendation to the following address: Eaton Corporation plc, Attention: Company Secretary, Eaton House, 30 Pembroke Road, Dublin 4, Ireland.Ireland D04 Y0C2. Recommendation letters must be received no earlier than December 18, 2016November 16, 2018 and no later than the close of business on January 17, 2017December 16, 2018, and must include the reasons for the recommendation, the full name and address of each proposed nominee, and a brief biographical history setting forth past and present directorships, past and present positions held, occupations and civic activities. The recommendation letter should be accompanied by a written statement from the proposed nominee consenting to be nominated and, if nominated and elected, to serve as a director.
Any shareholder wishing to recommend an individual as a nominee for election as a director must also describe in a detailed writing any financial agreement, arrangement or understanding between the nominee and any party other than the Company relating to such nominee’s potential service as a director, and details of any compensation or other payment received from any such third party other than the Company relating to such nominee’s potential service as a director, and details regarding such agreement, arrangement or understanding and its terms, or of any compensation received.director.
The Board of Directors Governance Policies provide that all of our non-employee directors should be independent. The listing standards of the New York Stock Exchange state that no director can qualify as independent unless the Board of Directors affirmatively determines that he or she has no material relationship with the Company. Additional, and more stringent, standards of independence are required of Audit Committee members. Our annual proxy statement discloses the Board’s determination as to the independence of the Audit Committee members and of all non-employee directors. For our current directors, we describe these determinations here.
As permitted by the New York Stock Exchange listing standards, the Board of Directors has determined that certain categories of relationships between a non-employee director and the Company will be treated as immaterial for purposes of determining a director’s independence. These “categorical” standards are included in the Board of Directors’ independence criteria. The independence criteria for non-employee directors and members of the Audit Committee are available on our website at http://www.eaton.com/governance.
Because directors’director independence may be influenced by their use of Company aircraft and other Company-paid transportation, the Board has adopted a policy on this subject.
In their review of director independence, the Board of Directors and its Governance Committee have considered the following circumstances:
Directors T. M. Bluedorn, C. M. Connor, L. A. Hill and G. R. Page currently serve or have served as officers or employees of companies that had purchases and/or sales of property or services with us during 2015.2017. In each case, the amounts of the purchases and sales met the Board’s categorical standard for immateriality; that is, they were less than the greater of $1 million or 2% of the annual consolidated gross revenues of the director’s company. Mr. Bluedorn is Chairman and CEO of Lennox International Inc., which purchased approximately $373,000$360,000 worth of Eaton products and sold approximately $38,000 worth of products to Eaton during 2015.2017. Mr. Connor is the retired Chairman and Chief Executive ChairmanOfficer of The Sherwin-Williams Company, which purchased approximately $47,000$97,000 worth of Eaton products and sold approximately $476,000$838,000 worth of products to Eaton during 2015. Ms. Hill is a director of Harvard Business Publishing, which provided executive training services to Eaton for an aggregate cost of $286,000
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during 2015.2017. Mr. Page is the retired Chairman and Chief Executive DirectorOfficer of Cargill, Incorporated, which purchased approximately $833,000$878,000 worth of Eaton products and sold approximately $17,633,000$17,982,000 worth of products to Eaton during 2015.2017. In addition, Cargill paid approximately $7,558,000$608,000 in royalty payments to the Company.
The use of our aircraft and other Company-paid transportation by all non-employee directors is consistent with the Board policy on that subject.
After reviewing the circumstances described above (which are the only relevant circumstances known to the Board of Directors), the Board has affirmatively determined that none of our non-employee directors has a material relationship with the Company other than in his or her capacity as a director, and that eachall of the followingour non-employee directors qualifiesqualify as independent under the Board’s independence criteria and the New York Stock Exchange standards: T. M. Bluedorn, C. M. Connor, M. J. Critelli, C. E. Golden, L. A. Hill, A. E. Johnson, N. C. Lautenbach, D. L. McCoy, G. R. Page, S. Pianalto and G. B. Smith.standards. All members of the
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Audit, Compensation and Organization, Finance, and Governance Committees qualify as independent under the standards described above.
The Board also has affirmatively determined that each member of the Audit Committee that is, T. M. Bluedorn, M. J. Critelli,— D. L. McCoy, S. Pianalto, G. R. Page, G. Smith and G. B. Smith,D. Thompson — meets not only our Board’s independence criteria but the special independence standards required by the New York Stock Exchange and the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission.
Review of Related Person Transactions
Our Board of Directors has adopted a written policy to identify and evaluate “related person transactions,” that is, transactions between us and any of our executive officers, directors, director nominees, 5%-plus security holders or members of their “immediate families,” or organizations where they or their family members serve as officers or employees. The Board policy calls for the disinterested members of the Board’s Governance Committee to conduct an annual review of all such transactions. At the Committee’s direction, a survey is conducted annually of all transactions involving related persons, and the Committee reviews the results in January or February of each year. The Committee is responsible for determining whether any “related person transaction” (i) poses a significant risk of impairing, or appearing to impair, the judgment or objectivity of the individuals involved; (ii) poses a significant risk of impairing, or appearing to impair, the independence of an outside director or director nominee; or (iii) has terms that are less favorable to us than those generally available in the marketplace. Depending upon the Committee’s assessment of these risks, the Committee will respond appropriately. In addition, as required by the rules of the Securities and Exchange Commission, any transactions that are material to a related person are disclosed in our proxy statement.
As discussed above, the Governance Committee is charged with reviewing issues involving director independence and all related persons transactions. The Committee and the Board have determined that since the beginning of 20152017 the only related person transactions were those described above under the heading “Director Independence” and that none of our executive officers engaged in any such transactions. The Committee also concluded that none of the related person transactions posed risks to the Company in any of the areas described above.
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The Board of Directors has the following standing committees: Audit, Compensation and Organization, Executive, Finance, and Governance.
Audit Committee | Met | ||||
| The functions of the Audit Committee include assisting the Board in overseeing: | ||||
■the integrity of our financial statements and its systems of internal accounting and financial controls; ■ the independence, qualifications and performance of our independent auditor; | ■the performance of our internal auditors; ■ the cybersecurity program as part of the risk oversight function; and ■ our compliance with legal and regulatory requirements. | ||||
The Committee also has sole authority to appoint, compensate and terminate the independent auditor, and pre-approves all auditing services and permitted non-audit services that the audit firm may perform for the Company. The Committee is also responsible for negotiating the audit fees. In order to ensure continuing auditor independence, the Committee periodically considers whether there should be a rotation of the independent audit firm. In conjunction with the mandated rotation of the audit firm’s lead engagement partner, the Committee and its Chair are directly involved in the selection of the audit firm’s new lead engagement partner. Among its other responsibilities, the Committee meets regularly in separate Executive Sessions with our independent auditor and senior leaders of Eaton Corporation, including the Vice Chairman and Chief Financial and Planning Officer, Executive Vice President and General Counsel, Each Committee member meets the independence requirements, and all Committee members collectively meet the other requirements, of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission. In addition, Committee members are prohibited from serving on more than two other public company audit committees. The Board of Directors has determined that each member of the Audit Committee is financially literate, that Messrs. | |||||
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Compensation and Organization Committee | Met | ||||
Todd M. Bluedorn Christopher M. Connor | The functions of the Compensation and Organization Committee include: | ||||
■reviewing proposed organization or responsibility changes at the senior officer level; ■ evaluating the performance of the Company’s Chairman and Eaton Corporation’s Chief Executive Officer with input from all non-employee directors; ■ reviewing the performance evaluations of the other senior officers; ■ reviewing succession ■ reviewing our practices for recruiting and developing a diverse talent pool; ■ determining the annual salaries and short-and long-term incentive opportunities for our senior officers; ■ establishing performance objectives under our | ■annually determining the aggregate amount of awards to be made under our short-term incentive compensation plans and adjusting those amounts as it deems appropriate within the terms of those plans; ■ annually determining the individual awards to be made to our senior officers under our short- and long-term incentive compensation plans; ■
■ reviewing compensation practices as they relate to key employees to confirm that those plans remain equitable and competitive; ■ reviewing significant new employee benefit plans or significant changes in such plans or changes with a disproportionate effect on our officers or primarily benefiting key employees; and ■
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Additional information on the Committee’s processes and procedures is contained in the Compensation Discussion and Analysis portion of this proxy statement beginning on page |
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Executive Committee | |||||
Each non-employee director serves a four-month term | The functions of the Executive Committee include: | ||||
■acting on matters requiring Board action during the intervals between Board meetings; and | ■carrying out any function of the Board except for filling Board or Committee vacancies. | ||||
Mr. | |||||
Finance Committee | Met 2 times in | ||||
Todd M. Bluedorn | The functions of the Finance Committee include: | ||||
■the periodic review of our financial condition and the recommendation of financial policies to the Board; ■ analyzing Company policy regarding its debt-to-equity relationship; ■ reviewing and making recommendations to the Board regarding our dividend policy; ■ reviewing our cash flow, proposals for long- and short-term debt financing and the financial risk management program; | ■meeting with and reviewing the performance of the management pension committees and any other fiduciaries appointed by the Board for pension and profit-sharing retirement plans; and ■ reviewing the key assumptions used to calculate annual pension expense. | ||||
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Governance Committee | Met 3 times in | ||||
Arthur E. Johnson
| The responsibilities of the Governance Committee include: | ||||
■ recommending to the Board improvements in our corporate governance processes and any changes in the Board Governance Policies; ■ advising the Board on changes in the size and composition of the Board; ■
annually submitting to the Board candidates for members and chairs of each standing Board committee; ■ in consultation with the Chief Executive Officer of Eaton Corporation, identifying and recommending to the Board candidates for Board membership; | ■reviewing and recommending to the Board the nomination of directors for re-election; ■ overseeing the orientation of new directors and the ongoing education of the Board; ■ recommending to the Board compensation of non-employee directors; ■ administering the Board’s policy on director retirements and resignations; and ■ establishing guidelines and procedures to be used by the directors to evaluate the Board’s performance. | ||||
Other responsibilities include providing oversight on significant public policy issues with respect to our relationships with shareholders, employees, customers, competitors, suppliers and the communities in which we operate, including such areas as ethics, compliance, environmental, health and safety issues, community relations, government relations, charitable contributions and shareholder relations. | |||||
Committee Charters and Policies
The Board committee charters are available on our website at http://www.eaton.com/governance.
In addition to the Board of Directors Governance Policies, certain other policies relating to corporate governance matters are adopted from time to time by Board committees, or by the Board itself upon recommendation of the committees.
BOARD MEETINGS AND ATTENDANCE AT ANNUAL GENERAL MEETING
The Board of Directors held fivefour meetings in 2015.2017. Each of the directors attended at least 85%90% of the meetings of the Board and the committees on which he or she served. The average rate of attendance for all directors was 95%.
Director Attendance at Annual General Meeting of Shareholders — The policy of the Board of Directors is that all directors should attend the annual general meetings of shareholders. At the 20152017 annual general meeting held April 22, 2015, 11 of the 1226, 2017, all members of the Board at that time were in attendance.
The Board revised the Board of Directors Governance Policies most recently in July 2015,October 2017, as recommended by the Governance Committee of the Board. The revised Governance Policies are available on our website at http://www.eaton.com/governance.
EXECUTIVE SESSIONS OF THE NON-EMPLOYEE DIRECTORS
The Board’s policy is that the non-employee directors, all of whom qualify as “independent” under the criteria of the Board of Directors and the New York Stock Exchange, meet in Executive Session at each regular Board meeting, without the Chairman or other members of management present, to discuss topics they deem appropriate. As described more fully in “Leadership Structure” below, the Lead Director chairs these Executive Sessions.
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At each meeting of the Audit, Compensation and Organization, Finance, and Governance Committees, the Committee members (all of whom qualify as independent) hold an Executive Session, without any members of our management present, to discuss topics they deem appropriate.
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Our governance structure follows a successful leadership model under which the Chief Executive Officer of Eaton Corporation also serves as Chairman of the Board of the Company. Recognizing that different leadership models may work well for other companies at different times depending upon individual circumstances, we believe that our Company has been well served by the combined Chief Executive Officer and Chairman leadership structure and that this approach has continued to be highly effective with the addition of a Lead Director. We believe we have benefited greatly from having a Chairman who sets the tone and direction for the Company while also having the primary responsibility as Chief Executive Officer for managing Eaton'sEaton’s day-to-day operations, and allowing the Board to carry out its strategic, governance, oversight and decision-making responsibilities with the equal involvement of each director.
