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, 2022. For 2022, our named executive officers are:
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.
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, at target approximately 79% 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:
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. The chart below shows the payouts as a percentage of target under our performance-based short- and long-term incentive programs and total return to shareholders over Mr. Arnold’s tenure as CEO, illustrating the strong correlation between pay and the performance we are delivering to our shareholders. More information about our short- and long-term incentive programs begins on page 37. This illustration of actual payouts as a percentage of target for completed award periods supplements the information provided in the Pay Versus Performance disclosure that begins on page 64 which includes valuations for completed and in-flight award periods.
The corporate performance factor under our short-term incentive plan was 83%. In February 2022, the Committee established Adjusted Earnings Per Share (EPS) and Adjusted Operating Cash Flow (OCF) goals for 2022. Adjusted EPS excludes from net income per share acquisition and divestiture charges, restructuring charges, and intangibles amortization expense. Adjusted OCF equals the sum of operating cash flow as reported and U.S. qualified pension contributions. The 2022 target Adjusted EPS and Adjusted OCF objectives were $7.45 and $3,100 million, respectively. Actual Adjusted EPS and Adjusted OCF were $7.57 and $2,533 million, respectively, which generated a calculated payout of 58% of target. The company missed its $2,600 million threshold Adjusted OCF goal by $67 million, or 2.6%, mostly due to strategic inventory investments made to address industry-wide supply chain challenges combined with surging orders and record backlog. For the reasons described under 2022 Short-Term Incentives on page 37, the Committee chose to pay out the Adjusted OCF portion of our Executive Incentive Compensation Plan ("EIC") at the minimum threshold goal level which, when combined with our record Adjusted EPS performance, results in a below-target 83% corporate performance factor.
2020-2022 ESIP opportunities took the form of Performance Share Units (PSUs) and were settled in Eaton ordinary shares. Dividend equivalents were paid in cash based on the earned number of PSUs and the aggregate dividend paid to our shareholders over the award period. Additional information about the 2020-2022 ESIP awards can be found on page 40.
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 2022, our shareholders approved our executives’ compensation by a vote of 93%.
The Committee considered these voting results, shareholder feedback, and a comprehensive assessment of Eaton’s executive compensation programs and did not make substantive changes to our executive compensation plans or programs in response to last year’s say-on-pay vote in light of the support we received from shareholders in 2022. The Committee will continue to review our compensation programs each year in light of the annual say-on-pay voting results and shareholder feedback.
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 realized based on our performance against the metrics established for the short- and long-term incentive plans that ended on December 31, 2022 and the appreciation of our share price. Short- and long-term incentive plan metrics are intended to drive results that create value for our shareholders. This table supplements, but is not a substitute for, the information contained in the Summary Compensation Table on page 50 and the Pay Versus Performance disclosure on page 64. Each pay component shown below is discussed in more detail in the CD&A that follows.
COMPENSATION REALIZED BY OUR CHIEF EXECUTIVE OFFICER IN 2022
Compensation
Component
|
Period
Earned
|
|
Description
|
Target
|
Amount
Earned
|
Annual Compensation
|
|
|
|
Base Salary
|
2022
|
|
We generally target the market median when establishing base salaries. Mr. Arnold did not receive a base salary increase in 2022.
|
n/a
|
$
|
1,400,000
|
Short-Term
Incentive
|
2022
|
|
Mr. Arnold’s target was 160% of base salary. His actual award of 87% of his individual target is consistent with awards delivered to other executives. For more information on this payment, please see “2022 Short-Term Incentive Awards”.
|
$2,240,000
|
$
|
1,952,160
|
Total Annual Cash
|
|
|
|
$
|
3,352,160
|
Realized Value from Long-Term Incentives
|
|
|
|
Stock
Option
Exercises
|
2019-2022
|
|
The gains upon exercise of stock options were based on the increase in our stock price over the period in which Mr. Arnold held the options. Additional details, including the number of shares exercised, are reported in the “Option Exercises and Stock Vested in 2022” table on page 54.
|
n/a
|
$
|
93,094
|
Performance
& Restricted
Share Unit
Vesting
|
2019-2022
|
|
This represents the vesting of RSUs that were granted in 2019, 2020, and 2021 and PSUs for the 2019-2021 ESIP award period that vested in 2022. This is reported in the “Option Exercises and Stock Vested in 2022” table on page 54.
|
n/a
|
$
|
21,867,588
|
Total Long-Term
|
|
|
$
|
21,960,682
|
All
Other
Compensation
|
|
|
Includes the items disclosed as “Other Compensation” in the Summary Compensation Table.
|
n/a
|
$
|
211,465
|
TOTAL REALIZED COMPENSATION
|
|
$
|
25,524,307
|
The long-term incentive opportunities listed below were earned during a performance period that ended on December 31, 2022 but did not vest until February 22, 2023. The amount realized upon the vesting of these awards will be reported in our 2024 proxy statement. Therefore, these amounts are not included in the table above.
|
2020-2022
ESIP
|
2020-2022
|
|
Executives earned 178% of the target number of performance share units that were granted in 2020. Dividend equivalents were paid in cash based on the earned number of share units and the aggregate dividend paid to shareholders over the award period.
|
$4,875,000 expressed as 50,050 PSUs
|
|
89,089 earned PSUs
|
The realized pay table differs from the Summary Compensation Table and Pay Versus Performance Table in a number of ways, including:
■
The Summary Compensation Table includes the grant date fair value of equity compensation (calculated in accordance with accounting rules) granted during the year, which may or may not ever be earned. The Pay Versus Performance Table reports changes in values of unvested equity that may or may not ever be earned, as measured at each year-end or at vesting, as applicable (in each case calculated in accordance with accounting rules). 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, 2022. Specifically, the values for equity awards in the realized pay table show the gross compensation (before applicable taxes) that Mr. Arnold received in 2022 upon the exercise of stock options and the vesting of RSUs and PSUs (as shown in the “Option Exercises and Stock Vested in 2022” table on page 54), regardless of when the shares were granted.
