DEF 14A 1 d295880ddef14a.htm DEF 14A DEF 14A
Table of Contents

 

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

(Amendment No.             )

Filed by the Registrant    

Check the appropriate box

Filed by a Party other than the Registrant    

 

Preliminary Proxy Statement
Confidential, for Use of the Commission Only
     (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to §240.14a-12

Eaton Corporation plc

(Name of Registrant as Specified in its Charter)

XXXXXXXXXXXXXXXX

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Table of Contents

Proxy Statement &

Notice of Meeting

 

2017 Annual General Meeting of Shareholders

 

LOGO


Table of Contents
   

    OUR

    VISION

 

   To improve the quality of life and the environment through the use of power management technologies and services.
      

    LEADERSHIP    

    ATTRIBUTES

 

 

 

  

Our culture and what we value are represented in the attributes of all Eaton 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 it okay to disagree.

 

   Learn: We learn. We are curious, adaptable and willing to teach what we know.


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Notice of Eaton Corporation plc’s Annual General Meeting

MEETING AGENDA:

 

1.   Electing the 12 director nominees named in the proxy statement;
2.   Approving a proposal to amend the Company’s Articles of Association to implement proxy access;
3.   Approving a proposal to amend the Company’s Articles of Association regarding bringing shareholder business and making director nominations at an annual general meeting;
4.   Approving the appointment of Ernst & Young LLP as independent auditor for 2017 and authorizing the Audit Committee of the Board of Directors to set its remuneration;
5.   Approving, on an advisory basis, the Company’s executive compensation;
6.   Approving, on an advisory basis, whether a shareholder vote to approve the compensation of our named executive officers should occur every 1, 2 or 3 years;
7.   Approving a proposal to grant the Board authority to issue shares under Irish law;
8.   Approving a proposal to grant the Board authority to opt-out of pre-emption rights under Irish law;
9.   Authorizing the Company and any subsidiary of the Company to make overseas market purchases of Company shares; and
10.   Transacting any other business that may properly come before the meeting.

Proposals 1, 4, 5, 6, 7 and 9 are ordinary resolutions requiring a simple majority of the votes cast at the meeting. Proposals 2, 3 and 8 are special resolutions requiring at least 75% of the votes cast at the meeting. Each of these proposals 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, 2016 along with the related directors’ and auditor’s reports.

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 77 for additional information.

By order of the Board of Directors,

 

LOGO

Thomas E. Moran

Senior Vice President and Secretary

March 17, 2017

 

 

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 broker will 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, 2, 3, 5, 6, 7, 8 and 9 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.

 

 

   
Date:   April 26, 2017
Time:   8:00 a.m. local time
Location:  

Eaton House

30 Pembroke Road

Dublin 4, Ireland

Record date: February 27, 2017

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 17, 2017 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 26, 2017: This proxy statement, the Company’s 2016 Annual Report to Shareholders and our Irish Statutory Accounts for the year ended December 31, 2016 are available at www.proxyvote.com.

 


Table of Contents

Table of Contents

 

 

 

Proxy Summary

 

     1  

 

Proposal 1: Election of Directors

     6  
 

Our Nominees

     6  
 

Director Nomination Process

     10  
 

Director Qualifications and Board Diversity

     11  
 

Shareholder Recommendations of Director Candidates

     11  
 

Director Independence

     11  
 

Review of Related Person Transactions

     12  
 

Board Committees

     13  
 

Committee Charters and Policies

     15  
 

Board Meetings and Attendance

     15  
 

Board Governance Policies

     15  
 

Executive Sessions of the Non-employee Directors

     15  
 

Leadership Structure

     15  
 

Lead Director

     16  
 

Oversight of Risk Management

     16  
 

Code of Ethics

     16  
 

Communicating with the Board

 

     16  

 

Proposal  2: Approving Amendments to the Articles of Association to Implement Proxy Access

     18  

 

Proposal 3: Approving Amendments to the Articles of Association regarding Bringing Shareholder Business and Making Director Nominations at an Annual General Meeting

 

     22  

 

Proposal 4: Appointment of Independent Auditor and Authorization of Audit Committee to Set Auditor Remuneration

     24  
 

Audit Committee Report

 

     24  

 

Proposal 5: Advisory Approval of the Company’s Executive Compensation

 

     26  

 

Executive Compensation Table of Contents

 

     27  

 

Compensation Discussion and Analysis

 

     28  

 

Compensation Tables

 

     51  

 

Proposal 6: Advisory Recommendation for Frequency of Executive Compensation Votes

 

     66  

 

2016 Director Compensation

 

     67  

 

Proposal 7: Granting the Board Authority to Issue Shares

 

     69  

 

Proposal 8: Granting the Board Authority to Opt-Out of Pre-Emption Rights

 

     70  

 

Proposal  9: Authorization of the Company and any Subsidiary of the Company to
Make Overseas Market Purchases of Company Shares

 

     72  

 

Other Business

 

     74  

 

Share Ownership Tables

 

     75  

 

EATON 2017 Proxy Statement and Notice of Meeting     


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Table of Contents

 

 

Other Information

     77  
 

Equity Compensation Plans

     77  
 

Admission to the Annual General Meeting

     77  
 

Proxy Solicitation

     77  
 

How Proxies Will Be Voted

     78  
 

Voting at the Meeting

     78  
 

Section 16(a) Beneficial Ownership Reporting Compliance

     78  
 

Future Shareholder Proposals and Director Nominations

     79  
 

Mailings to Shareholders in the Same Household

 

     79  

 

Appendix A —  Amendments to the Articles of Association regarding Implementation of Proxy Access

 

     80  

 

Appendix B —  Amendments to the Articles of Association regarding Bringing Shareholder Business and Making
Director Recommendations at an Annual General Meeting

     88  

 

EATON 2017 Proxy Statement and Notice of Meeting     


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Proxy Summary

This summary provides an overview of the items that you will find elsewhere in this proxy statement. We 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, 2016 and our Irish Statutory Accounts for the year ended December 31, 2016 will be made available or sent to shareholders commencing on or about March 17, 2017.

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.

MEETING AGENDA VOTING MATTERS

This year there are nine proposals on the agenda. Adoption of Proposals 1, 4, 5, 6, 7 and 9 requires the affirmative vote of a majority of ordinary shares represented at the meeting by person or by proxy. Adoption of Proposals 2, 3 and 8 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

To elect the 12 director nominees named in this Proxy Statement

     FOR each nominee      6  

Proposal 2

To approve a proposal to amend the Company’s Articles of Association to implement proxy access

     FOR      18  

Proposal 3

To approve a proposal to amend the Company’s Articles of Association regarding bringing shareholder business and making director nominations at an annual general meeting

     FOR      22  

Proposal 4

To appoint Ernst & Young LLP as independent auditor for the 2017 fiscal year and to authorize the Audit Committee to set the auditor fees

     FOR      24  

Proposal 5

To approve, on an advisory (non-binding) basis, our named executive officers’ compensation as described in this Proxy Statement

     FOR      26  

Proposal 6

To approve, on an advisory (non-binding) basis, whether a shareholder vote to approve the compensation of named executive officers should occur every 1, 2 or 3 years

     FOR      66  

Proposal 7

To approve a proposal to grant the Board authority to issue shares under Irish law

     FOR      69  

Proposal 8

To approve a proposal to grant the Board authority to opt-out of pre-emption rights under Irish law

     FOR      70  

Proposal 9

To authorize the Company and any subsidiaries of the Company to make overseas market purchases of Company shares

     FOR      72  

 

EATON 2017 Proxy Statement and Notice of Meeting    1


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Proxy Summary — Board and Governance Facts

 

BOARD AND GOVERNANCE FACTS

In addition to executive compensation practices that strongly link pay and performance, Eaton’s Code of Ethics and Board of Directors Governance Policies help to ensure that we “do business right.” For more information about our governance programs and Board of Directors, see Proposal 1 beginning on page 6.

 

Board and Governance Information    2016            Board and Governance Information    2016  

Size of Board

     14       

Independent Directors Meet without Management Present

     Yes  

Average Age of Directors

     62.4       

Director Stock Ownership Guidelines

     Yes  

Number of Independent Directors

     12       

Mandatory Retirement Age

     Yes  

Board Meetings Held in 2016 (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  

Majority Voting For Directors

     Yes       

Succession Planning and Implementation Process

     Yes  

Lead Independent Director

     Yes       

Comprehensive Sustainability Program

     Yes  

 

EATON 2017 Proxy Statement and Notice of Meeting    2


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Proxy Summary — Director Nominees

 

DIRECTOR NOMINEES

Each director nominee is elected annually by a majority of votes cast. For more information about our nominees, see page 6 of this proxy statement.

 

                Board Committee Memberships     
Name   Age  

Director

Since

  Independent   Audit  

Compensation

& Organization

  Executive*   Finance   Governance   

  Other Public  

Company

Boards

Craig Arnold

Chairman, Eaton Corporation plc and CEO, Eaton Corporation

  56   2015               l            1

Todd M. Bluedorn

Chairman and CEO, Lennox International Inc.

  53   2010                    2

Christopher M. Connor

Lead Director

Retired Chairman and Chief Executive Officer, The Sherwin-Williams Company

  60   2006         l            1

Michael J. Critelli

Retired Chairman and Chief Executive Officer, Pitney Bowes Inc.

  68   1998                    -

Richard H. Fearon

Vice Chairman and Chief Financial and Planning Officer, Eaton Corporation

  61   2015                            1

Charles E. Golden

Retired Executive Vice President and CFO,

Eli Lilly and Company

  70   2007                    1

Arthur E. Johnson

Retired Senior Vice President, Corporate Strategic Development, Lockheed Martin Corporation

  70   2009                 l    1

Deborah L. McCoy

Independent aviation safety consultant

  62   2000                    -

Gregory R. Page

Retired Chairman and Chief Executive Officer, Cargill, Incorporated

  65   2003                    2

Sandra Pianalto

Retired President and CEO of the Federal Reserve Bank of Cleveland

  62   2014             l        2

Gerald B. Smith

Chairman and CEO, Smith Graham & Co.

  66   2012     l                -

Dorothy C. Thompson

Chief Executive, Drax Group plc

  56   2016                    -

Member    l Chair

* Mr. Arnold has been a member of the Executive Committee since June 1, 2016 and serves as Committee Chair.
     Each of the non-employee directors serves a four-month term.

 

EATON 2017 Proxy Statement and Notice of Meeting    3


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Proxy Summary — Linking Pay with Performance

 

LINKING PAY WITH PERFORMANCE

Pay 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 individual performance objectives designed to enhance shareholder value. In prior years, we illustrated the correlation between cumulative shareholder returns and Mr. Cutler’s compensation over his tenure as CEO. Given our leadership transition and the distortion in pay that primarily results from the change in the form of our long-term performance based incentive plan as described on page 31, we have modified the pay and performance illustration to show the payouts as a percentage of target under our performance-based annual and long-term incentive programs and total return to shareholders over the last five years. The table clearly illustrates the correlation between pay and the performance we are delivering to our shareholders.

 

Total Shareholder Return and Performance-Based Incentive Plan Payouts

 

 

 

LOGO

  *   There was no payout under the long-term performance-based plan (ESIP) in 2012.

 

EATON 2017 Proxy Statement and Notice of Meeting    4


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Proxy Summary — Executive Compensation

 

EXECUTIVE COMPENSATION

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.

2016 EXECUTIVE COMPENSATION PRACTICES

 

What We Do:

   

What We Don’t Do:

   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)

 

   Shareholder-approved short-term and long-term incentive plans

 

   Incentive plan payout 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

 

   

û    No employment contracts with any salaried U.S. employees, including named executive officers

 

û    No hedging or pledging of our shares

 

û    No dividend or dividend equivalent payments on unearned performance-based grants

 

û    No use of the same metrics in short- and long-term incentive plans

 

û    No repricing of stock options and no discounted stock options

 

û    No tax gross-up provisions in change of control agreements

 

 

 

Say On Pay 2016 Advisory Vote and Shareholder Engagement

 

 

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 2016, our shareholders approved our executives’ compensation by a vote of 94%.