Our Board is composed primarily of independent directors, except for our Chairman, Mr. Cutler,Arnold, and Messrs. Arnold andMr. Fearon. Of our 1110 non-employee directors, fourfive are currently serving or have served as a chief executive officer of a publicly traded company. The Audit, Compensation and Organization, Finance, and Governance Committees are chaired by independent directors. Our Chairman has benefited from the extensive leadership experience represented on our Board of Directors.
The Board evaluates the leadership structure annually, and it will continue to do so as circumstances change, including when a new Chief Executive Officer is elected. In its February 20162018 annual evaluation, the Board concluded that the current leadership structure — under which the Chief Executive Officer of Eaton Corporation serves as Chairman of the Board of the Company, our Board committees are chaired by independent directors, and a Lead Director assumes specific responsibilities on behalf of the independent directors — remains the optimal board leadership structure for our Company and our shareholders at the present time.
Ned C. Lautenbach,Christopher M. Connor, who has served on Eaton’s Board since 1997,2006, was first elected Lead Director by our independent directors in 2010.2016. The Lead Director has specific responsibilities, including chairing meetings of the Board at which the Chairman is not present (including Executive Sessions of the Board), approving the agenda and schedule for Board meetings on behalf of the independent directors, approving information sent to the Board, serving as liaison between the Chairman and the independent directors, and being available for consultation and direct communications with shareholders and other Company stakeholders. The Lead Director has the authority to call meetings of the independent directors and to retain outside advisors who report directly to the Board of Directors. The Lead Director’s performance is assessed annually by the Board in a process led by the Chair of the Governance Committee, and the position of Lead Director is elected annually by our independent directors.
Management continually monitors the material risks facing the Company, including strategic risk, financial risk, operational risk, and legal and compliance risk. The Board of Directors has chosen to retain overall responsibility for risk assessment and oversight at the Board level in light of the interrelated nature of the elements of risk, rather than delegating this responsibility to a Board committee. The Board is responsible for overseeing the strategic planning process and reviewing and monitoring management’s execution of the corporate and business plan. As described below, the Board receives assistance from certain of its committees for the identification and monitoring of those risks that are related to the committees’ areas of focus as described in each committee charter. The Board and its committees exercise their risk oversight function by carefully evaluating the reports they receive from management and by making inquiries of management with respect to areas of particular interest to the Board.
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The Audit Committee considers risks related to internal controls, disclosure, financial reporting and legal and compliance matters. Among other processes, the Audit Committee meets regularly in closed-door sessions with our internal and external auditors and senior leaders of Eaton Corporation, including the senior members of the Finance function, the Executive Vice President and General Counsel, and Secretary, and the Senior Vice President-Global Ethics and Compliance. As described more fully in the section entitled “Relationship Between Compensation Plans and Risk” on page 49,42, the Compensation and Organization Committee reviews risks associated with the Company’s compensation programs to ensure that incentive compensation arrangements for senior executives do not encourage inappropriate risk taking. The Governance Committee considers risks related to corporate governance, such as director independence and related person transactions, and risks associated with the environment, health and safety.
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We have a Code of Ethics that was approved by the Board of Directors. We provide training globally for all employees on our Code of Ethics. We require that all directors, officers and employees of the Company, our subsidiaries and affiliates, abide by our Code of Ethics, which is available on our website at http://www.eaton.com/governance. In addition, we will disclose on our website any waiver of or amendment to our Code of Ethics requiring disclosure under applicable rules.
The Board of Directors provides a process for shareholders and other interested parties to send communications to the Board, individual directors or the non-employee directors as a group. Shareholders and other interested parties may send such communications by mail or courier delivery addressed as follows:
Company Secretary
Eaton Corporation plc
Eaton House
30 Pembroke Road
Dublin 4, Ireland
D04 Y0C2
Email messages to the directors may be sent to Board@eaton.com.
In general,Generally, the Company Secretary forwards all such communications to the Lead Director. The Lead Director in turn determines whether the communications should be forwarded to other members of the Board and if so, forwards them accordingly. However, forFor communications addressed to a particular member of the Board, the Chair of a particular Board committee or the non-employee directors as a group, the Company Secretary forwards those communications directly to those individuals.
Alternatively, correspondence may be sent to:
Lead Director
Eaton Corporation plc
Eaton House
30 Pembroke Road
Dublin 4, Ireland
D04 Y0C2
The Secretary maintains a log of all correspondence addressed to the Board and, except as noted below, forwards all communications to the interested directors. For example, correspondence on a financial topic would be sent to the Chair of the Finance or Audit Committees, and correspondence on governance topics to the Lead Director or Chair of the Governance Committee.
The Secretary makes periodic reports to the Governance Committee regarding correspondence from shareholders and other interested parties. Because most correspondence is received shortly before or after our Annual General Meeting of Shareholders that is generally held in April, the report is typically made at the July Governance Committee meeting.
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Derivative shareholder communications and demands for inspection of company records should be sent to the Secretary who will promptly disseminate such communications to the entire Board. The Board will consult with the General Counsel or his designee to determine appropriate action.
The directors have requested that communications that do not directly relate to their duties and responsibilities as our directors be excluded from distribution and deleted from email that they access directly. Such excluded items include “spam,” advertisements, mass mailings, form letters and email campaigns that involve unduly large numbers of similar communications, solicitations for goods, services, employment or contributions, surveys and individual product inquiries or complaints. Additionally, communications that appear to be unduly hostile, intimidating, threatening, illegal or similarly inappropriate will be screened for omission. Any omitted or deleted communications will be made available to any director upon request.
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Proposal 2A sets out certain proposed amendments to the Company’s Articles of Association and Proposal 2B sets out certain proposed amendments to the Company’s Memorandum of Association. Under Irish law, any amendment to a public company’s Articles of Association must be voted on separately from any amendment to a public company’s Memorandum of Association. For that reason, we are asking shareholders to vote separately on Proposals 2A and 2B. However, given the inextricable link between Proposals 2A and 2B, each proposal is subject to the other being approved by shareholders and, as a result, both proposals will fail if either proposal does not pass.
Set forth below is background information on the proposed amendments to the Company’s Articles of Associationpursuant to this proposal. The description of the following proposed amendments is only a summary and is qualifiedin its entirety by reference to the complete text of the proposed amendments, which is attached to this Proxy Statement as Part 1 of Appendix A. We urge you to read Part 1 of Appendix A in its entirety before casting your vote.
On June 1, 2015, the Companies Act 2014 took effect in Ireland. The Companies Act 2014 is meant to consolidate and modernize company law in Ireland. Although the changes to Irish company law will not impact the Company’s day-to-day operations, we must make certain administrative updates to the Company’s Articles of Association to ensure that these operations are not impacted or affected by the introduction of this new law.
As an example, the Companies Act 2014 will automatically apply certain sections of the Act to the Company unless we explicitly opt out. Given that many of these sections either address matters that are already covered by the Company’s Articles of Association or are not applicable to the Company, we are proposing to amend the Company’s Articles of Association to explicitly opt out of certain provisions, as permitted by the Companies Act 2014. For example, the Companies Act 2014 includes a provision regarding the appointment of directors, which is already covered by existing provisions in the Company’s Articles of Association. Therefore, we recommend opting out of that provision.
Attached as Appendix B to this Proxy Statement is a table that sets out a summary of the optional provisions from which we propose to opt out, a table that sets out a summary of the optional provisions from which we propose not to opt out, as well as certain other general administrative amendments that we propose to make to the Company’s Articles of Association.
As required under Irish law, the resolution in respect of Proposal 2A is a special resolution that requires the affirmative vote of the holders of at least 75% of the votes cast. In addition, Proposal 2A is subject to Proposal 2B being adopted. Therefore, unless shareholders approve Proposal 2B, Proposal 2A will fail.
THE TEXT OF THE RESOLUTION IN RESPECT OF PROPOSAL 2A IS AS FOLLOWS:
“Asaspecialresolutionthat,subjecttoandconditionaluponProposal2Bbeingpassed,theArticlesofAssociationbeandherebyareamendedinthemannerprovidedinPart1ofAppendixAofthisProxyStatement.”
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Set forth below is background information on the proposed amendments to the Company’s Memorandum of Association pursuant to this proposal. The description of the following proposed amendments is only a summary and is qualified in its entirety by reference to the complete text of the proposed amendments, which is attached to this Proxy Statement as Part 2 of Appendix A. We urge you to read Part 2 of Appendix A in its entirety before casting your vote.
As described in Proposal 2A, on June 1, 2015, the Companies Act 2014 took effect in Ireland. In addition to the proposed amendments described above to the Company’s Articles of Association to accommodate the adoption of the Companies Act 2014, we must also make certain corresponding administrative amendments to the Company’s Memorandum of Association to account for the enactment of the Companies Act 2014. Each of the proposed amendments to the Company’s Memorandum of Association are specifically described in the text of the resolution below, as required under Irish law.
As required under Irish law, the resolution in respect of Proposal 2B is a special resolution that requires the affirmative vote of the holders of at least 75% of the votes cast. In addition, Proposal 2B is subject to Proposal 2A being adopted. Therefore, unless shareholders approve Proposal 2A, Proposal 2B will fail.
THE TEXT OF THE RESOLUTION IN RESPECT OF PROPOSAL 2B IS AS FOLLOWS:
“Asaspecialresolutionthat,subjecttoandconditionaluponProposal2Abeingpassed,thefollowingamendments,asshowninPart2ofAppendixAofthisProxyStatement,bemadetotheMemorandumofAssociation:
theMemorandumofAssociationbeandherebyisamendedbythedeletionoftheexistingclause3.16andthesubstitutionthereforofthefollowingnewclause3.16:
“3.16Toincorporateorcausetobeincorporatedanyoneormoresubsidiaries(withinthemeaningoftheCompaniesActs)oftheCompanyforthepurposeofcarryingonanybusiness.”;
theMemorandumofAssociationbeandherebyisamendedbythedeletionoftheexistingclause3.28andthesubstitutionthereforofthefollowingnewclause3.28:
“3.28Toguarantee,support,secure,whetherbypersonalcovenantorbymortgagingorchargingalloranypartoftheundertaking,propertyandassets(bothpresentandfuture)anduncalledcapitaloftheCompany,orbybothsuchmethods,theperformanceoftheobligationsof,andtherepaymentorpaymentoftheprincipalamountsofandpremiums,interestanddividendsonanysecuritiesof,anyperson,firm,orcompanyincluding(withoutprejudicetothegeneralityoftheforegoing)anycompanywhichisforthetimebeingtheCompany’sholdingcompanyasdefinedbytheCompaniesActs,orasubsidiaryasthereindefinedofanysuchholdingcompanyorotherwiseassociatedbytheCompanyinbusiness.”;and
theMemorandumofAssociationbeandherebyisamendedbythedeletionoftheexistingclause3.39andthesubstitutionthereforofthefollowingnewclause3.39:
“3.39TodistributeamongthemembersoftheCompanyincash,kind,specieorotherwiseasmayberesolved,bywayofdividend,bonusorinanyothermannerconsideredadvisable,anypropertyoftheCompany,subjectalwaystotheprovisionsoftheCompaniesActsandanyotherapplicablelaws.”
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The Board of Directors recommends a vote FOR this proposal
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The description of the following proposed amendments is only a summary and is qualified in its entirety by reference to the complete text of the proposed amendments, which is attached to this Proxy Statement as Appendix C. We urge you to read Appendix C in its entirety before casting your vote.
Proposal 3 sets out certain proposed amendments to the Company’s Articles of Association to clarify that the Board has the sole authority to set its size within the fixed limits set out in the Articles of Association. The amendments are designed to clarify the voting standard to be used in director elections at shareholder meetings. The Company’s Articles of Association provide for majority voting in uncontested director elections. Under this standard, each shareholder is entitled to one vote per share for each director position, and only candidates receiving a majority of votes cast are elected. The Articles of Association provide for a plurality voting standard in contested director elections. Plurality voting will be used if the number of director nominees exceeds the size of the Board. Under this standard, each shareholder is entitled to one vote per share for each director position, and the nominees receiving the most votes for those positions are elected. The proposed amendments to the Articles of Association do not change these voting standards. They instead clarify that a contested election involving plurality voting will occur if the number of director nominees exceeds the number of directors fixed from time to time by the Board, rather than the maximum allowable size of the Board contained in the Articles of Association.