■
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 34 in the context of a competitive overall benefit design and not as an element of its annual compensation decisions.
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| EATON 2023 Proxy Statement and Notice of Meeting | 31 |
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ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE
Membership and Responsibilities
The Compensation and Organization Committee of the Board of Directors in 2022 consisted of 5 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 Tasks
|
|
Organizational Tasks
|
•
Reviews, approves, and oversees all of our executive compensation plans, including our stock plans;
•
Establishes performance objectives under our short- and long-term incentive compensation plans;
•
Determines the attainment of those performance objectives and the awards to be made to our senior officers under our short- and long-term incentive compensation plans;
•
Determines the compensation for our senior officers, including salary and short- and long-term incentive opportunities;
•
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 performance of the CEO, with input from all non-employee directors;
•
Reviews the performance capabilities of the other senior officers based on input from the CEO;
•
Reviews succession planning for officer positions including the position of the CEO;
•
Reviews proposed organization or responsibility changes at the senior officer level; and
•
Reviews our practices for the recruitment and development of a diverse talent pool.
|
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 2022 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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| EATON 2023 Proxy Statement and Notice of Meeting | 32 |
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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
|
Data Source
|
Purpose
|
How It’s Used
|
When It’s Conducted
|
Market Analysis
|
Aon and Willis Towers Watson executive compensation databases
|
Setting pay for our executives
|
Setting base pay and short- and long-term incentive targets for the next year/award cycle
|
November — February
|
Performance Assessments
|
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 — February
|
Tally Sheets
|
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 and Performance Analysis
|
Publicly available financial and compensation information as reported by the companies that we have identified as peers for compensation and strategic planning purposes
|
Evaluating pay and performance to validate individual compensation plans that were established in February
|
Comparing pay and performance results with that of the peer group to determine the efficacy of the “Total Compensation Analysis and Planning Process”.
This study also provides insight into how competitors establish their pay for performance profile.
|
July
|
Executive Compensation Program Audit
|
External market data compiled by the Committee’s independent consultant
|
Comprehensive review of all executive compensation, benefit, and perquisite programs and design features
|
This report compares our programs to prevalent practices in the external market to ensure alignment with the market and best in class governance practices
|
October
|
Total Compensation Analysis and Planning Process (November – 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 — In the fourth quarter 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 and Willis Towers Watson. We also review the compensation data that is publicly reported by the companies that comprise our compensation peer group described on page 34. 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 compensation peer group median and the average of the surveys’ median compensation data. This helps the Committee determine how each executive officer’s compensation compares to current market practices.
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| EATON 2023 Proxy Statement and Notice of Meeting | 33 |
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In preparing our comparison for 2022, 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 150 companies with revenues ranging from 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.
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, 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 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 — The Committee uses proxy compensation data reported by a compensation peer group together with the survey data described under “market analysis” to set each named executive officer’s base salary, short- and long-term incentive targets. The Committee uses a compensation peer group in order to have additional data points to consider when setting pay and evaluating compensation programs. With input from Meridian, the Committee chose the companies in the compensation peer group based on specific characteristics such as, but not limited to: trailing twelve months revenue; market cap and revenue in the range of one-third to three-times those of Eaton’s; number of employees; financial performance; industry; total non-U.S. revenue; number of reporting segments; and whether the company includes Eaton in its own peer group. In addition, the peer industry mix of the compensation peer group is focused on diversified industrial companies that are operationally and strategically similar to Eaton and represents a sample of companies with whom we compete for talent. The 23 companies that comprise Eaton’s compensation peer group used for benchmarking executive pay in 2022 are listed below. Eaton’s revenue and market cap are approximately aligned with the median revenue and market cap of the compensation peer group.
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| EATON 2023 Proxy Statement and Notice of Meeting | 34 |
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2022 Compensation Peer Group
|
|
3M Company
|
ABB Ltd.
|
Aptiv, plc
|
Carrier Global Corporation
|
Caterpillar Inc.
|
Cummins Inc.
|
Deere & Company
|
Dover Corporation
|
Emerson Electric Company
|
Honeywell International Inc.
|
Illinois Tool Works Inc.
|
International Paper Company
|
Johnson Controls International plc
|
Lear Corporation
|
Northrop Grumman Corporation
|
Otis Worldwide Corporation
|
PACCAR Inc.
|
Parker-Hannifin Corporation
|
Rockwell Automation, Inc.
|
Stanley Black & Decker, Inc.
|
TE Connectivity Ltd.
|
Trane Technologies plc
|
Whirlpool Corporation
|
|
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 (Electrical, Aerospace, 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.
Peer Pay Analysis — Each year we provide the Committee with an analysis that includes the compensation reported by each publicly traded peer in its annual proxy statement and market survey data for positions that are equivalent to positions held by our named executive officers. The Committee uses this analysis in reviewing and establishing our stretch incentive plan goals and in answering whether our compensation targets and payouts are appropriately aligned to market comparators given our performance. In 2022, this review of survey and peer proxy data confirmed that Eaton’s compensation opportunities were aligned with the external data points.
Executive Compensation Program Audit — Each October, the Committee’s independent consultant prepares a report that compares Eaton’s executive compensation programs to prevalent practices in the external market. This review includes, but is not limited to, the design of our short- and long-term incentive plans, deferral plan design, severance and change of control practices, executive benefits and perquisites, stock ownership requirements, and clawback policies. The Committee uses this report to determine whether any changes are needed to any of our executive compensation programs to better align with market and governance practices. In 2022, the Committee did not make any changes to our executive compensation plans or programs as a result of this report.
