DEF 14A 1 letn2020_def14a.htm EATON CORP PLC - DEF 14A EATON2020ProxyStatementandNoticeofMeeting

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC 20549

 

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No.    )

 

 Filed by the Registrant  Filed by a Party other than the Registrant

 

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Soliciting Material under §240.14a-12

 

Eaton Corporation plc

(Name of Registrant as Specified in Its Charter)

 

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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.

 

 

 

 

 


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 adopt the 2020 Stock Plan;

3.

Approving the appointment of Ernst & Young as independent auditor for 2020 and authorizing the Audit Committee of the Board of Directors to set its remuneration;

4.

Approving, on an advisory basis, the Company’s executive compensation;

5.

Approving a proposal to grant the Board authority to issue shares under Irish law;

6.

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

7.

Authorizing the Company and any subsidiary of the Company to make overseas market purchases of Company shares; and

8.

Transacting any other business that may properly come before the meeting.

   

Date:

 

Time:

 

Location:

April 22, 2020

 

8:00 a.m. local time

 

Eaton House

30 Pembroke Road

Dublin 4, Ireland

Record date: February 24, 2020

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 13, 2020 and provides instructions on how you may access and review the proxy materials on the Internet and how to vote.

Proposals 1, 2, 3, 4, 5 and 7 are ordinary resolutions requiring a simple majority of the votes cast at the meeting or by proxy. Proposal 6 is a special resolution requiring at least 75% of the votes cast at the meeting or by proxy. Each proposal 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, 2019 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 72 for additional information.

By order of the Board of Directors,

 

Nigel Crawford
Vice President and Secretary

March 13, 2020

 

 

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 and 4 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.

 
   
   

 

 

Important Notice Regarding Internet Availability of Proxy Materials for the Annual General Meeting of Shareholders to be held on April 22, 2020: This proxy statement, the Company’s 2019 Annual Report to Shareholders and our Irish Statutory Accounts for the year ended December 31, 2019 are available at www.proxyvote.com.

 


Table of Contents

 

EATON 2020 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, 2019 and our Irish Statutory Accounts for the year ended December 31, 2019 will be made available or sent to shareholders commencing on or about March 13, 2020.

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 seven proposals on the agenda. Adoption of Proposals 1, 2, 3, 4, 5 and 7 requires the affirmative vote of a majority of ordinary shares of the votes cast in person or by proxy. Adoption of Proposal 6 requires the affirmative vote of at least 75% of ordinary shares of the votes cast 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 proposed 2020 Stock Plan

FOR

 

19

Proposal 3
To appoint Ernst & Young as independent auditor for the 2020 fiscal year and to authorize the Audit Committee to set the auditor fees

FOR

 

28

Proposal 4
To approve, on an advisory (non-binding) basis, our named executive officers’ compensation as described in this Proxy Statement

FOR

 

30

Proposal 5
To approve a proposal to grant the Board authority to issue shares under Irish law

FOR

 

64

Proposal 6
To approve a proposal to grant the Board authority to opt-out of pre-emption rights under Irish law

FOR

 

65

Proposal 7
To authorize the Company and any subsidiaries of the Company to make overseas market purchases of Company shares

FOR

 

67

EATON 2020 Proxy Statement and Notice of Meeting 1

 


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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

2019

 

Board and Governance Information

2019

Size of Board

12

 

Independent Directors Meet without Management Present

Yes

Average Age of Directors

63.1

 

Director Stock Ownership Guidelines

Yes

Number of Independent Directors

10

 

Mandatory Retirement Age

Yes

Board Meetings Held in 2019 (average director attendance 95%)

4

 

Board Orientation and Continuing Education Program

Yes

Annual Election of All Directors

Yes

 

Code of Ethics for Directors, Officers and Employees

Yes

Majority Voting for Directors

Yes

 

Succession Planning

Yes

Lead Independent Director

Yes

 

Comprehensive Sustainability Program

Yes

 

EATON 2020 Proxy Statement and Notice of Meeting 2

 


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DIRECTOR NOMINEES

Each director nominee is elected annually by a majority of votes cast. For more information about our nominees, see pages 6 through 10 of this proxy statement.

 

Board Committee Memberships

 

Name

Age

Director

Since

Independent

Audit

Compensation

&

Organization(1)

Executive(2)

Finance

Governance

Other Public

Company

Boards

Craig Arnold
Chairman, Eaton Corporation plc and CEO, Eaton Corporation

59

2015

 

 

 

 

 

1

Christopher M. Connor
Lead Director
Retired Chairman and Chief Executive Officer, The Sherwin-Williams Company

63

2006

 

 

2

Michael J. Critelli
Retired Chairman and Chief Executive Officer, Pitney Bowes Inc.

71

1998

 

 

 

-

Richard H. Fearon
Vice Chairman and Chief Financial and Planning Officer, Eaton Corporation

64

2015

 

 

 

 

 

 

2

Olivier Leonetti
Chief Financial Officer, Zebra Technologies Corporation

55

2019

 

 

 

-

Deborah L. McCoy
Independent aviation safety consultant

65

2000

 

 

 

-

Silvio Napoli
Executive Chairman of the Board,
Schindler Holding AG

54

2019

 

 

 

1

Gregory R. Page
Retired Chairman and Chief Executive Officer, Cargill

68

2003

 

 

 

3

Sandra Pianalto
Retired President and CEO of the Federal Reserve Bank of Cleveland

65

2014

 

 

3

Lori J. Ryerkerk
Chief Executive Officer, Celanese Corporation

57

-

 

 

 

 

 

1

Gerald B. Smith
Chairman and CEO, Smith Graham & Co.

69

2012

 

 

-

Dorothy C. Thompson
Retired Chief Executive, Drax Group plc

59

2016

 

 

1

(1)

Todd Bluedorn served as chair of the Compensation and Organization Committee throughout 2019 and will continue to serve as such until his resignation is effective on April 22, 2020.

(2)

Mr. Arnold was a member of the Executive Committee for all of 2019 and serves as Committee Chair. The Lead Director and the chairs of each Board Committee serve as members of the Executive Committee.

Member

Chair

 

 

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 3

 


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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. The chart below shows the payouts as a percentage of target under our performance-based short- and long-term incentive programs and total return to shareholders over the last five years, illustrating the strong correlation between pay and the performance we are delivering to our shareholders.

 

 

TOTAL SHAREHOLDER RETURN AND PERFORMANCE-BASED INCENTIVE PLAN PAYOUTS

 

1.

In 2015, we changed the length of our performance-based long-term award periods from four to three years. As a result, two long-term performance periods ended on December 31, 2017. Awards for each period were earned at 25% of target.

 

2.

In 2016, we changed the long-term incentive plan performance criteria from Adjusted Earnings per Share growth and Cash Flow Return on Gross Capital (weighted equally) to relative Total Shareholder Return. The first TSR-based award period began on January 1, 2016 and ended on December 31, 2018. More information about our short- and long-term incentive programs can be found on page 40.

 

EATON 2020 Proxy Statement and Notice of Meeting 4

 

 


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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.

2019 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)

Caps in our short- and long-term incentive plans, which prevent unintended windfalls

Compensation recovery policy (clawbacks)

Use of targeted performance metrics to align pay with performance

 

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

No hedging or pledging of our shares

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

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

No repricing of stock options and no discounted stock options

No tax gross-ups

Say On Pay 2019 Advisory Vote

The Board of Directors is committed to understanding the views of our shareholders by providing an opportunity to endorse our executive compensation through an advisory, non-binding vote. In 2019, 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 and feedback we receive from our shareholders.

 

EATON 2020 Proxy Statement and Notice of Meeting 5

 

 


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Proposal 1: Election of Directors

 

Our Board of Directors is currently comprised of 12 members, all of whom serve for a term of one year or until a respective successor is elected and has been qualified. Todd M. Bluedorn has decided not to stand for re-election. Mr. Bluedorn informed the Chairman of the Board of Directors that he would not stand for re-election due to time constraints and other board obligations. All nominees are currently Eaton directors who were elected by shareholders at the 2019 annual general meeting, except Silvio Napoli, who was elected by the Board of Directors effective July 26, 2019, and Lori J. Ryerkerk. Ms. Ryerkerk, if elected, will replace Mr. Bluedorn.

If any of the nominees becomes unable or declines to serve, the individuals named as proxies in the accompanying 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 within 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.

 

Director Since 2015
Age 59

 

 

 

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 from 1983 through 2016. He became Chief Executive Officer in 1999, Chairman and Chief Executive Officer in 2000, and Executive Chairman in 2016, and retired as Executive Chairman in December 2016. Mr. Connor currently serves on the boards of Yum! Brands, Inc., International Paper 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, and 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 broad experience are of particular benefit to Eaton in his role as Lead Director.

 

Lead Director
Director since 2006
Age 63

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 6

 


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Michael J. Critelli

Retired Chairman and Chief Executive Officer, Pitney Bowes Inc.

Michael J. Critelli serves as the Chief Executive Officer of MoveFlux Corporation, an artificial intelligence software company. Prior to joining MoveFlux in April 2018, he served as the Chief Executive Officer and a director of CloudParc, Inc., a smart cities and transportation technology company, during 2017. Mr. Critelli was the Chief Executive and President and a director of Dossia Services Corporation, a personal and population health management systems company, from 2010 until 2016. He is the retired Chairman and Chief Executive Officer of Pitney Bowes Inc., a provider of global mailstream solutions. Mr. Critelli served as Chairman and Chief Executive Officer of Pitney Bowes from 1997 to 2007 and as Executive Chairman from 2007 to 2008. He also served as a director of ProHealth Physicians, Inc. from 2012 until 2015.

Director Qualifications: Mr. Critelli has extensive experience in risk management, cybersecurity, industry-wide leadership in transportation, logistics, corporate governance, online and social media marketing and communications issues. In addition to broad business experience gained while leading a global Fortune 500 company, he is a thought leader on transportation strategy and regulatory reform, as well as innovative approaches to healthcare. His background and experience are valuable to our Board as it oversees management’s efforts to develop and maintain talent, assess and evaluate enterprise risk management and cybersecurity issues, and navigate the regulatory environment.

 

Director since 1998
Age 71

 

 

 

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 a director of Crown Holdings, Inc. Mr. Fearon also serves on the boards of 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.

 

Director since 2015
Age 64

 

 

 

Olivier Leonetti

Chief Financial Officer, Zebra Technologies Corporation

Olivier Leonetti is Chief Financial Officer of Zebra Technologies Corporation, a global leader in innovating at the edge of the enterprise, designing and marketing enterprise solutions software, services and products. Prior to joining Zebra Technologies in November 2016, he served as chief financial officer of Western Digital Corporation, an industry leading provider of storage technologies and solutions, from 2014 to 2016. Mr. Leonetti served as Vice President, Finance – Global Commercial Organization at Amgen, Inc. from 2011 to 2014. From 1997 to 2011, Mr. Leonetti served in various senior finance positions with increasing responsibility at Dell Inc., including most recently as Vice President, Finance. He is a board member of Junior Achievement of Chicago.

Director Qualifications: Mr. Leonetti has comprehensive knowledge of financial accounting standards and extensive experience in accounting, tax, treasury, financial planning and investor relations. He has significant experience of importance to the Company, including management of global businesses in various industries, oversight of large corporate transactions, experience with capital markets, global corporate strategy, management of business services and IT functions, and leadership of operational excellence initiatives. Mr. Leonetti’s experience with technological products and information technology is of particular importance to Eaton as our products evolve to meet customer needs.

 

Director since 2019
Age 55

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 7

 


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Deborah L. McCoy

Independent aviation safety consultant

Deborah L. McCoy is an independent aviation safety consultant. She retired from Continental Airlines, Inc. in 2005, where she had served as Senior Vice President, Flight Operations since 1999. During part of 2005, Ms. McCoy also briefly served as the Chief Executive Officer of DJ Air Group, a start-up commercial airline company.

Director Qualifications: Ms. McCoy has extensive experience in the commercial aerospace markets and brings an understanding of aircraft design and performance, global airline operations and the strategic issues and direction of the aerospace industry. In addition, Ms. McCoy has extensive experience in safety initiatives, Federal regulatory compliance, labor relations, talent management, and risk analysis and mitigation. All of these attributes are of benefit to Eaton’s Board in its oversight role across the enterprise.

 

Director since 2000 Age 65

 

 

 

Silvio Napoli

Executive Chairman of the Board of Directors, Schindler Holding AG

Silvio Napoli is executive chairman of the Board of Directors of Schindler Holding AG, one of the world’s leading providers of elevators, escalators and related services. He joined the Schindler Group in 1994. During his time with the company, he served in a number of leadership roles including director of corporate development, president and chief executive officer of Schindler India, president of Asia-Pacific, and as the company’s chief executive officer. He previously worked for The Dow Chemical Company in Europe. Mr. Napoli also serves as chairman and president of the Board of Directors of the Swiss-American Chamber of Commerce.

Director Qualifications: As the executive chairman of a large global industrial company, Mr. Napoli has extensive executive leadership experience and is very knowledgeable in the management of industrial products and services. In particular, he has considerable experience in the areas of talent development, financial management, manufacturing and product innovation, and risk management. Mr. Napoli also brings a dynamic international business perspective and global corporate strategy experience to the Board.

 

Director since 2019
Age 54

 

 

 

Gregory R. Page

Retired Chairman and Chief Executive Officer, Cargill

Gregory R. Page is the retired Chairman and Chief Executive Officer of Cargill, 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 served as Executive Director from 2015 to 2016, after which he retired from the Cargill Board. Mr. Page is a director of 3M and Deere & Company and is non-executive chairman and a director of Corteva, Inc. He is past Chairman and current board member of Big Brothers Big Sisters of America. Mr. Page is a former director of Carlson and past President and a board member of the Northern Star Council of the Boy Scouts of America. He is a board member of Alight (fka the American Refugee Committee).

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.

 

Director since 2003
Age 68

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 8

 


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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 and 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, Prudential Financial, Inc., and FirstEnergy Corporation. Ms. Pianalto is an Executive in Residence at the University of Akron. She serves on the board of directors of University Hospitals Health System and College Now Greater Cleveland, and is past chair and life director of the board of United Way of 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.

 

Director since 2014
Age 65

 

 

 

Lori J. Ryerkerk

Chief Executive Officer, Celanese Corporation

Lori J. Ryerkerk is the Chief Executive Officer and a director of Celanese Corporation, a Fortune 500 global chemical and specialty materials company. Prior to joining Celanese in May 2019, she was the Executive Vice President of Global Manufacturing of Shell Downstream Inc. Ms. Ryerkerk joined Shell in May 2010 as Regional Vice President of Manufacturing in Europe and Africa. In October 2013, she was named Executive Vice President of Global Manufacturing. Before joining Shell, Ms. Ryerkerk was Senior Vice President, Refining, Supply and Terminals at Hess Corporation from 2008 through 2010. Prior to that, she spent 24 years with ExxonMobil and served in a variety of operational and senior leadership roles. Ms. Ryerkerk served on the board of Axalta Coating Systems Limited from 2015 through 2019.

Director Qualifications: As the Chief Executive Officer and a director of a global engineering and manufacturing company, Ms. Ryerkerk has executive leadership experience in the area of industrial materials and products production. In particular, she has considerable experience in leading global operations and managing complex technologies, engineering and supply chain systems. Ms. Ryerkerk also brings an international business perspective, having previously spent time in roles in Europe and Africa. Her experience with industrial companies and in responding to changing market conditions are of particular benefit to Eaton.

 

Age 57

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 9

 


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Gerald B. Smith

Chairman and Chief Executive Officer, Smith Graham & Co.