As with plurality voting in contested elections, granting the Board sole authority to set its size is a common governance practice in the United States. The overwhelming majority of the 100 largest U.S. public companies have granted their Boards sole authority to set the size of the Board. Accordingly, Proposal 3 seeks shareholder approval to amend the Company’s Articles of Association to grant the Board sole authority to set its size within the parameters established in the Company’s Articles of Association.
As required under Irish law, the resolution in respect of Proposal 3 is a special resolution that requires the affirmative vote of the holders of at least 75% of the votes cast.
THE TEXT OF THE RESOLUTION IN RESPECT OF PROPOSAL 3 IS AS FOLLOWS:
“AsaspecialresolutionthattheArticlesofAssociationbeandareherebyamendedinthemannerprovidedinAppendixCofthisProxyStatement.”
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Shareholders are being asked to appointapprove the appointment our independent auditor and to authorize the Audit Committee of our Board of Directors to set the auditor’s remuneration. Appointment of the independent auditor and authorization of the Audit Committee to set its remuneration require the affirmative vote of a majority of the votes cast by the holders of ordinary shares represented at the annual general meeting in person or by proxy. The Audit Committee and the Board recommend that shareholders reappoint Ernst & Young LLP as our independent auditor to audit our accounts for the fiscal year ending December 31, 20162018 and authorize the Audit Committee of the Board to set the auditor’s remuneration.
A representative of Ernst & Young LLP will be present at the annual general meeting to answer any questions concerning the independent auditor’s areas of responsibility and will have an opportunity to make a statement if he or she desires to do so.
The Audit Committee of the Board of Directors is responsible for assisting the Board in overseeing: (1) the integrity of the Company’s consolidated financial statements and its systems of internal accounting and financial controls;controls, (2) the independence, qualifications and performance of the Company’s independent auditor;auditor, (3) the performance of the Company’s internal auditors;auditors, and (4) the Company’s compliance with legal and regulatory requirements. The Committee’s specific responsibilities, as described in its charter, include the sole authority to appoint, terminate and compensate the Company’s independent auditor, and to pre-approve all audit services and other permitted non-audit services to be provided to the Company by the independent auditor. The Committee is currently comprised of five directors, all of whom are independent under the Sarbanes-Oxley Act of 2002, the rules of the Securities and Exchange Commission and the Board of Directors’ own independence criteria.
The Board of Directors amended the Committee’s charter most recently on October 22, 2013.24, 2017. A copy of the charter is available on the Company’s website at http://www.eaton.com/governance.
The Audit Committee has retained Ernst & Young LLP as Eaton’s independent auditor for 2016.2018. Ernst & Young has been the independent auditor for the Company or its predecessor since 1923. The members of the Audit Committee and the Board believe that due to Ernst & Young’s deep knowledge of the Company and of the industries in which the Company operates, it is in the best interests of the Company and its shareholders to continue retention of Ernst & Young to serve as Eaton’s independent auditor.
In carrying out its responsibilities, the Audit Committee has reviewed, and has discussed with the Company’s management and independent auditor, the Company’s 20152017 audited consolidated financial statements and the assessment of the Company’s internal control over financial reporting.
The Committee has also discussed with Ernst & Young the matters required to be discussed by applicable auditing standards.
The Committee has received the written disclosures from Ernst & Young regarding their independence from the Company that are required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with the Audit Committee concerning independence, has discussed with
Ernst & Young their independence and has considered whether their provision of non-audit services to the Company is compatible with their independence. Based upon the foregoing review and discussions, the Committee recommended to the Board that the financial statements be included in the Company’s Form 10-K for the year ended December 31, 20152017 and annual report to shareholders.
EATON 2016
EATON2018 Proxy Statement and Notice of Meeting | 19 |
For 2017 and Notice of Meeting 22
For 2015 and 2014,2016, Ernst & Young’s fees to the Company and certain of its subsidiaries were as follows:
| 2015 | 2014 | 2017 | 2016 |
Audit Fees | $25.7 million | $27.7 million | $20.6 million | $21.2 million |
Includes Sarbanes-Oxley Section 404 attest services |
|
|
|
|
Audit-Related Fees | $0.3 million | $0.2 million | $0.2 million | $0.3 million |
Includes business acquisitions and divestitures |
|
|
|
|
Tax Fees | $3.7 million | $3.9 million | $3.6 million | $2.1 million |
Tax compliance services | $2.2 million | $1.8 million | $1.0 million | $1.2 million |
Tax advisory services | $1.5 million | $2.1 million | $2.6 million | $0.9 million |
All Other Fees | $0 | $0 | $0 | $0 |
The Audit Committee approved all of the services shown in the above three categories in accordance with the Audit Committee’s pre-approval process. The Audit Committee did not approve any of the services shown in the above three categories through the use of the “de minimis” exception permitted by Securities and Exchange Commission rules.
The Audit Committee has adopted the following procedure for pre-approving audit services and other services to be provided by the Company’s independent auditor: specific services are pre-approved from time to time by the Committee or by the Committee Chair on its behalf. As to any services approved by the Committee Chair, the approval is made in writing and is reported to the Committee at the following meeting of the Committee.
Based upon the Committee’s reviews and discussions referred to above, and in reliance upon them, the Committee has recommended to the Board of Directors that the Company’s audited consolidated financial statements for 2017 be included in the
Company’s annual report on Form 10-K, and the Board has approved their inclusion. |
|
Respectfully submitted to the Company’s shareholders by the Audit Committee of the Board of Directors.
Gregory R. Page,Gerald B. Smith, ChairTodd M. BluedornMichael J. Critelli
Deborah L. McCoyGerald B. SmithGregory R. Page
Sandra Pianalto
Dorothy C. Thompson
EATON 2016 Proxy Statement and Notice of Meeting 23
✓ The Board of Directors recommends a vote FOR this proposal to approve the appointment of the independent auditor and authorize the Audit Committee to set auditor remuneration. |
Advisory Approval of the Company’s Executive Compensation
EATON2018 Proxy Statement and Notice of Meeting | 20 |
Proposal 3: | Advisory Approval of the Company’s Executive Compensation |
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 20172019 annual general meeting of shareholders.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.
NAMED EXECUTIVE OFFICERS'OFFICERS’ COMPENSATION PROGRAM HIGHLIGHTS
As part of our pay for performance culture, our executive compensation plans include the following: | Other features of these programs include: |
● On average, ● Our plans deliver awards below target, or none at all, when Company performance does not meet threshold levels. ● Our executive incentive programs are intended to deliver awards at target | ● Our share ownership requirements range from one times base salary for our general managers to six times base salary for the Company’s Chairman and CEO of Eaton ● Our incentive plan payouts are capped to prevent unintended ● Our compensation clawback policy allows us to recover incentive compensation in case of employee misconduct that causes the need for a material restatement of financial ● We do not enter into employment contracts with any of our salaried U.S. employees, including the named executive officers. |
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 20152017 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 20162018 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 2018 annual general meeting of shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2017 Summary Compensation Table and the other related tables and disclosure.”
| ✓The Board of Directors recommends a vote FOR advisory approval of |
EATON 2016 Proxy Statement and Notice of Meeting 24
EATON2018 Proxy Statement and Notice of Meeting | 21 |
Executive Compensation Table of Contents
EATON2018 Proxy Statement and Notice of Meeting | 22 |
EATON 2016 Proxy Statement and Notice of Meeting 25
Compensation Discussion and Analysis
In this Compensation Discussion and Analysis (CD&A), we discuss our pay for performance philosophy, our pay-setting process, the components of our executive compensation program, and the compensation of our named executive officers for 2015.2017. We also explain our performance metrics in detail and review our executive compensation policies.
Please note that the use of use of “we,” “us” or “our” throughout this CD&A refers to the Company, its subsidiaries or its management. In addition, the use of “Chairman and Chief Executive Officer” or “CEO” throughout this CD&A refers to Alexander M. Cutler,Craig Arnold, Chairman of the Company and Chief Executive Officer of Eaton Corporation. Also, all share amounts and per-share prices for awards and objectives established before February 28, 2011 have been adjusted to reflectSimilarly, the Company’s two-for-one stock split that occurred on that date.other four named executive officers are employees of an Eaton subsidiary.
This section provides a summary of the performance metrics and actual results for the incentive plans in which our named executive officers and other executives participated for the year ending December 31, 2015.2017. For 2015,2017, our named executive officers are:
Alexander M. Cutler,Craig Arnold, Chairman of the Company and Chief Executive Officer of Eaton Corporation
Richard H. Fearon, Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation
Craig Arnold, President and Chief Operating Officer of Eaton Corporation
Mark M. McGuire, Executive Vice President, General Counsel and Secretary of Eaton Corporation
Revathi Advaithi, Chief Operating Officer – Officer–Electrical Sector of Eaton Corporation
Thomas S. Gross, Retired Vice Chairman andUday Yadav, Chief Operating Officer – ElectricalOfficer–Industrial Sector of Eaton Corporation
Curtis J. Hutchins, President–Hydraulics Group
Mr. Gross retired on August 31, 2015. If he had been serving as an executive officer on December 31, 2015, he would have been one of our three most highly compensated executive officers after our Principal Executive Officer and Principal Financial Officer.
Executive Compensation Philosophy
We design our executive compensation plans and programs to help attract, motivate, reward, and retain highly qualified executives who are capable of creating and sustaining value for our shareholders over the long term. We endorse compensation actions that fairly reflect Company performance as well as the responsibilities and personal performance of individual executives.
HIGHLIGHTS OF OUR EXECUTIVE COMPENSATION PROGRAM
Our executive compensation programs are intended to align the interests of our executives with those of our stakeholders and are structured to reflect best practices. On average, 80% of our named executive officers’ compensation is performance-based and tied to our short- and long-term incentive programs. Key features of these programs include:
A capCaps on potential payouts under our short- and long-term incentive plans;
Shareholder-approved short-term and long-term incentive plans;
A clawback policy;
A policy that prohibits hedging or pledging of our shares;
Share ownership and holding requirements;
No tax gross-ups;
No employment contracts; and
In 2015, removal of tax protection provisions from our double-triggerDouble-trigger equity vesting upon a change of control agreements, the addition of restrictive covenants in those agreements, and shortening of the period in which an executive is entitled to benefits under the change of control agreement from three years to two years.control.
EATON 2016 Proxy Statement and Notice of Meeting 26
EATON2018 Proxy Statement and Notice of Meeting | 23 |
Our executive compensation programs reflect the belief that the amount earned by our executives must, to a significant extent, depend on achieving rigorous Company, business unit and individual performance objectives designed to enhance shareholder value. Our executive incentive compensation programs are intended to deliver target awards when our performance aligns withThis illustration shows the peer group median performance and awards that exceed 150%payouts as a percentage of target whenunder our performance is at or above the top quartile of the peer group.
The following chart illustrates Mr. Cutler’s compensationperformance-based annual and cumulativelong-term incentive programs and total return to shareholders over his tenure as the Company’s Chairman and Chief Executive Officer. last five years. As described on page 25, in 2015, we changed the length of our performance-based long-term award periods from four to three years. As a result, two long-term performance periods ended on December 31, 2017. Awards for each period were earned at 25% of target.
The table clearly illustrates the correlation between pay and the performance we are delivering to our shareholders.
CUMULATIVE SHAREHOLDER RETURNS vs. TOTAL DIRECT COMPENSATION
Cumulative Total Shareholder ReturnsReturn and Performance-Based Incentive Plan Payouts
Summary of 2017 Performance-Based Incentive Plan Payouts
Short-Term Incentives
Goals under our short-term, performance-based incentive plan were achieved at 125% of target but management recommended and the Committee determined it was appropriate to reduce the payout to 110%. A bonus pool equal to 1.5% of Annual Net Income served as the initial funding mechanism for our Senior Executive Incentive Compensation Plan (Senior EIC Plan). In addition, the Committee established Adjusted Earnings Per Share (EPS) (which excludes acquisition integration charges) and Cash Flow Return on Gross Capital (CFR) goals that also are used in determining actual awards. For 2017, the target EPS and CFR objectives were $4.45 and 16.6%, respectively. Actual EPS and CFR were $4.65 (after excluding the gain on the Cummins joint venture and the impact of U.S. Tax Reform) and 16.9%.