 

The Committee will continue to review our compensation programs each year in light of the annual “say-on-pay” voting results.

 

EATON 2017 Proxy Statement and Notice of Meeting    5


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Proposal 1: Election of Directors

Our Board of Directors is currently comprised of 13 members, all of whom serve for a term of one year or until a respective successor is elected and has been qualified. Effective at the annual general meeting, our board size will be reduced to 12 members as Linda A. Hill has decided not to stand for re-election. Ms. Hill informed the Governance Committee chair that she would not stand for re-election due to scheduling conflicts between her responsibilities as a director and her other commitments such as teaching and other academic responsibilities. All nominees are currently Eaton directors who were elected by shareholders at the 2016 annual general meeting, except Dorothy C. Thompson, who was elected by the Board of Directors effective July 29, 2016.

If any of the nominees becomes unable or declines 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.

 

OUR NOMINEES     
                 

Craig Arnold

Chairman, Eaton Corporation plc and Chief Executive Officer, Eaton Corporation

 

Craig Arnold is Chairman of the Company and Chief Executive Officer of Eaton Corporation. Mr. Arnold joined Eaton in 2000 as senior vice president and group executive of the Fluid Power Group. He was Vice Chairman and Chief Operating Officer of the Industrial Sector until August 2015 and President and Chief Operating Officer until June 2016. He currently serves on the boards of Medtronic plc and University Hospitals Health System and is a member of The Business Roundtable and The Business Council. Mr. Arnold serves as a director of The Greater Cleveland Partnership and the United Way of Greater Cleveland, and as an advisory board member of the Salvation Army of Greater Cleveland.

 

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.

      LOGO
     

 

Director Since 2015

Age 56

 

     

 

                 

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 a director of Texas Instruments Incorporated and a trustee of Washington University in St. Louis.

 

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.

      LOGO
     

 

Director Since 2010

Age 53

 

     

 

EATON 2017 Proxy Statement and Notice of Meeting    6


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Proposal 1:  Election of Directors — Our Nominees

 

 

                 

Christopher M. Connor

Retired Chairman and Chief Executive Officer, The Sherwin-Williams Company

 

Christopher M. Connor is the retired Chairman and Chief Executive Officer of The Sherwin-Williams Company, a global manufacturer of paint, architectural coatings, industrial finishes and associated supplies. Mr. Connor held a number of executive positions at Sherwin-Williams since 1983. He became Chief Executive Officer in 1999, Chairman and Chief Executive Officer in 2000, and Executive Chairman in 2016. He currently serves on the boards of The Sherwin-Williams Company, University Hospitals Health System, Playhouse Square Foundation and The Rock and Roll Hall of Fame.

 

Director Qualifications: As the retired Chairman and former CEO of a Fortune 500 company, Mr. Connor has leadership experience and is thoroughly knowledgeable in marketing, talent development, planning, operational and financial processes. In particular, he has had extensive sales and marketing experience in both direct and distribution channels, and brings broad knowledge of construction, automotive and industrial markets, all areas of strategic importance to Eaton. His background and experience with human resources, talent development, compensation and management are of particular benefit to Eaton in his role as Chair of the Compensation and Organization Committee. His background and broad experience are of particular benefit to Eaton in his role as Lead Director.

 

      LOGO
     

 

Lead Director

Director since 2006

Age 60

 

     

 

                 

Michael J. Critelli

Retired Chairman and Chief Executive Officer, Pitney Bowes Inc.

 

Michael J. Critelli served as Chief Executive and President and a director of Dossia Services Corporation, a personal and population health management systems company, from 2011 until 2016. Mr. Critelli is the retired Chairman and Chief Executive Officer of Pitney Bowes Inc., a provider of global mailstream solutions. He served as Chairman and Chief Executive Officer of Pitney Bowes from 1997 to 2007 and as Executive Chairman from 2007 to 2008. Mr. Critelli served as a director of ProHealth Physicians, Inc. from 2012 until 2015. He currently serves as a director of CloudParc.

 

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.

      LOGO
     

Director since 1998

Age 68

 

     

 

                 

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 Corporation and also serves on the boards of Playhouse Square Foundation, The Cleveland Museum of Art, and Manufacturers Alliance, a trade organization of leading manufacturing companies.

 

Director Qualifications: Mr. Fearon’s years of experience as Eaton’s Chief Financial Officer provide the Board with important insight. He has comprehensive knowledge of financial accounting standards and extensive experience in financial statement preparation, corporate finance, corporate development, risk management and investor relations. Further, given his experience as Lead Director at PolyOne, he also provides significant governance expertise.

     

LOGO

     

Director since 2015

Age 61

 

     

 

EATON 2017 Proxy Statement and Notice of Meeting    7


Table of Contents

 

Proposal 1:  Election of Directors — Our Nominees

 

                 

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. Mr. Golden also serves as a director of the Lilly Endowment and Indiana University Health.

 

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 to the Board. Mr. Golden also has significant experience in global vehicle markets.

      LOGO
     

 

Director since 2007

Age 70

 

     

 

                 

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.. He is an independent trustee of the Fixed Income and Asset Allocation Funds of Fidelity Investments.

 

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.

      LOGO
     

 

Director since 2009

Age 70

 

     

 

                 

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.

      LOGO
     

 

Director since 2000

Age 62

 

     

 

EATON 2017 Proxy Statement and Notice of Meeting    8


Table of Contents

 

Proposal 1:  Election of Directors — Our Nominees

 

                 

Gregory R. Page

Retired Chairman and Chief Executive Officer, Cargill, Incorporated

 

Gregory R. Page is the retired Chairman and Chief Executive Officer of Cargill, Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products and services. He was named Corporate Vice President & Sector President, Financial Markets and Red Meat Group of Cargill in 1998, Corporate Executive Vice President, Financial Markets and Red Meat Group in 1999, and President and Chief Operating Officer in 2000. He became Chairman and Chief Executive Officer in 2007 and was named Executive Chairman in 2013. Mr. Page subsequently served as Executive Director from 2015 to 2016, after which he retired from the Cargill Board. Mr. Page is a director of 3M Company and Deere & Company, and a director and past non-executive Chair of the Board of Big Brothers Big Sisters of America. He is a former director of Carlson and the immediate past President and a board member of the Northern Star Council of the Boy Scouts of America.

 

Director Qualifications: As the retired Chairman and former Chief Executive Officer of one of the largest global corporations, Mr. Page brings extensive leadership and global business experience, in-depth knowledge of commodity markets, and a thorough familiarity with the key operating processes of a major corporation, including financial systems and processes, global market dynamics and succession management. Mr. Page’s experience and expertise provide him valuable insight on financial, operational and strategic matters.

      LOGO
     

Director since 2003

Age 65

 

     

 

                 

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 department. She was appointed Assistant Vice President of public affairs in 1984, Vice President and Secretary to the board of directors in 1988, and Vice President and Chief Operating Officer in 1993. Before joining the Bank, Ms. Pianalto was an economist at the Federal Reserve Board of Governors and served on the staff of the Budget Committee of the U.S. House of Representatives. She is currently a director of The J.M. Smucker Company and Prudential Financial, Inc., chair of the board of directors of University Hospitals Health System, and past chair and life director of the board of United Way of Greater Cleveland. She holds the FirstMerit Chair in Banking at the University of Akron. Ms. Pianalto is also an advisory trustee at the University of Akron and serves on the board of College Now Greater Cleveland.

 

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 in her role as Chair of the Finance Committee.

      LOGO
     

 

Director since 2014

Age 62

 

     

 

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Proposal 1:  Election of Directors — How Nominees are Chosen

 

                 

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 is a former director of the Federal Reserve Bank of Dallas, Houston branch.

 

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 Chief Executive Officer of Smith Graham & Co. His experience as a director of companies in the oil and gas and energy services businesses has provided him with valuable insight into markets in which Eaton also participates. Mr. Smith’s experience as lead independent director of Cooper Industries plc since 2007 has benefited the process of integrating Cooper into Eaton. His experience and expertise provide him valuable insight on financial, operational and strategic matters in his role as Chair of the Audit Committee.

      LOGO
     

Director since 2012

Age 66

 

     

 

             

Dorothy C. Thompson

Chief Executive, Drax Group plc

 

Dorothy C. Thompson CBE is Chief Executive and a 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 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.

      LOGO
     

 

Director since 2016

Age 56

 

HOW NOMINEES ARE CHOSEN

Director Nomination Process

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. Director Dorothy C. Thompson was elected by the Board effective July 29, 2016. Ms. Thompson was identified as a director candidate by the Chairman and other Company directors.

 

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Proposal 1:  Election of Directors — Director Independence

 

Director Qualifications and Board Diversity

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.

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 evaluation and input from the chairs of each Board committee. 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.

Shareholder Recommendations of Director Candidates

The Governance Committee will consider director candidates who are recommended to it in writing by any Eaton shareholder 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 2018 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 D04 Y0C2. Recommendation letters must be received no earlier than December 17, 2017 and no later than the close of business on January 16, 2018, or if Proposal 3 in this year’s proxy statement is approved by shareholders at this year’s annual general meeting, recommendation letters must be received no earlier than November 17, 2017 and no later than the close of business on December 17, 2017, 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 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, any compensation or other payment received from any 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 INDEPENDENCE

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.

 

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Proposal 1:  Election of Directors — Director Independence

 

Because directors’ 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. Bluedorn, C. Connor, L. Hill, G. Page and D. Thompson serve or have served as officers or employees of companies that had purchases and/or sales of property or services with us during 2016. 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 $368,000 worth of Eaton products during 2016. Mr. Connor is the retired Chairman and Chief Executive Officer of The Sherwin-Williams Company, which purchased approximately $153,000 worth of Eaton products and sold approximately $898,000 worth of products to Eaton during 2016. Mr. Page is the retired Chairman and Chief Executive Officer of Cargill, Incorporated, which purchased approximately $740,000 worth of Eaton products and sold approximately $17,460,000 worth of products to Eaton during 2016. In addition, Cargill paid approximately $7,967,000 in royalty payments to the Company. Ms. Hill is a director of Harvard Business Publishing, which provided executive training services to Eaton for an aggregate cost of $1,000 during 2016. Ms. Thompson is Chief Executive of Drax Group plc, which sold approximately $203,000 in goods or services to Eaton in 2016.
    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 each of the following directors qualifies as independent under the Board’s independence criteria and the New York Stock Exchange standards: T. Bluedorn, C. Connor, M. Critelli, C. Golden, L. Hill, A. Johnson, D. McCoy, G. Page, S. Pianalto, G. Smith and D. Thompson. All members of the 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 — D. McCoy, S. Pianalto, G. Page, G. Smith and 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 2016 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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Proposal 1:  Election of Directors — Board Committees

 

 

BOARD COMMITTEES

The Board of Directors has the following standing committees: Audit, Compensation and Organization, Executive, Finance and Governance.

 

    Audit Committee    Met 7 times in 2016    
 

Gerald B. Smith

(Chair)

Deborah L. McCoy

Gregory R. Page

Sandra Pianalto

Dorothy C. Thompson

 

 

  

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; 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, General Counsel and Secretary, Senior Vice President-Internal Audit, and Senior Vice President-Global Ethics and Compliance; approves the Committee’s report to be included in our annual proxy statement; assures that performance evaluations of the Audit Committee are conducted annually; and establishes procedures for the proper handling of complaints concerning accounting or auditing matters.

 

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. Page and Smith and Mses. Pianalto and Thompson each qualify as an audit committee financial expert (as defined in Securities and Exchange Commission rules) and that all members of the Audit Committee have accounting or related financial management expertise.

 

    Compensation and Organization Committee   Met 5 times in 2016    
 
 

Christopher M. Connor (Chair)

Todd M. Bluedorn

Michael J. Critelli

Charles E. Golden

Linda A. Hill

Arthur E. Johnson

 

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 planning for the Company’s

Chairmanand Eaton Corporation’s Chief Executive Officer and for other key officer positions;

  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 short- and long-term incentive compensation plans and assessing performance against these objectives;

 

  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;

 

     

  administering our stock 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

  preparing an annual report for our proxy statement regarding executive compensation.