Gerald B. Smith was a director of Cooper Industries plc from 2000 until 2012 and served as lead independent director of Cooper Industries plc from 2007 to 2012. 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. He serves as Chairman of the Texas Southern University Foundation and a director of the Federal Reserve Bank of Dallas. He is a former director of the Federal Reserve Bank of Dallas, Houston 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 past experience as lead independent director of Cooper provides ongoing institutional knowledge of legacy Cooper businesses and 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.

 

Director since 2012
Age 69

 

 

 

Dorothy C. Thompson

Retired Chief Executive, Drax Group plc

Dorothy C. Thompson CBE is the retired Chief Executive and director of Drax Group plc, an international electricity and energy company, where she served from 2005 until her retirement in 2017. Before joining Drax, Ms. Thompson managed InterGen NV’s European power business, was assistant group treasurer at Powergen plc and worked at CDC Capital Partners, the private sector arm of the British Government’s aid program. Ms. Thompson is a member of the Court of Directors of the Bank of England, where she is also Chair of the Audit and Risk Committee and Senior Independent Director. She also serves as the Chair of Tullow Oil plc, the London Stock Exchange listed oil exploration and production company. She was a director of Johnson Matthey Plc from 2007 through 2016.

Director Qualifications: As the retired Chief Executive of Drax, Ms. Thompson has unique insight into the sourcing, generation and supply of sustainable and renewable energy. She also brings to the Board vast experience in all aspects of finance as well as an international business perspective. Ms. Thompson’s work as Chair of the Audit and Risk Committee of the Bank of England and as Chair of Tullow Oil plc provide valuable financial and governance insight and experience to the Board and Audit Committee of the Company.

 

Director since 2016
Age 59

 

 

 

EATON 2020 Proxy Statement and Notice of Meeting 10

 


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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 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 Silvio Napoli was elected by the Board effective July 26, 2019. Mr. Napoli and director nominee Lori J. Ryerkerk were identified as director candidates by a third-party search firm retained by the Governance Committee and were recommended as nominees to the Board by the Committee.

Director Qualifications and Board Diversity

The Board of Directors recognizes the value of nominating director candidates who bring diverse opinions, perspectives, skills, experiences, backgrounds, and orientations to Board deliberations. The Governance Committee uses a rigorous process for identifying and evaluating director nominees. In order to be recommended by the 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 sensitivity to our corporate responsibilities. In addition, the 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, input from the Chairman and CEO, and input from the chairs of each Board committee. A self-evaluation is designed to elicit each director’s thoughts about his or her contributions in light of the needs of the Board and the Company. The evaluation is focused on opportunities for further improvement in effectiveness, indication of preferences in future Board committee rotation, identification of board matter educational priorities, and requests for Company specific orientation information. The director evaluation process is typically conducted during the October and February Governance Committee and Board meetings. At the conclusion of the evaluation process, the Chair of the Governance Committee provides specific feedback to the individual directors relative to further performance improvement, educational opportunities, and other counsel.

Upon completion of the skills matrix and the evaluation process, the Governance Committee identifies areas of director knowledge and experience that may benefit the Board in the future and uses that information as part of the director search and nomination effort.

The Board of Directors Governance Policies are available on our website at www.eaton.com/governance.

 

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Shareholder Recommendations of Director Candidates

The Governance Committee will consider director candidates who are recommended to it in writing by any Eaton shareholder 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 2021 annual general meeting 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 November 13, 2020 and no later than December 13, 2020, and must include the reasons for the recommendation, the full name, age and address of each proposed nominee, a brief biographical history setting forth past and present directorships, past and present positions held, occupations and civic activities, and details of Company shares owned by each proposed nominee. The recommendation letter should be accompanied by a written statement from the proposed nominee consenting to be nominated and, if nominated and elected, to serve as a director.

Any shareholder wishing to recommend an individual as a nominee for election as a director must also describe in a detailed writing any financial agreement, arrangement or understanding between the nominee and any party other than the Company relating to such nominee’s potential service as a director, and details of any compensation or other payment received from any such third party relating to such nominee’s potential service as a director.

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 non-employee directors and nominees, 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 www.eaton.com/governance.

Because director independence may be influenced by their use of Company aircraft and other Company-paid transportation, the Board has adopted a policy on this subject.

In their review of director and nominee independence, the Board of Directors and its Governance Committee have considered the following circumstances:

Directors Todd M. Bluedorn and Silvio Napoli and director nominee Lori J. Ryerkerk serve as executive officers of companies that had purchases and/or sales of property or services with us during 2019. 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 $524,000 worth of Eaton products and sold approximately $4,000 worth of products to Eaton during 2019. Mr. Napoli is the Executive Chairman of the Board of Directors of Schindler Holding AG, which purchased approximately $1,585,000 worth of Eaton products and sold approximately $12,000 worth of products to Eaton during 2019. Ms. Ryerkerk is the Chief Executive Officer of Celanese Corporation, which purchased approximately $133,000 worth of Eaton products and sold approximately $3,418,000 worth of products to Eaton during 2019.

The use of our aircraft and other Company-paid transportation by all non-employee directors is consistent with the Board policy on that subject.

 

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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, nor director nominee Lori J. Ryerkerk, has a material relationship with the Company other than in his or her capacity as a director, and that all of our non-employee directors qualify as independent under the Board’s independence criteria and the New York Stock Exchange standards. 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 — O. Leonetti, D. McCoy, S. Pianalto, 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 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 disclosed 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 2019 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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BOARD COMMITTEES

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

Audit Committee

Met 5 times in 2019

 

Gerald B. Smith
(Chair)
Olivier Leonetti
Deborah L. McCoy
Sandra Pianalto
Dorothy C. Thompson

The functions of the Audit Committee include assisting the Board in overseeing:

the integrity of our financial statements and our systems of internal accounting and financial controls;

the independence, qualifications and performance of our independent auditor;

the performance of our internal auditors;

the cybersecurity program as part of the risk oversight function; and

our compliance with legal and regulatory requirements.

The Committee also has sole authority to appoint, compensate and terminate the independent auditor, and pre-approves all auditing services and permitted non-audit services that the audit firm may perform for the Company. The Committee is also responsible for negotiating the audit fees. In order to ensure continuing auditor independence, the Committee periodically considers whether there should be a rotation of the independent audit firm. In conjunction with the mandated rotation of the audit firm’s lead engagement partner, the Committee and its Chair are directly involved in the selection of the audit firm’s new lead engagement partner. Among its other responsibilities, the Committee meets regularly in separate Executive Sessions with our independent auditor and senior leaders of Eaton Corporation, including the Vice Chairman and Chief Financial and Planning Officer, Executive Vice President and General Counsel, 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. Leonetti 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.

     

 

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Compensation and Organization Committee

Met 4 times in 2019

 

Todd M. Bluedorn
(Chair)
Christopher M. Connor
Michael J. Critelli
Silvio Napoli
Gregory R. Page

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;

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;

overseeing 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

issuing 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 32.

     

 

Executive Committee

 

 

Craig Arnold
(Chair)
Todd M. Bluedorn
Christopher M. Connor
Sandra Pianalto
Gerald B. Smith
Dorothy C. Thompson

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 serves as Committee Chair. The Lead Director and the chairs of each Board Committee serve as members of the Executive Committee. The Committee did not meet in 2019.

 
     

 

Finance Committee

Met 2 times in 2019

 

Sandra Pianalto
(Chair)
Todd M. Bluedorn
Michael J. Critelli
Gregory R. Page
Gerald B. Smith           

The functions of the Finance Committee include:

the periodic review of our financial condition and the recommendation of financial policies to the Board;

analyzing Company policy regarding its debt-to-equity relationship;

reviewing and making recommendations to the Board regarding our dividend policy;

reviewing our cash flow, proposals for long- and short-term debt financing and the financial risk management program;

meeting with and reviewing the performance of the management pension committees and any other fiduciaries appointed by the Board for pension and profit-sharing retirement plans; and

reviewing the key assumptions used to calculate annual pension expense.

   
     
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Governance Committee

Met 4 times in 2019

 

Dorothy C. Thompson (Chair)
Christopher M. Connor
Olivier Leonetti
Deborah L. McCoy
Silvio Napoli        

The responsibilities of the Governance Committee include:

recommending to the Board improvements in our corporate governance processes and any changes in the Board Governance Policies;

advising the Board on changes in the size and composition of the Board;

annually submitting to the Board candidates for members and chairs of each standing Board committee;

in consultation with the Chief Executive Officer of Eaton Corporation, identifying and recommending to the Board candidates for Board membership;

reviewing and recommending to the Board the nomination of directors for re-election;

overseeing the orientation of new directors and the ongoing education of the Board;

recommending to the Board compensation of non-employee directors;

administering the Board’s policy on director retirements and resignations; and

establishing guidelines and procedures to be used by the directors to evaluate the Board’s performance.

Other responsibilities include providing oversight on significant public policy issues with respect to our relationships with shareholders, employees, customers, competitors, suppliers and the communities in which we operate, including such areas as ethics, compliance, environmental, health and safety issues, community relations, government relations, charitable contributions and shareholder relations.

     

Committee Charters and Policies

The Board committee charters are available on our website at 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 2019. 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 2019 annual general meeting held April 24, 2019, all 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 July 2018, as recommended by the Governance Committee of the Board. The revised Governance Policies are available on our website at 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, Mr. Fearon 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.

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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 of independent directors, except for our Chairman, Mr. Arnold, and Mr. Fearon. Of our 10 non-employee directors, six are currently serving or have served as a chief executive officer and/or chair 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. In its February 2020 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.

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 and General Counsel, 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 47, the Compensation and Organization Committee reviews risks associated with the Company’s compensation programs to ensure that incentive compensation arrangements for senior executives do not encourage inappropriate risk taking. The Governance Committee considers risks related to corporate governance, such as director independence and related person transactions, and risks associated with the environment, health and safety.

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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 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.

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 her 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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Approving a Proposed 2020 Stock Plan

INTRODUCTION

Our Board of Directors believes that share-based incentives are important factors in attracting and retaining highly qualified executives and non-employee directors, and that such incentives help to align the interests of those executives and directors with the interests of our shareholders. Therefore, on February 26, 2020, the Board of Directors unanimously adopted the Eaton Corporation plc 2020 Stock Plan (the “2020 Plan”), subject to approval of the Plan by our shareholders.

The 2020 Plan, if approved by our shareholders, will be the successor to the Company’s 2015 Stock Plan (the “2015 Plan”). As of February 29, 2020, approximately 6,787,000 ordinary shares (“shares”) remained available for issuance under the 2015 Plan and 7,027,961 shares were subject to outstanding awards under the 2015 Plan and other Company stock plans previously approved by shareholders. If the 2020 Plan is approved by our shareholders, no further awards will be made under the 2015 Plan. However, awards granted under the 2015 Plan before shareholder approval of the 2020 Plan will remain outstanding in accordance with their terms.

Shareholders are asked to approve the 2020 Plan to authorize 18,000,000 million shares for issuance under the 2020 Plan, plus the number of shares that are still available to be granted under the 2015 Plan immediately before the date of shareholder approval of the 2020 Plan. Shareholders are being asked to approve the 2020 Plan in order to satisfy New York Stock Exchange rules relating to equity compensation plans and to authorize the grant of stock options under the 2020 Plan that are intended to qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code.

KEY CONSIDERATIONS IN ADOPTION OF THE 2020 PLAN

The Board of Directors believes that the 2020 Plan is needed to continue to provide long-term incentives to executives for outstanding service to us and our shareholders and to assist in recruiting and retaining highly qualified individuals as employees and non-employee directors.

In recommending that the Board of Directors adopt the 2020 Plan, the Compensation and Organization Committee considered the Company’s historical and expected usage of equity compensation (also referred to as burn rate), the number of shares remaining for awards under the 2015 Plan, potential dilution from the 2020 Plan, overhang resulting from our equity compensation plans, the importance of an effective equity compensation program to the Company’s success, and the potential effect of the 2020 Plan on the Company’s shareholders.

The Company’s equity compensation grant practices and certain key features of the 2020 Plan are described below.

EQUITY GRANT PRACTICES

Outstanding Equity Awards

As of February 29, 2020, there were approximately 2,453,802 million full value awards (that is, awards other than stock options and stock appreciation rights) issued and outstanding and approximately 4,574,159 million stock options outstanding under the 2015 Plan and prior Eaton stock plans. As of that date, the weighted average exercise price of our outstanding stock options was $68.31, and the weighted average remaining contractual term for the outstanding stock options was 5.7 years. As noted above, as of February 29, 2020, approximately 6,787,000 ordinary shares remained available for issuance under the 2015 Plan.

Dilution

Annual dilution from our equity compensation program is measured as the total number of shares subject to equity awards granted in a given year, less cancellations and other shares returned to the reserve that year, divided by total shares outstanding at the end of the year. Annual dilution from our equity compensation program for fiscal year 2019 was

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0.38%. The overall potential dilution from the 24,787,000 share reserve under the 2020 Plan would be 6.00%, based on the total shares outstanding as of December 31, 2019.

Burn Rate

Burn rate is a measure of the number of shares subject to equity awards that we grant annually, which helps indicate the life expectancy of our equity plans and is another measure of shareholder dilution. We determine our burn rate by dividing the aggregate number of shares subject to awards granted during the year (with full value awards adjusted to be counted on a 2.36-to-1 basis) by the weighted average number of shares outstanding during the year. The Company’s burn rate for the past three fiscal years has been as follows:

Year

Options Granted

Adjusted Full Value

Awards Granted

Options + Adjusted Full

Value Awards

Weighted Average

Number of Ordinary

Shares Outstanding

Burn Rate

2019

758,125

2,824,970

3,583,095

420,800,000

0.85%

2018

585,500

2,443,523

3,029,023

436,900,000

0.69%

2017

729,050

2,976,994

3,706,044

447,000,000

0.83%

Our three-year average Burn Rate is 0.79%.

 

Overhang

Overhang is another measure of the dilutive impact of equity programs. Our overhang is equal to the number of shares subject to outstanding equity compensation awards plus the number of shares available to be granted, divided by the total number of outstanding shares. As of December 31, 2019, our overhang was 3.96%. As of February 29, 2020, the 18,000,000 shares being requested under the 2020 Plan would bring our aggregate overhang to approximately 7.70%.

Requested Shares

Based on our burn rate experience, the shares remaining available for issuance under the 2015 Plan will not allow us to continue our equity program in its current format beyond 2021. Unless our shareholders approve the 2020 Plan, we may be required to increase the cash component of our compensation mix which would inhibit our ability to align our executives’ interests with the interests of our shareholders, to recruit and retain new executives, key employees and non-employee directors, and motivate our current executives and key employees over a long-term horizon. We believe that the 24,787,000 shares that would be authorized under the 2020 Plan will be sufficient for the Company to continue its equity compensation program for approximately 5 years. However, there can be no certainty as to the future use of shares under the 2020 Plan (assuming it is approved by shareholders), because awards under the 2020 Plan are discretionary, we may grant a different mix of equity awards than in the past, and other factors, such as our share price, may affect the rate at which shares are utilized under the 2020 Plan.

KEY FEATURES OF THE 2020 PLAN

Certain key features of the 2020 Plan are described below:

Feature

Description

Fungible Share Plan Design

The 2020 Plan employs a “fungible” plan design that assigns a higher cost to full value awards by reducing the share reserve on a greater than one-for-one basis for full value awards. Consistent with the 2015 Plan, we have maintained a fungible rate of 2.36-to-1 for full value awards. Full value awards are any awards granted under the 2020 Plan other than stock options and stock appreciation rights.

Responsible Share Counting Provisions

The 2020 Plan does not permit “liberal share recycling.” Only awards that are cancelled, forfeited or paid only in cash can be added back to the 2020 Plan’s share reserve. Shares withheld to satisfy a tax withholding obligation or pay the exercise price of a stock option will not be added back to the 2020 Plan’s share reserve, and neither will any shares repurchased by the Company using stock option proceeds.