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| EATON 2023 Proxy Statement and Notice of Meeting | 35 |
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COMPONENTS OF COMPENSATION
In this section, we describe the main components of our compensation, including the plan design and metrics we use in our performance-based incentive plans. The charts below illustrate the mix of pay at target for our CEO and the average of the other named executive officers. Items reported as All Other Compensation and the Change in Pension Values in the Summary Compensation Table are not included in the following charts. The Committee reviews compensation that is reported as All Other Compensation and compensation based upon the change in pension values as part of the Tally Sheet review discussed on page 34 in the context of a competitive overall benefit design and not as an element of its annual compensation decisions.
OVERVIEW OF OUR PRIMARY COMPENSATION COMPONENTS
Component
|
|
|
Description
|
|
Form/Timing of Payout
|
Base salary
|
Levels reflect job responsibilities and market competition
|
|
Paid in cash throughout the year
|
Short-term incentive
|
|
Executive Incentive Compensation Plan (EIC) – Cash incentive tied to the following performance metrics:
Adjusted Earnings Per Share (EPS) and Adjusted Operating Cash Flow (OCF) goals as well as business unit and individual performance criteria which include environmental, social and governance measures
|
|
Paid in cash after the year has ended and performance has been measured
Executives can choose to defer payments under our Deferred Incentive Compensation Plan II
|
Long-term incentives
|
Executive Strategic Incentive Program (ESIP) – Long-term performance-based incentive tied to the following performance metric:
|
|
Awards are distributed in Eaton ordinary shares after the 3-year award period has ended and performance has been measured
|
|
|
50% Performance-
Based Long-Term Incentive (ESIP)
|
Relative Total Shareholder Return
ESIP opportunities are denominated in performance share units (PSUs) and settled in Eaton ordinary shares
Value realization depends on our stock performance
|
|
|
|
|
25% RSUs
25% stock options
|
Restricted Share Units (RSUs) and stock options – Long-term incentives that vest over time based on continued service to our company
Value realization depends on our stock performance
|
|
Vesting in approximately equal annual installments over 3 years
|
Other performance and retention grants
|
Retention restricted share units – Granted on rare occasions to foster engagement and retention
May be tied to achievement of performance objectives
Value realization depends on our stock performance
|
|
Vesting periods range from 3 to
10 years
|
|
|
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| EATON 2023 Proxy Statement and Notice of Meeting | 36 |
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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 33. 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.
2022 BASE SALARY
During the February 2022 Total Compensation Analysis and Planning Process, the Committee reviewed each executive’s base salary relative to the market data as described under “Total Compensation Analysis and Planning Process,” as well as the executive’s individual performance over the prior year. After discussing these items, the Committee determined it was appropriate to deliver merit increases on March 1, 2022, to Messrs. Okray, Monesmith, Ruiz, Brickhouse, and Yadav. The Committee did not adjust Mr. Arnold’s base salary because it found it to be appropriately aligned to the survey and peer median.
On July 5, 2022, Mr. Monesmith and Mr. Ruiz were promoted to President and Chief Operating Officer – Electrical Sector and President and Chief Operating Officer – Industrial Sector, respectively. The Committee considered median market data and internal parity in determining their salaries. The increases shown below include the 3.5% merit increase each received in March 2022 and the 6.91% promotional increase delivered to Mr. Monesmith and the 6.06% promotional increase delivered to Mr. Ruiz in July.
Executive
|
|
Increase %
|
New Base Salary
|
C. Arnold
|
|
0.00%
|
$1,400,000
|
T. Okray
|
|
3.50%
|
$853,875
|
H. Monesmith
|
|
10.65%
|
$725,000
|
P. Ruiz
|
|
9.78%
|
$685,000
|
B. Brickhouse
|
|
3.00%
|
$659,715
|
U. Yadav
|
|
3.50%
|
$828,742
|
Short-Term Performance-Based Compensation
We establish a competitive annual cash incentive opportunity for each named executive officer which is intended to align with the market median short-term incentive target (expressed as a percentage of base salary) as determined in our annual market analysis. The Committee determines target opportunities for each executive in February during its Total Compensation Analysis and Planning Process.
Metrics, Goals and Results — In February 2022, the Committee established Adjusted EPS and Adjusted OCF goals based on its review of market analyses, our annual profit plan as approved by the Board of Directors, external research reports, and analyses of peer group data. The Committee also considered Adjusted EPS growth rate guidance for us and our strategic peers as a key starting point for setting aggressive performance objectives for our short-term incentive plan. The Adjusted EPS metric measures earnings growth, while the Adjusted OCF metric is a direct measure of the operating efficiencies we need to be successful such as but not limited to the company’s ability to produce cash that is available to drive shareholder value through acquisitions, dividends, share buybacks, repayment of debt, and other strategic initiatives. In addition, both metrics are widely used among our peers. We and the Committee also believe these are appropriate metrics because of their link to shareholder value creation. The Committee believes that the target level Adjusted EPS and Adjusted OCF goals established at the beginning of 2022 were demanding but attainable.
The following table shows the 2022 goals and our actual results for the year. Adjusted EPS (which excludes from net income acquisition and divestiture charges, restructuring charges and intangibles amortization expense) and Adjusted OCF (which for purposes of the EIC Plan equals operating cash flow as reported plus U.S. qualified pension contributions) results were $7.57 and $2,533 million, respectively. The results generated a calculated payout of 58% of target, but the Committee determined it was appropriate to adjust the formula driven payout to 83% of target to remove the negative impact on operating cash flows of strategically high inventory levels designed to address unanticipated macro-economic
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| EATON 2023 Proxy Statement and Notice of Meeting | 37 |
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conditions that caused unprecedented supply chain disruption, elevated order intake and backlog. The company missed its $2,600 million minimum threshold Adjusted OCF goal by $67 million, or 2.6%, mostly due to these strategic inventory investments. When determining whether it would be appropriate to increase the payout for the Adjusted OCF metric, the Committee considered factors such as the company’s total shareholder return, 2022 record earnings, and that the inventory investment was similar to that of our peers. In addition, the Committee discussed its prior use of discretion to reduce the formula driven EIC payout factors in 6 of the last 7 years in the range of 6 to 52 percentage points (which equated to 8% to 30% reductions in payouts). The reductions impacted all plan participants (approximately 2,800 employees) and were made to guard against windfalls generated by events that were not influenced by management. The inventory and supply chain issues in 2022 were also largely beyond management’s control but management prudently chose to increase inventory to protect surging orders, resulting in a miss on the Adjusted OCF threshold goal. Although removing the impact of the strategic inventory adjustment would have generated a payout greater than 80% of the Adjusted OCF target, after considering the aforementioned factors, the Committee agreed that it was appropriate to deliver and cap the payout for the Adjusted OCF measure at the threshold level of 50%. The 50% payout for Adjusted OCF (weighted 50%) and 115% payout on the Adjusted EPS metric (weighted 50%) result in a total payout of 83% of target.