2017 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS
EATON2018 Proxy Statement and Notice of Meeting | 24 |
Long-TermIncentives
In 2015, we changed the length of our performance-based long-term incentive program from four to three years. The peer group represents an equal weighted index of ABB, Ltd., Danaher Corporation, Dover Corporation, Emerson Electric Co., Honeywell International, Inc., Illinois Tool Works, Inc., Ingersoll-Rand plc, Legrand S.A., Parker Hannifin Corporation, Rockwell Automation, Schneider Electric SE, Siemens AG, and United Technologies Corporation.
Total direct compensation isCommittee determined it was appropriate to change the sumlength of the annual base salary, items reported as "All Other Compensation", short-term incentive award earnedperiods because it had become increasingly difficult to accurately forecast economic cycles over four years. In addition, three-year performance periods are the most prevalent length among our peers and in each respective year,the external market. As a result of this change, both the 2014-2017 and 2015-2017 performance-based long-term cash incentive (ESIP) award earned for the award period ending in each respective year, and grant date value of stock and option awards granted in each respective year. There was no payment under the long-term ESIP plan in 2012. 2013 total compensation includes a $15.6M payout from the 2010-2013 ESIP. This resulted from exceeding the maximum EPS growth and CFR goals of 30% and 15.1%, respectively, and an increase in our stock price of 123% over the four-year period that began on January 1, 2010 andperiods ended on December 31, 2013.2017.
In 2015, total compensation includes payoutswe also changed the form of the performance-based long-term incentive awards from phantom shares that are settled in cash to performance share units that settle in our ordinary shares. The Committee made this change because the accounting treatment for share-based long-term performance awards is more favorable than it is for the cash-settled plans, which are subject to mark-to-market accounting.
The results pertaining to the two long-term incentive periods that ended on December 31, 2017 are shown below. The 2014-2017 award period is the last cash settled award period and awards are reported in the “Non-Equity Incentive Compensation Plan” column of the Summary Compensation Table. Earned awards from the 2015-2017 award period vested on February 27, 2018 and settled in ordinary shares. The values realized upon the vesting of these performance shares will be reported in the Options Exercised and Stock Vested Table in our next proxy statement.
2014-2017 ESIP: Our long-term, performance-based Executive Strategic Incentive Plan (“ESIP”) achieved a 25% payout for the 2014-2017 award period. The target cumulative EPS and CFR goals for the 2014-2017 award period were $22.11 and 20.8%, respectively. Our actual cumulative EPS over the four-year award period of $17.84 (after adjusting for the impact of certain legal settlements, gains from two joint ventures, and the 2017 U.S. Tax Reform) was below the threshold level necessary to earn a payment for the EPS growth metric but actual average CFR of 16.8% exceeded the CFR threshold of 8%.
2014-2017 ESIP opportunities took the form of phantom share units based on the average price of our ordinary shares over the first twenty trading days of the award period (in 2014) and were settled in cash based on the average price of our ordinary shares over the last twenty days of the award period (in 2017). Therefore, appreciation in Eaton’s share price over the four-year award period impacted the value that our executives realized from the ESIP awards, which is consistent with our policy of aligning their interests with those of our shareholders.
2014-2017 EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTS
2015-2017 Executive Strategic Incentive Program (also referred to as ESIP): Our long-term, performance-based ESIP achieved a 25% payout for the 2015-2017 award period. The target cumulative EPS and CFR goals for the 2015-2017 award period were $16.07 and 19.2%, respectively. Our actual cumulative EPS over the four-year award period of $13.17 (after excluding the gain on the Cummins joint venture and the impact of U.S. Tax Reform) was below the threshold level necessary to earn a payment for the EPS growth metric but actual average CFR of 16.5% exceeded the CFR threshold of 8%.
2015-2017 ESIP opportunities took the form of performance share units and were settled in Eaton ordinary shares. Earned shares vested on the date the Committee determined performance results and the calculated payout, which for this grant was February 27, 2018. The value realized by our executives is based on the closing price of our ordinary shares on that matureddate, which was $81.96. Appreciation in Eaton’s share price over the three-year award period impacted the value that our executives realized from the ESIP awards, which is consistent with our policy of aligning their interests with those of our shareholders.
EATON2018 Proxy Statement and Notice of Meeting | 25 |
2015-2017 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PROGRAM GOALS AND RESULTS
Additional information about our annual and long-term incentive plans begins on page 33.
Review of 2017 Advisory Vote on Executive Compensation
The Board of Directors is committed to understanding the views of our shareholders by providing an opportunity to endorse our executive compensation through an advisory, non-binding vote. In 2017, our shareholders approved our executives’ compensation by a vote of 94%. In addition, 90% of shares were voted in favor of holding the non-binding vote on an annual basis.
The Committee considered these voting results, shareholder feedback, and a comprehensive assessment of Eaton’s executive compensation programs, and in light of the support we received from shareholders in 2017, did not make substantive changes to our executive compensation plans or programs. The Committee will continue to review our compensation programs each year in light of the annual “say-on-pay” voting results and shareholder feedback.
Prior Year Changes That Impact the Summary Compensation Table | |||||||||
Effective with the 2015-2017 award period, the Committee approved a change in the form of the ESIP opportunities from phantom shares that are settled in cash to performance share units that settle in our ordinary shares. The Committee made this change because the accounting treatment for share-based long-term performance awards is more favorable than it is for the cash-settled plans, which are subject to mark-to-market accounting. Although this change did not result in larger ESIP target or payout opportunities to participants, the change distorts Total Compensation reported in the Summary Compensation Table. The distortion occurs because we are reporting grants that were made in the most recently reported year as “Stock Awards” and the cash payout for the ESIP performance period that ended in the reported year as “Non-Equity Incentive Plan Compensation.” This distortion occurred in 2015, 2016 and 2017. As of January 1, 2018, the cash-based ESIP periods have ended and there will be no more dual reporting of grants and payouts in the Summary Compensation Table starting with compensation reported for 2018 in next year’s proxy statement. | |||||||||
2017 Summary Compensation Table | |||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||
2014-2017 Long Term Cash Performance Plan Award Period | |||||||||
2017-2019 Long Term Performance Share Award Period | |||||||||
The payout from the cash plan for a prior performance period and the share grant under a new plan for the future performance period distorts reported compensation. The 2014-2017 ESIP award results in realized pay at the end of the 2014-2017 performance period whereas the 2017-2019 grant will only result in realized pay after 2019 if the Company achieves its performance criteria. The 2014-2017 award period is the final cash-settled ESIP opportunity. | |||||||||
EATON2018 Proxy Statement and Notice of Meeting | 26 |
2017 CEO REALIZED PAY AND OUR PERFORMANCE
Our compensation programs for Mr. Arnold and the other named executive officers are heavily weighted toward performance-based opportunities that are at-risk and subject to our performance.
The table below illustrates the relationship between Mr. Arnold’s target award opportunity and the amounts he actually earned based on our performance against the metrics established for the short- and long-term incentive plans that ended on December 31, 20152017. Short- and becauselong-term incentive plan metrics are intended to drive results that create value for our shareholders. This table supplements, but does not substitute, the form of our performance-based long term incentives changed, grants forinformation contained in the period that began on January 1, 2015. The $10.98 million is the amount that would have been reported for 2015 if the form of ESIP had not changed. Please refer to “Adjustments toSummary Compensation Programs For 2015”Table on page 33 for45. Each pay component shown below is discussed in more information about this change.
detail in the CD&A that follows.
EATON 2016 Proxy Statement and Notice of Meeting 27
Back to ContentsCOMPENSATION REALIZED BY OUR CHIEF EXECUTIVE OFFICER IN 2017
Summary of 2015 Performance-Based Incentive Plan Payouts
Compensation Component Period Earned Description Target Amount Earned Annual Compensation Base Salary 2017 We generally target the market median when establishing base n/a $1,125,002 Short-TermIncentive 2017 Mr. Arnold’s target was 150% of base salary. His actual award of 116% of his individual target is consistent with awards delivered to other executives. For more information on this payment, please see “2017 Short Term Incentive Awards”. $1,725,000 $1,992,375 TotalAnnualCash $3,117,377 RealizedValuefromLong-Term Incentives ESIP 2014-2017 Executives earned 25% of $1,050,000 expressed as 13,950 PSUs $300,742 2011-2017 The gains upon exercise of stock options were based on n/a $172,083 RestrictedShareVesting 2013-2017 This represents the vesting of stock awards that were granted in 2013, 2014, 2015 and 2016. Additional details are n/a $1,184,556 AllOtherCompensation Includes the n/a $39,863 TOTALREALIZEDCOMPENSATION $4,814,621 2015-2017 2015-2017 Executives earned 25% of the target number of performance share units that were granted in Compensation Element Period Earned Target Amount Earned Performance Results Over Period Earned Annual Compensation Base Salary 2015 n/a $1,222,056 We generally target the market median when establishing base salaries. Mr. Cutler received an 8.33% increase effective July 1, 2015, bringing his current salary to $1.3 million. This is the first salary increase Mr. Cutler has received since 2010. Short-term Incentive 2015 $1,950,000 $1,681,875 Mr. Cutler’s target was set at 150% of base salary. His actual award of 86% of his individual target is consistent with awards delivered to other executives. For more information on this payment, please see "2015 Short Term Incentive Awards" on page 40. Total Annual Cash $2,903,931 Long-Term Compensation ESIP 2012-2015 $4,250,000 expressed $3,706,674 Mr. Cutler and the other ESIP participants were awarded 70% of the target number of phantom share units that were granted in 2012. The number of phantom share units was multiplied by the average share price at the end of the award period to determine the cash payment. Dividend equivalents also were paid based on the aggregate dividend paid to shareholders over the period and the final number of share units. Stock Option Exercises 2006-2015 n/a $11,594,047 The gains upon exercise of stock options were based on the stock price appreciation from 2006-2015. Shareholders also experienced a 155.8% gain over the period in which the options were held. Additional details, including the number of shares exercised, are reported in the Option Exercises and Stock Vested table on page 59. RSUs Vesting 2012-2015 n/a $3,178,857 This represents the vesting of 45,528 RSUs that were granted in 2012, 2013, and 2014. Additional details are reported in the Option Exercises and Stock Vested table. Total Realized Value from Long-Term Compensation $18,479,578 Other Compensation $102,021 This includes the items disclosed as “Other Compensation” in the Summary Compensation Table, such as use of our aircraft, financial planning reimbursement, and Company matching contributions to the Eaton Savings Plan. TOTAL COMPENSATION $21,485,530 $1,050,000 expressed as 3,930 earned performance share units
salaries. Mr. Arnold received a 4.55% merit increase on July 1, 2017.Goals under our short-term, performance-based incentive plan were achieved at 75% target.A bonus pool equal to 1.5% of Annual Net Income served as the initial funding mechanism for our Senior Executive Incentive Compensation Plan (Senior EIC Plan). In addition, the Committee established Operating Earnings Per Share (EPS) (which exclude acquisition integration charges) and Cash Flow Return on Gross Capital (CFR) goals that also are used in determining actual awards. For 2015, the target EPS and CFR objectives were $4.85 and 17.9%, respectively. Actual EPS and CFR were $4.30 and 16.3%.2015 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTSLong-TermIncentivesOur long-term, performance-based Executive Strategic Incentive Plan (“ESIP”) achieved a 100% payout for the 2012-2015 award period, but the Committee exercised its discretion to reduce awards to 70% of target in order to guard against any potential windfall that could have resulted from the transaction to acquire Cooper Industries, plc. In reducing the awards, the Committee considered that the 2012 transaction to acquire Cooper Industries, plc had a positive impact on the EPS and CFR results and the Committee felt it was important to recognize the transformational impact of the acquisition. However, the Committee also was mindful of the potential windfall the acquisition could have created for participants because it occurred after the Committee set the 2012-2015 ESIP EPS growth and CFR goals.Our actual cumulative EPS over the four-year award period was $17.04, and our actual CFR averaged 25.3%.2012-2015 ESIP opportunities took the formnumber of phantom share units based on ourthat were granted in 2014. The earned number of phantom share price atunits was multiplied by the beginning of the award period (in 2012) and were settled in cash based on theaverage share price at the end of the award period (in 2015). Therefore, appreciation in Eaton’s share priceto determine the cash payment. Dividend equivalents were paid based on the aggregate dividend paid to shareholders over the four-year award period impacted the value that our executives realized from the ESIP awards, which is consistent with our policy of aligning their interests with those of our shareholders. Total return to shareholders was 34.9% over the four-year period.2012-2015 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTSAdditional information about our annual and long-term incentive plans begins on page 39.EATON 2016 Proxy Statement and Notice of Meeting 28Review of 2015 Advisory Vote on Executive CompensationThe Board of Directors is committed to understanding the views of our shareholders by providing an opportunity to endorse our executive compensation through an advisory, non-binding vote. In 2015, our shareholders approved our executives’ compensation by a vote of 93%.The Committee considered these voting results, shareholder feedback, as well comprehensive assessment of Eaton’s executive compensation programs and decided to make certain changes to our executive compensation programs beginning in 2015. Significant changes to our performance-based long-term incentive program are summarized below and the other changes we made are discussed on page 33. The Committee will continue to review our compensation programs each year in lightfinal number of the annual “say-on-pay” voting results and shareholder feedback.share units.Changes to Performance-Based Long-Term Incentive OpportunitiesThe Committee made two significant changes to our long-term performance-based Executive Strategic Incentive program (ESIP) effective with the award period that began on January 1, 2015. These changes are described in greater detail on page 33.1.LengthStock ofOption AwardExercisesPeriod: Effective with award periods beginningor after January 1, 2015, the Committee approved a change instock price appreciation from 2011-2017. Additional details, including the lengthnumber of ESIP award periods from four to three years. The Committee determined it was appropriate to change the length of prospective award periods because it has become increasingly difficult to accurately forecast economic cycles over four years. Three-year performance periods alsoshares exercised, are the most prevalent length among our peers and in the external market.2.FormofPerformance-BasedLong-TermIncentiveOpportunities: Effective with the 2015-2017 award period, the Committee approved a change in the form of the ESIP opportunities from phantom shares that are settled in cash to performance share units that settle in our ordinary shares. The Committee made this change because the accounting treatment for share-based long-term performance awards is more favorable than it is for the cash-settled plans, which are subject to mark-to-market accounting.IMPACT ON THE SUMMARY COMPENSATION TABLEAlthough neither of these changes result in larger ESIP target or payout opportunities to participants, the change in the form of the award distorts Total Compensation reported in the Summary Compensation Table. The distortion occurs because weOption Exercises and Stock Vested in 2017 table on page 50.reporting the 2015-2017 performance-based ESIP grant that was made in 2015 as “Stock Awards” and the cash payout from the 2012-2015 ESIP performance period that concluded in 2015 as “Non-Equity Incentive Plan Compensation.” This distortion will occur for each year through 2017, after which time the cash-based ESIP periods will have matured and there will be no more "doubling up" of grants and payoutsreported in the Summary Compensation Table.Option Exercises and Stock Vested in 2017 table.EATONTotal 2016 Proxy Statement and Notice of Meeting 29Long-TermOur compensation programs for Mr. Cutler and$1,657,381other named executive officers are heavily weighted toward performance-based opportunities that are at-risk and subject to our performance.The table below illustrates the relationship between Mr. Cutler’s target award opportunity and the amounts he actually earned based on our performance against the metrics established for the short- and long-term incentive plans that matured on December 31, 2015. Short- and long-term incentive plan metrics are intended to drive results that create value for our shareholders. This table supplements, but does not substitute, the information containeditems disclosed as “Other Compensation” in the Summary Compensation Table, on page 54. Further, each pay component shown below is discussedsuch as use of our aircraft, financial planning reimbursement, and Company matching contributions to the Eaton Savings Plan.