Minimum Vesting Periods

The 2020 Plan generally provides for a minimum vesting period of at least three years for awards to employees that vest based on continued service, a minimum vesting period of at least one year for awards to non-employee directors that vest based on continued service, and a minimum performance period of at least one year for awards subject to the achievement of performance objectives. However, up to 5% of the total number of shares authorized for delivery under the 2020 Plan may be issued pursuant to awards that do not meet these minimum vesting and performance period requirements.

 

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Feature

Description

No Current Payment of Dividends or Dividend Equivalents on Unearned Full Value Awards; No Dividend Equivalents on Stock Options or SARs

Dividends and dividend equivalents will not be paid currently on any full value awards (whether vesting is performance-based or service-based) unless and until the awards become vested. Instead, any dividends or dividend equivalents on full value awards must be accumulated or deemed reinvested and paid on a deferred basis, contingent upon the vesting of the underlying award. No dividend equivalents may be paid on any stock options or stock appreciation rights.

No “Liberal” Change of Control Definition

The 2020 Plan does not include a “liberal” change of control definition, which means that a change of control must actually occur in order for the change of control provisions of the 2020 Plan to apply.

Double-Trigger Vesting

The 2020 Plan generally provides that, in the event of a change of control, awards will vest on a “double-trigger” basis. That is, if the awards are assumed or substituted by the acquiring or surviving company, they generally will continue to be subject to the original vesting schedule, except that vesting generally will accelerate as provided in the 2020 Plan in the event of a qualifying termination of employment within two years after the change of control. If awards are not assumed or substituted by the acquiring or surviving company, they generally will become vested upon the change of control as provided in the 2020 Plan.

Clawback and Forfeiture Provisions

Awards granted under the 2020 Plan will be subject to recoupment under our compensation recovery policy (as it may be amended from time to time). Awards granted under the 2020 Plan also will be subject to forfeiture and potential recoupment as provided by the Compensation and Organization Committee if a participant is terminated for cause or if the participant engages in certain harmful activity, whether during or after termination of employment.

No Repricing of Stock Options or SARs

The 2020 Plan does not permit the “repricing” of stock options and stock appreciation rights without shareholder approval. This includes repricing by exchange for cash or a new or different type of award.

Annual Limit on Awards to Directors

The 2020 Plan imposes an annual limit on awards to the Company’s non-employee directors. Specifically, the sum of (i) the amount of cash fees payable to a non-employee director in a single calendar year, and (ii) the grant date fair value of any equity awards granted the non-employee director under the 2020 Plan during that calendar year generally may not exceed $750,000. Should the roles of the Company’s CEO and Chairman of the Board of Directors become separated, the compensation limit for a non-employee director serving as non-executive Chairman of the Board of Directors would be $1,500,000.

No Discounted Stock Options or SARs

The 2020 Plan does not permit the use of “discounted” stock options or stock appreciation rights, which means that such awards must be granted with an exercise price or base price at least equal to the fair market value per share on the date of grant.

Administered by an Independent Committee

The 2020 Plan will be administered by the Compensation and Organization Committee, except for non-employee director awards, which will be administered by the Governance Committee. Each of the members of the Compensation and Organization Committee and the Governance Committee qualifies as “independent” under the listing standards of the New York Stock Exchange.

SUMMARY OF THE PLAN

The following summary of the 2020 Plan, which is qualified in its entirety by the full text of the 2020 Plan attached as Appendix A to this Proxy Statement.

Eligibility and Types of Awards

The 2020 Plan authorizes the grant of equity-based compensation awards to those employees of the Company and its subsidiaries who are selected by the Compensation and Organization Committee, and the 2020 Plan also authorizes the Governance Committee to grant awards to non-employee directors of the Company. Awards under the 2020 Plan may be granted in the form of stock options, stock appreciation rights (or “SARs”), restricted shares, restricted share units, performance shares and other share-based awards. If approved by shareholders, the Company’s 10 non-employee directors and approximately 800 employees would be eligible to be selected to receive awards under the 2020 Plan.

ADMINISTRATION

The Compensation and Organization Committee, which is comprised of non-employee directors, will administer awards granted to employees. The Governance Committee of the Board, which is also comprised of non-employee directors, will administer non-employee director awards. In the remainder of this summary, we use the term “Committee” to refer to the committee of the Board of Directors with authority to administer the applicable awards under the 2020 Stock Plan (that is, the Governance Committee, with respect to awards granted to non-employee directors, and the Compensation and Organization Committee, with respect to all other awards). To the extent permitted by applicable law, the Committee may delegate its authority to one or more officers or directors of the Company or Eaton Corporation. Further, the Board of Directors may reserve to itself any of the Committee’s authority and may act as the administrator of the Plan.

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SHARES AVAILABLE

Subject to adjustments as described below, the total number of shares that may be delivered under the 2020 Plan will not exceed 18,000,000 (all of which potentially may be issued pursuant to awards of incentive stock options), plus the number of shares that, immediately prior to the date of shareholder approval of the 2020 Plan, were available to be granted under the 2015 Stock Plan. The number of shares available under the 2020 Plan will be reduced by one share for each share subject to an award of options or stock appreciation rights and by 2.36 shares for each full value award granted under the 2020 Plan. Shares tendered or withheld to pay the exercise price of a stock option or to cover tax withholding will not be added back to the number of shares available under the 2020 Plan. Upon exercise of any stock appreciation right that may be settled in shares, the full number of shares subject to that award will be counted against the number of shares available under the 2020 Plan, regardless of the number of shares used to settle the stock appreciation right upon exercise. To the extent that any award under the 2020 Plan or any award granted under the 2015 Plan prior to shareholder approval of the 2020 Stock Plan is forfeited, or any option or stock appreciation right terminates, expires or lapses without being exercised, the shares subject to such awards granted but not delivered will be added to the number of shares available for awards under the 2020 Plan. Any shares that become so available for grant under the 2020 Plan shall be added back as one share if such shares were subject to stock options or stock appreciation rights, and as 2.36 shares if such shares were subject to full value awards. Shares available for awards under the 2020 Plan may consist of authorized and unissued shares, treasury shares (including shares purchased by the Company in the open market) or a combination of the foregoing.

Limitation on Awards to Non-Employee Directors

Notwithstanding any other provision of the 2020 Plan to the contrary, the aggregate grant date fair value (determined in accordance with applicable financial accounting rules) of all awards granted to any single non-employee director during any single calendar year, taken together with all cash fees payable to the non-employee director during that calendar year, generally may not exceed $750,000. However, should the roles of the Company’s CEO and Chairman of the Board of Directors become separated, the compensation limit for a non-employee director serving as non-executive Chairman of the Board of Directors would be $1,500,000.

STOCK OPTIONS

Subject to the terms and provisions of the 2020 Plan, options to purchase shares may be granted to eligible individuals at any time and from time to time as determined by the Committee. Options may be granted as incentive stock options (to employees only) or as nonqualified stock options. The Committee will determine the number of options granted to each recipient. Each option grant will be evidenced by an award agreement that specifies whether the options are intended to be incentive stock options or nonqualified stock options and such additional limitations, terms and conditions as the Committee may determine, consistent with the provisions of the 2020 Plan.

The exercise price for each stock option may not be less than 100% of the fair market value of an ordinary share on the date of grant, and each stock option shall have a term no longer than 10 years. For this purpose, fair market value will be the closing price as quoted on the New York Stock Exchange unless the Committee specifies a different method to determine fair market value. The closing price per ordinary share on the New York Stock Exchange on February 28, 2020 was $90.72. Stock options granted under the Plan may be exercised by such methods and procedures as determined by the Committee from time to time.

STOCK APPRECIATION RIGHTS

The Committee in its discretion may grant SARs under the 2020 Plan. A SAR entitles the holder to receive from the Company upon exercise an amount equal to the excess, if any, of the aggregate fair market value of a specified number of shares that are the subject of such SAR over the aggregate exercise price for the underlying shares. The exercise price for each SAR may not be less than 100% of the fair market value of a share on the date of grant, and each SAR shall have a term no longer than 10 years.

We may make payment in settlement of the exercise of a SAR by delivering shares, cash or a combination of shares and cash as set forth in the applicable award agreement. Each SAR will be evidenced by an award agreement that specifies the date and terms of the award and such additional limitations, terms and conditions as the Committee may determine, consistent with the provisions of the 2020 Plan.

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RESTRICTED SHARES

Under the Plan, the Committee may grant or sell restricted shares to plan participants (i.e., shares that are subject to a substantial risk of forfeiture based on continued service and/or the achievement of performance objectives and that are subject to restrictions on transferability). Except for these restrictions and any others imposed by the Committee, upon the grant of restricted shares, the recipient generally will have rights of a shareholder with respect to the restricted shares, including the right to vote the restricted stock and to receive dividends and other distributions paid or made with respect to the restricted shares. However, any dividends payable with respect to unvested restricted shares will be accumulated or reinvested in additional restricted shares until the vesting of the award. During the applicable restriction period, the recipient may not sell, transfer, pledge, exchange or otherwise encumber the restricted shares. Each award of restricted shares will be evidenced by an award agreement that specifies the terms of the award and such additional limitations, terms and conditions, which may include restrictions based upon the achievement of performance objectives, as the Committee may determine.

RESTRICTED SHARE UNITS

Subject to the terms and provisions of the 2020 Plan, the Committee may grant or sell restricted share units to participants. Restricted share units constitute an agreement to deliver shares (or an equivalent value in cash) to the participant at the end of a specified restriction period, subject to such other terms and conditions as the Committee may specify, consistent with the provisions of the 2020 Plan. Restricted share units are not ordinary shares and do not entitle the recipients to any of the rights of a shareholder. Restricted share units will be settled, in cash or shares, in an amount based on the fair market value of an ordinary share on the settlement date. Each restricted share unit award will be evidenced by an award agreement that specifies the terms of the award and such additional limitations, terms and conditions as the Committee may determine, which may include restrictions based upon the achievement of performance objectives.

PERFORMANCE SHARES

Subject to the terms and provisions of the 2020 Plan, the Committee may grant performance shares to participants. Performance Shares are restricted stock units that vest based on the achievement of performance objectives specified in the applicable award agreement. Performance Shares may be settled in shares or cash, as specified in the award agreement which may include additional such limitations, terms and conditions, as the Committee may determine, consistent with the provisions of the 2020 Plan. The performance objectives for any performance shares or other performance-based awards under the 2020 Plan may include—but will not necessarily be limited to—objectives based on one or more of the following performance measures: earnings, cash flow, cash flow return on gross capital, revenues, financial return ratios, market performance, shareholder return and/or value, operating profits, net profits, earnings per share, adjusted earnings per share, profit returns and margins, share price, working capital, and changes between years or periods, or returns over years or periods that are determined with respect to any of those performance measures.

OTHER SHARE-BASED AWARDS

Subject to the terms and provisions of the 2020 Plan, the Committee may grant other share-based awards to participants. Other share-based awards are awards that are valued in whole or in part by reference to ordinary shares, or are otherwise based on the value of ordinary shares, such as unrestricted shares or time-based or performance-based units that are settled in shares and/or cash. Any dividends payable with respect to shares issued pursuant to unvested other share-based awards will be accumulated or reinvested in additional shares until the vesting of the award. Each other share-based award will be evidenced by an award agreement that specifies the terms of the award and such additional limitations, terms and conditions as the Committee may determine, consistent with the provisions of the 2020 Plan.

DIVIDEND EQUIVALENTS

As determined by the Committee in its discretion, restricted share units, performance shares or other share-based awards may provide the participant with a deferred and contingent right to receive dividend equivalents, either in cash or in additional shares. Any such dividend equivalents will be accumulated or deemed reinvested until such time as the underlying award becomes vested (including, where applicable, vesting based on the achievement of performance objectives). No dividend equivalents may be granted with respect to shares underlying any stock option or SAR.

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MINIMUM VESTING PROVISIONS FOR AWARDS TO EMPLOYEES

The 2020 Plan generally provides for a minimum vesting period of at least three years for awards to employees that vest based on continued service (with vesting either on a “cliff” basis or ratably over the vesting period, but with no portion of the award vesting prior to the first anniversary of the date of grant), a minimum vesting period of at least one year for awards to non-employee directors that vest based on continued service, and a minimum performance period of at least one year for awards with vesting based on the achievement of performance objectives. However, up to 5% of the total number of shares authorized for delivery under the 2020 Plan may be issued pursuant to awards that do not meet these minimum vesting and performance period requirements.

CHANGE OF CONTROL

The 2020 Plan provides that, except as otherwise may be provided in an award agreement or in an employment or change of control agreement, awards granted under the 2020 Plan will be subject to “double-trigger” vesting in the event of a change of control. That is, awards that are assumed or substituted by the acquiring or surviving company in connection with a change of control will continue to be subject to the original vesting schedule, except that vesting will accelerate (on a prorated basis through the date of termination, based on the “target” level, in the case of awards subject to performance objectives) in the event of a qualifying termination of employment within two years after the change of control (by the Company without “cause” or by the employee for “good reason” as those terms are defined in the 2020 Plan). Any time-based awards that are not assumed or substituted by the acquiring or surviving company will become vested in full upon the change of control, and performance-based awards that are not assumed or substituted in connection with the transaction will vest on a prorated basis through the date of the change of control, based on the “target” level of performance.

The 2020 Plan defines a change of control generally to include: (i) the acquisition of 25% or more of the Company’s shares (or other voting securities), (ii) the incumbent members of the Board of Directors ceasing to constitute a majority of the Board of Directors, (iii) a merger, sale of all or substantially all of the Company’s assets or a similar transaction, unless the Company’s shareholders own more than 55% of the shares (and other voting securities) of the resulting corporation, or (iv) shareholder approval of a complete liquidation or dissolution of the Company. The 2020 Plan, attached as Appendix A, contains the complete, detailed definition of change of control.

FORFEITURE AND COMPENSATION RECOVERY POLICY

Awards granted under the 2020 Plan are subject to reduction, cancellation or reimbursement pursuant to the Company’s compensation recovery policy, as in effect from time to time. The Company’s current compensation recovery policy provides that if the Board of Directors determines that 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 period as to which a performance-based award was paid or credited to the executive, the performance-based award is subject to reduction, cancellation or reimbursement at the discretion of the Board of Directors.

In addition, if a participant’s employment is terminated by the Company or a subsidiary for cause, the participant will (i) immediately forfeit all outstanding awards granted under the 2020 Plan, and (ii) at the Committee’s discretion, return to the Company any cash and shares (or the cash value of such shares) that the participant acquired under the 2020 Plan within two years prior to the date of termination of employment.

Further, if the Committee (or its delegate) determines that a participant has engaged in “harmful activity,” either while employed or after termination, the Committee has discretion to (i) cause all or a portion of the participant’s outstanding awards to be forfeited, and (ii) require the participant to repay the Company for all or a portion of the cash and shares received under the 2020 Stock Plan within the preceding two years. For purposes of the 2020 Stock Plan, “harmful activity” generally means: (x) violating any applicable contractual restrictions regarding non-competition, non-solicitation, confidentiality or ownership of intellectual property; (y) engaging in any activity that constitutes (or would have constituted) grounds for the termination of the participant’s employment for cause; or (z) engaging in any other conduct that is detrimental to the business or reputation of the Company and/or its subsidiaries.

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ADJUSTMENTS

In the event of any equity restructuring, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, the Committee will adjust the number and kind of shares that may be delivered under the 2020 Plan, the number and kind of shares subject to outstanding awards and the exercise price or other price of shares subject to outstanding awards, to prevent dilution or enlargement of rights. In the event of any other change in corporate capitalization, such as a merger, consolidation or liquidation, the Committee may, in its discretion, make such an equitable adjustment, to prevent dilution or enlargement of rights. However, unless otherwise determined by the Committee, we will always round down to a whole number of shares subject to any award. Moreover, in the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for any or all outstanding awards such alternative consideration (including cash) as it, in good faith, may determine to be equitable in the circumstances and may require in connection therewith the surrender of all awards so replaced.