    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 28.

 

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Proposal 1:  Election of Directors — Board Committees

 

 

    Executive Committee
 

Craig Arnold

(Chair)

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. Arnold joined the Committee on June 1, 2016 and serves as Committee Chair. Each of the non-employee directors serves a four-month term on this Committee. The Committee did not meet in 2016.

    

 

    Finance Committee   Met 2 times in 2016    
 
 

Sandra Pianalto

(Chair)

Todd M. Bluedorn

Christopher M. Connor

Gerald B. Smith

Dorothy C. Thompson

  

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.

       
       

 

    Governance Committee   Met 3 times in 2016    
 

Arthur E. Johnson

(Chair)

Michael J. Critelli

Charles E. Golden

Linda A. Hill

Deborah L. McCoy

Gregory R. Page

  

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

  

  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

    

Corporation, identifying and recommending to the Board candidates for Board membership;

  

  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.

 

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Proposal 1:  Election of Directors — Leadership Structure

 

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 four meetings in 2016. Each of the directors attended at least 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%.

The policy of the Board of Directors is that all directors should attend the annual general meetings of shareholders. At the 2016 annual general meeting held April 27, 2016, 13 of the 14 members of the Board at that time were in attendance.

BOARD GOVERNANCE POLICIES

The Board revised the Board of Directors Governance Policies most recently in February 2016, 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.

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.

LEADERSHIP STRUCTURE

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’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. Arnold, and Mr. Fearon. Of our 10 non-employee directors, five 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 2017 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.

 

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Proposal 1:  Election of DirectorsCommunicating with the Board

 

Lead Director

Christopher M. Connor, who has served on Eaton’s Board since 2006, was first elected Lead Director by our independent directors in 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.

OVERSIGHT OF RISK MANAGEMENT

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.

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, 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, 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.

CODE OF ETHICS

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.

COMMUNICATING WITH THE BOARD

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.

 

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Proposal 1:  Election of DirectorsCommunicating with the Board

 

Generally, the Company Secretary forwards all such communications to the Lead Director. The Lead Director determines whether the communications should be forwarded to other members of the Board and forwards them accordingly. For 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.

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 2: Approving Amendments to the Articles of Association to Implement Proxy Access

In connection with a review of the Company’s corporate governance practices, the Board decided to proactively propose the adoption of proxy access. Therefore, the Board is recommending that shareholders approve amendments to the Company’s Articles of Association to implement proxy access. Proxy access will allow eligible shareholders to include their own nominees for election to the Board in the Company’s proxy materials, along with the nominees nominated by the Board. The Board is committed to strong corporate governance practices and believes that proxy access is in the best interests of the Company and its shareholders.

The Board believes that the implementation of proxy access in the manner set forth in this Proposal 2 will provide meaningful rights to shareholders while ensuring the rights are used by shareholders in a responsible manner. The Board recommends the implementation of proxy access and, as required under Irish law, now seeks shareholder approval for its adoption.

As required under Irish law, the resolution in this respect of Proposal 2 is a special resolution that requires the affirmative vote of the holders of at least 75% of the votes cast.

Because the amendments to the Articles of Association contemplated by this Proposal 2 reference provisions in the amendments to the Articles of Association contemplated by Proposal 3 relating to the amendment of the advance notice provisions of the Articles of Association, the approval of this Proposal 2 is contingent upon the approval of Proposal 3.

THE TEXT OF THE RESOLUTION IN RESPECT OF PROPOSAL 2 IS AS FOLLOWS:

“As a special resolution that the Articles of Association be and are hereby amended in the manner provided in Appendix A of the Proxy Statement.”

The Board of Directors recommends a vote FOR the approval of the amendments to the Company’s Articles of Association to implement proxy access.

Description of the Proxy Access Amendments

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 A. We urge you to read Appendix A in its entirety before casting your vote.

Shareholder Eligibility to Nominate Directors

The Company will include in its proxy materials shareholder director nominees to the Board if the shareholder and the director nominee satisfy the proxy access requirements under the Articles of Association, including the timely delivery of a shareholder notice.

Any shareholder or group of not more than twenty shareholders that has maintained ownership of at least 3% of the Company’s shares continuously for at least three years as of the date of the shareholder notice will be permitted to include a specified number of director nominees in the Company’s proxy materials for the annual general meeting, subject to the conditions below.

Number of Shareholder Nominees

The maximum number of shareholder nominees nominated by all eligible shareholders that the Company will be required to include in its proxy materials shall not exceed the greater of (i) two and (ii) 20% of the number of Directors in office as of the last day on which a notice of proxy access nomination may be delivered to the Company. Any nominee who is included by the Board in the Company’s proxy materials as an unopposed (by the Company) nominee pursuant to an agreement with a shareholder or group of shareholders and any nominees who were previously elected to the Board as shareholder nominees at any of the preceding two annual general meetings will be counted against the nominee limit.

 

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Proposal 2: Approving Amendments to the Articles of Association to Implement Proxy Access

 

Calculation of Qualifying Ownership

In order to ensure that the interests of shareholders seeking to include director nominees in the Company’s proxy materials are aligned with those of other shareholders, a shareholder will be deemed to own only those shares of the Company as to which the shareholder possesses both (1) the full voting and investment rights pertaining to such shares and (2) the full economic interest in (including the opportunity for profit and risk of loss on) such shares. The following shares will not count as “owned” shares for purposes of determining whether the ownership threshold has been met:

 

    shares sold in any transaction that has not been settled or closed;
    shares borrowed or purchased pursuant to an agreement to resell; and
    shares subject to any derivative or similar agreement in respect of the Company’s shares, which instrument or agreement has the purpose or effect of (1) reducing the full right to vote or direct the voting of any such shares and/or (2) hedging, offsetting or altering the gain or loss arising from the full economic ownership of such shares.

A shareholder will be deemed to “own” shares held in the name of a nominee or other intermediary so long as the person retains the full voting and investment rights and the full economic interest in the shares. A shareholder’s ownership of shares will be deemed to continue during any period in which such shareholder delegated any voting power by means of proxy, power of attorney or other instrument or arrangement that is revocable at any time by the shareholder. A shareholder’s ownership of shares will also be deemed to continue during any period in which such person has loaned the shares if the person has the power to recall the loaned shares on not more than five business days’ notice.

Information in Proxy Statement

The Company will include in its proxy statement:

 

    the names of the director nominees;
    information set forth in the Schedule 14N concerning each director nominee and eligible shareholder; and
    if the eligible shareholder elects, a written statement of up to 500 words in support of the director nominee. The Company will be permitted to omit any information or statement that the Company, in good faith, believes is untrue in any material respect or would violate any applicable law, rule, regulation or listing standard.

Information Required From All Nominating Shareholders

Each shareholder seeking to include a director nominee in the Company’s proxy materials will be required to provide certain information to the Company, including but not limited to:

 

    a copy of the Schedule 14N filed by the shareholder(s) with the SEC;
    a written statement and information regarding, the stock ownership of the shareholder; and
    in the case of a nomination by a group of shareholders, the designation by all group members of one group member that is authorized to act on behalf of all group members with respect to the nomination and all related matters.

Each shareholder will also be required to make certain representations to, and agreements with, the Company, including but not limited to, that the shareholder:

 

    will provide a written statement and information regarding the stock ownership of the shareholder;
    acquired the shares in the ordinary course of business and does not have any intent to change or influence control of the Company;
    has not and will not nominate for election any person as a director other than its nominee(s);
    has not and will not engage or participate in a solicitation in support of any person as a director other than its nominee(s) or a nominee of the Board;
    will not distribute any form of proxy for the annual general meeting other than the form distributed by the Company;
    will assume liability arising out of the nominating shareholder’s communications with the Company and its shareholders;
    will indemnify the Company and its directors, officers and employees for liability arising from or relating to the shareholder’s communications with Company shareholders or information provided to the Company in connection with the annual general meeting;
    will comply with applicable laws, rules, regulations and listing standards;

 

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Proposal 2: Approving Amendments to the Articles of Association to Implement Proxy Access

 

    will file with the SEC any solicitation or other communication relating to the annual general meeting, directors or nominee(s); and
    will provide such additional information as reasonably requested by the Company.

Each director nominee will deliver a signed written representation and agreement to the Company setting forth that the director nominee is not and will not become a party to any agreement, arrangement or understanding:

 

    as to how the director nominee will act or vote on any issue or question that has not been disclosed to the Company;
    that could limit or interfere with the director nominee’s ability to comply with fiduciary duties; and
    with any person or entity other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director or nominee that has not been disclosed to the Company.

Each director nominee will deliver a signed written consent to serve as a Director, to have the nominee’s name in the proxy materials and to the public disclosure of information provided to the Company and a written representation and agreement:

 

    to comply with the Articles of Association of the Company and all publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Company; and
    that the nominee intends to serve as a Director for the full term for which the nominee is standing for election.

Each director nominee will also submit all completed and signed questionnaires required and provide to the Company such other information as reasonably requested by the Company.

If any information or communications provided by any eligible shareholder or nominee is not, when provided, or thereafter ceases to be true, correct and complete in all material respects, the eligible shareholder or nominee shall promptly notify the Company and provide the information that is required to make such information or communication true, correct and not misleading.

Nominating Procedures

In order to provide adequate time to assess shareholder-nominated nominees, requests to include director nominees in the Company’s proxy materials must be received no later than 120 days, and no earlier than 150 days, before the first anniversary of the date that the Company’s definitive proxy statement was first released to shareholders in connection with the prior year’s annual general meeting.

Exclusion of Shareholder Nominees

The Company will not be required to include a nominee in the Company’s proxy materials if, among other things:

 

    the eligible shareholder or the nominee breaches any of its agreements, representations or warranties in a shareholder notice or otherwise submitted, any information submitted was not, when provided, true, correct and complete or the eligible shareholder or nominee otherwise fails to comply with its obligations under the Articles of Association;
    the nominee is not independent under applicable listing standards, rules of the SEC and publicly disclosed standards used by the Board, is or has been an officer or director of a competitor within the past three years, is a named subject of a pending criminal proceeding or has been convicted in a criminal proceeding (excluding traffic violations and other minor offenses) within the past 10 years or is subject to any order of the type specified in Rule 506(d) of Regulation D promulgated under the Securities Act of 1933, as amended;
    the Company has received a notice that a shareholder intends to nominate a nominee pursuant to advance notice provisions of the Articles of Association;
    the election of the nominee would cause the Company to violate its Memorandum or Articles of Association or any applicable law, rule, regulation or listing standard; or
    the eligible shareholder fails to continuously own the required shares.

In addition, the Board or the chairman of the annual general meeting will disregard a nomination if the shareholder does not appear at the annual general meeting in person. The Board shall have the power and authority to interpret the Articles of Association and to make all determinations necessary or advisable to apply the proxy access provisions in the Articles of Association.

 

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Proposal 2: Approving Amendments to the Articles of Association to Implement Proxy Access

 

Procedure if Nominee Limit Is Exceeded

Any shareholder or group of shareholders that submits more than one nominee for inclusion in the Company’s proxy materials will be required to rank its nominees. If the number of nominees exceeds the nominee limit, the highest ranking eligible nominee from each shareholder or group of shareholders will be included in the Company’s proxy materials until the limit is reached, beginning with the shareholder or group of shareholders with the largest number of shares.

Future Disqualification of Shareholder Nominees and Nominating Shareholders

Any nominee who is included in the Company’s proxy materials but withdraws from or becomes ineligible or unavailable for election at the annual general meeting will be ineligible for nomination at the following two annual general meetings.

 

 

  The Board of Directors recommends a vote FOR the amendments to the Company’s Articles of Association to implement proxy access in the manner described above.