ESIP (to be realized in more detail2018)the CD&A that follows.COMPENSATION REALIZED BY THE CHIEF EXECUTIVE OFFICER OF EATON CORPORATION IN 2015
as 88,400
phantom share unitsEATON 2016 Proxy Statement and Notice of Meeting 30The realized pay table2015. Dividend equivalents were paid in cash based on the previous page differs from the Summary Compensation Table in aearned number of ways, including:■In additionshare units and the aggregate dividend paid to pay actually received,shareholders over the Summary Compensation Table includes the accounting value of equity compensation granted during the year, which may or may not ever be earned. In contrast, thisaward period. The amount realized pay table reports only the elements of compensation actually received and/or realized by Mr. Cutler in 2015. Specifically, the values for equity awards in the realized pay table show the gross compensation (before applicable taxes) that Mr. Cutler received in 2015 upon his exercise of stock options and the vesting of his RSUs (as shownthese award on February 27, 2018 will be reported in the "Option Exercises and Stock Vested in 2015" table on page 59), regardless of when these options or awards were granted to him.■In addition, the realized pay table doesour next proxy statement. Therefore, this amount is not reflect compensation that is based upon pension value increases and above-market nonqualified deferred compensation earnings, although these amounts are included in the Summary Compensation Table. The Committee reviews compensation that is based upon the change in pension values and above-market nonqualified deferred compensation earningstable above.part of the Tally Sheet review discussed on page 3615,720 PSUs
The realized pay table differs from the Summary Compensation Table in a number of ways, including:
In addition to pay actually received, the Summary Compensation Table includes the accounting value of equity compensation granted during the year, which may or may not ever be earned. In contrast, this realized pay table reports only the elements of compensation actually received and/or realized by Mr. Arnold for performance periods that ended on December 31, 2017. Specifically, the values for equity awards in the realized pay table show the gross compensation (before applicable taxes) that Mr. Arnold received in 2017 upon the exercise of stock options and the vesting of RSUs (as shown in the “Option Exercises and Stock Vested in 2017” table on page 50), regardless of when these options or awards were granted.
In addition, the realized pay table does not reflect compensation that is based upon pension value increases although these amounts are included in the Summary Compensation Table. The Committee reviews compensation that is based upon the change in pension values as part of the Tally Sheet review discussed on page 30 in the context of a competitive overall benefit design and not as an element of its annual compensation decisions.
EATON | 27 |
ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE
Membership and Responsibilities
The Compensation and Organization Committee of the Board of Directors in 2017 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.
Compensation-relatedTasks |
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● Establishes performance objectives under our short- and ● Determines the attainment of those performance objectives and the awards to ● Determines the compensation for our ● Reviews compensation practices relating to key employees to confirm that these practices remain equitable and competitive; and ● Reviews new benefit plans or significant changes in such plans or changes with a disproportionate effect on our officers or primarily benefiting key employees. | ● Evaluates the ●
● Reviews succession planning for officer positions including the position of ● Reviews proposed organization or
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Use of Consultants
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 2017 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.
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HOW WE ESTABLISH AND VALIDATE PAY
This section explains the Committee’s process for establishing and validating our pay targets. As shown in the table and described in detail below, this process involves several important analyses:
Analysis |
| How It’s Used | When It’s Conducted | ||||||||||||
Market Analysis | Aon Hewitt Associates and Willis Towers Watson Executive Compensation databases | Setting pay for our executives | Setting base pay and short- and long-term incentive targets for the | October — February | |||||||||||
PerformanceAssessments | Executive feedback | Evaluating individual performance based on input from the CEO | Determining the short-term incentive award payments for the award period that recently ended and in determining merit increases and adjusting individual award opportunities for the next award cycle | November — January | |||||||||||
TallySheets | Internal compensation and benefits data | Evaluating total remuneration and internal pay equity of our executives | Evaluating the total remuneration and projected payments to the named executive officers under various termination scenarios. This helps to determine if each executive’s compensation package is appropriately aligned with that of internal peers and whether any adjustment to our compensation plans or programs, or an individual’s pay package, is necessary. | February | |||||||||||
Peer Pay andPerformance | Publicly available financial | Evaluating pay and performance to validate individual compensation plans that were established in February | Comparing pay and performance results with that of This study also provides insight into how competitors establish their pay for
Total Compensation Analysis and Planning Process (October–February) 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: Market Analysis — From October through December of each year, our human resources department conducts a market analysis. First, we align our executives’ positions with comparable positions as reported in surveys published by two national consulting firms, Aon Hewitt and Willis Towers Watson. Then, in February, we prepare a comprehensive report for the Committee, which also is reviewed by its independent consultant, that compares our executives’ compensation to the average of the surveys’ median compensation data. This helps the Committee determine how each executive officer’s compensation compares to current market practices. In preparing our comparison for 2017, 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.
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EATON 20162018 Proxy Statement and Notice of Meeting33
Analysis of Internal Pay Equity and our Current Pay Levels — Internal equity among similarly situated positions is an important consideration in establishing individual pay targets. We maintain internal equity by establishing approximately the same target incentive opportunities for similarly situated positions. When determining what positions are similarly situated, we consider the following aspects of each position: its essential functions, the ability of the position holder to influence our overall results, any educational requirements, where the position stands in our leadership ranks, and job demands such as frequent travel and the responsibility to respond to business matters at any time and under any circumstances.
Tally Sheets — In addition to the market analysis, each February we provide the Committee with a comprehensive compensation Tally Sheet for each named executive officer. These Tally Sheets, which also are reviewed by the Committee’s independent consultant, help the Committee evaluate total remuneration and internal pay equity. The Committee reviews them before making decisions about the compensation of the named executive officers for the next year. Each Tally Sheet includes all components of the executive’s current compensation, including base salary, short-term incentive compensation, long-term cash incentive compensation, equity incentive compensation, retirement savings programs, health and welfare programs, and the cost of personal executive benefits. The Committee also reviews potential payments under various termination scenarios.
Performance Assessments — Assessments of executive performance are another key part of the Committee’s Total Compensation Analysis and Planning Process. Mr. Arnold meets individually with his direct reports, including the named executive officers, to discuss the performance assessments for their respective direct reports and to formulate initial recommendations for an appropriate total compensation plan for each executive. No member of management, including Mr. Arnold, makes recommendations regarding his or her own pay. The Committee meets with its independent consultant in Executive Session (with no members of management in attendance) to review Mr. Arnold’s performance assessment, the comprehensive market data for his position and his Tally Sheet to establish his total compensation plan.
Evaluating 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.
PEER GROUP ANALYSIS
Peer Group Selection — Historically, we did not use a compensation peer group to set compensation targets for our named executive officers. Instead, we used the survey data reported by two consulting firms as described under “Market Analysis” on page 29 as the primary source for setting pay and evaluating the competitiveness of our executive compensation programs. In July 2017, the Committee adopted a compensation peer group and starting in 2018, will use the proxy compensation data reported by this group together with the survey data reported by the two consulting firms to set each executive’s base salary and annual and long-term incentive targets. The Committee adopted the peer group in order to have additional data points to consider when setting pay and evaluating compensation programs. The Committee chose the companies in the compensation peer group based on revenue size, market capitalization, and industry. The compensation peer group also represents a sample of companies with whom we compete for talent. Eaton’s revenue and market cap are approximately aligned with the median revenue and market cap of the compensation peer group.
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.
IMPACT OF CHANGING THE FORM OF LONG-TERM PERFORMANCE AWARDS ON SUMMARY COMPENSATION TABLE TOTAL COMPENSATION
The change in the form of the performance-based long-term incentive program will not result in a windfall to participants but will result in three successive years of distorted Summary Compensation Table Total Compensation because we will be reporting the performance-based grant that was made in the reported year as “Stock Awards” along with the cash payout for the ESIP award period that concluded in the reported year as “Non-Equity Incentive Plan Compensation”. This will occur for 2015, 2016 and 2017, assuming an ESIP payout is earned for the award period that matures in each respective year.
ESIP opportunities for periods that began prior to January 1, 2015 were not "equity incentive plan" compensation and were not reported as Stock Awards in the Summary Compensation Table because there was no opportunity to settle awards in stock (but these ESIP opportunities were reported in the Grants of Plan Based Awards Tables for the year in which the opportunities were established). An “equity incentive plan” is one in which awards have an embedded right to stock settlement, and ESIP opportunities established prior to 2015 had no opportunity to settle in shares per the terms of the shareholder-approved Amended and Restated Executive Strategic Incentive Plan. Effective in 2015, the long-term performance-based awards for periods that began on or after January 1, 2015 were granted from Eaton’s shareholder-approved stock plan. These opportunities were denominated in performance share units and will be settled in shares and therefore will be characterized as equity incentive plan compensation throughout our Compensation Discussion and Analysis and all related tables.