The Committee, in its sole discretion, may also provide at any time for the exercisability of outstanding stock options and SARs, the lapse of time-based vesting restrictions and the satisfaction of performance objectives applicable to outstanding awards, or the waiver of any other limitation or requirement under any awards.

TRANSFERABILITY

Except as the Committee otherwise determines, awards granted under the 2020 Plan will not be transferable by a participant other than by will or the laws of descent and distribution. Except as otherwise determined by the Committee, stock options and SARs will be exercisable during a participant’s lifetime only by him or her or, in the event of the participant’s incapacity, by his or her guardian or legal representative. Any award made under the 2020 Plan may provide that any shares issued as a result of the award will be subject to further restrictions on transfer.

NO REPRICING OF STOCK OPTIONS OR STOCK APPRECIATION RIGHTS

Except in connection with an adjustment involving a change in capitalization or other corporate transaction or event as provided for in the Plan, the Committee may not authorize the amendment of any outstanding stock option or stock appreciation right to reduce the exercise price, and no outstanding stock option or stock appreciation right may be cancelled in exchange for cash or other awards, or cancelled in exchange for stock options or stock appreciation rights having a lower exercise price, or cancelled in exchange for cash, without the approval of our shareholders.

TERM OF THE 2020 PLAN; AMENDMENT AND TERMINATION

The 2020 Plan will become effective upon approval by our shareholders, and no awards may be granted under the 2020 Plan after February 25, 2030 or such earlier date as the 2020 Plan may be terminated by the Board of Directors. The Board of Directors may, without shareholder approval, amend or terminate the 2020 Plan, except in any respect as to which shareholder approval is required by law, regulation or the rules of the New York Stock Exchange. In all cases, the 2020 Plan may not be amended without shareholder approval to (i) materially increase the aggregate number of shares which may be issued under the Plan, (ii) increase the maximum number of shares which may be granted to any employee, or (iii) grant stock options or SARs at a purchase price below fair market value on the date of grant or otherwise provide for the re-pricing of underwater stock options or SARs.

Federal Income Tax Consequences

The following is a summary of certain U.S. federal income tax consequences of awards made under the 2020 Plan, based upon the laws in effect on the date hereof. The discussion is general in nature and does not take into account a number of considerations which may apply in light of the circumstances of a particular participant under the plan. The income tax consequences under applicable foreign, state and local tax laws may not be the same as under U.S. federal income tax laws.

NON-QUALIFIED STOCK OPTIONS

A participant will not recognize taxable income at the time of grant of a non-qualified stock option. A participant will recognize compensation taxable as ordinary income (and subject to income tax withholding in respect of an employee) upon exercise of a non-qualified stock option equal to the excess of the fair market value of the shares purchased over their exercise price.

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INCENTIVE STOCK OPTIONS

A participant will not recognize taxable income at the time of grant of an incentive stock option. A participant will not recognize taxable income (except for purposes of the alternative minimum tax) upon exercise of an incentive stock option. If the shares acquired by exercise of an incentive stock option are held for the longer of two years from the date the option was granted and more than one year from the date the shares were transferred, any gain or loss arising from a subsequent disposition of such shares will be taxed as long-term capital gain or loss. If, however, such shares are disposed of within either of such two- or one-year periods, then in the year of such disposition the participant will recognize compensation taxable as ordinary income equal to the excess of the lesser of the amount realized upon such disposition and the fair market value of such shares on the date of exercise over the exercise price.

STOCK APPRECIATION RIGHTS

A participant will not recognize taxable income at the time of grant of a SAR. Upon exercise, a participant will recognize compensation taxable as ordinary income (and subject to income tax withholding in respect of an employee) equal to the fair market value of any shares delivered and the amount of cash paid upon exercise of the SAR.

RESTRICTED SHARES

A participant will not recognize taxable income at the time of grant of restricted shares, unless the participant makes an election under Section 83(b) of the Internal Revenue Code to be taxed at such time. If such election is made, the participant will recognize compensation taxable as ordinary income (and subject to income tax withholding in respect of an employee) at the time of the grant equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for the restricted shares. If such election is not made, the participant will recognize compensation taxable as ordinary income (and subject to income tax withholding in respect of an employee) at the time the restrictions lapse in an amount equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for the restricted shares.

RESTRICTED SHARE UNITS

A participant will not recognize taxable income at the time of grant of a restricted share unit award. A participant will recognize compensation taxable as ordinary income (and subject to income tax withholding in respect of an employee) at the time of settlement of the award equal to the fair market value of any shares delivered and the amount of cash paid upon settlement of the award.

PERFORMANCE SHARES AND OTHER SHARE-BASED AWARDS

Generally, participants will recognize taxable income at the time of settlement of performance shares and other share-based awards, with the amount of income recognized generally being equal to the amount of cash and the fair market value of any shares delivered under the award.

TAX DEDUCTIBILITY OF COMPENSATION PROVIDED UNDER THE 2020 PLAN

When a participant recognizes ordinary compensation income as a result of an award granted under the 2020 Plan, the Company may be permitted to claim a federal income tax deduction for such compensation, subject to various limitations that may apply under applicable law. As a result of those limitations, there can be no assurance that any compensation awarded or paid under the 2020 Plan will be deductible, in whole or in part.

For example, Section 162(m) of the Internal Revenue Code generally disallows the deduction of compensation in excess of $1 million per year payable to certain “covered employees”, and the Tax Cuts and Jobs Act of 2017 expanded the scope of Section 162(m) in several respects, including by repealing an exemption from the $1 million deduction limit for “qualified performance-based compensation” and by expanding the class of “covered employees.” As a result, all or a portion of the compensation paid to one of our covered employees pursuant to the 2020 Plan may be non-deductible pursuant to Section 162(m).

Further, to the extent that compensation provided under the Plan may be deemed to be contingent upon a change in control, a portion of such compensation may be non-deductible by the Company under Section 280G of the Internal Revenue Code and may be subject to a 20% excise tax imposed on the recipient of the compensation.

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SECTION 409A

Section 409A of the Internal Revenue Code imposes certain restrictions upon the payment of nonqualified deferred compensation. We intend that awards granted under the 2020 Plan will be designed and administered in such a manner that they are either exempt from the application of, or comply with, the requirements of Section 409A of the Internal Revenue Code. However, the Company does not warrant the tax treatment of any award under Section 409A or otherwise.

This general discussion of U.S. federal income tax consequences is intended for the information of shareholders considering how to vote with respect to this proposal and not as tax guidance to participants in the 2020 Plan. Different tax rules may apply to specific participants and transactions under the 2020 Plan, particularly in jurisdictions outside the United States.

Registration with the SEC

The Company intends to file a Registration Statement on Form S-8 relating to the issuance of the shares reserved for issuance under the 2020 Plan with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, after approval of the 2020 Plan by the Company’s shareholders.

Plan Benefits

It is not possible to determine specific amounts and types of awards that may be awarded in the future under the 2020 Plan because the grant of awards under the 2020 Plan is discretionary.

   The Board of Directors recommends a vote FOR this proposal to approve the 2020 Stock Plan.

 

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Appointment of Independent Auditor and Authorization of Audit Committee to Set Auditor Remuneration

Shareholders are being asked to approve the appointment of 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 as our independent auditor to audit our accounts for the fiscal year ending December 31, 2020 and authorize the Audit Committee of the Board to set the auditor’s remuneration.

A representative of Ernst & Young 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 24, 2017. A copy of the charter is available on the Company’s website at www.eaton.com/governance.

The Audit Committee has retained Ernst & Young as Eaton’s independent auditor for 2020. 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 2019 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.

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For 2019 and 2018, Ernst & Young’s fees to the Company and certain of its subsidiaries were as follows:

 

2019

2018

Audit Fees

$19.0 million

$20.0 million

Includes Sarbanes-Oxley Section 404 attest services

 

 

Audit-Related Fees

$6.1 million

$0.9 million

Includes business acquisitions and divestitures

 

 

Tax Fees

$4.3 million

$5.2 million

Tax compliance services

$0.8 million

$1.0 million

Tax advisory services

$3.5 million

$4.2 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 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 2019 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
Olivier Leonetti
Deborah L. McCoy
Sandra Pianalto
Dorothy C. Thompson

 

   The Board of Directors recommends a vote FOR this proposal to approve the appointment of the independent auditor and to authorize the Audit Committee to set auditor remuneration.

 

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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 2021 annual general meeting.

As we explain in the Compensation Discussion and Analysis that follows, our executive compensation programs are designed to attract, motivate, reward and retain our named executive officers, who are critical to the success of our Company. Our programs reward our named executive officers for achieving specific annual, long-term and strategic goals, and also for increasing shareholder value.

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, more than 75% 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 awards at target when our performance aligns with our peer group median performance and awards of up to 200% 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.

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 our 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 2019 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 2020 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 2020 annual general meeting of shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the 2019 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

 

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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 2019. 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.

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, 2019. For 2019, our named executive officers are:

Craig Arnold, Chairman of the Company and Chief Executive Officer

Richard Fearon, Vice Chairman and Chief Financial and Planning Officer

Uday Yadav, President and Chief Operating Officer – Electrical Sector

Heath Monesmith, President and Chief Operating Officer – Industrial Sector

Brian Brickhouse, President-Americas Region – Electrical Sector

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, more than 75% 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 payouts under our short- and long-term incentive plans;

Shareholder-approved equity 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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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. The chart below shows the payouts as a percentage of target under our performance-based short- and long-term incentive programs and total return to shareholders over the last five years, illustrating the strong correlation between pay and the performance we are delivering to our shareholders. More information about our short- and long-term incentive programs begins on page 40.

 

 

Total Shareholder Return and Performance-Based Incentive Plan Payouts

 

(1)

In 2015, we changed the length of our performance-based long-term award periods from four to three years. As a result, two long-term performance periods ended on December 31, 2017. Awards for each period were earned at 25% of target.

 

(2)

In 2016, we changed the long-term incentive plan performance criteria from Adjusted Earnings per Share growth and Cash Flow Return on Gross Capital (weighted equally) to relative Total Shareholder Return. The first TSR-based award period began on January 1, 2016 and ended on December 31, 2018.

Summary of 2019 Performance-Based Incentive Plan Payouts

Short-Term Incentives

The corporate performance factor under our short-term incentive plan was 90%. In February 2019 the Committee established Adjusted Earnings Per Share (EPS) (which excludes acquisition integration and divestiture charges from net income per share) and Cash Flow Return on Gross Capital (CFR) goals. For 2019, the target EPS and CFR objectives were $5.85 and 18.8%, respectively. Actual EPS after excluding expected Vehicle segment warranty costs and CFR were $5.76 and 18.5%, respectively, which generated a calculated payout of 96% of target. However, management recommended and the Committee determined it was appropriate to reduce the payout to 90% of target.

 

2019 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS

 

 

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Long-Term Incentives

2017-2019 ESIP: Our 2017-2019 long-term, performance-based Executive Strategic Incentive Plan (“ESIP”) was earned at 130% of target. The performance criteria under our long-term incentive plan is based on the rank of our Total Shareholder Return (TSR) relative to a group of peers. The results for the 2017-2019 award period are summarized below.

 

Threshold

Target

 

 

 

Maximum

Actual Results

 

Relative Ranking

TSR is positive but ranks the lowest among the peers

50th Percentile

 

65th Percentile

 

100th Percentile

Adjustment Factor

25%

100%

 

130%

 

200%

2017-2019 ESIP opportunities took the form of performance share units and were settled in Eaton ordinary shares. Dividend equivalents were paid in cash based on the earned number of share units and the aggregate dividend paid to our shareholders over the award period. Additional information about the 2017-2019 ESIP awards can be found on page 42.

Review of 2019 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 2019, our shareholders approved our executives’ compensation by a vote of 94%.

The Committee considered these voting results, shareholder feedback, and a comprehensive assessment of Eaton’s executive compensation programs, and in light of the support we received from shareholders in 2019, did not make substantive changes to our executive compensation plans or programs. The Committee will continue to review our compensation programs each year in light of the annual “say-on-pay” voting results and shareholder feedback.

 

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2019 CEO REALIZED PAY AND OUR PERFORMANCE

Our compensation programs for Mr. Arnold and the other named executive officers are heavily weighted toward performance-based opportunities that are at-risk and subject to our performance.

The table below illustrates the relationship between Mr. Arnold’s target award opportunity and the amounts he actually earned based on our performance against the metrics established for the short- and long-term incentive plans that ended on December 31, 2019. 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 50. Each pay component shown below is discussed in more detail in the CD&A that follows.

COMPENSATION REALIZED BY OUR CHIEF EXECUTIVE OFFICER IN 2019

Compensation

Component

Period 

Earned

 

Description

Target

 

Amount

Earned

Annual Compensation

 

 

 

Base Salary

2019

 

Mr. Arnold received an 8% salary increase, effective July 1, 2019. The Committee has made annual adjustments to Mr. Arnold’s base salary to align it with a market competitive level in each year since he became CEO.

n/a

 

$1,300,000

Short-Term Incentive

2019

 

Mr. Arnold’s target was 160% of base salary. His actual award of 95% of his individual target is consistent with awards delivered to other executives. For more information on this payment, please see “2019 Short Term Incentive Awards”.

$2,080,000

 

$1,965,600

Total Annual Cash

 

 

 

 

$3,265,600

Realized Value from Long-Term Incentives

 

 

 

Stock Option Exercises

2011-2019

 

The gains upon exercise of stock options were based on the stock price appreciation from 2011-2019. Additional details, including the number of shares exercised, are reported in the Option Exercises and Stock Vested in 2019 table on page 53.

n/a

 

$3,147,144

Restricted Share
Vesting

2016-2019

 

This represents the vesting of stock awards that were granted in 2016, 2017 and 2018. This is reported in the Option Exercises and Stock Vested in 2019 table.

n/a

 

$9,887,897

Total Long-Term

 

 

 

$13,035,041

All Other Compensation

 

 

Includes the items disclosed as “Other Compensation” in the Summary Compensation Table, such as financial planning reimbursement, and Company matching contributions to the Eaton Savings Plan.

n/a

 

$54,459

TOTAL REALIZED COMPENSATION

 

 

$16,355,100

The long-term incentive opportunities listed below were earned during a performance period that ended on December 31, 2019 but did not vest until February 25, 2020. The amount realized upon the vesting of these awards will be reported in our 2021 proxy statement. Therefore, these amounts are not included in the table above.

2017-2019
ESIP

2017-2019

 

Executives earned 130% of the target number of performance share units that were granted in 2017. Dividend equivalents were paid in cash based on the earned number of share units and the aggregate dividend paid to shareholders over the award period.

$3,562,500 expressed as 51,340 PSUs

 

66,742 earned PSUs

The realized pay table differs from the Summary Compensation Table in a number of ways, including:

In addition to base pay and annual incentive actually earned, the Summary Compensation Table includes the accounting value of equity compensation granted during the year, which may or may not ever be earned. In contrast, this realized pay table reports only the elements of compensation actually received and/or realized by Mr. Arnold for performance periods that ended on December 31, 2019. Specifically, the values for equity awards in the realized pay table show the gross compensation (before applicable taxes) that Mr. Arnold received in 2019 upon the exercise of stock options and the vesting of RSUs and PSUs (as shown in the “Option Exercises and Stock Vested in 2019” table on page 53), regardless of when the shares were granted.

In addition, the realized pay table does not reflect compensation that is based upon pension value increases although these amounts are included in the Summary Compensation Table. The Committee reviews compensation that is based upon the change in pension values as part of the Tally Sheet review discussed on page 38 in the context of a competitive overall benefit design and not as an element of its annual compensation decisions.