 

 

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Proposal 3: Approving Amendments to the Articles of Association regarding Bringing Shareholder Business and Making Director Nominations at an Annual General Meeting

In connection with a review of the Company’s corporate governance practices, the Board decided to propose amendments to the Company’s Articles of Association regarding how business is properly requested by a shareholder to be brought before an annual general meeting (amendments to Article 59) and how shareholders may nominate persons for election as Directors at an annual general meeting (amendments to Article 76). The Board is committed to strong corporate governance practices and believes that the proposed amendments are in the best interests of the Company and its shareholders.

The Board recommends the implementation of the amendments to Articles 59 and 76 and, as required under Irish law, now seeks shareholder approval for their adoption.

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:

“As a special resolution that the Articles of Association be and are hereby amended in the manner provided in Appendix B of the Proxy Statement.”

The Board of Directors recommends a vote FOR the approval of the amendments to the Company’s Articles of Association regarding bringing shareholder business and making director nominations at an annual general meeting.

Description of Amendments

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 B. We urge you to read Appendix B in its entirety before casting your vote.

Article 59

In conjunction with the proxy access amendments described in Proposal 2, the Board is proposing to amend Article 59 to change the deadline for business to be properly requested by a shareholder to be brought before an annual general meeting and clarify what information the shareholder must provide related to the business to be brought before an annual general meeting. The Article 59 amendments specify that the shareholder notice must be received no later than 90 days, and no earlier than 120 days, before the first anniversary of the date that the Company’s definitive proxy statement was first released to shareholders in connection with the prior year’s annual general meeting. Currently under Article 59, shareholder notices must be received no later than 60 days, and no earlier than 90 days. This change aligns the deadline for proposing business with the deadline for shareholders to nominate persons for appointment as Directors other than nominations pursuant to the proxy access provisions of the new Article 78A.

The Article 59 amendments also clarify certain information that must be provided to the Company including:

 

    That if notice is provided by the shareholder on behalf of a beneficial owner then information must be provided as to both the shareholder and beneficial owner;
    That if the shareholder or the beneficial owner on whose behalf the business is being proposed is an entity then certain information as to share ownership and agreements between parties must be provided as to the proposing entity as well as to any director, executive, managing member or other control person of the entity.

 

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Proposal 3: Approving Amendments to the Articles of Association regarding Bringing Shareholder Business and Making Director Nominations at an Annual General Meeting

 

    Clarifying that the shareholder must update the Company if the information provided in its notice changes prior to the annual general meeting; and
    Requiring that the shareholder and beneficial owner (if any) agree to public disclosure of the information provided to the Company pursuant to Article 59.

Article 76

In conjunction with the proxy access amendments described in Proposal 2, the Board is proposing to amend Article 76 to change the deadline that nominations of persons for appointment as Directors may be made by other than complying with the new proxy access requirements in the new Article 78A and clarify what information the shareholder must provide related to such nominations. The Board is proposing to amend Article 76 to specify that for nominations to be timely, the shareholder notice must be received no later than 90 days, and no earlier than 120 days, before the first anniversary of the date that the Company’s definitive proxy statement was first released to shareholders in connection with the prior year’s annual general meeting. Currently under Article 76, shareholder notices must be received no later than 60 days, and no earlier than 90 days. This change is desirable in light of the provisions of the proxy access right in the new Article 78A, which provides that the right is not available if a shareholder makes a nomination pursuant to Article 76. Further, these time periods are more in line with common market practice. Changing the deadline for nominations pursuant to Article 76 will allow the Company to have sufficient time to review any submissions pursuant to Article 76 and 78A to determine which shareholder nominated director candidates will be eligible for election at the annual general meeting.

The Article 76 amendments also clarify certain information that must be provided to the Company including:

 

    That if notice is provided by the shareholder on behalf of a beneficial owner then information must be provided as to both the shareholder and beneficial owner;
    That if the shareholder or the beneficial owner on whose behalf the nomination is being made is an entity then certain information as to share ownership and agreements between parties must be provided as to the proposing entity as well as to any director, executive, managing member or other control person of the entity.
    Clarifying that the shareholder must update the Company if the information provided in its notice changes prior to the annual general meeting;
    Requiring representations that the director nominee proposed by the shareholder has disclosed agreements between the nominee and other parties relating to the nominee’s actions and compensation as a nominee and as a director if elected and that the nominee is not party to an agreement that could limit or interfere with the nominee’s ability to comply with fiduciary duties;
    Requiring a representation that the nominee proposed by the shareholder intends to serve as a director for the full term for which the nominee is standing for election; and
    Requiring that the shareholder and beneficial owner (if any) agree to public disclosure of the information provided to the Company pursuant to Article 76.

In addition, some clarification amendments to definitions and adjournments to meetings are being proposed.

 

 

  The Board of Directors recommends a vote FOR this proposal to approve the amendments to the

Articles of Association regarding bringing shareholder business and making director nominations

at an annual general meeting.

 

 

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Proposal 4: Appointment of Independent Auditor and Authorization of Audit Committee to Set Auditor Remuneration

Shareholders are being asked to appoint 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, 2017 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.

AUDIT COMMITTEE REPORT

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, (2) the independence, qualifications and performance of the Company’s independent auditor, (3) the performance of the Company’s internal 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 25, 2016. 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 2017. 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 2016 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, 2016 and annual report to shareholders.

 

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Proposal 4: Appointment of Independent Auditor and Authorization of Audit Committee to Set

Auditor Remuneration — Audit Committee Report

 

For 2016 and 2015, Ernst & Young’s fees to the Company and certain of its subsidiaries were as follows:

 

           2016      2015  
Audit Fees      $21.2 million        $25.7 million  
    Includes Sarbanes-Oxley Section 404 attest services                  
Audit-Related Fees      $0.3 million        $0.3 million  
    Includes business acquisitions and divestitures                  
Tax Fees      $2.1 million        $3.7 million  
  Tax compliance services      $1.2 million        $2.2 million  
    Tax advisory services      $0.9 million        $1.5 million  
All Other Fees      $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 2016 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.

 

Gerald B. Smith, Chair

Deborah L. McCoy

Gregory R. Page

Sandra Pianalto

Dorothy C. Thompson

 

 

  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.

 

 

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Proposal 5: 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 2018 annual general meeting of shareholders.

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’ 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, 80% of our named executive officers’ compensation is performance based.

  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 target awards when our performance aligns with our peer group median performance, and awards exceeding 150% of target when our performance is at or above the top quartile of our peer group.

  

  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 Corporation;

  Our incentive plan payouts are capped to prevent unintended windfalls;

  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 results; and

  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 2016 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 2017 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 2017 annual general meeting of shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2016 Summary Compensation Table and the other related tables and disclosure.”

 

 

  The Board of Directors recommends a vote FOR advisory approval of executive compensation.

 

 

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Executive Compensation Table of Contents

 

COMPENSATION DISCUSSION AND ANALYSIS

 

    

 

28

 

 

 

EXECUTIVE SUMMARY

 

    

 

28

 

 

 

2016 CEO REALIZED PAY AND OUR PERFORMANCE

 

    

 

32

 

 

 

EXECUTIVE COMPENSATION PHILOSOPHY

 

    

 

33

 

 

 

ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE

 

    

 

33

 

 

 

ADJUSTMENTS TO COMPENSATION PROGRAMS FOR 2016

 

    

 

34

 

 

 

HOW WE ESTABLISH AND VALIDATE PAY

 

    

 

35

 

 

 

COMPONENTS OF COMPENSATION

 

    

 

38

 

 

 

HEALTH AND WELFARE, RETIREMENT AND OTHER BENEFIT PLANS

 

    

 

46

 

 

 

EXECUTIVE COMPENSATION POLICIES AND GUIDELINES

 

    

 

47

 

 

 

RELATIONSHIP BETWEEN COMPENSATION PLANS AND RISK

 

    

 

49

 

 

 

COMPENSATION TABLES      51  

 

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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 2016. We also explain our performance metrics in detail and review our executive compensation policies.

Please note that the 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 Craig Arnold, Chairman of the Company and Chief Executive Officer of Eaton Corporation as of June 1, 2016 and Alexander M. Cutler prior to June 1, 2016.

EXECUTIVE SUMMARY

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, 2016. For 2016, our named executive officers are:

 

    Craig Arnold, Chairman of the Company and Chief Executive Officer of Eaton Corporation
    Alexander M. Cutler, Retired 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
    Revathi Advaithi, Chief Operating Officer–Electrical Sector of Eaton Corporation
    Uday Yadav, Chief Operating Officer–Industrial Sector of Eaton Corporation
    Mark M. McGuire, Executive Vice President, General Counsel and Secretary of Eaton Corporation

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:

 

    Caps 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,
    Double-trigger equity vesting upon a change in control.

 

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Compensation Discussion and Analysis — Executive Summary

 

Pay 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 individual performance objectives designed to enhance shareholder value. In prior years, we illustrated the correlation between cumulative shareholder returns and Mr. Cutler’s compensation over his tenure as CEO. Given our leadership transition and the distortion in pay that primarily results from the change in the form of our long-term performance-based incentive plan described on page 31, we have modified the pay and performance illustration to show the payouts as a percentage of target under our performance-based annual and long-term incentive programs and total return to shareholders over the last five years. The table clearly illustrates the correlation between pay and the performance we are delivering to our shareholders.

 

Total Shareholder Return and Performance-Based Incentive Plan Payouts

 

 

LOGO

  *   There was no payout under the long-term performance-based plan (ESIP) in 2012.

 

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Compensation Discussion and Analysis — Executive Summary

 

Summary of 2016 Performance-Based Incentive Plan Payouts

SHORT-TERM INCENTIVES

Goals under our short-term, performance-based incentive plan were achieved at 92% of target but the Committee elected to reduce the payout to 85%. The Committee’s decision to reduce the award, along with other efforts such as restructuring actions, reducing discretionary spending, and tightening inventory controls helped fulfill our commitments to our investors despite the impact that sluggish market conditions had on Eaton’s earnings and revenue in 2016. 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 2016, the target EPS and CFR objectives were $4.30 and 16.8%, respectively. Actual EPS and CFR were $4.22 and 16.1%.

 

2016 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS

 

 

LOGO

LONG-TERM INCENTIVES

Our long-term, performance-based Executive Strategic Incentive Plan (“ESIP”) achieved a 25% payout for the 2013-2016 award period. The target cumulative EPS and CFR goals for the 2013-2016 award period were $21.34 and 20.4%, respectively. Our actual cumulative EPS over the four-year award period of $17.32 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%.

2013-2016 ESIP opportunities took the form of phantom share units based on our share price at the beginning of the award period in 2013 and were settled in cash based on the share price at the end of the award period in 2016. 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.

 

 

2013-2016 EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTS

 

 

LOGO

Additional information about our annual and long-term incentive plans begins on page 39.

 

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Compensation Discussion and Analysis — Executive Summary

 

Review of 2016 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 2016, our shareholders approved our executives’ compensation by a vote of 94%.

The Committee considered these voting results, shareholder feedback, as well as a comprehensive assessment of Eaton’s executive compensation programs and decided to change the performance criteria for our long-term ESIP beginning in 2016. This change is summarized below and the change to the vesting of shares into retirement is discussed on page 34. The Committee will continue to review our compensation programs each year in light of the annual “say-on-pay” voting results and shareholder feedback.

 

 

 

Change to Performance-Based Long-Term Incentive Performance Criteria

 

 

Effective with the 2016-2018 ESIP period, awards will be determined based on our total return to shareholders (TSR) ranked against a group of companies (TSR Peer Group). Consistent with our historical practice, awards under this plan design are capped at 200% of target.

Prior to 2016, awards were determined based on company performance versus operating EPS growth and CFR goals. In setting the EPS growth and CFR goals for the prior periods, the Board would evaluate our Strategic Plan projections and analysts’ estimates of peer company performance; however, the impact of changes in market growth rates has had a disproportionate impact on actual versus forecasted results and it has become increasingly difficult to forecast absolute performance against our peers. Therefore, the Committee changed the performance criteria to relative TSR which alleviates the increasingly difficult market calibration issue and introduces a stronger sense of relative peer performance. This change also eliminates any concern about the use of overlapping EPS and CFR criteria in our short-term incentive plans (Senior EIC and EIC) and our performance-based long term incentive plan (ESIP). The short-term incentive plans will continue to focus on annual EPS and CFR goals. 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.