The following table uses Mr. Cutler’s compensation to illustrate the impact the change in the form of the award had on the Summary Compensation Table for 2015. Changes in Pension Values and Non-Qualified Deferred Compensation Earnings and items reported as All Other Compensation in the Summary Compensation Table are not included in the illustration. This change in the form of the award will distort Summary Compensation Table Total Compensation for 2015, 2016 and 2017.
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CompensationPeerGroup* | ||
| 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 |
Delphi Automotive was identified as a compensation peer in July 2017 and was removed in December 2017 after the company split into Delphi Technologies and Aptiv plc.
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. In 2017, the peer group for purposes of this report included the publicly traded companies in our strategic peer group. 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 2017, this review of survey and peer proxy data confirmed that Eaton’s compensation opportunities were aligned with the external data points.
In prior years, we also conducted a peer pay targeting and performance hurdle study that analyzed our peers’ pay for performance profiles relative to that of their own peer groups. This helped the Committee to determine if we were setting rigorous and appropriate performance hurdles. This analysis was irrelevant in 2017 because (a) we adopted relative Total Shareholder Return (TSR) as our long-term incentive performance criteria and are no longer setting performance hurdles and (b) the strategic peer group does not serve as a compensation peer group.
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Total Compensation Analysis and Planning Process (October–February)
We target total compensation to be within the median range of compensation paid by similarly sized industrial companies. We continuously 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 different analyses play a role in the Committee’s Total Compensation Analysis and Annual Planning Process:
Market Analysis — From October through December of each year, our human resources department conducts a market analysis. First, we align our executives’ positions with comparable positions as reported in surveys published by two national consulting firms, Aon Hewitt and Towers Watson. Then, in February, we prepare a comprehensive report for the Committee, which also is reviewed by its independent consultant, that compares each component of our executives’ compensation to the average of the surveys’ median data for that component. This helps the Committee determine how each executive officer’s compensation compares to current market practices.
In preparing our comparison for 2015, 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. Our revenues fall at approximately the median revenue level of this group, which contains between 100 to 120 companies. The companies
EATON 20162018 Proxy Statement and Notice of Meeting35
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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-termincentive | Senior EIC Plan – Cash incentive tied to
● Net income generates a pool that determines the
● The Committee
| Paid in cash after the Executives can choose to defer payments under our Deferred Incentive Compensation Plan II | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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50% Performance- | Tied to Relative Total Shareholder Return ESIP opportunities are denominated in performance share units and settled in Eaton ordinary shares; therefore, value realization depends on our | Awards are distributed in Eaton Ordinary Shares after the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
50% Equity ● 25% RSUs 25% stock options | RSUs and stock options Value realization depends on our stock performance | Vesting in approximately equal installments over 3 years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted shares granted on rare occasions to foster engagement and
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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 29. 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 such as individual performance against business plans, initiative, leadership, experience, knowledge, and success in building organizational capability.
2017 BASE SALARY
During the 2017 Total Compensation Analysis and Planning Process, the Committee reviewed each executive’s base salary relative to the market data from the two surveys 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 merit increases on July 1, 2017, to the named executive officers as shown in the following table.
Executive | Increase % | New Base Salary |
C. Arnold | 4.55% | $1,150,000 |
R. Fearon | 5.00% | $928,200 |
R. Advaithi | 4.00% | $757,120 |
U. Yadav | 4.00% | $655,200 |
C. Hutchins | 3.00% | $583,161 |
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Back to Contents
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Short-Term Performance-Based Compensation
We establish a competitive annual cash incentive opportunity for our executives. The Committee determines target opportunities for each executive in February during its Total Compensation Analysis and Planning Process. As we previously discussed, the average of the median short-term incentive values as reported in two compensation surveys is used as the basis for determining our executives’ targets.
Metrics, Goals and Results — In February 2017, the Committee established a bonus pool under the Senior EIC Plan equal to 1.5% of our Annual Net Income. The Committee also considered, among other metrics, EPS growth rate guidance for us and our 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 and serve as subordinate metrics that the Committee considers when exercising negative discretion to determine actual award amounts under the Senior EIC Plan. 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.
For 2017, the Committee established the subordinate 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. We cap EPS and CFR goals at 200% of target. The Committee believes that the target levels established at the beginning of 2017 for the EPS and CFR goals were demanding but attainable.
The following table shows the 2017 goals and our actual results for the year (after excluding the gain on the Cummins joint venture and the impact of U.S. Tax Reform). Actual EPS and CFR results were 125% of target, but management recommended and the Committee determined it was appropriate to reduce the calculated payout to 110% of target.
2017 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS
2017 SHORT-TERM INCENTIVE AWARDS
In February 2017, in addition to establishing the Senior EIC Plan Net Income Pool, the Committee also assigned a percentage of this pool to each participant, setting the maximum amount that the participant could receive under the Plan for 2017. For the named executive officers, these percentages ranged from 7% to 20% of the Annual Net Income Incentive Pool. Under the terms of the plan, no participant may be assigned a percentage share of the pool that is worth more than $7,500,000. The Committee also established an individual target award opportunity for each executive that reflected the median annual incentive opportunity reported in the compensation surveys that are used to establish individual compensation targets.
At the end of the award period, the Committee considered the following items in determining individual payouts:
The maximum award generated by the Net Income Pool for each participant.
The Company’s actual performance relative to subordinate EPS and CFR performance objectives and the Committee’s decision to adjust the payout to 110% of target as described above.
An individual performance factor that is based on the achievement of the individual performance goals described below:
FinancialGoals: Achieving the Company’s annual financial plan, as well as the annual financial plan for the executive’s business unit.
GrowthGoals: Building our brand; outgrowing the markets in which we operate; introducing new products and services.
OperationalExcellence: Workplace safety and emissions reduction; advancements in quality; supply chain improvement; and operational efficiency/productivity.
Executive | Senior EIC Net Income Pool Allocation | Senior EIC Target as a % of Salary | Senior EIC Target $ |
| EPS and CFR Results |
| Individual Performance Factor |
| Award | Award as % of Target |
A. M. Cutler | $6,530,700 | 150% | $1,950,000 | x | 75% | x | 115% | = | $1,681,875 | 86% |
R. H. Fearon | $3,265,350 | 100% | $821,192 | x | 75% | x | 110% | = | $677,486 | 83% |
C. Arnold | $3,265,350 | 108% | $961,119 | x | 75% | x | 110% | = | $792,924 | 83% |
R. Advaithi | $3,265,350 | 93% | $596,189 | x | 75% | x | 105% | = | $469,679 | 79% |
M. M. McGuire | $1,781,100 | 75% | $437,982 | x | 75% | x | 105% | = | $344,912 | 79% |
T. S. Gross | $3,265,350 | 67% | $548,311 | x | 75% | x | 105% | = | $431,795 | 83% |
Mr. Fearon’s eligible salary for purposes of determining his award was prorated based on the effective dates of the salary changes described earlier. Mr. Arnold’s target and salary were prorated based on the effective date of his appointment to his position as President and Chief Operating Officer. His targets prior to and after his promotion were 100% and 125% of base salary, respectively. Ms. Advaithi’s target and salary were prorated based on the effective date of her promotion to Chief Operating Officer of Eaton’s Electrical Sector. Her targets prior to and after her promotion were 90% and 100% of base salary, respectively. Mr. Gross’s target opportunity of 100% of base salary was prorated based on his retirement date. Each named executive officer’s short-term incentive award is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Long-Term Performance-Based Compensation
We provide long-term incentive compensation to our executive officers in two components that generally are weighted as follows:
50% in equity awards, which provide a link to external performance. The named executive officers receive an equal mix of stock options and restricted stock units (RSUs); and
50% in a performance-based incentive compensation opportunity (ESIP), which is based upon performance against EPS compound growth rate goal and CFR goals. Award periods that began prior to January 1, 2015 span four years and award periods that began on or after January 1, 2015 are three years long. The amount earned by executives depends on actual EPS growth and CFR results relative to these performance metrics and share price appreciation or depreciation over the same time period, thereby providing a direct link to shareholder value creation.
We believe that this “portfolio approach” to structuring long-term incentives provides an appropriate balance that focuses executives on both an external measure of our success (via equity awards) and on internal performance metrics (via the performance-based ESIP). In limited circumstances, the Committee also provides restricted share awards (RSAs) to foster 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.
For 2015, the Committee established a long-term incentive target opportunity for each executive that was intended to align with the market median values reported in the two surveys we use to establish individual compensation plans.
Performance-Based Component of Long-Term Compensation — Each year the Committee creates a new long-term Executive Strategic Incentive opportunity and establishes objectives for the four-year award period (for periods that began before January 1, 2015) or three-year award period (for award periods that began on or after January 1, 2015), which historically have been tied to our success in achieving aggressive CFR and EPS growth goals over the award period, with each goal weighted equally.
Establishing Long-Term Performance Goals — Each ESIP period has its own aggressive CFR and EPS growth objectives. The CFR objective focuses management on driving attractive returns on the capital we employ over the multi-year award period, while the EPS goal focuses management on driving earnings growth throughout the multi-year cycle. The Committee uses a comprehensive report that analyzes publicly available peer group financial data to establish the CFR and EPS objectives. Our Board also uses this report in reviewing our Strategic and Profit Plans. The report includes:
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BuildingOrganizationalCapacity: 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 2017 award opportunity and his or her actual Senior EIC Plan award relative to that opportunity:
Executive | Senior EIC Net Income Pool Allocation | Senior EIC Target as a % of Salary | Senior EIC Target $ |
| EPS and CFR Results |
| Individual Performance Factor |
| Award | Award as % of Target |
C. Arnold | $6,240,000 | 150% | $1,725,000 | x | 110% | x | 105% | = | $1,992,375 | 116% |
R. Fearon | $4,680,000 | 100% | $906,100 | x | 110% | x | 105% | = | $1,046,546 | 116% |
R. Advaithi | $4,680,000 | 100% | $742,560 | x | 110% | x | 100% | = | $816,816 | 110% |
U. Yadav | $4,680,000 | 100% | $642,600 | x | 110% | x | 107% | = | $756,340 | 118% |
C. Hutchins(1) | $2,184,000 | 75% | $431,001 | x | 110% | x | 110% | = | $521,511 | 121% |
(1) Mr. Hutchins’ Individual Performance Factor blends both Individual and Business Unit Adjustment Factors. For 2017, the Business Unit Factor was 100% and his Individual Factor was 110%. |
Each named executive officer’s short-term incentive award is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Long-Term Performance-Based Compensation
For 2017, the Committee established a long-term incentive target opportunity for each executive that was intended to align with the market median values reported in the two surveys we use to establish individual compensation plans. We provide long-term incentive compensation to our executive officers in two components that generally are weighted as follows:
50% in Performance-Based Long-Term Compensation: Relative TSR serves as the performance criteria for the three-year ESIP period that began on January 1, 2017. The amount earned by executives depends on the rank of our total return to shareholders against that of a TSR Peer Group. Share price appreciation or depreciation over the award period also affects the value realized by our executives, thereby providing a direct link to shareholder value creation.
50% in Time Based Equity Awards: The named executive officers receive an equal mix of stock options and restricted stock units (RSUs) which also provide a link to external performance. Time-based equity vests over a minimum of a three-year period.
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 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 2017.
PERFORMANCE BASED LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2017
In February 2015 the Committee made two significant changes to the performance based long-term incentive program.
The form of the award changed from phantom shares that settle in cash to performance shares that settle in Eaton ordinary shares. The Committee made this change because the accounting treatment for share-based plans is much more favorable than it is for the cash-settled plans, which are subject to mark-to-market accounting.
The Committee also changed the length of the award period from four to three years because it had become increasingly difficult to accurately forecast economic cycles over four years and to align Eaton’s award period with the prevalent market practice. Two ESIP award periods ended on December 31, 2017 as a result of the change in the length of the award period and are described below.
2014-2017 and 2015-2017 ESIP Goals— In February 2014 and in February 2015, the Committee established challenging EPS compound growth rate and CFR performance goals for the 2014-2017 and 2015-2017 ESIP award periods, respectively. The CFR objective for each period focused management on driving attractive returns on the capital we employ over the multi-year award period, while the EPS goal for each period focused management on driving earnings growth throughout the multi-year cycle. In each year the Committee used a comprehensive report that analyzed publicly
A comparison of our past performance across a range of performance metrics, compared to those same metrics as reported for our peer group;
Our estimated financial results and those for each peer group company as projected by sell-side analysts who follow these companies; and
A review of our strategic objectives and annual business plans for the multi-year performance period.