 

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ROLE OF THE COMPENSATION AND ORGANIZATION COMMITTEE

Membership and Responsibilities

The Compensation and Organization Committee of the Board of Directors in 2019 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. The Committee’s charter is available on our website at http://www.eaton.com/governance.

Compensation Tasks

 

Organizational Tasks

Reviews, approves, and oversees all of our executive compensation plans, including our stock plans;

Establishes performance objectives under our short- and long-term incentive compensation plans;

Determines the attainment of those performance objectives and the awards to be made to our senior officers under our short- and long-term incentive compensation plans;

Determines the compensation for our senior officers, including salary and short- and long-term incentive opportunities;

Reviews compensation practices relating to key employees to confirm that these practices remain equitable and competitive; and

Reviews new benefit plans or significant changes in such plans or changes with a disproportionate effect on our officers or primarily benefiting key employees.

 

Evaluates the performance of the CEO, with input from all non-employee directors;

Reviews the performance capabilities of the other senior officers based on input from the CEO;

Reviews succession planning for officer positions including the position of the CEO;

Reviews proposed organization or responsibility changes at the senior officer level; and

Reviews our practices for the recruitment and development of a diverse talent pool.

Use of Consultants

The Committee retained Meridian Compensation Partners as its independent executive compensation consultant to support the Committee’s oversight and management of our executive compensation programs. The consultant’s duties include helping the Committee validate our executive compensation plans and programs through periodic comprehensive studies. The consultant performed a variety of work for the Committee, including assessing Eaton’s executive compensation programs relative to market trends and best-in-class governance practices, providing independent feedback on our analytical work, and assisting the Committee in its review and discussion of material agenda items and its decision-making about our executive compensation programs and individual compensation opportunities. The consultant also coordinated and supported the annual performance appraisal for Mr. Arnold. The Committee used this appraisal as one of several factors in determining his payout under our short-term incentive plan for 2019 and also considered it in determining whether to adjust his base salary or his short- and long-term incentive targets for the next year.

The Committee’s written policies require the Company to obtain its review and approval before awarding any material consulting assignment to a firm that the Committee already has engaged. This policy ensures that the Committee’s consultants are well positioned to provide independent and impartial advice on executive compensation and governance matters.

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HOW WE ESTABLISH AND VALIDATE PAY

This section explains the Committee’s process for establishing and validating our pay targets. As shown in the table and described in detail below, this process involves several important analyses:

Analysis

Data Source

Purpose

How It’s Used

When It’s Conducted

Market Analysis

Aon Hewitt Associates and Willis Towers Watson Executive Compensation databases

Setting pay for our executives

Setting base pay and short- and long-term incentive targets for the next year/award cycle

November — February

Performance Assessments

Executive feedback

Evaluating individual performance based on input from the CEO

Determining the short-term incentive award payments for the award period that recently ended and in determining merit increases and adjusting individual award opportunities for the next award cycle

November — 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 adjustment to our compensation plans or programs, or an individual’s pay package, is necessary.

February

Peer Pay and Performance
Analysis

Publicly available financial
and compensation information as reported by
the companies that we have identified as peers for compensation and strategic planning purposes

Evaluating pay and performance to validate individual compensation
plans that were established in February

Comparing pay and performance results with that of the peer group to determine the efficacy of the “Total Compensation Analysis and Planning Process”.

This study also provides insight into how competitors establish their pay for performance profile.

July

Total Compensation Analysis and Planning Process (October–February)

We target total compensation to be within the median range of compensation paid by similarly sized industrial companies. We continually monitor and assess the competitive retention and recruiting pressures in the industries and markets where we compete for executive talent. As a result, the Committee periodically has exercised its judgment to set target compensation levels of certain executives above the market median to foster retention.

Several analyses play a role in the Committee’s Total Compensation Analysis and Annual Planning Process:

Market Analysis — In the fourth quarter of each year, our human resources department conducts a market analysis. First, we align our executives’ positions with comparable positions as reported in surveys published by two national consulting firms, Aon Hewitt and Willis Towers Watson. We also review the compensation data that is publicly reported by the companies that comprise our compensation peer group described on page 38. Then, in February, we prepare a comprehensive report for the Committee, which also is reviewed by its independent consultant, that compares our executives’ compensation to the compensation peer group median and the average of the surveys’ median compensation data. This helps the Committee determine how each executive officer’s compensation compares to current market practices.

In preparing our comparison for 2019, we used the survey results for “industrial” companies (as categorized by the survey vendors), whether publicly or privately held, with revenues between $10 billion and $50 billion. The group contains between 100 and 150 companies with revenues ranging from approximately one-half to two times our revenue. We believe this comparator group adequately represents the market in which we compete for talent. The companies participating in each survey vary, and we are not able to determine which of the companies reported data for each position and each component of pay.

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Analysis of Internal Pay Equity and our Current Pay Levels — Internal equity among similarly situated positions is an important consideration in establishing individual pay targets. We maintain internal equity by establishing approximately the same target incentive opportunities for similarly situated positions. When determining what positions are similarly situated, we consider the following aspects of each position: its essential functions, the ability of the position holder to influence our overall results, any educational requirements, where the position stands in our leadership ranks, and job demands such as frequent travel and the responsibility to respond to business matters at any time and under any circumstances.

Tally Sheets — In addition to the market analysis, each February we provide the Committee with a comprehensive compensation Tally Sheet for each named executive officer. These Tally Sheets, which also are reviewed by the Committee’s independent consultant, help the Committee evaluate total remuneration and internal pay equity. The Committee reviews them before making decisions about the compensation of the named executive officers for the next year. Each Tally Sheet includes all components of the executive’s current compensation, including base salary, short-term incentive compensation, equity incentive compensation, retirement savings programs, health and welfare programs, and the cost of personal executive benefits. The Committee also reviews potential payments under various termination scenarios.

Performance Assessments — Assessments of executive performance are another key part of the Committee’s Total Compensation Analysis and Planning Process. Mr. Arnold meets individually with his direct reports, including the named executive officers, to discuss the performance assessments for their respective direct reports and to formulate initial recommendations for an appropriate total compensation plan for each executive. No member of management, including Mr. Arnold, makes recommendations regarding his or her own pay. The Committee meets with its independent consultant in Executive Session (with no members of management in attendance) to review Mr. Arnold’s performance assessment, the comprehensive market data for his position, and his Tally Sheet to establish his total compensation plan.

Evaluating Pay

In July of each year, the Committee evaluates pay relative to external market data to validate the individual compensation opportunities that were established in February, and also considers whether we are setting appropriate performance criteria. This process involves collecting and reviewing peer group information and third-party survey data and analyzing it as described below.

PEER GROUP ANALYSIS

Peer Group Selection — In 2018 the Committee began using proxy compensation data reported by a compensation peer group together with the survey data described under “annual market analysis” to set each named executive officer’s base salary, short-, and long-term incentive targets. The Committee adopted a compensation peer group in order to have additional data points to consider when setting pay and evaluating compensation programs. The Committee chose the companies in the compensation peer group based on revenue size, market capitalization, and industry. The compensation peer group also represents a sample of companies with whom we compete for talent. Eaton’s revenue and market cap are approximately aligned with the median revenue and market cap of the compensation peer group.

The compensation peer group does not replace Eaton’s strategic peer group that is used by the Board in setting the Company’s strategic plan. The publicly traded companies in the strategic peer group continue to serve as the relative peer group for purposes of comparing total shareholder return as it relates to Eaton’s long-term performance-based incentive plan. The strategic peers were chosen based on their industry segment, among other considerations, so that the overall revenue of each segment would approximate Eaton’s revenues for each segment (Aerospace, Electrical, Hydraulics, Vehicle) versus overall revenue for the entire enterprise. The revenue of many companies in the strategic peer group is smaller than Eaton’s and given that there is a correlation between the revenue size of a company and the pay it delivers, the Committee determined that the strategic peer group would not serve as an appropriate peer group for purposes of setting pay. Therefore, with input from its consultant, the Committee chose the companies listed in the following table as the compensation peer group.

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Compensation Peer Group

 

3M Company

ABB Ltd.

Caterpillar, Inc.

Cummins

Danaher Corporation

Deere & Company

Dover Corporation

Emerson Electric Company

Halliburton Company

Honeywell International Inc.

Illinois Tool Works Inc.

Ingersoll-Rand Plc

International Paper Company

Johnson Controls Inc.

Lear Corporation

Northrop Grumman Corporation

PACCAR Inc.

Parker-Hannifin Corporation

Raytheon Company

Rockwell Automation, Inc.

Stanley Black & Decker Inc.

Union Pacific Corporation

United Technologies Corporation

Whirlpool Corporation

Peer Pay Analysis — Each year we provide the Committee with an analysis that includes the compensation reported by each publicly traded peer in its annual proxy statement and market survey data for positions that are equivalent to positions held by our named executive officers. The Committee uses this analysis in reviewing and establishing our stretch incentive plan goals and in answering whether our compensation targets are appropriate relative to market comparators. In 2019, this review of survey and peer proxy data confirmed that Eaton’s compensation opportunities were aligned with the external data points.

COMPONENTS OF COMPENSATION

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

OVERVIEW OF OUR PRIMARY COMPENSATION COMPONENTS

Component

 

 

Description

 

Form/Timing of Payout

Base salary

Levels reflect job responsibilities and market competition

 

Paid in cash throughout the year

Short-term incentive

 

Executive Incentive Compensation Plan (EIC) – Cash incentive tied to the following performance metrics:

Adjusted Earnings Per Share (EPS) and Cash Flow Return on Gross Capital (CFR) goals as well as business unit and individual performance criteria

 

Paid in cash after the year has ended and performance has been measured

Executives can choose to defer payments under our Deferred Incentive Compensation Plan II

Long-term incentives

Executive Strategic Incentive Program (ESIP) – Long-term performance-based incentive tied to:

 

 

 

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

Relative Total Shareholder Return

ESIP opportunities are denominated in performance share units (PSUs) and settled in Eaton ordinary shares

Value realization depends on our stock performance 

 

Awards are distributed in Eaton ordinary shares after the 3-year award period has ended and performance has been measured

 

25% RSUs

25% stock options

Restricted Share Units (RSUs) and stock options

Value realization depends on our stock performance

 

Vesting in approximately equal installments over 3 years

Other performance and retention grants

Retention restricted share units are granted on rare occasions to foster engagement and retention

May be tied to achievement of performance objectives

Value realization depends on our stock performance

 

Vesting periods range from 3 to 10 years

Base Salary

We pay a competitive base salary to our executive officers in recognition of their job responsibilities. In general, the Committee sets base salaries at approximately the market median as described under “Total Compensation Analysis and Planning Process” on page 37. On occasion, the Committee may set an executive’s base salary above the reported market median to foster retention and/or recognize superior performance. Executives must demonstrate consistently effective individual performance in order to be eligible for a base salary increase. In making salary adjustments, the Committee considers the executive’s base salary and total compensation relative to the market median and other factors such as individual performance against business plans, initiative, leadership, experience, knowledge, and success in building organizational capability.

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2019 BASE SALARY

During the 2019 Total Compensation Analysis and Planning Process, the Committee reviewed each executive’s base salary relative to the market data as described under “Total Compensation Analysis and Planning Process,” as well as the executive’s individual performance over the prior year. After discussing these items, the Committee determined it was appropriate to deliver merit increases on July 1, 2019, to Mr. Arnold and Mr. Fearon.

On July 1, 2019, Mr. Yadav and Mr. Monesmith were promoted to President and Chief Operating Officer - Electrical Sector and President and Chief Operating Officer - Industrial Sector, respectively and Mr. Brickhouse was promoted to President, Americas Region - Electrical Sector. The increases shown below include the merit and promotional increases each received in 2019.

Executive

Increase %

New Base Salary

C. Arnold

8.00%

$1,350,000

R. Fearon

4.00%

$1,003,941

U. Yadav

13.00%

$777,395

H. Monesmith

20.58%

$630,000

B. Brickhouse

12.49%

$610,000

Short-Term Performance-Based Compensation

We establish a competitive annual cash incentive opportunity for each named executive officer which is intended to align with the market median short-term incentive target (expressed as a percentage of base salary) as determined in our annual market analysis. The Committee determines target opportunities for each executive in February during its Total Compensation Analysis and Planning Process.

Metrics, Goals and Results — In February 2019, the Committee established EPS and CFR goals based on its review of market analyses, our annual profit plan as approved by the Board of Directors, external research reports, and analyses of peer group data. The Committee also considered EPS growth rate guidance for us and our strategic peers as a key starting point for setting aggressive performance objectives for our short-term incentive plan. The short-term objectives historically have been tied to EPS and CFR metrics. The EPS metric measures earnings growth, while the CFR objective is an internal measure of return on capital. We and the Committee believe these are appropriate metrics because of their link to shareholder value creation. The Committee believes that the target level EPS and CFR goals established at the beginning of 2019 were demanding but attainable.

The following table shows the 2019 goals and our actual results for the year. EPS (after excluding expected Vehicle segment warranty costs) and CFR results were $5.76 and 18.5%, respectively. The results generated a calculated payout of 96% of target but management recommended and the Committee determined it was appropriate to reduce the calculated payout to 90% of target.

2019 EXECUTIVE INCENTIVE COMPENSATION PLAN GOALS AND RESULTS

 

2019 SHORT-TERM INCENTIVE AWARDS

In February 2019, in addition to establishing EIC Plan performance objectives, the Committee also established an individual target award opportunity for each executive that reflected the market median target annual incentive opportunity as determined in our annual market analysis as described on page 37. At the end of the award period, the Committee considered the following items in determining individual payouts:

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The Company’s actual performance relative to EPS and CFR performance objectives and the Committee’s decision to reduce the payout to 90% of target as described above.

Individual and Business Unit performance factors that are based on the achievement of the following performance criteria:

Financial Goals: Achieving the Company’s annual financial plan, as well as the annual financial plan for the executive’s business unit.

Growth Goals: Building our brand; outgrowing the markets in which we operate; introducing new products and services.

Operational Excellence: Workplace safety and emissions reduction; advancements in quality; supply chain improvement; and operational efficiency/productivity.

Building Organizational Capacity: Reinforcing our ethical standards; attracting and developing talent; developing a diverse and inclusive organization; promoting a learning culture.

The following table illustrates each named executive officer’s 2019 award opportunity and his actual EIC award relative to that opportunity. Mr. Arnold's and Mr. Fearon's awards are subject to the corporate and individual performance factors. In their roles as Chief Operating Officers of Eaton Corporation, Mr. Yadav's and Mr. Monesmith's awards are also subject to the corporate and individual performance factors. Mr. Brickhouse leads a reporting segment and his award is subject to a business unit performance factor in addition to the individual and corporate performance factors. The performance factors shown below are rounded to the nearest whole percentage and the rating for Mr. Brickhouse reflects a blended individual and business unit performance factor. Each named executive officer’s short-term incentive award is reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

Executive

EIC

Target as a

% of Salary

EIC

Target

$

 

EPS and CFR

Results

 

Business Unit

/Individual

Performance

Factor

 

Award

Award as

% of Target

C. Arnold

160%

$2,080,000

x

90%

x

105%

=

$1,965,600

95%

R. Fearon

100%

$984,635

x

90%

x

105%

=

$930,480

95%

U. Yadav

100%

$732,678

x

90%

x

103%

=

$675,895

92%

H. Monesmith

85%

$492,498

x

90%

x

105%

=

$465,411

95%

B. Brickhouse

83%

$476,167

x

90%

x

121%

=

$518,546

109%

 

Long-Term Incentive Compensation

The Committee establishes a target long-term incentive opportunity for each executive that is intended to align with the market median values as determined in our annual market analysis. We provide long-term incentive compensation to our executive officers in two components that generally are weighted as follows:

50% in Performance Share Units: Relative TSR serves as the performance criteria for the performance-based ESIP periods which are three years in length. ESIP opportunities are denominated in performance share units and the number of share units earned by executives will depend on the rank of our total return to shareholders against that of a TSR Peer Group. The value realized by executives will depend on share price appreciation or depreciation over the award period; thereby providing a direct link to shareholder value creation.