2022 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS
2022 SHORT-TERM INCENTIVE AWARDS
In February 2022, in addition to establishing EIC Plan performance objectives, the Committee also established an individual target award opportunity for each executive that reflected the market median target annual incentive opportunity as determined in our annual market analysis as described on page 33.
Environmental, Social and Governance measures in categories such as ethics, sustainability, and diversity and inclusion, have been embedded in our short-term incentive plan for more than ten years. These measures are factored into the following growth, operational excellence and building organizational capacity goals that the Committee considered in determining the final payout.
■
The Company’s 83% payout factor as described above.
■
Individual performance factors that are based on the achievement of the following performance criteria:
■
Financial Goals: Achieving the Company’s annual financial plan, as well as the annual financial plan for the executive’s business unit.
■
Growth Goals: Building our brand; outgrowing the markets in which we operate; introducing new products and services.
■
Operational Excellence: Workplace safety and emissions reduction; advancements in quality; supply chain improvement; and operational efficiency/productivity.
■
Building Organizational Capacity: Reinforcing our ethical standards; attracting and developing talent; developing a diverse and inclusive organization; promoting a learning culture.
The following table illustrates each named executive officer’s 2022 award opportunity and his actual EIC award relative to that opportunity. Messrs. Arnold’s, Okray’s, Monesmith’s, Ruiz’s and Yadav’s awards are subject to the corporate and individual performance factors described above. Prior to his promotion to Chief Operating Officer – Industrial Sector, Mr. Ruiz led a business group and the portion of his award attributable to that time period is also subject to a business unit factor. Mr. Brickhouse leads a reporting segment and his award is subject to corporate, business unit, and individual performance factors. The awards shown below are rounded to the nearest whole dollar. Each named executive officer’s short-term incentive award is appropriately reported in the Summary Compensation Table.
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| EATON 2023 Proxy Statement and Notice of Meeting | 38 |
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Executive
|
EIC
Target as a
% of Salary
|
EIC
Target
$
|
|
Adjusted EPS
and Adjusted
OCF Results
|
|
Business
Unit/Individual
Performance
Factor
|
|
Award
|
Award as
% of Target
|
C. Arnold
|
160%
|
$2,240,000
|
x
|
83%
|
x
|
105%
|
=
|
$1,952,160
|
87%
|
T. Okray
|
100%
|
$853,875
|
x
|
83%
|
x
|
105%
|
=
|
$744,152
|
87%
|
H. Monesmith
|
100%
|
$701,568
|
x
|
83%
|
x
|
100%
|
=
|
$582,301
|
83%
|
P. Ruiz
|
83%
|
$550,444
|
x
|
83%
|
x
|
99.5%
|
=
|
$454,858
|
83%
|
B. Brickhouse
|
85%
|
$560,758
|
x
|
83%
|
x
|
102%
|
=
|
$474,598
|
85%
|
U. Yadav(1)
|
100%
|
$276,247
|
x
|
83%
|
x
|
100%
|
=
|
$229,285
|
83%
|
(1)
Mr. Yadav’s award was prorated based on the number of months he was actively employed during the award period.
|
Long-Term Incentive Compensation
The Committee establishes a target long-term incentive opportunity for each executive that is intended to align with the market median values as determined in our annual market analysis. We provide long-term incentive compensation to our executive officers in two components that generally are weighted as follows:
■
50% in Performance Share Units: Relative TSR serves as the performance criteria for the performance-based ESIP periods which are three years in length. ESIP opportunities are denominated in performance share units and the number of share units earned by executives will depend on the rank of our total return to shareholders against that of a TSR Peer Group. The value realized by executives will depend on share price appreciation or depreciation over the award period; thereby providing a direct link to shareholder value creation.
■
50% in Time Based Equity Awards: The named executive officers receive approximately an equal mix of stock options and RSUs which also provide a link to external performance. Time-based equity vests over a minimum of a three-year period and is subject to continued employment with us over the vesting 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 unit grants to foster engagement and retention. The Committee’s independent compensation consultant has confirmed that this approach is appropriate to delivering long-term compensation and is consistent with market practices. No named executive officers received retention grants in 2022.
Equity Grant Practices — We typically grant equity-based awards in February. Consistent with market practices, the Committee also provides new hire grants at the time of hire that are intended to replace the value of long-term incentives that a newly hired executive forfeits when he or she leaves the prior employer to join our company. In addition, in limited circumstances the Committee may provide a grant in the event of a significant promotion. In August 2022, the Committee approved a grant of restricted share units for Mr. Ruiz in consideration of the significant increase in scope and responsibilities that accompanied his promotion to President and Chief Operating Officer - Industrial Sector. This additional grant also helped foster market alignment and internal equity among our senior leaders. Mr. Ruiz's grant is subject to the same terms and performance criteria as the equity awards granted in February 2022. The Committee has the authority to fix the date and all terms and conditions of equity grants to executive officers and other employees under our various stock plans, all of which have been approved by our shareholders. Our equity program adheres to the following best practices:
■
Equity-based awards generally vest over, or upon the conclusion of, at least a three-year period and vesting is contingent upon continued service with us over the vesting period (except in the case of an employee’s death, disability, or retirement).