 

 

 

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 concluded in the reported year as “Non-Equity Incentive Plan Compensation.” This distortion occurred in 2015 and 2016 and will occur in 2017, after which time the cash-based ESIP periods will have matured and there will be no more dual reporting of grants and payouts in the Summary Compensation Table.

 

     

 

2016 Summary Compensation Table

 

 
             
2013   2014   2015   2016   2017   2018
             

 

2013-2016 ESIP LONG TERM CASH PERFORMANCE PLAN AWARD PERIOD

 

   
           
     

 

2016-2018 ESIP 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 2013-2016 ESIP award results in realized pay at the end of the 2013-2016 performance period, whereas the 2016-2018 grant will only result in realized pay at the end of 2018 if the Company achieves its performance criteria. The reporting of grants and payouts occurs until the final cash-settled ESIP period matures at the end of 2017.
           

 

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Table of Contents

 

Compensation Discussion and Analysis — 2016 CEO Realized Pay and Our Performance

 

2016 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 and Mr. Cutler’s target award opportunity and the amounts each actually earned based on our performance against the metrics established for the short- and long-term incentive plans that matured on December 31, 2016. 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 contained in the Summary Compensation Table on page 52. Further, each pay component shown below is discussed in more detail in the CD&A that follows.

COMPENSATION REALIZED BY THE CHIEF EXECUTIVE OFFICERS OF EATON CORPORATION IN 2016

 

Compensation Realized by Our Chief Executive Officers in 2016  
            Mr. Arnold     Mr. Cutler  
Compensation Element   Period Earned   Description   Target     Amount Earned     Target     Amount Earned  
Annual Compensation          
Base Salary   2016   We generally target the market median when establishing base salaries. Mr. Arnold received a 10% increase on June 1, 2016 when he became Chief Executive Officer of Eaton Corporation.     n/a     $ 1,040,389       n/a     $ 541,666  
Short-Term Incentive   2016   Mr. Arnold’s target was prorated based on his promotion to Chief Executive Officer and Mr. Cutler’s was prorated based on his retirement date. Mr. Arnold’s actual award of 91% of his individual target and Mr. Cutler’s of 94% are consistent with awards delivered to other executives. For more information on this payment, please see “2016 Short Term Incentive Awards”.   $ 1,483,334     $ 1,346,011     $ 812,500     $ 759,688  
Total Annual Cash                   $ 2,386,400             $ 1,301,354  
Realized Value From Long-Term Incentives          
ESIP   2013-2016   Executives earned 25% of the target number of phantom share units that were granted in 2013. 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. Mr. Cutler’s award was prorated based on the number of months he worked in the award period.   $
 
1,050,000
expressed as
18,700 PSUs
 
 
 
  $ 357,077     $
 
3,630,208
expressed as
64,532 PSUs
 
 
 
  $ 1,232,239  
   
Stock Option Exercises   2007-2016   The gains upon exercise of stock options were based on the stock price appreciation from 2007-2016. Additional details, including the number of shares exercised, are reported in the Option Exercises and Stock Vested table on page 57.     n/a     $ 3,106,089       n/a     $ 6,179,528  
   
RSA/RSU Vesting   2013-2016   This represents the vesting of stock awards that were granted in 2013, 2014, and 2015. Additional details are reported in the Option Exercises and Stock Vested table.     n/a     $ 646,794       n/a     $ 1,824,262  
Total Long-Term                   $ 4,109,960             $ 9,236,029  
All Other Compensation       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.     n/a     $ 28,864       n/a     $ 142,996  
TOTAL REALIZED COMPENSATION                   $ 6,525,224             $ 10,680,379  

 

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Compensation Discussion and Analysis Executive Compensation Philosophy

 

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 and Mr. Cutler in 2016. Specifically, the values for equity awards in the realized pay table show the gross compensation (before applicable taxes) that Mr. Arnold and Mr. Cutler received in 2016 upon the exercise of stock options and the vesting of RSUs (as shown in the “Option Exercises and Stock Vested in 2016” table on page 57), 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 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 earnings as part of the Tally Sheet review discussed on page 36 in the context of a competitive overall benefit design and not as an element of its annual compensation decisions.

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.

ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE

Membership and Responsibilities

The Compensation and Organization Committee of the Board of Directors in 2016 consisted of six 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.

 

Compensation-related Tasks    Organizational Tasks

  Reviews, approves, and administers 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 employee 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.

The Committee’s charter is available on our website at http://www.eaton.com/governance.

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 2016 and also considered it in determining whether to adjust his base salary or his short- and long-term incentive targets for the next year.

 

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Compensation Discussion and Analysis — Adjustments to Compensation Programs for 2016

 

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.

ADJUSTMENTS TO COMPENSATION PROGRAMS FOR 2016

The Committee made the following changes in 2016 to ensure plans and programs align with common practices in the external market.

 

 

 

Change in Long-Term Performance Plan Performance Criteria

 

 

Prior to 2016, awards were determined based on company performance versus operating EPS growth and CFR goals. In setting the EPS growth and CFR goals for the prior periods, the Board would evaluate our Strategic Plan projections and analysts’ estimates of peer company performance; however, the impact of changes in market growth rates has had a disproportionate impact on actual versus forecasted results and it has become increasingly difficult to forecast absolute performance against our peers.

Effective with the 2016-2018 ESIP period, awards will be determined based on our total return to shareholders (TSR) ranked against that of the TSR Peer Group described on pages 36 and 42. Consistent with our historical practice, awards under this plan design are capped at 200% of target. Additionally, if our TSR is positive but ranks the lowest among the TSR 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 peer companies, but is negative, then the maximum payout that can be earned is 100% of target.

The companies in the TSR Peer Group are listed on page 36. Fourteen of the companies in the TSR Peer Group 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. We have also identified six indirect but relevant peers, which when combined with the Electrical peers represent the Electrical sector weightings within all of Eaton.

Rationale: The change in performance criteria will alleviate the market calibration issue and introduce a stronger sense of relative peer performance. 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.

This new peer group will not be the primary compensation peer group that we use to set individual pay targets. Instead, we will continue to use the data reported in third-party surveys (as described on page 35) as our primary resource in setting pay for our executives.

 

 

 

Vesting of Shares into Retirement

 

 

Effective March 1, 2016, equity grants may continue to vest according to the terms of the grant agreement for employees who are age 55 or older with 10 or more years of service who either (1) retire in good-standing or (2) who are terminated through no fault of their own due to a company action. (All scenarios are referred to as “retirement” for purposes of this topic.) Additionally, retirees will be able to exercise outstanding stock options for the remaining term of the grant. The Committee will retain its discretion to cancel shares in the event that (1) an executive does not provide proper notice of retirement or (2) retires and begins working for a competitor or (3) for any other reason the Committee determines is in Eaton’s best interest.

Previously, all shares or options that would have otherwise vested within 12 months of retirement would have vested at retirement and all other outstanding equity grants were forfeited. Additionally, executives could exercise outstanding stock options for the lesser of five years or the remaining term of the stock option.

The continued vesting applies to time-based awards. We are not making changes to vesting practices for performance-based ESIP awards which are subject to proration for time worked in the performance period and to the company achieving the performance metrics for each respective award period. Any prorated ESIP awards earned by retired executives will be paid after the award period has ended and actual performance has been measured.

All long-term incentive plan participants will be eligible for this treatment. As of January 31, 2016, there were approximately 680 employees who were eligible for long-term incentive awards.

Rationale: The Committee reviewed surveys of external market practices which report that the majority of companies allow shares to vest beyond retirement. This change was made to align our practice with the most common practice in the market.

 

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Compensation Discussion and Analysis — How We Establish and Validate Pay

 

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 Hewitt Associates and
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   October — 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 — January
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 adjustments 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 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

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 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 2016, 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 feel 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.

 

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Compensation Discussion and Analysis — How We Establish and Validate Pay

 

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 hurdles. 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 — We do not use a comparator group of companies to set individual compensation targets. However, in 2016, the Board of Directors selected a strategic peer group of twenty-two companies whose performance is considered in the context of setting our Strategic and Annual Profit Plans. Effective with the three-year award period that began on January 1, 2016, the twenty publicly traded companies in this group serve as the TSR Peer Group for purposes of determining relative TSR performance and payouts under ESIP, which is described on page 42.

Fourteen of the twenty public companies in the peer group 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. We have also identified six indirect but relevant peers, which when combined with the Electrical peers, approximately represent the Electrical Sector’s weightings across all of Eaton. The strategic peer group includes:

 

Applicable Direct Competitors    Indirect Peers
ABB Ltd.    Hubbell Incorporated    Deere & Company
Allison Transmission Holdings, Inc.    Legrand SA    Dover Corporation
BorgWarner Inc.    Moog Inc.    Honeywell International Inc.
Bosch Hydraulics    Parker-Hannifin Corporation    Illinois Tool Works Inc.
Danfoss Power Solutions    Rockwell Automation Inc.    Ingersoll-Rand Plc
Cummins Inc.    Schneider Electric SE    United Technologies Corporation
Emerson Electric Co.    Siemens Aktiengesellschaft     
Federal-Mogul Holdings Corporation*    Woodward, Inc.   

 

* Federal-Mogul Holdings Corporation was replaced with American Axle & Manufacturing Holdings, Inc., effective January 1, 2017.

Although we do not use the pay reported by these companies to establish individual compensation opportunities, each July the Committee reviews these companies’ publicly reported financial and compensation data to help retrospectively validate our pay for performance profile.

 

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Compensation Discussion and Analysis — How We Establish and Validate Pay

 

Peer Pay Analysis — Although the strategic peer group does not serve as a compensation peer group, we do provide the Committee with an analysis that includes the compensation reported by each publicly traded peer in its annual proxy statement and market survey data for positions that are equivalent to positions held by our named executive officers. The Committee uses this analysis in reviewing and establishing our stretch incentive plan goals and in answering whether our compensation targets are appropriate relative to market comparators. In 2016, this review of survey and peer proxy data confirmed that Eaton’s compensation opportunities were aligned with the external data points. The Committee also affirmed that it would continue to use the data reported in the two previously mentioned compensation surveys as the basis for setting individual compensation opportunities, but would use the peer proxy data as a secondary data point if an executive’s compensation was well below or above the survey comparator group median.

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 2016 because (a) we adopted relative 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. The 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.

 

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Compensation Discussion and Analysis — Components of Compensation

 

COMPONENTS OF COMPENSATION

In this section, we describe the main components of our compensation, including the metrics we use for our performance-based incentives.

OVERVIEW OF OUR PRIMARY COMPENSATION COMPONENTS

 

Component      Description    Form/Timing of Payout
Base salary      Levels reflect job responsibilities and market competition    Paid in cash throughout the year
Short-term incentive     

Senior EIC Plan – Cash incentive tied to the following performance metrics:

  Net income generates a pool that determines the maximum award amount. This maximum award may be reduced by the Committee.

  The Committee considers performance relative to Operating Earnings Per Share (EPS) and Cash Flow Return on Gross Capital (CFR) goals as well as business unit and individual performance in making its final award determination.

Meets the requirements of Section 162(m) of the Internal Revenue Code

  

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     

Tied to the following performance metrics:

Effective January 1, 2016:

  Relative Total Shareholder Return

  

Awards are distributed after the award period has ended and performance has been measured.

 

For periods that began prior to January 1, 2015 – Awards are paid in cash.

 

For periods that began on or after January 1, 2015 – awards are settled in Eaton ordinary shares.

 

Executives can choose to defer payments for periods that began prior to 2015 under our Incentive Compensation Deferral Plan II.