50% in Time Based Equity Awards: The named executive officers receive approximately an equal mix of stock options and RSUs which also provide a link to external performance. Time-based equity vests over a minimum of a three-year period and executives must be employed on the vesting date in order for shares to vest.

We believe that this “portfolio approach” to structuring long-term incentives provides an appropriate balance that focuses executives on both an external and internal measure of our success. In limited circumstances, the Committee provides retention restricted share unit grants to foster engagement and retention. The Committee’s independent compensation consultant has confirmed that this approach is appropriate to delivering long-term compensation and is consistent with market practices. No named executive officers received retention grants in 2019.

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Equity Grant Practices We typically grant equity-based awards in February. The Committee has the authority to fix the date and all terms and conditions of equity grants to executive officers and other employees under our various stock plans, all of which have been approved by our shareholders. Our equity program adheres to the following best practices:

Equity-based awards generally vest over, or upon the conclusion of, at least a three-year period and vesting is contingent upon continued service with us over the vesting period (except in the case of an employee's death, disability, or retirement).

The aggregate number of shares or share units underlying options or related to other awards that may be granted to any employee during any three consecutive calendar year period may not exceed 2,400,000 under our 2015 Stock Plan.

No more than 5% of the total number of shares authorized for delivery under the Plan may vest within less than one year after the grant date (except for awards granted to non-employee directors, in the event of a change of control of the Company, in the event of a divestment of a business or upon an employee’s death, disability, or retirement).

We set the strike price for all of our stock options at the fair market value of our shares on the date of the grant. Our current shareholder-approved stock plans define “fair market value” as the “closing price” as quoted on the New York Stock Exchange on the date of the grant.

More information about the long-term incentives granted in 2019 begins on page 43.

PERFORMANCE-BASED LONG-TERM INCENTIVES FOR THE PERIOD ENDING DECEMBER 31, 2019

2017-2019 ESIP Performance Criteria: The Committee adopted relative TSR as the performance criteria for the 2017-2019 ESIP period. The Committee chose TSR as the metric to introduce a stronger sense of relative peer performance and to alleviate the increasingly difficult market calibration issues that we faced in prior years when the plan was tied to earnings per share growth and cash flow return on gross capital metrics. We and the Committee believe a short-term plan with an earnings growth and return on assets orientation (via the EPS and CFR goals) complemented by a TSR-driven long-term plan is an effective combination that will enhance shareholder value.

The 2017-2019 ESIP was designed such that our TSR rank among a TSR Peer Group would determine an adjustment factor which could range from 0% to 200%. Ranking in between the threshold, target and maximum performance levels results in linear interpolation of the percentage earned.

Additionally, if our TSR was positive but ranked the lowest among the peer group, the maximum payout that could be earned was 25% of target. If our TSR was the highest when compared to that of the peer companies, but was negative, then the maximum payout that could be earned was 100% of target. Consistent with our historical practice, awards under this plan design were capped at 200% of target.

The TSR Peer Group for the 2017-2019 award period included twenty companies, fourteen of which are direct peers in either the Electrical, Hydraulics, Aerospace or Vehicle segments and six of which are indirect but relevant peers. The revenue of the directly competitive peers in each segment expressed as a percentage of total peer group revenue roughly equated to the percentage of revenue each such segment represented of total Eaton revenue at the beginning of the award period (with the indirect peers added to the direct Electrical peers).

2017-2019 ESIP Awards — Awards for the 2017-2019 award period were determined based on our TSR ranking among the TSR Peer Group. For ESIP TSR calculation purposes, our stock price at the beginning of the award period was $60.68, (adjusted to reflect dividend reinvestments over the period) and our stock price at the end of the award period was $94.72. This resulted in TSR of 56%, an absolute ranking among the peers at eight out of twenty-one, and a percentile ranking at the 65th percentile. This percentile ranking resulted in a performance adjustment factor of 130% of target. The results are shown in the following tables. 

 

Threshold

Target

 

 

 

Maximum

Actual Results

 

Relative Ranking

TSR is positive but ranks the lowest among the peers

50th Percentile

 

65th Percentile

 

100th Percentile

Adjustment Factor

25%

100%

 

130%

 

200%

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Company Name

TSR

Absolute Ranking

Relative Ranking

Adjustment Factor

Dover Corporation

104.29%

1

100.00%

 

Ingersoll Rand plc

87.80%

2

95.00%

 

Deere & Company

77.85%

3

90.00%

 

Woodward, Inc.

75.09%

4

85.00%

 

Honeywell International Inc.

69.49%

5

80.0%

 

Rockwell Automation

60.50%

6

75.00%

 

Illinois Tool Works, Inc.

57.57%

7

70.00%

 

Eaton Corporation

56.09%

8

65.00%

130%

Parker- Hannifin Corporation

55.03%

9

60.00%

 

Schneider Electric SE

51.22%

10

55.00%

 

Allison Transmission Holdings Inc.

49.68%

11

50.00%

 

Emerson Electric Co.

49.59%

12

45.00%

 

United Technologies Corporation

46.22%

13

40.00%

 

Legrand SA

43.23%

14

35.00%

 

Cummins Inc.

42.80%

15

30.00%

 

Hubbell, Inc.

36.97%

16

25.00%

 

Moog Inc.

32.67%

17

20.00%

 

ABB Ltd.

22.28%

18

15.00%

 

BorgWarner Inc.

15.17%

19

10.00%

 

Seimens Akteingesellschaft

10.20%

20

5.00%

 

American Axle

-44.25%

21

0.00%

 

Final awards were determined by multiplying the target number of performance share units by the calculated performance factor of 130% and rounding up to the nearest whole share. The earned number of performance share units vested on February 25, 2020 and will be reported in the Options Exercised and Stock Vested Table in our next proxy statement. Dividend equivalents were also paid in cash based on the aggregate dividend paid over the period ($7.88) and the final number of share units that were earned.

Awards earned by our named executive officers for the 2017-2019 ESIP Period are shown below.

Executive

2017-2019

Target

Target Units

Earned Share

Units

(based on

130% payout)

Value of Award

at Vesting

(based on $100.28

on 2/25/2020)

Accumulated

Dividends

(based on $7.88)

Total Award +

Dividend

Equivalents

C. Arnold

$3,562,500

51,340

66,742

$6,692,888

$525,927

$7,218,815

R. Fearon

$1,500,000

21,620

28,106

$2,818,470

$221,475

$3,039,945

U. Yadav

$900,000

12,970

16,861

$1,690,821

$132,865

$1,823,686

H. Monesmith

$475,000

6,850

8,905

$892,993

$70,171

$963,164

B. Brickhouse

$250,000

3,605

4,687

$470,012

$36,934

$506,946

Long-Term Incentives Granted in 2019

Establishment of Performance Criteria for the 2019-2021 ESIP — Awards for the 2019-2021 ESIP award period will be determined based on our TSR relative to that of the TSR Peer Group as described on the following page. The structure of our 2019-2021 ESIP is identical to that of the 2017-2019 ESIP described on page 42. That is, TSR is calculated by taking the total of share price appreciation and dividends (assuming immediate reinvestment of dividends) over the three-year period compared to our share price at the beginning of the period. Our TSR rank among the TSR Peer Group will determine an adjustment factor which can range from 0% to 200%, such that executives will earn an award if our TSR ranks as follows:

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Threshold

Target

Maximum

Relative Ranking

TSR is positive but ranks the lowest among the peer group

50th Percentile

100th Percentile

Adjustment Factor

25%

100%

200%

Additionally, if our TSR is the highest when compared to that of the TSR Peer Group, but is negative, then the maximum payout that can be earned is 100% of target. The payout between threshold and maximum will be interpolated based on the rank of our TSR among the peer companies.

The TSR Peer Group for the 2019-2021 award period includes twenty companies, fourteen of which are direct peers in either the Electrical, Hydraulics, Aerospace or Vehicle segments and six of which are indirect but relevant peers. The revenue of the directly competitive peers in each segment expressed as a percentage of total peer group revenue roughly equates to the percentage of revenue each such segment represented of total Eaton revenue (with the indirect peers added to the direct Electrical peers).The companies included in the TSR Peer Group are:

Direct Peers: ABB, Ltd., Allison Transmission Holdings, Inc., American Axle & Manufacturing, Inc., BorgWarner, Inc., Cummins Inc., Emerson Electric Co., Hubbell Inc., Legrand S.A., Moog Inc., Parker-Hannifin Corporation, Rockwell Automation, Inc., Schneider Electric SE, Siemens AG, and Woodward, Inc.

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

Performance Share Units Granted for the 2019-2021 ESIP — In February 2019, the Committee established total long-term incentive opportunities, expressed as a cash value, for each executive. Targets are intended to align with the market median long-term incentive value as determined during our annual market analysis described on page 37. Half of the total long-term incentive target was converted to a number of performance share units based on the 30-day average closing price of our ordinary shares at the beginning of the award period. At the end of the award period, the number of performance share units will be adjusted up or down based on achievement of our TSR rank relative to that of the peers as previously described. The adjusted number of share units, if any, will be distributed to participants in the form of our ordinary shares. An accumulated dividend equivalent covering the performance period will be paid in cash based on the number of share units actually earned.

RSUs Granted in 2019 — In February 2019, the Committee approved RSU grants that represented approximately 25% of each named executive officer’s target total long-term incentive opportunity. These RSUs vest in approximately equal installments over three years, subject to continued employment with us. We pay dividend equivalents on the earned number of RSUs at the time the shares vest.

Stock Options Granted in 2019 — Stock options make up the remaining 25% of each named executive officer’s total target long-term incentive opportunity. The stock options granted in 2019 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.

2019 Long-Term Incentive Grants Each named executive officer’s target long-term incentive opportunity and mix of grant types is shown below. The target amounts shown below differ from the amounts reported in the Summary Compensation Table, which reports the grant date fair value determined in accordance with ASC Topic 718.

Executive

ESIP Target ($)

(50% of LTI)

RSU Target ($)

(25% of LTI)

Stock Option Target ($)

(25% of LTI)

Target Total

Long-Term Incentive ($)

C. Arnold

$4,500,000

$2,250,000

$2,250,000

$9,000,000

R. Fearon

$1,500,000

$750,000

$750,000

$3,000,000

U. Yadav

$950,000

$475,000

$475,000

$1,900,000

H. Monesmith

$625,000

$312,500

$312,500

$1,250,000

B. Brickhouse

$500,000

$250,000

$250,000

$1,000,000

 

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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 the named executive officers and approximately 325 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. This level of coverage is consistent with the level of coverage provided through our group term life policy to other non-union U.S. salaried employees including executives hired on or after January 1, 2016. The majority of the executives’ life insurance (base salary minus $50,000) is covered under an executive-owned individual whole-life policy, with the remaining $50,000 of insurance covered under our group term life policy. The value of the Company-paid premium for the whole life policy is imputed as income to each covered executive. We decided to provide this executive life insurance arrangement to allow each executive to have a paid-up policy at retirement that would mirror Company-provided post-retirement group term life insurance, but with less post-retirement tax complexity for both the executive and the Company.

Other Retirement and Compensation Arrangements

The 2019 Pension Benefits table on page 55 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 age 55 or older with at least 10 years of service, or at age 65 or older regardless of the years of service. No new participants have been added to this plan since 2011.

The tax-qualified pension plans that we maintain for our U.S. salaried and non-union employees define the term compensation to include base salary, overtime pay, pay premiums and awards under any short-term variable pay or incentive compensation plans (including amounts deferred for receipt at a later date). We use this same definition for calculating pension benefits under the nonqualified executive retirement income arrangements described in the preceding paragraph. These qualified and nonqualified retirement income plans are the only compensation or benefit plans or programs that we provide to executive officers that consider base salary and earned annual incentive awards in the calculation of the executives’ account balances. Long-term incentives, including cash and amounts realized upon the exercise of stock options and/or vesting of other equity-based awards are not factored into these calculations.

Deferral Plans

We provide our executives with opportunities to defer the receipt of their earned and otherwise payable awards under our short- and long-term cash incentive plans. Our deferral plans do not allow executives to defer the receipt of their share-based awards. We offer these deferral arrangements so that our executives have a competitive opportunity to accumulate additional retirement assets and a means to meet our share ownership requirements.

 

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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 56.

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 travel, whenever feasible, to ensure his personal security and enhance his productivity. The policy also allows Mr. Arnold to use our aircraft for personal travel as needed. Our aircraft policy does not permit other executives to use Company-owned aircraft for personal use without the advance approval of the Chief Executive Officer. No named executive officers receive tax protection on the imputed income for personal use of Company-owned aircraft.

EXECUTIVE COMPENSATION POLICIES AND GUIDELINES

Share Ownership Requirements

We expect all of our executive officers and certain other high-level key executives to hold a number of our shares with a value equal to a pre-determined multiple of their base salary. These multiples, as shown below, represent the minimum guidelines and are consistent with trends we have seen in the competitive market. Each executive is required to 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.

The Committee reviews each executive officer’s share ownership relative to these levels each February. As of the date this proxy was filed, each of the named executive officers exceeded his ownership and holding requirements.

Position

Minimum Requirement

Chairman and Chief Executive Officer

6 times base salary

Vice Chairman, Chief Financial and Planning Officer

4 times base salary

President and Chief Operating Officer Electrical or Industrial Sector

4 times base salary

Other Officers

2-3 times base salary

General Managers and other ESIP participants

1 times base salary

 

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Anti-Hedging and Pledging

No Hedging Transactions - Our insider trading policy prohibits all of our officers, including our named executive officers, and directors from engaging in the following types of hedging transactions involving our common stock: (1) any transaction involving the establishment of a short position in Eaton securities; (2) buying or selling puts or calls or other derivatives on Eaton’s securities, or (3) otherwise entering into any hedging arrangements involving Eaton securities.

No Pledging - Our insider trading policy prohibits our employees, including our named executive officers, and directors from holding our common stock in a margin account or pledging it as collateral for a loan.

Clawback Policy

The Board of Directors has adopted a formal policy stating that, if an executive engaged in any fraud, misconduct or other bad-faith action that, directly or indirectly, caused or partially caused the need for a material accounting restatement for any periods as to which a performance-based award was paid or credited to the executive during the 12-month period following the first public issuance of the incorrect financial statement, such award shall be subject to reduction, cancellation or reimbursement to the Company at the Board’s discretion. The clawback policy covers any executive who participates in our ESIP or any successor plans. Our incentive compensation plans, stock plans and deferral plans all include the provisions of this policy. This policy may be found on our website at http://www.eaton.com/governance.

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.

RELATIONSHIP BETWEEN COMPENSATION PLANS AND RISK

Compensation and Organization Committee Annual Risk Assessment

Each year, the Committee and management conduct a comprehensive review of our executive and broad-based compensation programs to determine whether any of our compensation programs, either individually or in the aggregate, would encourage employees to undertake excessive risks that are reasonably likely to have a material adverse impact on the Company.

After reviewing an inventory of our 2019 broad-based variable pay and sales commission plans, which included the number of participants in each plan, the participants’ levels within the organization, the target and maximum payment potential, performance criteria under each plan, and the type of plan (for example, management-by-objective and goal sharing), the Committee concluded that none of the broad-based programs would likely give rise to a material risk.

The Committee also applied a risk assessment to the short- and long-term incentive plans that are described in this CD&A. This analysis included, but was not limited to, (a) whether performance goals were balanced and potential payments were reasonable based on potential achievement of those goals at the threshold, target and maximum levels; (b) whether there is a balance between short- and long-term incentive opportunities and that pay is not overly weighted toward annual incentive opportunities; and, (c) how our performance objectives and target award opportunities compared to the objectives and target awards underlying our peers’ incentive programs. The Committee concluded that these short- and long-term incentive plans are not likely to give rise to a material risk.