The Committee sets performance hurdles for each multi-year award period so that our executives would receive payment of approximately 100% of the target incentive opportunity if our performance over the award period is at or above the projected median of performance in our peer group, and payment at or above 150% of the target incentive opportunity if our performance over the award period is at or above the projected top 25th percentile of performance in our peer group. We cap CFR and EPS growth goals under ESIP at 200% of target. This cap is consistent with the maximum incentive opportunity as reported by the companies that respond to the compensation surveys to which we subscribe, and also is prevalent among our peer group companies.
The key to achieving an above-target payout for an open ESIP period is to fully meet our annual operating plans, achieve our targeted operating margins, closely manage our working capital and fully achieve our committed integration and synergy targets.
Share price appreciation is also an important factor in the value actually realized by our executives from their ESIP awards.
For award periods that began prior to January 1, 2015, the executive’s cash target was converted to a number of phantom share units based on our 20-day average stock price at the beginning of the award period. At the end of the award period, the number of phantom share units is adjusted up or down based on achievement relative to the performance hurdles that were set at the beginning of the award period. Then, the adjusted number of phantom share units is converted back to cash based on our 20-day average share price at the end of the award period. Dividend equivalents also are paid based on the actual dividends paid over the award period and the earned number of phantom shares units. The dividend equivalents are paid in cash at the end of the award period. The combination of the cash value from the earned phantom share units and the accumulated dividend approximates the total shareholder return over that period.
For award periods that began on January 1, 2015, the executive’s cash target was converted to a number of performance share units based on our 30-day average stock price 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 relative to the performance hurdles that were set at the beginning of the award period. 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. The combination of the value realized from the earned performance shares and the accumulated dividend approximates the total shareholder return over that period.
HOW OUR SHORT- AND LONG-TERM METRICS DIFFER
We and the Committee believe that Earnings Per Share and Cash Flow Return on Gross Capital are appropriate metrics to use in our short-term and long-term incentive plans because of the impact these items have on creating shareholder value.
Although we use an earnings per share (EPS) metric in both our short- and long-term incentive plans, the two metrics are different:
The short-term plan metric is tied to annual EPS. A goal is set in February of each year based on items such as EPS growth rate guidance for the year, market analyses and our annual profit plan.
The long-term ESIP metric is tied to EPS growth and the corresponding CFR over a four- or three-year period, as applicable. This multi-year goal is set based on the Board’s review of our Strategic Plan and the long-term, five-year financial goals that we share with investors.
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available peer group financial data to establish the CFR and EPS objectives. Our Board also used this report in reviewing our Strategic and Profit Plans. The report includes:
A comparison of our past performance across a range of performance metrics, compared to those same metrics as reported for our peer group;
2015 LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2015
2012-2015 ESIP — In February 2012, the Committee established challenging EPS compound growth rate and CFR performance goals for the 2012-2015 ESIP. The EPS growth and CFR goals for the period were weighted equally. In addition to setting ESIP goals in February 2012, the Committee also set individual ESIP target award opportunities for each named executive officer that represented approximately 50% of his or her total long-term incentive opportunity that was established in 2012. Individual target opportunities were expressed as a cash value and then converted to phantom share units based on the average New York Stock Exchange price of Eaton ordinary shares over the first 20 trading days of the award period, which was $48.09. Phantom share units align the interests of the executives with those of the shareholders because the units reflect appreciation or depreciation and earnings on our ordinary shares during the performance period.
Payout of 2012-2015 ESIP —The CFR component of the 2012-2015 ESIP was earned at the maximum level of 200% because actual results of 25.3% exceeded the maximum objective of 23.5%. Actual EPS growth of $17.04 did not achieve the threshold level of $19.04 that was necessary to generate a payout for the EPS component of the award. Each goal was weighted equally and the 0% EPS growth achievement combined with the 200% CFR achievement resulted in a payout at 100% of target. In addition, the Committee decided to reduce awards to 70% of target to offset any potential windfall that could have resulted from the transaction to acquire Cooper Industries plc. The Committee chose to reduce awards because the 2012-2015 ESIP EPS growth and CFR goals did not include the benefits of the Cooper acquisition since it occurred after the Committee set the goals for this award period. The goals and results for the 2012-2015 ESIP period are illustrated below.
2012-2015 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTS
Final awards were determined by multiplying the target number of phantom share units by the adjusted performance factor of 70%. The earned number of phantom share units was then converted to cash based on the average New York Stock Exchange price of Eaton ordinary shares over the last 20 trading days of the award period, which was $52.54, and dividend equivalents were added based on the final number of share units that were earned. Awards earned by our named executive officers for the 2012-2015 ESIP Period are shown below:
Executive | 2012-2015 Target | Target Units (based on $48.09 in 2012) | Earned Share Units (based on 70% payout) | Earned Award (based on $52.54 in 2015) | Accumulated Dividends (based on $7.63) | Total Award + Dividend Equivalents | Total Award as % of Target |
A. M. Cutler | $4,250,000 | 88,400 | 61,880 | $3,251,237 | $455,437 | $3,706,674 | 87% |
R. H. Fearon | $1,000,000 | 20,800 | 14,560 | $764,997 | $107,162 | $872,159 | 87% |
C. Arnold | $1,000,000 | 20,800 | 14,560 | $764,997 | $107,162 | $872,159 | 87% |
R. Advaithi | $500,000 | 10,400 | 7,280 | $382,498 | $53,581 | $436,079 | 87% |
M. M. McGuire | $500,000 | 10,400 | 7,280 | $382,498 | $53,581 | $436,079 | 87% |
T. S. Gross | $916,667 | 19,067 | 13,347 | $701,259 | $98,233 | $799,493 | 87% |
Mr. Gross’s award was prorated based on his retirement date. Each named executive officer’s earned ESIP award is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Our estimated financial results and those for each peer group company as projected by sell-side analysts who follow these companies; and
A review of our strategic objectives and annual business plans for the multi-year performance period.
The EPS growth and CFR goals for each award period were weighted equally. The Committee set performance hurdles at levels such that our executives would receive payment of approximately 100% of the target incentive opportunity if our performance over the award period was at or above the projected median of performance compared to that of our peer group that was in place at the time the opportunity was established, and payment at or above 150% of the target incentive opportunity if our performance over the award period was at or above the projected top 25th percentile of performance of our peer group. We capped CFR and EPS growth goals for each ESIP period at 200% of target. This cap is consistent with the maximum incentive opportunity as reported by the companies that respond to the compensation surveys to which we subscribe.
The key to achieving an above-target payout for each ESIP period was to fully meet our annual operating plans, exceed our targeted operating margins and our earnings per share targets, closely manage our working capital, and fully achieve our committed integration and synergy targets.
In addition to setting ESIP goals, in February 2014 and February 2015, the Committee also set individual ESIP target award opportunities for each named executive officer that represented approximately 50% of his or her total long-term incentive opportunity that was established in each year.
2014-2017 ESIP — Individual target opportunities were expressed as a cash value and then converted to phantom share units based on the average New York Stock Exchange price of our ordinary shares over the first 20 trading days of the award period, which was $75.34. Phantom share units align the interests of the executives with those of the shareholders because the units reflect appreciation or depreciation and earnings on our ordinary shares during the performance period.
The CFR component of the 2014-2017 ESIP was achieved at 16.8%, which was above the threshold level of 8.0% needed to generate a payout under the plan. Actual cumulative EPS of $17.84 (after adjusting for the impact of certain legal settlements, gains from two joint ventures, and the 2017 U.S. Tax Reform) was below the minimum level of $19.62 that was necessary to generate a payout for the EPS component of the award. The combined results generated a payout of 25% of target.
2014-2017 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTS
Final awards were determined by multiplying the target number of phantom share units by the calculated performance factor of 25%. The earned number of phantom share units was then converted to cash based on the average New York Stock Exchange price of our ordinary shares over the last 20 trading days of the award period, which was $77.38, and dividend equivalents were added based on the aggregate dividend paid over the period ($8.84) and the final number of share units that were earned. The combination of the cash value from the earned phantom share units and the accumulated dividend approximates the total shareholder return over that period.
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Awards earned by our named executive officers for the 2014-2017 ESIP Period are shown below:
Executive | 2014-2017 Target | Target Units (based on $75.34 in 2014) | Earned Share Units (based on 25% payout) | Earned Award (based on $77.38 in 2017) | Accumulated Dividends (based on $8.84) | Total Award + Dividend Equivalents | Total Award as % of Target |
C. Arnold | $1,050,000 | 13,950 | 3,488 | $269,908 | $30,834 | $300,742 | 29% |
R. Fearon | $1,050,000 | 13,950 | 3,488 | $269,908 | $30,834 | $300,742 | 29% |
R. Advaithi | $800,000 | 10,650 | 2,663 | $206,068 | $23,541 | $229,609 | 29% |
U. Yadav | $340,000 | 4,550 | 1,138 | $88,061 | $10,060 | $98,121 | 29% |
C. Hutchins | $340,000 | 4,550 | 1,138 | $88,061 | $10,060 | $98,121 | 29% |
2015-2017 ESIP — Individual target opportunities were expressed as a cash value and then converted to performance share units based on the average New York Stock Exchange closing price of our ordinary shares over the first 30 trading days of the award period, which was $66.81. Performance share units align the interests of the executives with those of the shareholders because the units reflect appreciation or depreciation and earnings on our ordinary shares during the performance period.
The CFR component of the 2015-2017 ESIP was achieved at 16.5%, which was above the threshold level of 8.0% needed to generate a payout under the plan. Actual cumulative EPS of $13.17 (after excluding the gain on the Cummins joint venture and the impact of U.S. Tax Reform) was below the minimum level of $14.58 that was necessary to generate a payout for the EPS component of the award. The combined results generated a payout of 25% of target.
2015-2017 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PROGRAM GOALS AND RESULTS
The earned number of performance shares was determined by multiplying the target number of performance share units by the calculated performance factor of 25%. The earned number of shares vested on February 27, 2018 upon the Committee’s determination and certification of the performance results. In accordance with SEC rules, the shares are reported in this proxy statement in the Outstanding Equity Awards at Fiscal Year End 2017 and will be reported in the Option Exercises and Stock Vested Table in 2018 in our next proxy statement. Executives also earned dividend equivalents based on the earned number of share units and the aggregate dividend paid on our ordinary shares over the period ($6.88).
Executive | 2015-2017 Target | Target Units (based on $66.81 in 2015) | Earned Share Units (based on 25% payout) | Accumulated Dividends (based on $6.88) |
C. Arnold | $1,050,000 | 15,720 | 3,930 | $27,038 |
R. Fearon | $1,050,000 | 15,720 | 3,930 | $27,038 |
R. Advaithi | $800,000 | 11,975 | 2,994 | $20,599 |
U. Yadav | $340,000 | 5,090 | 1,273 | $8,758 |
C. Hutchins | $340,000 | 5,090 | 1,273 | $8,758 |
The Committee determined it was appropriate to change the length of the prospective performance-based award periods from four to three years. The Committee made this change to align our performance period with the most common practice in the market and because it has become increasingly difficult to accurately forecast economic cycles over four years.
The Committee also decided to change the form of the award from phantom shares that settle in cash to performance share units that settle in-kind. The Committee made this change because the accounting treatment for share-based incentives is much more favorable than it is for the cash-settled plans, which are subject to mark-to-market accounting. In addition, our shareholder-approved stock plans have allowed for the delivery of performance units, but until 2015, we did not have a sufficient number of shares available in the plan to grant performance units and annual restricted share unit grants to all employees who are eligible for long-term incentives. The change to performance share units also aligns with the prevalent form of long-term incentives that are delivered in the external market.
In addition to these changes, the Committee established EPS growth and CFR performance goals for the 2015-2017 ESIP award period, which are capped at 200% of target. The Committee also approved individual 2015-2017 ESIP opportunities expressed in the form of performance share units. The Committee discussed Mr. Cutler's award opportunity in Executive Session, with only its independent consultant in attendance. The number of performance share units awarded to each executive was determined by dividing the cash ESIP target, which represents approximately one-half of the named executive officer’s total long-term incentive opportunity for 2015, by the average New York Stock Exchange closing price of our shares over the first 30 days of the award period, and rounding up to the nearest five shares. These award opportunities are shown in the Grants of Plan Based Awards Table and are also included in the "Stock Awards" column of the Summary Compensation Table.
At the end of the award period, the number of performance share units will be modified based on corporate performance relative to the challenging CFR and EPS growth objectives that the Committee approved in February 2015. The modified number of share units will be distributed to participants in the form of our ordinary shares. The actual value realized by our executives, if any, will also be influenced by the increase or decrease in our stock price over the three-year award period. In addition, dividend equivalents will be paid based on the earned number of performance share units and the aggregate dividends paid to investors during the award periods.
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How Our CFR and EPS Goals Used in Short- and Long-Term Incentive Plans Prior to 2016 Differ
We and the Committee believe that Earnings Per Share and Cash Flow Return on Gross Capital are appropriate metrics to use in our incentive plans because of the impact these items have on creating shareholder value.
Although we used an earnings per share (EPS) metric in both our short- and long-term incentive plans prior to 2016, the two metrics were different:
The short-term plan metric is tied to annual EPS. A goal is set in February of each year based on items such as EPS guidance for the year, market analyses and our annual profit plan.
The long-term ESIP metric was tied to EPS growth and the corresponding CFR over a four- or three-year period, as applicable. This multi-year goal was set based on the Board’s review of our Strategic Plan and the long-term, five-year financial goals that we shared with investors.
As we described on page 34, ESIP opportunities for periods that began prior to January 1, 2015 were not reported previously as Stock Awards in the Summary Compensation Table because there was no embedded right to stock settlement (however, these ESIP opportunities were reported in the Grants of Plan Based Awards Tables for the year in which the opportunities were established). Instead, these awards have been reported in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” in the year in which the award period matured. In this and future proxy statements, the long-term performance-based incentive opportunities for periods that began on or after January 1, 2015 will settle in shares and therefore will be reported as “Stock Awards” in the Summary Compensation Table. In this and our next two proxy statements, the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table also will include payouts for the cash-settled award periods that began prior to January 1, 2015 (assuming threshold performance levels are achieved). As a result of reporting grants and payouts, our Summary Compensation Table Total Compensation will be distorted until the final cash-settled period matures at the end of 2017.
The illustration below highlights the impact the change in the form of ESIP had on this proxy statement, using Mr. Cutler’s actual earned 2012-2015 ESIP award and 2015-2017 ESIP grant as an example. “Changes in Pension Values and Above-Market Earnings on Non-Qualified Deferred Compensation” and “All Other Compensation” are included in the Summary Compensation Table (SCT) but are not included in the following illustration because they do not have a material impact for purposes of this illustration.
| Year | Salary | Stock Options | NON-EQUITY INCENTIVE PLAN COMPENSATION | STOCK AWARDS | Total Compensation |
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| Annual Incentive | Earned ESIP Payout | Time-Based RSUs | ESIP Grant |
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| 2015 SCT Total Compensation Reported | 1,222,056 | 2,217,968 | $1,681,875 | $3,706,674 | 2,143,676 | 4,562,826 | $15,535,075 |
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| 2015 SCT if the Form of ESIP had | 1,222,056 | 2,217,968 | $1,681,875 | $3,706,674 | 2,143,676 | not denominated in performance share units | $10,972,249 |
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| 2014 SCT Total | 1,200,000 | 2,125,427 | $ 1,835,400 | $4,821,095 | 2,076,331 | not denominated in performance share units | $12,058,253 |
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Long-Term Incentives Granted in 2017
Establishment of Performance Criteria for the 2017-2019 ESIP — By way of background, in 2016 the Committee adopted relative TSR as the performance criteria for long-term performance based award periods that began on or after January 1, 2016. The change from EPS growth and CFR goals to TSR was made because changes in end market growth rates had a disproportionate impact on actual versus forecasted results and it had become increasingly difficult to forecast absolute performance against that of our peers. The change alleviated the market calibration issue and introduced a stronger sense of relative performance. The change also eliminated any concern about the use of overlapping criteria in our short- and long-term incentive programs. 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.
Awards for the 2017-2019 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 first among the TSR Peer Group and is positive.
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 2017-2019 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.
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Establishment of ESIP Award Opportunities for the 2017-2019 ESIP — In February 2017, the Committee established total long-term incentive opportunities, expressed as a cash value, for each executive. Targets are intended to align with the median long-term incentive value reported in the external market. 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 described above. 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. The combination of the value realized from the earned performance shares and the accumulated dividend approximates the total shareholder return over that period. The vesting of RSUs and stock options is contingent upon continued service with us over the vesting period.
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 1,200,000 under our Amended and Restated 2012 Stock Plan or 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.
RSUs Granted in 2015 — In February 2015, the Committee approved RSU grants that represented approximately 25%of each named executive officer’s target long-term incentive opportunity. These RSUs vest in substantially equal installments over three years. We do not pay dividend equivalents on RSUs that are granted to our executives or other employees.
Stock Options Granted in 2015 — Stock options make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2015 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.
Restricted Share Awards (“RSAs”) — In certain limited circumstances, we grant RSAs to our executives, including our named executive officers, for retention purposes. In February 2015, the Committee approved retention restricted share grants of 4,865 RSAs for Ms. Advaithi. These shares cliff vest on the tenth anniversary of the date of the grant.
Each named executive officer’s long-term incentive opportunity and the mix of long-term vehicles is shown below. The target values in this table are based on the market median survey data for each position. The amounts shown below differ from the amounts reported in the Summary Compensation Table, which reports the grant date fair value determined in accordance with FASB 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 ($) | Retention Grant ($) |
A. M. Cutler | $4,250,000 | $2,125,000 | $2,125,000 | $8,500,000 | $0 |
R. H. Fearon | $1,050,000 | $525,000 | $525,000 | $2,100,000 | $0 |
C. Arnold | $1,050,000 | $525,000 | $525,000 | $2,100,000 | $0 |
R. Advaithi | $800,000 | $400,000 | $400,000 | $1,600,000 | $325,000 |
M. M. McGuire | $650,000 | $325,000 | $325,000 | $1,300,000 | $0 |
T. S. Gross | $1,050,000 | $525,000 | $525,000 | $2,100,000 | $0 |
The Committee did not provide interim performance or time-based grants to Messrs. Fearon or Arnold or Ms. Advaithi at the time of their promotions. Instead, the Committee will consider adjusting their long-term incentive targets in the 2016 planning cycle. RSUs, RSAs and stock options granted to the named executive officers are valued in the Summary Compensation Table and the number of shares granted are shown in the Grants of Plan Based Awards table.
Equity Component of Long-Term Compensation — The named executive officers receive the equity component of their long-term incentive opportunity in both RSUs and stock options. The Committee considers alignment with the external market median and individual performance and potential when making equity grants. We typically grant equity 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:
Stock options and RSUs generally vest over, or upon the conclusion of, at least a three-year period. The vesting of RSUs and stock options is contingent upon continued service with us over the vesting period.
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.
RSUs Granted in 2017 — In February 2017, 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. We pay dividend equivalents on the earned number of RSUs at the time the shares vest.
Stock Options Granted in 2017 — Stock options make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2017 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.
2017 Long-Term Incentive Grants — Each named executive officer’s target long-term incentive opportunity and mix is shown below. The target total long-term incentive values in this table are based on the market median survey data for each position. 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 FASB 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 | $3,562,500 | $1,781,250 | $1,781,250 | $7,125,000 |
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 |
C. Hutchins | $625,000 | $312,500 | $312,500 | $1,250,000 |
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Change in the Form of ESIP Distorts the Summary Compensation Table
ESIP opportunities for periods that began prior to January 1, 2015 were not reported as Stock Awards in the Summary Compensation Table because there was no embedded right to stock settlement (however, these ESIP opportunities were reported in the Grants of Plan Based Awards Tables for the year in which the opportunities were established). Instead, these awards have been reported in the Summary Compensation Table as “Non-Equity Incentive Plan Compensation” in the year in which the award period ended. The “Non-Equity Incentive Plan” column of this and the proxy statements we filed in 2017 and 2016 includes the payouts from our cash settled ESIP award periods.
The long-term performance-based incentive opportunities for periods that began on or after January 1, 2015 will settle in shares and therefore are reported as “Stock Awards” in the Summary Compensation Table. The “Stock Awards” column of this and our proxy statements filed in 2017 and 2016 includes the values of the performance shares granted in 2017, 2016 and 2015 under ESIP.
As a result of reporting grants and payouts in the same year, our Summary Compensation Table Total Compensation is distorted. The final cash-settled ESIP period matured at the end of 2017 and this is the last year that will report payouts and grants in the Summary Compensation Table.
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.
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. 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.
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.
Other Retirement and Compensation Arrangements
The 2017 Pension Benefits table on page 52 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
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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 or RSUs, PSUs or RSAs, 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 Control Agreements may be found in the narrative discussion accompanying the Potential Payments Upon Termination beginning on page 55.
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 Chairman and 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
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 incentive 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.
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Twice each year, the Committee reviews each executive officer’s share ownership relative to these levels, and our Chief Executive Officer reviews the ownership of other non-officer executives. On December 31, 2015, each of the named executive officers exceeded his or her ownership and holding requirements.
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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 | |
Chairman and |
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| 4 times base salary |
Chief Operating Officer Electrical or Industrial Sector | 4 times base salary |
Other Officers | 2-3 times base salary |
General Managers and |
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Twice each year, the Committee reviews each executive officer’s share ownership relative to these levels, and our Chief Executive Officer reviews the ownership of other non-officer executives. On December 31, 2017, each of the named executive officers exceeded his or her 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.
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. Where the transition rules allow, we intend to deduct remuneration in excess of $1 million paid to covered employees pursuant to performance-based compensation plans that were in effect on November 2, 2017 and not modified after that date.
EATON | 41 |
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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 2017 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 earlier in the CD&A. This analysis included, but was not limited to, the following items:
Whether performance goals were balanced and potential payments were reasonable based on potential achievement of those goals at the threshold, target and maximum levels;
When applicable, whether the relationship between performance objectives under the short-term incentive programs was consistent with the performance objectives tied to the long-term incentive plans;
The caps on individual awards and aggregate payments under the plans; and
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. These objectives have included CFR and adjusted EPS financial goals and qualitative goals under the short-term plan, such as leadership development, growth, operational excellence, and building organizational capacity. We believe all of these items contribute to increased shareholder value;
Our long-term performance plan (ESIP) focuses on cumulative EPS and CFR for overlapping multi-year award periods that began prior to 2016 and relative TSR for periods that began in or after 2016. 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.
EATON | 42 |
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COMPENSATION AND ORGANIZATION COMMITTEE REPORT The Compensation and Organization Committee of the Board of Directors has reviewed and discussed with the Company’s management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and, based on this review and discussion, the Compensation and Organization Committee recommends to the Board that the Compensation Discussion and Analysis be included in this proxy statement. COMPENSATION AND ORGANIZATION COMMITTEE Todd M. Bluedorn, Chair
This table shows the total compensation of the Company’s Chairman and Chief Executive Officer of Eaton Corporation, the Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation, and our three other most highly compensated executive officers in NARRATIVE EXPLANATION OF SUMMARY COMPENSATION TABLE COLUMN INFORMATION:
(4) In 2017, no named executive officers received above-market earnings on his or her nonqualified deferred compensation. The aggregate change in the actuarial present value of the accumulated benefit under all defined benefit pension plans for each named executive officer is noted below.
(5) “All Other Compensation” includes the aggregate incremental cost we incurred for certain personal benefits, including: ● Reimbursement of financial, tax and ● Personal Use of
Life Insurance: We provide approximately 600 employees, including the named executive officers, with the opportunity to acquire individual whole-life insurance as described on page 39. The annual premium paid by us during 2017 for each of the named executive officers is shown in the chart below. Each participant is responsible for paying individual income taxes due with respect to our insurance program. ● 401(k) Company Matching Contributions: The amount of our contributions to the named executive officers’ accounts under the 401(k) Eaton Savings Plan (the “ESP”) is reported below. The ESP permits an employee to contribute a portion of his or her salary to the ESP, subject to limits imposed under the Internal Revenue Code. ● The amounts of these items reported as
(6)
GRANTS OF PLAN-BASED AWARDS IN The following table summarizes the potential awards payable to named executive officers with respect to the short-term and long-term incentive award opportunities granted in
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