■
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.
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| EATON 2023 Proxy Statement and Notice of Meeting | 39 |
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PERFORMANCE-BASED LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2022
2020-2022 ESIP Performance Criteria: The Committee adopted relative TSR as the performance criteria for the 2020-2022 ESIP period. The Committee began using a relative TSR metric in 2016 to foster a stronger sense of relative peer performance and to alleviate the increasingly difficult market calibration issues that we faced in prior years when the plan was tied to earnings per share growth and cash flow return on gross capital metrics. We and the Committee believe a short-term plan with earnings growth and operating cash flow metrics (via the Adjusted EPS and Adjusted OCF goals) complemented by a TSR-driven long-term plan is an effective combination that will enhance shareholder value.
The 2020-2022 ESIP was designed such that our TSR rank among a TSR Peer Group would determine an adjustment factor which could range from 0% to 200%. Ranking in between the threshold, target and maximum performance levels results in linear interpolation of the percentage earned.
Additionally, if our TSR was positive but ranked the lowest among the peer group, the maximum payout that could be earned was 25% of target. If our TSR was the highest when compared to that of the peer companies, but was negative, then the maximum payout that could be earned was 100% of target. Consistent with our historical practice, awards under this plan design were capped at 200% of target.
The TSR Peer Group for the 2020-2022 award period was comprised of twenty companies (excluding Eaton), fourteen of which are direct peers in either the Electrical, Aerospace or Vehicle segments and six of which are indirect but relevant peers. The revenue of the directly competitive peers in each segment expressed as a percentage of total peer group revenue roughly equated to the percentage of revenue each such segment represented of total Eaton revenue at the beginning of the award period (with the indirect peers added to the direct Electrical peers). During 2020, two of our TSR peers, Ingersoll-Rand plc and United Technologies Corporation changed due to spinoff and mergers. Ingersoll-Rand plc now operates as Trane Technologies plc after spinning-off its industrial business at the end of February 2020 and United Technologies Corporation now operates as Raytheon Technologies Corporation after spinning off its Otis and Carrier businesses and merging with Raytheon Company in April 2020. These companies in their new form are no longer strategic TSR peers. Furthermore, their TSR performance was skewed by the share distributions and conversions resulting from the spinoff and mergers. When the Committee approved the goals for the 2020-2022 award period, they reserved the right to exclude from the TSR ranking for the full award period any companies who merge or who are acquired. In light of the foregoing, the Committee has exercised their right to remove these companies from the TSR Peer group.
2020-2022 ESIP Awards — Awards for the 2020-2022 award period were determined based on our TSR ranking among the TSR Peer Group. For ESIP TSR calculation purposes, our stock price at the beginning of the award period was $90.49, (adjusted to reflect dividend reinvestments over the period) and our stock price at the end of the award period was $160.07. This resulted in TSR of 76.88%. As described above, per the rights granted under our plan, the Committee determined it was appropriate to exclude from the TSR ranking for the full period those companies who merged during the period. Prior to excluding Trane Technologies plc and Raytheon Technologies Corporation from the results, Eaton had an absolute ranking of three of twenty-one and a percentile ranking at the 90th percentile which would have generated a payout of 180% of target. Following the removal of these two companies and re-ranking of the remaining peers, Eaton had an absolute ranking of three out of nineteen, and a percentile ranking at the 88.8th percentile. This percentile ranking resulted in a performance adjustment factor of 178% of target (rounded up to a whole percentage from 177.60%). The results are shown in the following tables.
|
Threshold
|
Target
|
|
|
Maximum
|
Actual Results
|
|
Relative Ranking
|
TSR is positive but ranks the lowest among the peers
|
50th Percentile
|
88.8th Percentile
|
|
100th Percentile
|
Adjustment Factor
|
25%
|
100%
|
178%
|
|
200%
|
| | |
| EATON 2023 Proxy Statement and Notice of Meeting | 40 |
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Company Name
|
TSR
|
Absolute Ranking
Prior to Peer Removal
|
Adjusted Ranking
Following Peer
Removal(1)
|
Adjustment Factor
(Linear Interpolation
From 0% to 200%,
Rounded to Whole Percent)
|
Deere & Company
|
164.91%
|
1
|
1
|
200%
|
Hubbell, Inc.
|
78.80%
|
2
|
2
|
189%
|
Eaton Corporation
|
76.88%
|
3
|
3
|
178%
|
Schneider Electric SE
|
58.19%
|
4
|
4
|
167%
|
Cummins Inc.
|
56.08%
|
5
|
5
|
155%
|
Parker-Hannifin Corporation
|
50.80%
|
6
|
6
|
144%
|
ABB Ltd.
|
48.96%
|
7
|
7
|
133%
|
Siemens Aktiengesellschaft
|
38.04%
|
8
|
8
|
122%
|
Rockwell Automation
|
36.09%
|
9
|
9
|
111%
|
Emerson Electric Co.
|
35.97%
|
10
|
10
|
100%
|
Illinois Tool Works, Inc.
|
32.43%
|
12
|
11
|
89%
|
Honeywell International Inc.
|
28.01%
|
13
|
12
|
78%
|
Dover Corporation
|
23.30%
|
14
|
13
|
67%
|
Legrand SA
|
13.28%
|
16
|
14
|
55%
|
BorgWarner Inc.
|
12.74%
|
17
|
15
|
44%
|
Allison Transmission Holdings Inc.
|
-1.87%
|
18
|
16
|
33%
|
Moog, Inc.
|
-1.90%
|
19
|
17
|
22%
|
American Axle
|
-4.33%
|
20
|
18
|
11%
|
Woodward, Inc.
|
-19.39%
|
21
|
19
|
0%
|
(1)
The following are removed due to mergers and spin-offs as described above. TSR and Rank prior to removal is as follows:
|
Trane Technologies plc
|
35.06%
|
11
|
|
|
Raytheon Technologies Corporation
|
17.37%
|
15
|
|
|
Final awards were determined by multiplying the target number of performance share units by the calculated performance factor of 178% and rounding up to the nearest whole share. The earned number of performance share units vested on February 22, 2023 and will be reported in the Options Exercised and Stock Vested Table in our proxy statement for our 2024 Annual General Meeting. Dividend equivalents were also paid in cash based on the aggregate dividend paid over the period ($9.20) and the final number of earned share units.
Awards earned by our named executive officers for the 2020-2022 ESIP Period are shown below.
Executive
|
2020-2022
Target
|
Target Units
|
Earned Share Units
(based on
178% payout)
|
Value of Award at Vesting
(based on $171.785 on
2/22/2023)
|
Accumulated
Dividends
(based on $9.20
per share)
|
Total Award +
Dividend
Equivalents
|
C. Arnold
|
$4,875,000
|
50,050
|
89,089
|
$15,304,154
|
$819,619
|
$16,123,773
|
T. Okray(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
H. Monesmith
|
$800,000
|
8,215
|
14,623
|
$2,512,012
|
$134,532
|
$2,646,544
|
P. Ruiz
|
$525,000
|
5,390
|
9,595
|
$1,648,277
|
$88,267
|
$1,736,544
|
B. Brickhouse
|
$600,000
|
6,160
|
10,965
|
$1,883,623
|
$100,878
|
$1,984,501
|
U. Yadav(2)
|
$816,667
|
8,384
|
14,924
|
$2,563,719
|
$137,301
|
$2,701,020
|
(1)
Per the terms of his offer, Mr. Okray’s participation begins with the 2021-2023 ESIP award period.
(2)
Mr. Yadav’s award was prorated based on the number of months he was actively employed during the award period.
|
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| EATON 2023 Proxy Statement and Notice of Meeting | 41 |
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Long-Term Incentives Granted in 2022
Establishment of Performance Criteria for the 2022-2024 ESIP — Awards for the 2022-2024 ESIP award period will be determined based on our TSR relative to that of the TSR Peer Group as described on the following page. The structure of our 2022-2024 ESIP is identical to that of the 2020-2022 ESIP described on page 40. That is, 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
|
Target
|
Maximum
|
Relative Ranking
|
TSR is positive but ranks the lowest among the peer group
|
50th Percentile
|
100th Percentile
|
Adjustment Factor
|
25%
|
100%
|
200%
|
Additionally, if our TSR is positive but ranked the lowest among the peer group, the maximum payout that can be earned is 25% of target. 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. The payout between threshold and maximum will be interpolated based on the rank of our TSR among the peer companies.
With the sale of our Lighting and Hydraulics businesses in 2020 and 2021, respectively, and the recent acquisitions within our Electrical and Aerospace businesses, our revenue mix has changed. Therefore, we established a new TSR peer group for our 2022-2024 award period that includes sixteen companies, eleven of which are direct peers in either the Electrical, Aerospace or Vehicle segments and five of which are diversified but relevant peers. The revenue of the directly competitive peers in each segment expressed as a percentage of total peer group revenue roughly equates to the percentage of revenue each such segment represented of total Eaton revenue (with the indirect peers added to the direct Electrical peers). The companies included in the TSR Peer Group are:
Direct Peers: ABB, Ltd., Allison Transmission Holdings, Inc., BorgWarner, Inc., Hubbell Inc., Legrand S.A., Moog Inc., Rockwell Automation, Inc., Schneider Electric SE, Siemens AG, Woodward, Inc., and Safran
Diversified Peers: Dover Corporation, Emerson Electric Co, Honeywell International Inc., Illinois Tool Works Inc., and Parker-Hannifin Corporation
Performance Share Units Granted for the 2022-2024 ESIP — In February 2022, the Committee established total long-term incentive opportunities, expressed as a cash value, for each executive. Targets are intended to align with the market median long-term incentive value as determined during our annual market analysis described on page 33. Half of the total long-term incentive target was converted to a number of performance share units based on the 30-day average closing price of our ordinary shares at the beginning of the award period. At the end of the award period, the number of performance share units will be adjusted up or down based on achievement of our TSR rank relative to that of the peers as previously described. The adjusted number of share units, if any, will be distributed to participants in the form of our ordinary shares. An accumulated dividend equivalent covering the performance period will be paid in cash based on the number of share units actually earned.
RSUs Granted in 2022 — In
February 2022, the Committee approved RSU grants that represented approximately 25% of each named executive officer’s
target total long-term incentive opportunity in effect at that time. Effective August 4, 2022, the Committee approved a grant
of restricted share units for Mr. Ruiz in consideration of the significant increase in scope and responsibilities that
accompany his promotion to President and Chief Operating Officer – Industrial Sector. This additional grant also helped
to foster market alignment and internal equity among our senior leaders. These RSUs vest in approximately equal installments
over three years, subject to continued employment with us. We pay dividend equivalents on the earned number of RSUs at the
time the shares vest.
Stock Options Granted in 2022 — The Committee approved Stock option grants which make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2022 will vest in substantially equal annual 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.
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| EATON 2023 Proxy Statement and Notice of Meeting | 42 |
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Long-Term Incentive Grants — Each named executive officer’s target long-term incentive opportunity and mix of grant types is shown below. The target amounts shown below differ from the amounts reported in the Summary Compensation Table, which reports the grant date fair value determined in accordance with ASC Topic 718.