 

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Our Executive Compensation Strategies and Programs Are Structured to Reduce Risk

The Committee and management also concluded that our executive compensation strategy and programs are structured in the best interest of the Company and its stakeholders and do not create a material risk due to a variety of mitigating factors, such as:

An emphasis on long-term compensation that utilizes a balanced portfolio of compensation elements and delivers rewards based on sustained performance over time;

The Committee’s sole power to set performance objectives for our incentive plans. In our short-term plan, this includes CFR and adjusted EPS objectives and qualitative goals such as leadership development, growth, operational excellence, and building organizational capacity. We believe these items contribute to increased shareholder value;

Our long-term performance plan (ESIP) focuses on relative TSR. This creates a focus on driving sustained performance over multiple award periods that mitigates the potential for executives to take excessive risks to drive one-time, short-term performance spikes in any one period;

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

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

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

Share ownership and holding requirements; and

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

 

COMPENSATION AND ORGANIZATION COMMITTEE REPORT

The Compensation and Organization Committee of the Board of Directors has reviewed and discussed with the Company’s management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and, based on this review and discussion, the Compensation and Organization Committee recommends to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

COMPENSATION AND ORGANIZATION COMMITTEE

Todd M. Bluedorn, Chair
Christopher M. Connor
Michael J. Critelli
Silvio Napoli
Gregory R. Page

 

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Compensation Tables

2019 SUMMARY COMPENSATION TABLE

This table shows the total compensation of the Company’s Chairman and Chief Executive Officer of Eaton Corporation, the Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation, and our three other most highly compensated executive officers in 2019.

NARRATIVE EXPLANATION OF SUMMARY COMPENSATION TABLE COLUMN INFORMATION:

Column

Explanation

 

Salary

Consists of base salary, which accounted for, on average, approximately 14% of the total compensation of the named executive officers in 2019. 

Bonus

“Bonus” payments are defined under the disclosure rules as discretionary payments that are not based on any performance criteria. The named executive officers were not entitled to receive “bonus” payments for 2019.

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 RSUs is based on our New York Stock Exchange closing price on the date of the grant. The value of ESIP PSUs is based on a Monte Carlo simulation.

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. The named executive officers received stock option grants in 2019, 2018 and 2017.

Non-Equity Incentive Plan Compensation

Reports the amount earned for 2019 under the EIC Plan. The incentive payments reported in this column were approved by the Committee at its February 25, 2020 meeting and, to the extent not deferred by the executive, will be paid on March 31, 2020.

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. No named executive officers had “above-market” earnings on deferred compensation. 

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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2019 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 and Chief Executive Officer

2019

$1,300,000

-

$8,280,171

$2,499,904

$1,965,600

$5,862,230

$54,459

 

$19,962,364

2018

$1,200,004

-

$6,929,798

$2,025,739

$2,277,000

$2,207,869

$33,435

 

$14,673,845

2017

$1,125,002

-

$5,956,210

$1,948,435

$2,293,117

$3,815,514

$39,863

 

$15,178,141

R. Fearon
Vice Chairman and Chief Financial and Planning Officer 

2019

$984,635

-

$2,760,634

$833,536

$930,480

$1,961,581

$40,372

 

$7,511,238

2018

$946,764

-

$2,558,793

$747,912

$1,143,218

$281,550

$33,081

 

$5,711,318

2017

$906,100

-

$2,508,244

$820,473

$1,347,288

$2,983,382

$37,493

 

$8,602,980

U. Yadav
President & COO -
Electrical Sector

2019

$719,448

 

$1,748,252

$528,000

$675,895

$2,118,872

$24,294

 

$5,814,761

2018

$671,580

-

$1,535,623

$448,920

$883,531

$495,974

$25,492

 

$4,061,120

2017

$642,600

-

$1,504,715

$492,586

$854,461

$1,276,569

$21,852

 

$4,792,783

H. Monesmith
President & COO -
Industrial Sector

2019

$576,248

-

$1,150,437

$347,776

$465,411

$819

$66,492

 

$2,607,183

B. Brickhouse
President - Americas
Region, Electrical Sector

2019

$576,146

-

$920,788

$278,080

$518,546

$1,327,346

$310,363

 

$3,931,269

(1)

In 2019, 2018, and 2017, $190,000, $190,000, and $181,250, respectively, of Mr. Arnold’s salary was attributable to his service as a member of Eaton’s Board of Directors. In 2019, 2018, and 2017, $150,000, $150,000, and $141,250, respectively, of Mr. Fearon’s salary was attributable to his service as a member of Eaton’s Board of Directors.

(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 2019 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, continued employment through the vesting date, and timing of option exercises.

(3)

Non-Equity Incentive Plan Compensation reported in this column includes payments earned under the 2019 EIC Plan. The material features of this incentive plan are described in the Compensation Discussion and Analysis. For 2017, this column also included awards earned under our 2014-2017 ESIP. ESIP awards for this period had no embedded right to stock settlement and were settled in cash and therefore, reported in this column.

(4)

In 2019, no named executive officers received above-market earnings on his nonqualified deferred compensation. The aggregate change in the actuarial present value of the accumulated benefit under all defined benefit pension plans for each named executive officer is noted below. Mr. Monesmith participated in the Cooper Pension Plan, which was merged with the Pension Plan for Eaton Corporation Employees in 2018. He receives no other benefit under the Pension Plan for Eaton Corporation Employees. Instead, he receives an additional employer-contribution under our defined contribution plan as discussed below and on page 53.

 

 

 

Qualified

Nonqualified

Total

 

C. Arnold

 

$264,405

$5,597,825

$5,862,230

 

R. Fearon

 

$36,070

$1,925,511

$1,961,581

 

U. Yadav

 

$54,673

$2,064,199

$2,118,872

 

H. Monesmith

$819

-

$819

 

B. Brickhouse

 

287,890

$1,039,456

$1,327,346

(5)

“All Other Compensation” includes the aggregate incremental cost we incurred for certain personal benefits, including:

Reimbursement of financial, tax and estate planning fees.

Amounts attributable to international assignments and mobility.

Personal Use of Company Aircraft: The amount reported in the following table is the executive’s use of our airplanes for personal travel. In 2019 Messrs. Arnold, Fearon, Yadav and Brickhouse each had family members accompany him on our aircraft to certain business-related events and meetings. There is no incremental cost to the company for family members to accompany executives on business trips; however, we are disclosing this perquisite in accordance with SEC rules. We do not reimburse named executive officers for tax costs related to personal or family member use of our aircraft.

Life Insurance: We provide approximately 325 employees, including the named executive officers who were hired prior to January 1, 2016 with the opportunity to acquire individual whole-life insurance as described on page 45. The annual premium paid by us during 2019 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.

Contributions to the Eaton Savings Plan: 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 salary to the ESP, subject to limits imposed under the Internal Revenue Code. Mr. Monesmith receives an additional employer contribution under the ESP in lieu of a benefit under our defined benefit pension plans. The amount of the additional employer contribution is also included in the table below.

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

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Financial

Planning

Personal use of

Aircraft

International

Assignment

and Mobility

Company

Paid Life

Employer Contributions

to the Eaton Saving

Plan Accounts

Total Other

 

 

C. Arnold

$12,906

$12,695

-

$20,458

$8,400

$54,459

 

 

R. Fearon

$14,439

-

-

$17,533

$8,400

$40,372

 

 

U. Yadav

$10,000

-

-

$5,894

$8,400

$24,294

 

 

H. Monesmith

$11,500

-

-

$3,858

$51,134

$66,492

 

 

B. Brickhouse

$15,558

-

$278,845

$7,560

$8,400

$310,363

 

GRANTS OF PLAN-BASED AWARDS IN 2019

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 2019.

 

Estimated Future Payout under

Non-Equity Incentive Plan Awards

 

Estimated Future Payout under

Equity Incentive Plan Awards

 

 

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

2/26/2019(1)

$520,000

$2,080,000

$6,240,000

 

 

 

 

 

 

 

 

 

 

2/26/2019(2)

 

 

 

 

15,594

62,375

124,750

 

 

 

 

 

$5,769,688

2/26/2019(3)

 

 

 

 

 

 

 

 

 

 

177,550

$80.49

$2,499,904

2/26/2019(3)

 

 

 

 

 

 

 

 

 

31,190

 

 

$2,510,483

R. Fearon

2/26/2019(1)

$246,159

$984,635

$2,953,905

 

 

 

 

 

 

 

 

 

 

2/26/2019(2)

 

 

 

 

5,199

20,795

41,590

 

 

 

 

 

$1,923,538

2/26/2019(3)

 

 

 

 

 

 

 

 

 

 

59,200

$80.49

$833,536

2/26/2019(3)

 

 

 

 

 

 

 

 

 

10,400

 

 

$837,096

U. Yadav

2/26/2019(1)

$183,170

$732,678

$2,198,034

 

 

 

 

 

 

 

 

 

 

2/26/2019(2)

 

 

 

 

3,293

13,170

26,340

 

 

 

 

 

$1,218,225

2/26/2019(3)

 

 

 

 

 

 

 

 

 

 

37,500

$80.49

$528,000

2/26/2019(3)

 

 

 

 

 

 

 

 

 

6,585

 

 

$530,027

H. Monesmith

2/26/2019(1)

$123,125

$492,498

$1,477,494

 

 

 

 

 

 

 

 

 

 

2/26/2019(2)

 

 

 

 

2,166

8,665

17,330

 

 

 

 

 

$801,513

2/26/2019(3)

 

 

 

 

 

 

 

 

 

 

24,700

$80.49

$347,776

2/26/2019(3)

 

 

 

 

 

 

 

 

 

4,335

 

 

$348,924

B. Brickhouse

2/26/2019(1)

$119,042

$476,167

$2,142,752

 

 

 

 

 

 

 

 

 

 

2/26/2019(2)

 

 

 

 

1,734

6,935

13,870

 

 

 

 

 

$641,488

2/26/2019(3)

 

 

 

 

 

 

 

 

 

 

19,750

$80.49

$278,080

2/26/2019(3)

 

 

 

 

 

 

 

 

 

3,470

 

 

$279,300

(1)

EIC PLAN. These amounts represent potential payments that were established for 2019 under our EIC Plan, as described on page 40.

(2)

ESIP AWARD. This represents the potential payments that were established in February 2019 for the 2019-2021 ESIP Award Period as described on page 43. ESIP opportunities take the form of PSUs and at the end of the award period, the target number of ESIP PSUs will be adjusted based on the Company’s TSR rank among a group of peers. The final number of PSUs cannot exceed two times the target number of share units. Dividend equivalents will be paid based on the earned number of PSUs and the aggregate dividend paid to our investors over the three-year award period. Earned awards, if any, will be distributed in the first quarter of 2022 and the value realized will vary based on share price. The value of PSUs shown in this table are computed in accordance with ASC 718.

(3)

STOCK OPTIONS and RSUs. These amounts represent stock options and RSUs granted on February 26, 2019. The value of RSUs 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 2019 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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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2019

The following table summarizes the outstanding equity awards held by the named executive officers at December 31, 2019. The closing price of our ordinary shares on the last trading day in 2019 ($94.72) was used to determine the market value of the unvested RSAs and RSUs shown in the “Market Value of Shares or Units of Stock That Have Not Vested ($)” column.

 

Option Awards

 

 

Stock Awards

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

2/26/2019

-

 177,550

 

$80.49

2/26/2029

 

 

2/26/2019

 31,190

$2,954,317

 62,375

$5,908,160

 

2/27/2018

38,791

 78,759

 

$81.96

2/27/2028

 

 

2/27/2018

 16,369

$1,550,472

 48,855

$4,627,546

 

2/21/2017

85,107

 43,843

 

$71.89

2/21/2027

 

 

2/21/2017

 8,728

$826,716

 51,340

$4,862,925

 

2/23/2016

132,850

 -

 

$56.55

2/23/2026

 

 

 

 

 

 

 

 

2/24/2015

35,900

 -

 

$71.72

2/24/2025

 

 

 

 

 

 

 

 

2/25/2014

26,150

 -

 

$75.36

2/25/2024

 

 

 

 

 

 

 

 

7/23/2013

42,000

 -

 

$68.95

7/23/2023

 

 

 

 

 

 

 

R. Fearon

2/26/2019

-

 59,200

 

$80.49

2/26/2029

 

 

2/26/2019

 10,400

$985,088

 20,795

$1,969,702

 

2/27/2018

14,322

 29,078

 

$81.96

2/27/2028

 

 

2/27/2018

 6,044

$572,488

 18,040

$1,708,749

 

2/21/2017

35,838

 18,462

 

$71.89

2/21/2027

 

 

2/21/2017

 3,676

$348,191

 21,620

$2,047,846

 

2/23/2016

79,700

-

 

$56.55

2/23/2026

 

 

 

 

 

 

 

 

2/24/2015

35,900

-

 

$71.72

2/24/2025

 

 

 

 

 

 

 

 

2/25/2014

26,150

-

 

$75.36

2/25/2024

 

 

 

 

 

 

 

 

7/23/2013

42,000

-

 

$68.95

7/23/2023

 

 

 

 

 

 

 

U. Yadav

2/26/2019

-

 37,500

 

$80.49

2/26/2029

 

 

2/26/2019

 6,585

$623,731

 13,170

$1,247,462

 

2/27/2018

8,596

 17,454

 

$81.96

2/27/2028

 

 

2/27/2018

 3,629

$343,739

 10,825

$1,025,344

 

2/21/2017

21,516

 11,084

 

$71.89

2/21/2027

 

 

2/21/2017

 2,205

$208,858

 12,970

$1,228,518

 

2/23/2016

47,850

 -

 

$56.55

2/23/2026

 

 

2/25/2014(3)

 6,840

$647,885

 

 

 

2/24/2015

11,650

 -

 

$71.72

2/24/2025

 

 

2/26/2013(3)

 5,035

$476,915

 

 

 

2/25/2014

8,500

 -

 

$75.36

2/25/2024

 

 

2/21/2012(3)

 5,965

$565,005

 

 

 

2/26/2013

13,600

 -

 

$59.56

2/26/2023

 

 

 

 

 

 

 

H. Monesmith

2/26/2019

-

 24,700

 

$80.49

2/26/2029

 

 

2/26/2019

 4,335

$410,611

 8,665

$820,749

 

2/27/2018

5,742

 11,658

 

$81.96

2/27/2028

 

 

2/27/2018

 2,419

$229,128

 7,220

$683,878

 

2/21/2017

11,352

 5,848

 

$71.89

2/21/2027

 

 

2/21/2017

 1,165

$110,349

 6,850

$648,832

B. Brickhouse

2/26/2019

-

 19,750

 

$80.49

2/26/2029

 

 

2/26/2019

 3,470

$328,678

 6,935

$656,883

 

2/27/2018

3,349

 6,801

 

$81.96

2/27/2028

 

 

2/27/2018

 1,411

$133,650

 4,210

$398,771

 

2/21/2017

5,973

 3,077

 

$71.89

2/21/2027

 

 

2/21/2017

 614

$58,158

 3,605

$341,466

 

2/24/2015

6,350

 -

 

$71.72

2/24/2025

 

 

 

 

 

 

 

 

2/25/2014

4,650

 -

 

$75.36

2/25/2024

 

 

 

 

 

 

 

(1) Unless otherwise noted, stock option awards and RSUs vest in approximately equal installments on the first, second and third anniversary of the date of the grant, subject to the executive’s continued employment with us, such that approximately one-third of the unexercisable option awards and one-third of the unvested stock awards granted in 2019 vest on each February 26, 2020, 2021 and 2022 and approximately one-half of the unexercisable option awards and one-half of the unvested stock awards granted in 2018 vest on each February 27, 2020 and 2021.