  LOGO

 

 

 

   




50%
Performance-
Based Long-
Term
Incentive
(ESIP)
 


 
 
 
  

For periods that began prior to January 1, 2016:

  Compound growth rate in operating EPS and

  Average annual CFR

 

ESIP opportunities for award periods that began prior to January 1, 2015 are settled in cash but awarded in the form of phantom share units; therefore, value realization is affected by our stock performance.

 

ESIP opportunities for award periods that began on or after January 1, 2015 are denominated in performance share units and settled in Eaton ordinary shares; therefore, value realization depends on our stock performance.

 

Meets the requirements of Section 162(m) of the Internal Revenue Code

  
   

 

LOGO

 

   

  

  

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
Restructuring performance grants     

Performance RSUs

Value realization depends on achieving performance criteria as determined by the Committee and our stock performance. See page 44 for a description of opportunities established in 2016.

   Vesting periods are a minimum of three years
Retention grants     

Restricted Stock Awards granted on rare occasions to foster engagement and retention

Value realization depends on our stock performance

   Vesting periods range from four to ten years

Base Salary

We pay a competitive base salary to our executive officers in recognition of their job responsibilities. In general, the Committee sets base salaries at approximately the market median as described under “Total Compensation Analysis and Planning Process” on page 35. 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

 

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Compensation Discussion and Analysis — Components of Compensation

 

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.

2016 BASE SALARY

During the 2016 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, 2016 to Messrs. Fearon, Yadav and McGuire and Ms. Advaithi as shown in the following table. The Committee awarded Mr. Arnold a 10% increase effective June 1, 2016 in consideration of his promotion to Chief Executive Officer. Mr. Cutler did not receive a salary increase in 2016 due to his planned retirement.

 

Executive   Increase %     New Base Salary  

C. Arnold

    10.00%       $1,100,000  

R. Fearon

    4.00%       $884,000  

R. Advaithi

    4.00%       $728,000  

U. Yadav

    5.00%       $630,000  

M. McGuire

    4.00%       $607,335  

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 2016, 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 hurdles 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 2016, 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 2016 for the EPS and CFR goals were demanding but attainable.

The following table shows the 2016 goals and our actual results for the year.

 

2016 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS

 

 

              

LOGO

Actual EPS and CFR results were 92% of target, but the Committee exercised its discretion to reduce the calculated payout to 85% of target. The Committee’s decision to reduce the award, along with other efforts such as restructuring actions, reducing discretionary spending, and tightening inventory controls helped fulfill our commitments to our investors despite the effect that sluggish market conditions had on Eaton’s earnings and revenue in 2016.

 

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Compensation Discussion and Analysis — Components of Compensation

 

2016 SHORT-TERM INCENTIVE AWARDS

In February 2016, 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 2016. For the named executive officers, these percentages ranged from 8% 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 Cash Flow Return on Gross Capital performance objectives and the Committee’s decision to adjust the payout to 85% of target as described above.
  An individual performance factor that is based on the achievement of the individual performance goals described below:
    Financial Goals: Achieving the Company’s annual financial plan, as well as the annual financial plan for the executive’s business unit.
    Growth Goals: Building our brand; outgrowing the markets in which we operate; introducing new products and services.
    Operational Excellence: Workplace safety and emissions reduction; advancements in quality; supply chain improvement; and operational efficiency/productivity.
    Building Organizational Capacity: Reinforcing our ethical standards; attracting and developing talent; developing a diverse and inclusive organization; promoting a learning culture.
    Acquisition Integration Goals: Successfully integrating acquisitions; recent acquisitions and meeting our synergy targets.

The following table illustrates each named executive officer’s 2016 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 (as CEO of Eaton Corp - 7 months)

    $5,766,000       150%          $962,500       x     85%   x   105%   =   $859,031   89%

C. Arnold (as COO of Eaton Corp - 5 months)

    $5,766,000       125%          $520,834       x     85%   x   110%   =   $486,980   94%

R. Fearon

    $4,324,500       100%          $867,000       x     85%   x   110%   =   $810,645   94%

R. Advaithi

    $4,324,500       100%          $714,000       x     85%   x   105%   =   $637,245   89%

U. Yadav

    $2,883,000       95%          $584,250       x     85%   x   105%   =   $521,443   89%

M. McGuire

    $2,883,000       75%          $446,742       x     85%   x   105%   =   $398,717   89%

A. Cutler

    $5,766,000       63%          $812,500       x     85%   x   110%   =   $759,688   94%

Each named executive officer’s eligible salary for purposes of determining his or her short-term incentive award was prorated based on the effective date of the merit increases described on page 39. Mr. Arnold’s target and salary were prorated based on the effective date of his appointment to his position as Chief Executive Officer. His targets prior to and after his promotion were 125% and 150% of base salary, respectively. Mr. Cutler’s target 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

For 2016, 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: ESIP periods that began prior to January 1, 2016 were based upon performance against EPS compound growth rate goal and CFR goals. Effective January 1, 2016, relative total shareholder return serves as the performance criteria for ESIP. ESIP 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 for periods prior to January 1, 2016. For periods that began on or after January 1, 2016, we will rank our total return to shareholders

 

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  against that of the TSR Peer Group to determine awards. 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.

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 also provides restricted share awards (RSAs) 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 2016.

PERFORMANCE BASED LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2016

2013-2016 ESIP — In February 2013, the Committee established challenging EPS compound growth rate and CFR performance goals for the 2013-2016 ESIP. The CFR objective focused management on driving attractive returns on the capital we employ over the multi-year award period, while the EPS goal focused management on driving earnings growth throughout the multi-year cycle. The Committee used a comprehensive report that analyzed publicly 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;
  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 the 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 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.

The key to achieving an above-target payout for this 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 2013, 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 2013. 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 $56.27. 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 2013-2016 ESIP — The CFR component of the 2013-2016 ESIP was achieved at 16.8%, which was above the threshold level of 8.0% needed to generate a payout under the plan. Actual EPS growth of $17.32 was below the minimum level of $18.95 that was necessary to generate a payout for the EPS component of the award. The combined results generated a payout of 25% of target.

 

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2013-2016 LONG-TERM EXECUTIVE STRATEGIC INCENTIVE PLAN GOALS AND RESULTS

 

 

LOGO

Final awards were determined by multiplying the target number of phantom share units by the adjusted 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 Eaton ordinary shares over the last 20 trading days of the award period, which was $68.26, and dividend equivalents were added based on the aggregate dividend paid over the period ($8.12) 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.

Awards earned by our named executive officers for the 2013-2016 ESIP Period are shown below:

 

Executive    2013-
2016 Target
    

Target Units

(based on $56.27

in 2013)

    

Earned Share

Units (based on 25%
payout)

    

Earned Award

(based on $68.26

in 2016)

    

Accumulated

Dividends (based

on $8.12)

    

Total Award +

Dividend

Equivalents

    

Total Award as

% of Target

 

C. Arnold

     $1,050,000        18,700        4,675        $319,116        $37,961        $357,077        34%  

R. Fearon

     $1,050,000        18,700        4,675        $319,116        $37,961        $357,077        34%  

R. Advaithi

     $800,000        14,250        3,563        $243,210        $28,932        $272,142        34%  

U. Yadav

     $340,000        6,050        1,513        $103,277        $12,286        $115,563        34%  

M. McGuire

     $650,000        11,600        2,900        $197,954        $23,548        $221,502        34%  

A. Cutler

     $3,630,208        64,532        16,133        $1,101,239        $131,000        $1,232,239        34%  

 

 

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 short-term and long-term 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.

  In 2016, relative TSR became the performance criteria for ESIP, thereby eliminating the concern that we use the “same” metrics in our short- and long-term incentive plans.

 

Long-Term Incentives Granted in 2016

Establishment of Performance Criteria for the 2016-2018 ESIP — The Committee adopted relative TSR as the performance criteria for the 2016-2018 ESIP period. Prior to 2016, awards were determined based on company performance versus operating EPS growth and CFR goals. In setting the EPS growth and CFR goals for the prior periods, the Board would evaluate our Strategic Plan projections and analysts’ estimates of peer company performance; however, the impact of changes in market growth rates has had a disproportionate impact on actual versus forecasted results. Therefore, the Committee chose TSR as the metric to alleviate the increasingly difficult market calibration issues and to introduce a stronger sense of relative peer performance. The change also eliminates any concern about the use of overlapping criteria in our Senior EIC and EIC and our ESIP program. We and the Committee believe a short-term plan

 

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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 2016-2018 award period will be determined based on our total return to shareholders (TSR) relative to that of the TSR Peer Group. 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%. Consistent with our historical practice, awards under this plan design are capped at 200% of target. Additionally, if our TSR is positive but ranks 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 peer companies, but is negative, then the maximum payout that can be earned is 100% of target.

The TSR Peer Group for the 2016-2018 award period includes nineteen companies, thirteen 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., 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. (Federal-Mogul Corporation was also originally included in the Direct Peer Group but has been removed because the company is no longer publicly traded.)

Indirect Peers: Deere & Company, Dover Corporation, Honeywell International Inc., Illinois Tool Works Inc., Ingersoll-Rand plc, and United Technologies Corporation.

Establishment of ESIP Award Opportunities for the 2016-2018 ESIP — In February 2016, 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 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 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.

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 2016 — In February 2016, 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 do not pay dividend equivalents on RSUs that are granted to our executives or other employees.

 

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In addition, in June 2016, the Committee granted Mr. Arnold an additional grant of RSUs in recognition of his promotion to Chief Executive Officer.

Stock Options Granted in 2016 — Stock options make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2016 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.

Performance Restricted Share Units Granted in 2016 — The Committee recognizes that the efforts of our leadership team are particularly critical to pursuing profitability and our competitive advantage during periods of decline and softening in our end markets and while managing a significant leadership transition. Therefore, the Committee granted an additional performance-based long term compensation opportunity to the named executive officers. The grants took the form of performance share units that if earned, will vest after three years. In order for any of these units to vest, the company must achieve at least 80% of the publicly announced three-year restructuring plan savings of $418 million prior to the end of the three-year period. If at least 80% but less than 100% of the goal is achieved, executives may earn 80% of the performance share unit grant. If 100% or more of the goal is achieved, executives may earn 100% of the performance share units. If less than 80% of the goal is achieved, no shares will be earned and the performance share units will be forfeited. Earned performance share units, if any, earn accumulated dividends which will be paid in cash at the end of the three-year period. These awards are not intended to meet the requirements to qualify the payments as deductible compensation under Internal Revenue Code Section 162(m).

2016 Long-Term Incentive Grants — Each named executive officer’s long-term incentive opportunity and the mix of long-term vehicles 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 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 ($)

     Promotional
Grant ($)
    

Performance

Grant ($)

 
C. Arnold      $2,500,000        $1,250,000        $1,250,000        $5,000,000        $1,000,000        $1,314,780  
R. Fearon      $1,500,000        $750,000        $750,000        $3,000,000        -        $1,314,780  
R. Advaithi      $1,000,000        $500,000        $500,000        $2,000,000        -        $1,002,405  
U. Yadav      $900,000        $450,000        $450,000        $1,800,000        -        $426,615  
M. McGuire      $650,000        $325,000        $325,000        $1,300,000        -        $814,980  
A. Cutler      $4,250,000        $2,125,000        $2,125,000        $8,500,000        -        -  

 

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Compensation Discussion and Analysis — Components of Compensation

 

 

 

Prior Year 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 matured. The “Non-Equity Incentive Plan” column of this proxy statement includes payouts from our 2013-2016 ESIP.

 

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. The “Stock Awards” column of this proxy statement includes the value of the performance shares granted in 2016 under our 2016-2018 ESIP.

 

As a result of reporting grants and payouts in the same year, our Summary Compensation Table Total Compensation will be distorted until the final cash-settled ESIP 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. Arnold’s actual earned 2013-2016 ESIP award and 2016-2018 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 but are not included in the following illustration because they do not have a material impact for purposes of this illustration.

 

 

LOGO

 

 

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Compensation Discussion and Analysis — Health and Welfare, Retirement and Other Benefit Plans

 

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 2016 Pension Benefits table on page 59 reports retirement benefits for Mr. Arnold and the other named executive officers. Certain provisions of the Internal Revenue Code limit the annual benefits that may be paid from a tax-qualified retirement plan. As permitted under the Code, the Board of Directors has authorized plans under which payment will be made for any benefits that may exceed those limits. If these nonqualified benefits accrued before 2005, executives may choose a lump sum payment or an annuity (unless otherwise determined by the Committee), except that if there is a change of control of the Company, they will be paid at the time of the event (unless otherwise determined by the Board of Directors) in a lump sum. These benefits that accrued after January 1, 2005 will be paid in the form of a single sum at retirement.

In response to market practices and to enhance our ability to attract and retain key executives, the Board of Directors also adopted plans that provide supplemental annual retirement income to certain executives whom we hire mid-career, because they do not have the opportunity to accumulate significant credited service with us under our tax-qualified retirement income or nonqualified restoration plans. These supplemental plans deliver a benefit if the executive either retires at 55 or older with at least 10 years of service, or at 65 or older regardless of the years of service. No new participants have been added to this plan since 2011.

The tax-qualified pension plans that we maintain for our U.S. salaried and non-union employees define the term compensation to include base salary, overtime pay, pay premiums and awards under any short-term variable pay or incentive compensation plans (including amounts deferred for receipt at a later date). We use this same definition for calculating pension benefits under the nonqualified executive retirement income arrangements described above. 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 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 executive 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.

 

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Compensation Discussion and Analysis Health and Welfare, Retirement and Other Benefit Plans

 

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 61.

Limited Tax Protection for Relocation and Foreign Assignments

We and the Committee believe that tax protection is appropriate in very limited circumstances to avoid the potential for the value of a benefit to be reduced as a result of tax requirements that are beyond an executive’s control. Specifically, we provide tax protection for our employees under our relocation and foreign assignment policies so that they are able to make decisions to accept new assignments without concern that relocating would be a disadvantage from a tax standpoint.

Use of Our Aircraft

We own, operate, and maintain Company aircraft to enhance the ability of our executive officers and other corporate and business leaders to conduct business in an effective manner. This principle guides how the aircraft are used. Our stringent aircraft use policy ensures that the primary use of this mode of transportation is to satisfy business needs and that all aircraft use is accounted for at all times and in accordance with applicable laws. The Board of Directors has directed Mr. Arnold to use our aircraft for his business and personal travel, whenever feasible, to ensure his personal security and enhance his productivity. Our aircraft policy does not permit other executives to use Company-owned aircraft for personal use without the advance approval of the Chief Executive Officer. No named executive officers receive tax protection on the imputed income for personal use of Company-owned aircraft.

EXECUTIVE COMPENSATION POLICIES AND GUIDELINES

Share Ownership Guidelines

We expect all of our executive officers and certain other high-level key executives to hold a number of our shares with a value equal to a pre-determined multiple of their base salary. These multiples, as shown below, represent the minimum guidelines and are consistent with trends we have seen in the competitive market. Each executive must own a minimum of 20% of the required shares outright. Executives are expected to hold shares that vest and shares acquired upon the exercise of stock options until these requirements are met. In addition, executives are expected to reach these guidelines within five years of appointment to a new position and are expected to satisfy them for the duration of their employment with the Company.

 

Position    Minimum Guideline  
Chief Executive Officer of Eaton Corporation      6 times base salary  
Vice Chairman, Chief Financial and Planning Officer of Eaton Corporation      4 times base salary  
Chief Operating Officer Electrical or Industrial Sector of Eaton Corporation      4 times base salary  
Other Officers      2-3 times base salary  
General Managers and other ESIP participants      1 time base salary  

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, 2016, each of the named executive officers exceeded his or her ownership and holding requirements.

 

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Compensation Discussion and Analysis Executive Compensation Policies and Guidelines

 

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.

$1 Million Tax Deduction Limit — Under Internal Revenue Code Section 162(m), any remuneration in excess of $1 million paid to Mr. Arnold or any of the three most highly compensated executive officers of the Company (other than the Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation) in a given year is not tax deductible unless it is paid pursuant to formula-driven, performance-based arrangements that preclude Committee discretion to adjust compensation upward after the beginning of the period in which the compensation is earned. In 2013, our shareholders approved the amended and restated Senior EIC and ESIP plans, which are intended to meet the requirements to qualify incentive payments under these Plans as deductible compensation under Internal Revenue Code Section 162(m). In addition, certain performance-based share grants made from our shareholder-approved 2015 Stock Plan are also intended to meet the requirements to qualify the payments as deductible compensation under Internal Revenue Code Section 162(m).

 

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Compensation Discussion and Analysis Relationship Between Compensation Plans and Risk

 

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 2016 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 the 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 operating 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. This creates a focus on driving sustained performance over multiple award periods that mitigates the potential for executives to take excessive risks to drive one-time, short-term performance spikes in any one period;

  The use of equity awards to foster retention and align our executives’ interests with those of our shareholders;

  Capping the potential payouts under the short- and long-term incentive plans to eliminate the potential for windfalls;

  A clawback policy that allows us to recover compensation in the case of a material restatement of financial results and/or employee misconduct;

  Share ownership guidelines; and

  A broad array of benefit programs that offer employees and executives an opportunity to build meaningful retirement assets throughout their careers.

 

 

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Compensation Discussion and Analysis — Compensation and Organization Committee Report

 

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

Christopher M. Connor, Chair

Todd M. Bluedorn

Michael J. Critelli

Charles E. Golden

Linda A. Hill

Arthur E. Johnson

 

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Compensation Tables

2016 SUMMARY COMPENSATION TABLE

This table shows the total compensation of the Company’s current and immediately prior 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 2016. Mr. Cutler retired on May 31, 2016 and Mr. Arnold became Chairman and Chief Executive Officer of Eaton Corporation on June 1, 2016.

NARRATIVE EXPLANATION OF SUMMARY COMPENSATION TABLE COLUMN INFORMATION:

 

Column    Explanation
Salary    Consists of base salary, which accounted for, on average, 11% of the total compensation of the named executive officers in 2016.
Bonus    The named executive officers were not entitled to receive “Bonus” payments for 2016 (“Bonus” payments are defined under the disclosure rules as discretionary payments that are not based on any performance criteria).
Stock and Option Awards   

These two columns show the grant date fair value of equity awards granted to the named executive officers.

  Stock Awards — Consists of the grant date fair value of awards delivered to each named executive officer in the year reported. The value of Stock Awards is based on our New York Stock Exchange closing price on the date of the grant. This column includes the following components for each reported year:

 

             2016            2015            2014  
    Restricted Stock Units                                     
    ESIP Performance Share Units                                    None granted
    Restructuring Performance Units                     None granted                None granted
    

  Option Awards — Reports the grant date fair value of stock options awarded in each respective year. The grant date fair value of stock options is based on the Black-Scholes option pricing model.

Non-Equity Incentive Plan Compensation    Reports the amount earned for 2016 under the Senior EIC Plan and 2013-2016 ESIP. The incentive payments reported in this column were approved by the Committee at its February 21, 2017 meeting and, to the extent not deferred by the executive, will be paid on March 15, 2017.
Changes in Pension Value and Nonqualified Deferred Compensation Earnings   

Contains two distinct components.

  “Changes in Pension Value ” represents the total change in the actuarial present value of each named executive officer’s accumulated benefit under all of our defined benefit pension plans (both tax qualified and nonqualified) from the measurement date used for financial reporting purposes. The change in this column from year-to-year reflects items such as: changes in compensation as defined under the pension plan in which the executive participates, an additional year of service, and changes in the discount and interest rates used to determine the actuarial present value of the accumulated benefit reported in each respective year.

  “Nonqualified Deferred Compensation Earnings” include earnings on deferred compensation that exceed 120% of a specified rate of interest for long-term debt instruments established by the Internal Revenue Service, when applicable. Under the disclosure rules, earnings on deferred compensation are considered to be “above-market” if the rate or formula used to calculate the interest under the plan in which the executive participates exceeded a rate of interest established by the Internal Revenue Service.

All Other Compensation    Consists of compensation that does not fit within any of the foregoing definitions of compensation. This compensation includes items such as personal benefits, our contributions to defined contribution plans and the value of insurance premiums paid by us.

 

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2016 SUMMARY COMPENSATION TABLE

 

Name and

Principal Position

  Year      Salary(1)      Bonus     

Stock

Awards(2)

    

Option

Awards(2)

    

Non-Equity

Incentive Plan

Compensation(3)

    

Changes In

Pension Value and

Nonqualified

Deferred

Compensation

Earnings(4)

    

All Other

Compensation(5)

    

Total

Compensation

 

C. Arnold

Chairman of the Company, Chief Executive Officer of Eaton Corporation

    2016        $1,040,389        -        $7,434,517        $1,453,379        $1,703,088        $1,376,872        $28,864        $13,037,109  
    2015        $842,636        -        $1,657,124        $548,193        $1,665,083        $575,817        $46,296        $5,335,149  
    2014        $768,529        -        $513,190        $525,578        $2,022,819        $1,745,286        $52,735        $5,628,137  

R. Fearon

Vice Chairman and Chief

Financial and Planning Officer of Eaton Corporation

    2016        $852,550        -        $4,482,911        $871,918        $1,167,722        $1,267,762        $31,076        $8,673,939  
    2015        $790,162        -        $1,657,124        $548,193        $1,549,645        $751,795        $37,714        $5,334,633  
    2014        $768,298        -        $513,190        $525,578        $1,983,752        $2,143,506        $50,046        $5,984,370  

R. Advaithi

COO — Electrical Sector of Eaton Corporation

    2016        $700,001        -        $3,127,456        $581,461        $909,387        $648,546        $12,291        $5,979,142  
    2015        $609,012        -        $1,611,431        $417,635        $905,758        $269,803        $61,499        $3,875,138  
                                                                               

U. Yadav

COO — Industrial Sector of Eaton Corporation

    2016        $602,885        -        $2,289,733        $523,479        $637,006        $710,822        $21,116        $4,785,041  
                         
                                                                               

M. McGuire

Executive Vice President,

General Counsel and Secretary of Eaton Corporation

    2016        $583,976        -        $2,213,171        $377,977        $620,219        $664,789        $27,488        $4,487,620  
    2015        $564,241        -        $1,025,688        $339,758        $780,991        $426,121        $36,847        $3,173,646  
    2014        $562,838        -        $317,842        $325,597        $1,094,226        $972,477        $27,173        $3,300,153  

A. Cutler

Retired Chairman of the Company, Retired Chief Executive Officer of Eaton Corporation

    2016        $541,666        -        $8,590,614        $2,470,252        $1,991,927        $3,698,012        $142,996        $17,435,467  
    2015        $1,222,056        -        $6,706,502        $2,217,968        $5,388,549        $12,496        $102,021        $15,649,592  
    2014        $1,200,000        -        $2,076,331        $2,125,427        $6,656,495        $4,538,766        $150,733        $16,747,752  
(1) In 2016 and 2015, $155,625 and $36,250, respectively, of Mr. Arnold’s salary was attributable to his service as a member of Eaton’s Board of Directors. In 2016 and 2015, $135,625 and $36,250, respectively, of Mr. Fearon’s salary was attributable to his service as a member of Eaton’s Board of Directors. In 2016, 2015 and 2014, $130,000, $165,625, and $162,500, respectively, of Mr. Cutler’s salary was attributed to his role as Chairman of the Board of the Company.
(2) These two columns show the grant date fair value of equity awards, computed in accordance with ASC 718, granted to the named executive officers. The value of stock options is based on the Black-Scholes option pricing model. The assumptions used in connection with these valuations are further described in Note 11 to the Consolidated Financial Statements of our 2016 annual report. The actual amounts realized by individual named executive officers likely will vary based on a number of factors, including the market performance of our shares and timing of option exercises. In 2016, we adopted a market-based TSR metric for our ESIP. In accordance with regulations, ESIP performance share units granted in 2016 were valued using a Monte Carlo simulation which yielded a premium over the closing price of our shares on the date of the grant. In 2015, ESIP objectives were tied to EPS and CFR goals. Accordingly, ESIP performance shares granted in 2015 were valued based on our New York Stock Exchange Closing Price on the date of the grant. No ESIP performance shares are reported in the stock awards column for 2014 because ESIP opportunities established in that year do not have an imbedded right to stock settlement.

 

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(3) Non-Equity Incentive Plan Compensation reported in this column includes payments earned under the 2016 Senior EIC Plan and the 2013-2016 ESIP. The amount earned under each plan is shown below. The material features of these incentive plans are described in the Compensation Discussion and Analysis.

 

     2016 Short-Term
Incentive Award
            2013-2016 Long-Term
Incentive Award
            Total  
C. Arnold      $1,346,011                 $357,077                 $1,703,088  
R. Fearon      $810,645                 $357,077                 $1,167,722  
R. Advaithi      $637,245                 $272,142                 $909,387  
U. Yadav      $521,443                 $115,563                 $637,006  
M. McGuire      $398,717                 $221,502                 $620,219  
A. Cutler      $759,688           $1,232,239           $1,991,927  

 

(4) In 2016, Mr. Cutler was the only named executive officer to receive above-market earnings on his nonqualified deferred compensation (in the amount of $14,220). 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.

 

    

Qualified

           

Non-qualified

           

Total

 
C. Arnold      $113,216                 $1,263,656                 $1,376,872  
R. Fearon      $30,042                 $1,237,720                 $1,267,762  
R. Advaithi      $44,919                 $603,627                 $648,546  
U. Yadav      $25,496                 $685,326                 $710,822  
M. McGuire      $23,558                 $641,231                 $664,789  
A. Cutler      $252,929           $3,430,863           $3,683,792  

 

(5) “All Other Compensation” includes the aggregate incremental cost we incurred for certain executive personal benefits, including:
    Reimbursement of financial, tax and estate planning fees.
    Personal Use of Company Aircraft: The calculation of incremental cost for personal use of our aircraft includes only those variable costs incurred as a result of personal flight activity. It excludes non-variable costs, which would have been incurred regardless of whether there was any personal use of our aircraft. We do not reimburse named executive officers for tax costs related to personal use of our aircraft.
    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 46. The annual premium paid by us during 2016 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.
    Mr. Cutler received a retirement gift for his service to the company.

 

     The amounts of these items reported as “All Other Compensation” are:

 

    

  Financial

Planning

           

  Personal Use of

Aircraft

           

  Company

Paid Life

           

  Employer

Contributions

to 401(k)

           

  Retirement
Gift

           

  Total Other

 
C. Arnold      $11,800                 $2,205                 $9,159                 $5,700                 -                 $28,864  
R. Fearon      $15,585                 -                 $10,791                 $4,700                 -                 $31,076  
R. Advaithi      -                 -                 $7,624                 $4,667                 -                 $12,291  
U. Yadav      $9,220                 $4,725                 $3,171                 $4,000                 -                 $21,116  
M. McGuire      $11,870                 -                 $11,725                 $3,893                 -                 $27,488  
A. Cutler      $38,900           $59,543           $32,533           $7,521           $4,500           $142,996  

 

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GRANTS OF PLAN-BASED AWARDS IN 2016

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 2016.

 

   

Estimated Future Payout under

Non-Equity Incentive Plan Award

   

Estimated Future Payout under

Equity Incentive Plan Award

                Stock Awards  
Name  

Grant

Date

   

Threshold

($)

   

Target

($)

   

Maximum

($)

   

  Threshold

(#)

   

  Target

(#)

   

  Maximum

(#)

                 

All Other

Stock

Awards: Number

of Shares of

Stock

or Units (#)

   

All Other

Option

Awards:

Number of

Securities

Underlying

Options (#)

   

Exercise

or Base

Price of

Option

Awards
($/Share)

   

Grant Date

Fair Value

of Stock &

Option Awards

 
C. Arnold     2/23/2016(1)     $ 370,834       $1,483,334       $5,766,000                                                                          
    2/23/2016(2)                               12,320       49,280       98,560                                               $3,765,485  
    2/23/2016(3)                               20,520       25,650       25,650                                               $1,450,508  
    2/23/2016(4)                                                                       24,640                       $1,288,179  
    2/23/2016(4)                                                                               132,850       $56.55       $1,453,379  
      6/1/2016(4)                                                                       16,221                       $930,346  
R. Fearon     2/23/2016(1)     $ 216,750       $867,000       $4,324,500                                                                          
    2/23/2016(2)                               7,393       29,570       59,140                                               $2,259,444  
    2/23/2016(3)                               20,520       25,650       25,650                                               $1,450,508  
    2/23/2016(4)                                                                       14,785                       $772,960  
      2/23/2016(4)                                                                               79,700       $56.55       $871,918  
R. Advaithi     2/23/2016(1)     $ 178,500       $714,000       $4,324,500                                                                          
    2/23/2016(2)                               4,929       19,715       39,430                                               $1,506,423  
    2/23/2016(3)                               15,640       19,550       19,550                                               $1,105,553  
    2/23/2016(4)                                                                       9,860                       $515,481  
      2/23/2016(4)                                                                               53,150       $56.55       $581,461  
U. Yadav     2/23/2016(1)     $ 146,063       $584,250       $2,883,000                                                                          
    2/23/2016(2)                               4,435       17,740       35,480                                               $1,355,513  
    2/23/2016(3)                               6,656       8,320       8,320                                               $470,496  
    2/23/2016(4)                                                                       8,870                       $463,724  
      2/23/2016(4)                                                                               47,850       $56.55       $523,479  
M. McGuire     2/23/2016(1)     $ 111,685       $446,742       $2,883,000                                                                          
    2/23/2016(2)                               3,204       12,815       25,630                                               $979,194  
    2/23/2016(3)                               12,716       15,895       15,895                                               $898,862  
    2/23/2016(4)                                                                       6,410                       $335,115  
      2/23/2016(4)                                                                               34,550       $56.55       $377,977  
A. Cutler     2/23/2016(1)     $ 203,125       $812,500       $5,766,000                                                                          
    2/23/2016(2)                               20,943       83,770       167,540                                               $6,400,866  
    2/23/2016(4)                                                                       41,885                       $2,189,748  
      2/23/2016(4)                                                                               225,800       $56.55       $2,470,252  

 

(1)   SENIOR EIC PLAN. The amounts shown represent potential payments that were established for 2016 under our Senior EIC Plan. As described in Short-Term Performance-Based Compensation on page 39, the Committee established a pool under the Senior EIC plan, which was expressed as a percentage of an objective corporate performance goal. A portion of this pool was assigned to each participant, thereby establishing each individual’s maximum award opportunity. The Committee considered the maximum allocation generated by the net income pool as well as achievement of corporate CFR and EPS, business unit and individual goals to determine actual incentive awards.
(2)  

ESIP AWARD. The amounts shown represent the potential payments that were established in February 2016 for the 2016-2018 ESIP Award Period. The ESIP opportunities were denominated in performance share units. The number of performance share units was determined by dividing the target value of the ESIP opportunity by the average closing price of our shares over the first 30 trading days of 2016 and rounding up to the nearest 5 shares. At the end of the award period, the number of ESIP performance share units will be adjusted based on the Company’s TSR rank among a group of peers. The

 

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  final number of performance share units cannot exceed two times the original number of share units. Dividend equivalents will be paid based on the earned number of performance share units and the aggregate dividend paid to our investors over the three-year award period. Actual awards, if any, will be distributed in the first quarter of 2019 and the value realized will vary based on share price appreciation and relative TSR. Mr. Cutler’s award will be prorated based on his retirement date.
(3)   PERFORMANCE RSUs. These amounts represent Performance RSUs granted on February 23, 2016. Performance shares will vest in 2019, subject to the achievement of restructuring goals described on page 44. The actual amounts realized by individual named executive officers, if any, will depend on the level of goal achievement and the market performance of our shares.
(4)   STOCK OPTIONS and RSUs. These amounts represent stock options and RSUs granted on February 23, 2016 and June 1, 2016.

 

     The value of performance shares and restricted stock units shown in this table are computed in accordance with ASC 718. The value of stock options is based on a Black-Scholes option pricing model. The assumptions used in connection with the valuations of the grants in this table are further described in Note 11 to Consolidated Financial Statements of our 2016 annual report. The actual amounts realized by individual named executive officers will vary based on a number of factors, including the market performance of our shares and timing of option exercises.

 

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Compensation Discussion and Analysis — Compensation Tables

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2016

The following table summarizes the outstanding equity awards held by the named executive officers at December 31, 2016. The closing price of our ordinary shares on the last trading day in 2016 ($67.09) was used to determine the market value of the unvested RSAs and RSUs shown in the “Market Value of Shares or Units of Stock That Have Not Vested ($)” column. All share amounts and per-share prices for awards and objectives established before February 28, 2011 have been adjusted to reflect the Company’s two-for-one stock split that occurred on that date.

 

Name   Grant Date      Number of
Securities
Underlying
Unexercised
Options
(# Exercisable)
     Number of
Securities
Underlying
Unexercised
Options (#
Unexercisable)(1)
    

Equity
Incentive
Plan
Awards:

No. of
Securities
Underlying
Unexercised
Unearned
Options (#)

     Option
Exercise
Price
     Option  
Expiration  
Date  
                   Grant Date     

Number
of Shares
or Units
of Stock

that
Have Not
Vested
(#)(1)

    Market
Value of
Shares or
Units of
Stock that
Have Not
Vested ($)
     Equity
Incentive
Plan
Awards:
No. of
Unearned
Shares,
Units or
other
Rights
that Have
Not
Vested
(#) (2)
     Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
other Rights
that Have
Not Vested
($)
 
C. Arnold     2/23/2016        -        132,850               $ 56.55        2/23/2026                        6/1/2016        16,221 (3)    $ 1,088,267                    
    2/24/2015        11,847        24,053               $ 71.72        2/24/2025                        2/23/2016        24,640     $ 1,653,098        74,930      $ 5,027,054  
    2/25/2014        17,259        8,891               $ 75.36        2/25/2024                        2/24/2015        5,267     $ 353,363        15,720      $ 1,054,655  
    7/23/2013        42,000        -               $ 68.95        7/23/2023                        2/25/2014        2,443     $ 163,901                    
    2/21/2012        44,100        -               $ 51.94        2/21/2022                        7/23/2013        2,978 (4)    $ 199,794                    
      2/22/2011        44,000        -               $ 53.71        2/22/2021                                                              
R. Fearon     2/23/2016        -        79,700               $ 56.55        2/23/2026                        2/23/2016        14,785     $ 991,926        55,220      $ 3,704,710  
    2/24/2015        11,847        24,053               $ 71.72        2/24/2025                        2/24/2015        5,267     $ 353,363        15,720      $ 1,054,655  
    2/25/2014        17,259        8,891               $ 75.36        2/25/2024                        2/25/2014        2,443     $ 163,901                    
    7/23/2013        42,000        -               $ 68.95        7/23/2023                                                              
    2/21/2012        44,100        -               $ 51.94        2/21/2022                                                              
      2/22/2011        44,000        -               $ 53.71        2/22/2021                                                              
R. Advaith     2/23/2016        -        53,150               $ 56.55        2/23/2026                        2/23/2016        9,860     $ 661,507        39,265      $ 2,634,289  
    2/24/2015        9,025        18,325               $ 71.72        2/24/2025                        2/24/2015        8,879 (5)    $ 595,692        11,975      $ 803,403  
    2/25/2014        13,167        6,783               $ 75.36        2/25/2024                        2/25/2014        6,312 (6)    $ 423,472                    
    2/26/2013        32,000        -               $ 59.56        2/26/2023                        2/26/2013        7,045 (7)    $ 472,649                    
    2/21/2012        22,050        -               $ 51.94        2/21/2022                                                              
      2/22/2011        13,000        -               $ 53.71        2/22/2021                                                              
U. Yadav     2/23/2016        -        47,850