Executive
|
ESIP Target ($)
|
RSU Target ($)
|
Stock Option Target ($)
|
Target Total
Long-Term Incentive ($)
|
C. Arnold
|
$5,250,000
|
$2,625,000
|
$2,625,000
|
$10,500,000
|
T. Okray
|
$1,175,000
|
$587,500
|
$587,500
|
$2,350,000
|
H. Monesmith
|
$900,000
|
$450,000
|
$450,000
|
$1,800,000
|
P. Ruiz
|
$525,000
|
$612,500
|
$262,500
|
$1,400,000
|
B. Brickhouse
|
$700,000
|
$350,000
|
$350,000
|
$1,400,000
|
U. Yadav
|
$1,200,000
|
$600,000
|
$600,000
|
$2,400,000
|
HEALTH AND WELFARE, RETIREMENT AND OTHER BENEFIT PLANS
Health and Welfare Benefits and Retirement Income Plans
We provide our executive officers with the same health and welfare and retirement income benefit programs that we provide to our other salaried employees in the United States, with certain exceptions described below. Our named executive officers may choose to participate in our 401(k) plan and receive Company matching contributions, which are reported as “Other Compensation” in the Summary Compensation Table. We provide 401(k) matching contributions that comply with Internal Revenue Code limits.
In place of typical Company-paid group term life insurance, we provide certain named executive officers and approximately 200 other employees who were hired prior to January 1, 2016 with Company-paid life insurance coverage under two separate policies. The aggregate coverage provided by these two policies of approximately one times base salary is consistent with the level of coverage provided through our group term life policy to other non-union and U.S. salaried employees. The majority of the executives’ life insurance (base salary minus $50,000) is covered under an executive-owned individual whole-life policy, with the remaining $50,000 of insurance covered under our group term life policy. The value of the Company-paid premium for the whole life policy is imputed as income to each covered executive. At the time of its inception, we decided to provide this executive life insurance arrangement to allow each executive to have a paid-up policy at retirement that would mirror Company-provided post-retirement group term life insurance, but with less post-retirement tax complexity for both the executive and the Company. Employees hired after January 1, 2016, including named executive officers, receive a benefit of one-times base salary through our group term life policy.
Other Retirement and Compensation Arrangements
The 2022 Pension Benefits table beginning on page 54 reports retirement benefits for Mr. Arnold and the other named executive officers who participate in our defined benefit pension plans. Certain provisions of the Internal Revenue Code limit the annual benefits that may be paid from a tax-qualified retirement plan. As permitted under the Code, the Board of Directors has authorized plans under which payment will be made for any benefits that may exceed those limits. If these nonqualified benefits accrued before 2005, executives may choose a lump sum payment or an annuity (unless otherwise determined by the Committee), except that if there is a change of control of the Company, they will be paid at the time of the event (unless otherwise determined by the Board of Directors) in a lump sum. These benefits that accrued after January 1, 2005 will be paid in the form of a single sum at retirement.
In response to market practices and to enhance our ability to attract and retain key executives, the Board of Directors also adopted plans that provide supplemental annual retirement income to certain executives whom we hire mid-career, because they do not have the opportunity to accumulate significant credited service with us under our tax-qualified retirement income or nonqualified restoration plans. These supplemental plans deliver a benefit if the executive either retires at age 55 or older with at least 10 years of service, or at age 65 or older regardless of the years of service. No new participants have been added to this plan since 2011.
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| EATON 2023 Proxy Statement and Notice of Meeting | 43 |
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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 of other equity-based awards are not factored into these calculations.
PENSION FREEZE ENACTED DECEMBER 31, 2020
Eaton regularly considers cost savings opportunities in all aspects of how we operate to ensure we remain competitive. Since 2001, we have periodically reviewed our pension plan to determine how we compare to companies like ours, particularly diversified industrial companies. Our survey found that many large companies, including over half of our peers had already frozen or announced they were freezing their pension plans. Effective December 31, 2020, we froze our qualified pension plans for US non-union employees, including our named executive officers. This freeze affects participants in our Pension Plan for Eaton Corporation Employees. In the first quarter of 2021, we froze, with the same effect and timing, the related nonqualified DB Restoration and Limited Service Supplemental Plans. These plans are referenced on page 54.
■
For those in our “Average Final Annual Compensation” benefit formula (the “AFAC benefit formula”), the freeze will take effect as of December 31, 2025 meaning no additional pay and service credits will be earned beginning on January 1, 2026.
■
For those in our “Eaton Personal Pension Account” under the cash balance formula (the “EPPA benefit formula”), the freeze took effect as of December 31, 2020, but we will not end cash balance pay credits until December 31, 2025. Instead of putting the pay credit in employees’ cash balance pension accounts, we will duplicate it as a contribution to the Eaton Savings Plan (Eaton’s 401(k)) and Eaton Supplemental Retirement Plan over the five-year transition period. Pay credits for compensation greater than the amount of annual compensation that may be taken into account in calculating contributions to a qualified savings plan are credited to the participant’s notional account in the Eaton Supplemental Retirement Plan.
At the end of the five-year period, beginning January 1, 2026, participants in these plans will then be eligible to receive the same contribution into the Eaton Savings Plan and Eaton Supplemental Retirement Plan, as applicable, as employees hired April 1, 2013 and following, which is currently a 4% Eaton Retirement Contribution. Any employee hired on or after April 1, 2013 and all U.S. employees of Cooper immediately prior to our acquisition of Cooper receive an additional employer contribution under the Eaton Savings Plan and Eaton Supplemental Retirement Plan, as applicable in lieu of earning a benefit under the aforementioned pension plans.
Deferral Plans
We provide our executives with opportunities to defer the receipt of their earned and otherwise payable awards under our short-term and cash-settled long-term 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 requirements.
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, Change of Control Agreements and Severance Benefits
We do not provide our executive officers with employment contracts; however, we do enter into Change of Control Agreements with each executive officer that provide benefits if an executive’s employment is terminated or materially changed for certain reasons following a change of control. In April 2022, we entered into new Change of Control Agreements with each Named Executive Officer and other eligible officers. The new agreements supersede and replace the prior Change of Control agreements. Like the prior agreements, the new agreements contain double-trigger severance provisions and restrictive covenants and do not provide tax gross ups. The new agreements remove certain fringe benefits and expand the definition of Cause to include (i) pleading guilty or nolo contendere to, or being convicted of, any felony or any crime involving moral turpitude, dishonesty, fraud or unethical business conduct; (ii) a material violation of the Code of Ethics or other
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| EATON 2023 Proxy Statement and Notice of Meeting | 44 |
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applicable policies or procedures; and (iii) willful misconduct which is materially detrimental to the financial condition or business reputation of the company.
We believe that these Change of Control 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 58.
As previously stated, we have not entered into employment contracts with any of our named executive officers. As such, no named executive officers have contractual arrangements that prescribe severance benefits in the event an executive's employment is involuntarily terminated by the Company for reason other than Cause. Instead, the Committee has the sole discretion to decide what, if any, severance benefits will be offered to the executive. In the case of an involuntary termination for reason other than Cause, we would expect the Committee to consider providing severance benefits of up to two-times the sum of annual base salary plus target annual incentive, as described in the Involuntary Termination - Not for Cause scenario on page 60 depending on the circumstances leading to the executive's termination. The Committee believes that it is in the best interest of the Company and our shareholders to ensure that a departing executive is treated fairly and in a manner that will help us to secure appropriate confidentiality, non-competition, non-solicitation, non-disparagement and general release agreements. It is not our practice to provide severance in the case of a termination for “Cause”, voluntary resignation, retirement (including when our officers reach the mandatory retirement age of 65), death, or disability.
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 policy also allows Mr. Arnold to use our aircraft for personal travel as needed to ensure his personal security and enhance his productivity. Our aircraft policy does not permit other executives to use Company-owned aircraft for personal use without the advance approval of the Chief Executive Officer. No named executive officers receive tax protection on the imputed income for personal use of Company-owned aircraft.
EXECUTIVE COMPENSATION POLICIES AND GUIDELINES
Share Ownership Requirements
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. The following shares are considered when measuring each executive's ownership compared to the multiple: Eaton stock owned outright, unvested Eaton restricted share awards or units, Eaton stock credited to the executive’s Eaton Savings Plan (ESP) account, and Eaton stock credited to the executive’s deferred compensation account. In addition, each executive is required to own a minimum of 20% of the required shares outright, that includes shares owned directly and shares held in the ESP. Stock options and performance share units are not counted toward these requirements.
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.
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| EATON 2023 Proxy Statement and Notice of Meeting | 45 |
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The Committee reviews each executive officer’s share ownership relative to these levels each February. As of the date this proxy was filed, each of the named executive officers has exceeded his ownership and holding requirements or is making adequate progress to meet the requirements within the five-year time frame.
Position
|
Minimum Requirement
|
Chairman and Chief Executive Officer
|
6 times base salary
|
Executive Vice President, Chief Financial Officer
|
4 times base salary
|
President and Chief Operating Officer Electrical or Industrial Sector
|
4 times base salary
|
Other Officers
|
2-3 times base salary
|
General Managers and other ESIP participants
|
1 times base salary
|
Anti-Hedging and Pledging
No Hedging Transactions – Our insider trading policy prohibits all of our officers, including our named executive officers, and directors from engaging in the following types of hedging transactions involving our common stock: (1) any transaction involving the establishment of a short position in Eaton securities; (2) buying or selling puts or calls or other derivatives on Eaton’s securities, or (3) otherwise entering into any hedging arrangements involving Eaton securities.
No Pledging – Our insider trading policy prohibits our employees, including our named executive officers, and directors from holding our common stock in a margin account or pledging it 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. This policy is being revised to comply with the final clawback rules established by the SEC in October 2022 and proposed by the NYSE in February 2023.
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.
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| EATON 2023 Proxy Statement and Notice of Meeting | 46 |
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RELATIONSHIP BETWEEN COMPENSATION PLANS AND RISK
Compensation and Organization Committee Annual Risk Assessment
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.
After reviewing an inventory of our 2022 broad-based variable pay and sales commission plans, which included the number of participants in each plan, the participants’ levels within the organization, the target and maximum payment potential, performance criteria under each plan, and the type of plan (for example, management-by-objective and goal sharing), the Committee concluded that none of the broad-based programs would likely give rise to a material risk.
The Committee also applied a risk assessment to the short- and long-term incentive plans that are described in this CD&A. This analysis included, but was not limited to, (a) whether performance goals were balanced and potential payments were reasonable based on potential achievement of those goals at the threshold, target and maximum levels; (b) whether there is a balance between short- and long-term incentive opportunities and that pay is not overly weighted toward annual incentive opportunities; and, (c) how our performance objectives and target award opportunities compared to the objectives and target awards underlying our peers’ incentive programs. The Committee concluded that these short- and long-term incentive plans are not likely to give rise to a material risk.
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:
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An emphasis on long-term compensation that utilizes a balanced portfolio of compensation elements and delivers rewards based on sustained performance over time;
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The Committee’s sole power to set performance objectives for our incentive plans. In our short-term plan, this includes Adjusted OCF and Adjusted EPS objectives and qualitative objectives that include Environmental, Social and Governance goals. We believe these items contribute to increased shareholder value;
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Our long-term performance plan (ESIP) focuses on relative TSR. This creates a focus on driving sustained performance over multiple award periods that mitigates the potential for executives to take excessive risks to drive one-time, short-term performance spikes in any one period;
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The use of equity awards to foster retention and align our executives’ interests with those of our shareholders;
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Capping the potential payouts under the short- and long-term incentive plans to eliminate the potential for windfalls;
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A clawback policy that allows us to recover compensation in the case of a material restatement of financial results and/or employee misconduct;
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Share ownership and holding requirements; and
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A broad array of benefit programs that offer employees and executives an opportunity to build meaningful retirement assets throughout their careers.
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| EATON 2023 Proxy Statement and Notice of Meeting | 47 |
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