 

(2) Unless otherwise noted, represents potential payments that were established in 2019, 2018 and 2017 for the 2019-2021, 2018-2020, and 2017-2019 ESIP Award Periods. The number of earned PSUs will be determined at the end of each three-year award period based on the Company’s achievement of the performance criteria that was established for each award period. The earned number of PSUs for each ESIP grant can range from 0 to 200%. The value realized upon the vesting of PSUs will be determined based on the closing price of our ordinary shares on the vesting date. The 2017-2019 ESIP opportunities included in this column were earned at 130% of target and shares vested on February 25, 2020.

 

(3) Unvested restricted stock awards cliff vest on the tenth anniversary of the date of the grant, subject to continued employment with us.

EATON 2020 Proxy Statement and Notice of Meeting 52

 


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OPTION EXERCISES AND STOCK VESTED IN 2019

The following table provides information about exercises of stock options and vesting of PSUs, RSAs and RSUs during the year ended December 31, 2019. The values for exercised stock options reflect the difference between the aggregate option exercise price and the market price of the applicable number of our ordinary shares on the date of exercise. The values for any PSUs, RSAs or RSUs that vested during 2019 reflect the per share closing price of our ordinary shares on the vesting date multiplied by the number of shares that vested.

 

Option Awards:

 

 

Stock Awards:

Name

Number of Shares

Acquired on

Exercise (#)

Value Realized on

Exercise ($)(1)

 

 

Number of Shares

Acquired on

Vesting (#)

Value Realized on

Vesting ($)(1)

C. Arnold

80,592

$3,147,144

 

 

123,843

$9,887,897

R. Fearon

88,100

$2,639,907

 

 

71,460

$5,766,778

U. Yadav

10,090

$407,043

 

 

35,804

$2,888,437

H. Monesmith

-

-

 

 

14,287

$1,149,277

B. Brickhouse

35,040

$1,081,129

 

 

12,383

$996,869

(1)

Amounts realized upon the exercise of options or on the vesting of PSUs, RSAs or RSUs are not eligible for deferral under any of our deferred compensation plans.

2019 PENSION BENEFITS

We maintain three basic types of retirement income plans for our U.S. salaried employees. The table that follows shows the estimated present value of the benefits payable under each of our retirement income plans.

a tax-qualified defined benefit pension plan (referred to as the Pension Plan for Eaton Corporation Employees in the Pension Benefits table) that has two separate benefit formulas: a final average pay formula and a cash balance formula;

two defined benefit restoration plans (collectively referred to as the DB Restoration Plan in the Pension Benefits table); and

a plan that allows us to supplement the pension benefits earned under our qualified pension plan and nonqualified DB Restoration Plan to certain elected officers and executives who are recruited by us mid-career (referred to as the Limited Service Supplemental Plan in the Pension Benefits table).

Tax-Qualified Retirement Income Plans — Effective January 1, 2003, employees who were then earning benefits under the “Average Final Annual Compensation” benefit formula (the “AFAC benefit formula”) under the Pension Plan for Eaton Corporation Employees (the “Pension Plan”) were given the option to either: (a) continue earning benefits under the AFAC benefit formula, or (b) convert the value of their accrued benefit to an “opening balance” and commence earning benefits in an “Eaton Personal Pension Account” under the cash balance formula (the “EPPA benefit formula”). Salaried employees hired on or after January 1, 2002, but before April 1, 2013, automatically earn benefits under the EPPA benefit formula upon becoming eligible for participation in the Pension Plan. Any employee hired on or after April 1, 2013 and all U.S. employees of Cooper immediately prior to our acquisition of Cooper will receive an additional employer contribution under the Eaton Savings Plan in lieu of earning a benefit under the Pension Plan. Employees of Cooper who were eligible for a benefit from the Cooper Pension Plan, which was merged with the Pension Plan on December 31, 2018, will receive no further benefit under the Pension Plan but will receive the additional Eaton Savings Plan contribution.

Under the AFAC benefit formula, annual normal retirement benefits are computed at the rate of 1% of average final annual compensation up to the applicable Social Security integration level plus 1.5% of average final annual compensation in excess of the Social Security integration level, multiplied by the employee’s years of credited service. In addition, the employee receives a supplement equal to 1/2% of average final annual compensation up to the applicable Social Security integration level payable until the Social Security Normal Retirement Age. An employee’s average final annual compensation is the average annual amount of his or her eligible compensation (generally consisting of salary plus short-term executive incentive compensation) for service during the five consecutive years within the last 10 years of employment for which the employee’s total compensation was the greatest. Years of credited service includes the number of years of employment between age 21 and retirement, subject to a maximum of 44 years. Corporate policies require the named executive officers to retire at age 65.

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Under the EPPA benefit formula, a participant’s single sum retirement benefit is accumulated throughout his or her career with us. This single sum amount is represented as a notional account balance to which credits are regularly added. The credits are equal to a percentage of eligible compensation (generally consisting of salary and short-term incentive compensation) plus interest at a specified rate and, where applicable, cost-of-living credits on certain opening balances. The percentage of eligible compensation credited to the participant’s notional account balance varies over his or her career based on the sum of the participant’s age and service with us. For any period when that sum is less than 50, 5.0% of eligible compensation is credited. For any period when the sum is between 50 and 59 (inclusive), 6.0% of eligible compensation is credited. When the sum is between 60 and 69 (inclusive), 7.0% of eligible compensation is credited. When the sum is 70 or greater, 8.0% of eligible compensation is credited. Except as noted below, upon termination of employment, the notional account balance is available as a single sum or may be converted to one of several annuity forms. Under the standard post-retirement surviving spouse option for the AFAC and EPPA benefit formulas, the participant receives a reduced pension, and a pension equal to 50% of the reduced pension is payable to his or her surviving spouse. For example, the benefit for an employee electing that option at age 65 whose spouse is five years younger would be approximately 11.5% less than the amount of the participant’s annual benefit.

Nonqualified Defined Benefit Retirement Plans  Certain provisions of the Internal Revenue Code limit the annual benefits that may be paid from a tax-qualified retirement plan. This includes a limitation on the amount of annual compensation that may be taken into account in calculating a participant’s benefit under a qualified retirement plan. As permitted under the Internal Revenue Code, the Board of Directors has authorized the payment from our general funds of any benefits calculated under the provisions of the Pension Plan that may exceed those limits. This applies to all participants, including the named executive officers.

Limited Eaton Service Supplemental Retirement Income Plan  The Board of Directors has adopted a plan that provides supplemental annual retirement income to elected officers and certain executives who do not have the opportunity to accumulate significant credited service with us under our tax-qualified retirement income plans, provided that they either retire at age 55 or older and have at least 10 years of service with us or retire at age 65 or older regardless of the years of service. The amount of the annual supplement generally is equal to the amount by which a percentage of the executive’s average final annual compensation exceeds his or her earned retirement income. This includes amounts receivable under the retirement plans described above. The percentage of average final annual compensation used for this purpose depends upon an executive’s age and years of service at retirement. The percentage ranges from 25% (for retirements at age 55 with less than 15 years of service) to 50% (for retirements at age 62 or older with 15 years or more of service). Benefits accrued and vested before January 1, 2005 under either the nonqualified or the limited service plans generally are paid in one of the forms available under the Pension Plan as elected by the participant. Benefits earned after 2004 are paid as a single lump sum. With respect to all benefits, regardless of when accrued, the present value of the benefit will be paid in a single installment upon a change of control of the Company.

 

EATON 2020 Proxy Statement and Notice of Meeting 54

 


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2019 PENSION BENEFITS

Name

Plan Name

Number of Years

of Credited Service (#)

Present Value of

Accumulated Benefit ($)

Payments During Last

Fiscal Year ($)

C. Arnold

Pension Plan for Eaton Corporation Employees

19.25

$1,229,685

-

DB Restoration Plan

19.25

$11,905,950

-

Limited Service Supplemental Plan

19.25

$6,398,960

-

R. Fearon

Pension Plan for Eaton Corporation Employees

17.75

$397,223

-

DB Restoration Plan

17.75

$1,750,263

-

Limited Service Supplemental Plan

17.75

$12,295,546

-

U. Yadav

Pension Plan for Eaton Corporation Employees

25.75

$385,800

-

DB Restoration Plan

25.75

$635,787

-

Limited Service Supplemental Plan

25.75

$6,089,510

-

H. Monesmith(1)

Pension Plan for Eaton Corporation Employees

-

$6,541

-

DB Restoration Plan

-

-

-

Limited Service Supplemental Plan

-

-

-

B. Brickhouse(2)

Pension Plan for Eaton Corporation Employees

34.50

$1,210,490

-

DB Restoration Plan

34.50

$2,912,147

-

Limited Service Supplemental Plan

-

-

-

(1)

Mr. Monesmith participated in the Cooper Pension Plan and receives no further benefit under the Pension Plan for Eaton Corporation Employees.

(2)

Mr. Brickhouse does not receive a benefit under the Limited Service Supplemental Retirement Income Plan.

 

2019 NONQUALIFIED DEFERRED COMPENSATION

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. We offer these plans to provide:

our executives with an opportunity to accumulate additional retirement assets,

a means for acquiring our shares in order to meet our share ownership guidelines, and

an additional form of employment retention.

The plans described in this section are as follows:

the Deferred Incentive Compensation Plan (the “DIC Plan”);

the Deferred Incentive Compensation Plan II (the “DIC Plan II”); and

the Incentive Compensation Deferral Plan II (the “IC Deferral Plan II”).

DIC Plans — Short-term incentive compensation earned prior to December 31, 2004 was eligible for deferral under the DIC Plan. On February 10, 2010, the Committee approved the termination of the DIC Plan with respect to all participant accounts except for certain accounts that contain deferrals for the years 1986 through 1989. The accounts that were not terminated earn fixed interest based on market rates and individual mortality assumptions in effect at the time of the deferrals. None of the named executive officers have accounts that contain deferrals for the years 1986 through 1989.

Short-term incentive compensation earned after December 31, 2004 is eligible to be deferred under the DIC Plan II. Incentive compensation earned in 2005 through December 31, 2007 that was deferred under the DIC Plan II was credited with earnings that accrued on a phantom share basis, as if the deferred amounts were invested in our ordinary shares, with earned dividends reinvested in shares. Under the DIC Plan II, prior to the beginning of each calendar year, participants must elect the method and timing of payment with respect to the incentive compensation to be earned in the year that is subject to the deferral election. The creation of the DIC Plan II and the exclusion of deferrals under the prior plan were implemented to satisfy the requirements of Internal Revenue Code Section 409A under the American Jobs Creation Act of 2004 (409A). Beginning with deferrals of short-term incentive compensation earned during 2008 and after for payment following retirement, each executive will have a choice of deferring up to 100% of his or her annual incentive compensation into either or both of (a) an account tracked on a phantom share basis and paid out in our ordinary

EATON 2020 Proxy Statement and Notice of Meeting 55

 


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shares or (b) an account that earns interest equal to that paid on 10-year Treasury Notes plus 300 basis points. Executives also may defer compensation under the DIC Plan II on a short-term basis for payment within 5 years or less.

IC Deferral Plan — Similarly, cash settled long-term incentive compensation earned after December 31, 2004 is eligible for deferral under the IC Deferral Plan II. Under the IC Deferral Plan II, prior to the beginning of any award period for which an award may be earned, or later if permitted by us in the case of performance-based compensation (as defined in the final regulations under 409A), participants must elect the method and timing of payment with respect to the incentive compensation to be earned during that award period, and that is subject to the deferral election. When an executive elects to defer a long-term incentive award under the IC Deferral Plan II for payment at or following his or her retirement, earnings on a minimum of 50% of the deferred amount must be tracked on a phantom share basis. The remainder of the amount deferred to retirement earns interest equivalents equal to that paid on 10-year Treasury Notes plus 300 basis points. At retirement, the portion of the executive’s account that is deferred into phantom shares is paid in our ordinary shares. Incentive compensation deferred pursuant to our deferral plans is unsecured, subject to the claims of our creditors and is exposed to the risk of our non-payment.

A grantor trust that we previously established, the assets of which are subject to the claims of our creditors, will be used to pay those obligations related to deferred incentive compensation earned by our executives prior to 2005. The transaction to acquire Cooper Industries plc required Eaton to fund the vested liabilities in the trust in the amount of $7.8 million. No comparable trust arrangements currently are in place with respect to incentive compensation deferred after 2004.

2019 NONQUALIFIED DEFERRED COMPENSATION

Name

Plan Name

Executive

Contributions in

Last Fiscal Year

Registrant

Contributions in

Last Fiscal Year

Aggregate

Earnings in Last

Fiscal Year(1)

Aggregate

Withdrawals/

Distributions

Aggregate

Balance at Last

Fiscal Year End(2)

C. Arnold

DIC Plan

       $

-

$

-

    $

-

$

-

$

-

DIC Plan II

$

2,049,300

$

-

$

107,086

$

-

$

2,156,386

IC Deferral Plan II

$

-

$

-

$

-

$

-

$

-

Subtotal

$

2,049,300

$

-

$

107,086

$

-

$

2,156,386

R. Fearon

Has not participated in our elective deferral programs

U. Yadav

Has not participated in our elective deferral programs

H. Monesmith

DIC Plan

$

-

$

-

$

-

$

-

$

-

DIC Plan II

$

-

$

-

$

10,972

$

-

$

220,312

IC Deferral Plan II

$

-

$

-

$

-

$

-

$

-

Subtotal

$

-

$

-

$

10,972

$

-

$

220,312

B. Brickhouse

Has not participated in our elective deferral programs

(1)

When applicable, the amounts reported in the “Aggregate Earnings in Last Fiscal Year” column are also reported in the ‘Changes in Pension Value and Nonqualified Deferred Compensation Earnings’ column of the Summary Compensation Table, to the extent such earnings exceed 120% of the applicable federal rate as determined under the Internal Revenue Code. No named executive officers received “above-market” earnings on his nonqualified deferred compensation.

(2)

Mr. Arnold’s aggregate balance includes his 2018 earned EIC award which was reported in the "Non-Equity Incentive Plan Compensation" column of the 2018 Summary Compensation Table. Mr. Monesmith’s aggregate balance includes amounts he earned and elected to defer before he became a named executive officer.

2019 POTENTIAL PAYMENTS UPON TERMINATION

A named executive officer may experience a termination of employment under several possible situations. In each of these circumstances, certain plans, agreements, arrangements or practices would provide compensation to the executive in varying amounts. We do not provide employment contracts to our executives and do not have plans or arrangements (other than the Change of Control Agreements previously discussed and standard severance benefits available to all U.S. salaried, nonunion employees) that would require any payment to a named executive officer in the event of a termination of his or her employment.

Instead, the Compensation and Organization Committee of our Board of Directors exercises the sole discretion to decide what, if any, additional severance payments or benefits will be offered to an executive in the case of a termination of employment. In exercising this discretion, the Committee takes a number of factors into consideration, including the reasons for the termination and the individual executive’s personal circumstances. The Committee believes that it is in

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the best interest of the Company and our shareholders to ensure that a departing executive is treated fairly and in a manner that will help us to secure appropriate confidentiality, non-competition, non-solicitation, non-disparagement and general release agreements. Moreover, providing fair and reasonable employment termination compensation is consistent with our overall compensation philosophy.

For each of the termination of employment scenarios described in this section, the estimated potential payments and benefits that might be received by each named executive officer are displayed in the table that immediately follows that description.

Background and Basic Assumptions

In this section, we discuss termination of employment scenarios that include: (a) Voluntary Resignation or a Termination for Cause; (b) Normal and Early Retirement; (c) Involuntary Termination — Not for Cause; (d) Change of Control; and (e) Death or Disability. The following key principles and assumptions apply to these disclosures: