Xylem Inc

Philosophy and Objectives

Our executive compensation program is based on the following principles:

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Linked to Our Strategy: Compensation should be simple, flexible, and sustainable to support Xylem’s ongoing business transformation, including increasing our focus on technology, positioning us as a leader in integrating sustainability into our business strategy, and advancing our “One Company” execution.

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Long Term: Design of compensation programs should reward executives for balanced long-term growth and profitability, emphasize pay-for-performance, and should be reasonable, fair, fully disclosed, and strongly-aligned with long-term shareholder value creation.

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Market Competitive: Target compensation (base salary, target annual incentive compensation and target long-term incentive compensation) opportunities should generally reflect the market median (with flexibility on long-term incentive compensation, as needed, to attract, retain or motivate key talent), and may be adjusted for individuals performance, strategic impact, level of responsibility, potential, industry or functional expertise, tenure, internal pay equity, or special recruitment considerations for newly-hired executives. Actual compensation and incentive award payouts should vary with annual and long-term performance, both at the Company and individual level.

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Avoids Excessive Risk: Compensation should be designed and structured so that unnecessary or excessive risk-taking behaviors are discouraged.

NEO Total Direct Compensation Mix

To align compensation levels for our NEOs with the Company’s performance and shareholder interests, our pay mix emphasizes variable compensation, including performance-based annual and long-term incentive awards. The following chart illustrates the 2023 target compensation mix for our NEOs. The percentages of total target compensation reflected in charts below were calculated using each NEO’s fiscal year 2023 base salary, target annual incentive compensation and target long-term incentive compensation.

Compensation Benchmarking

Executive compensation is benchmarked using the compensation levels and practices for the NEOs at companies in our Peer Group and data from multiple broad-based compensation surveys. Each year, the LDCC reviews and selects companies to comprise the Peer Group for the next performance year based on the following criteria: business attributes, extent of global presence, revenue size, market capitalization and talent pool. In August 2022, the LDCC reviewed the Peer Group and made the decision to remove Enovis Corporation (formerly known as Colfax Corporation) based on analysis against our Peer Group selection criteria. Our 2023 Peer Group includes the following companies:

In August 2023, the LDCC reviewed the current Peer Group and removed Crane Co. and Donaldson Company, Inc. and added Trane Technologies, plc, Ecolab Inc., and Veralto Corporation for the 2024 performance year based on analysis against our Peer Group selection criteria.

In addition to using the Peer Group for benchmarking NEO compensation, the LDCC uses data from multiple broad-based compensation surveys for assessing the competitiveness of our NEOs’ compensation. Survey data sources include Aon Hewitt’s Total Compensation Measurement and Willis Towers Watson’s Compensation Data Bank. Each survey includes approximately 500 to 1,000 participants. The LDCC does not select the companies that participate in these broad-based surveys and does not consider the specific participants in the surveys as a factor in its compensation determinations. Available information regarding compensation levels at our Peer Group companies and in surveys is weighted equally in developing “market median” consensus data.

Our NEOs’ target compensation opportunity is designed to approximate the market median (with flexibility on long-term incentive compensation, as needed, to attract, retain or motivate key talent), and may be adjusted for other factors such as outstanding performance, strategic impact, level of responsibility, potential, industry or functional expertise, tenure, internal pay equity, or special recruitment considerations for newly-hired executives. Our NEOs’ actual compensation is intended to vary on a yearly basis in accordance with actual annual and long-term performance.

Elements of Our Executive Comp ensation Program — Overview

Our executive compensation program offers a mix of compensation elements with a significant focus on variable pay. As an executive’s grade increases, the proportion of variable pay increases. There are three core elements of the compensation program for our NEOs for 2023:

Base Salary

Base salary is a fixed and core element of our executive compensation program designed to be competitive in the marketplace in order to attract and retain the best talent. Key factors that help determine base salary include:

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Level and consistency of individual performance.

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Proficiency in the position, including skill set and knowledge for the position.

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Tenure in the position.

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Specific recruitment circumstances for newly-hired executives.

Base salaries are reviewed annually for potential merit increase. For 2023, the average global merit increase was 4.5%. In February 2023, the LDCC provided the following base salary increases for our NEOs based on a review of market median data and performance.

(1)

Mr. Grogan joined the Company on September 18, 2023, to serve as CFO effective on October 1, 2023.

(2)

Mr. Pine's salary increase was effective as of January 1, 2023, including additional salary adjustment to reflect expanded scope and responsibilities due to promotion to COO.

(3)

Converted from Swiss Francs (CHF) to US Dollars (USD).

Annual Incentive Plan

Our AIP is a cash-based incentive program designed to link compensation to Xylem’s annual financial performance and strategic growth objectives, including our sustainability and human capital priorities, as well as individual results.

The “Target AIP Award” opportunity for our NEOs (expressed as a percentage of base salary) is set to generally align with market median. Actual “AIP Payout” is determined as follows:

Each AIP performance metric and the overall AIP award is capped at 200% of target and results are interpolated between points for Team Performance results.

For Mr. Pine, the LDCC increased the Target AIP Award as a percentage of base salary from 75% to 80% for 2023 to better align with the market median for his promotion to the COO role. For the other NEOs, the 2023 AIP target awards as a percentage of base salary were unchanged from 2022.

Team Performance Metrics (75%)

For 2023, financial metrics were selected to reflect the importance of top line growth, profit, and management of free cash flow as the foundation for building shareholder value.

The performance targets for the financial metrics were based on internal operating plans that were established taking into consideration the high end of the range of the 2023 guidance we communicated to shareholders and only based on legacy Xylem (excludes Evoqua). This supports performance targets that are challenging, but achievable in order to motivate our NEOs and broader employee base.

Definition, weighting, and payout percentage for each performance metric based on actual performance relative to target performance are summarized below:

(1)

Defined as revenue excluding the impact of fluctuations in foreign currency translation as compared to target and contributions from acquisitions and divestitures.

(2)

Defined as earnings before interest, taxes, depreciation and amortization expense, adjusted to exclude share-based compensation charges, restructuring and realignment costs, gain or loss from sale of businesses and special charges.

(3)

Defined as Free Cash Flow (net cash from operating activities, as reported in the Statement of Cash Flows, less capital expenditures) divided by net income, excluding the gain on sale of businesses and other non-recurring significant non-cash impacts, such as non-cash impairment charges and significant deferred tax items. Our definition of Free Cash Flow Conversion does not consider certain non-discretionary cash payments, such as debt.

Individual Objectives (“IO”) (25%)

For 2023, financial and non-financial IOs for NEOs were used to align closely with the Company’s Core Strategic Pillars and Sustainability Framework, as described in the Proxy Statement Summary.

IO scores are designed to be differentiated based on the assessment of the individual’s performance against IOs. There is no specific weighting assigned to each goal and the evaluation is non-formulaic. From a design perspective, actual IO scores can range from 0% to 200% of target in 2023. Higher IO scores are intended to be given to individuals with the highest performance relative to their financial and non-financial strategic objectives; and the lowest IO scores are intended to be given to individuals who have underperformed relative to their financial and non-financial strategic objectives. Each year, management and the LDCC review individual performance and set the distribution and range of IO scores.

To emphasize total Xylem performance and align the overall pool with business results, the Company funded the IO portion of the AIP award pool based on the 2023 overall Team Performance results with a floor of 90% of target. The IO pool funding floor recognizes that there may be significant performance contributions to current and future results even if current-year Team Performance based on our three financial metrics is below 90%. From a design perspective, individual IO scores can still range from 0% to 200% of target in 2023, keeping within the IO pool funding in total, and as such no portion of the AIP award is guaranteed to be paid.

2023 AIP Awards Paid in 2024 (based on legacy Xylem results)

The LDCC evaluated Xylem’s actual Team Performance against the pre-established metrics and considered the following results in determining the actual Team Performance score, overall IO funding, and awards for NEOs:

For 2023, we overachieved our revenue growth and adjusted EBITDA metrics based on strong execution on healthy demand across our business, with drop through on overdrive in adjusted EBITDA performance. We fell slightly short of target for free cash flow conversion primarily due to higher than planned working capital levels. The performance above resulted in a Team Performance score of 165% and an overall Company IO funding of 165% of target.

The LDCC reviewed the NEOs’ performance in 2023. Each NEO had IOs that were linked to the strategic priorities listed above under “Individual Objectives” and included the following, as applicable:

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Deliver 2023 financial targets for organic revenue, adjusted EBITDA, and free cash flow conversion, including for a particular segment or region;

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Continue to deploy the Xylem strategy to drive customer success, grow in emerging markets, deliver continuous improvement, strengthen innovation and technology, cultivate leadership and talent development, and integrate sustainability into everything we do;

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Advance our progress in the areas of sustainability and human capital management, including safety and diversity and inclusion, as well as the activation of our high impact culture; and

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Integrate Evoqua, including tracking to our integration scorecard.

In February 2024, the LDCC determined the 2023 AIP payouts for all NEOs. In determining IO performance scores for NEOs, the LDCC considered the management team’s strong performance in exceeding its overall financial commitments for 2023 (Team Performance score of 165%), and in delivering against non-financial dimensions, including: achievement of meaningful improvements in our injury frequency rate; progress against Women in Leadership representation goals, using merit-based hiring, promotions and diverse candidate slates to attract and retain the most qualified talent; the achievement of full process water recycling in certain major facilities, as well as achievement of our water saving goal; and the achievement of the Evoqua integration scorecard. The LDCC awarded Mr. Decker an IO performance score of 100%, which recognizes management’s delivery of financial and non-financial goals, as well as Mr. Decker’s strategic leadership on the Evoqua transaction and execution of the CEO succession plan and transition. Mr. Pine was awarded an IO performance score of 115% based on his strong leadership in driving Xylem’s operational performance in his new role as COO in 2023, as well as the onboarding of Mr. Grogan. Mr. Grogan, Mr. Yarkadas, and Ms. Rowland were awarded IO performance scores of 100% to recognize their leadership and meaningful contributions in their individual functional, segment, and commercial areas. The LDCC decided to award Mr. Cerwinka an IO performance score of 95% largely based on the 2023 financial results for Emerging Markets. Mr. Cerwinka led the Emerging Markets region until May 1, 2023, and continues to lead the Applied Water Systems segment and our Global Process Transformation initiatives.

The following table summarizes the actual AIP awards paid to the NEOs in March 2024:

(1)

Mr. Grogan’s AIP award was pro-rated based on his September 18, 2023 start date.

Long-Term Incentive Plan

Our LTIP is designed to link an executive’s compensation to long-term shareholder value creation. The 2023 LTIP awards for NEOs included the following components:

PSU awards underscore our pay-for-performance philosophy, provide alignment with key long-term financial metrics, and strengthen the performance-based aspects of our compensation program for executive officers and other direct reports to the CEO. The LDCC also considers RSUs and stock options to be performance-based, at-risk pay because their value depends on stock price performance. The mix and balance of LTIP awards were chosen based on the LDCC’s belief in performance-based compensation elements in the context of the Company’s business strategy, as well as market trends and relevant practices among peer companies. The target LTIP award value for each NEO is established each year to be generally in alignment with the market median value for long-term incentives, but also considers potential, performance, retention, and certain other considerations.

Performance Share Units

PSUs are stock awards that are settled in shares of Xylem’s common stock subject to three-year cliff vesting and performance requirements. New for 2023, adjusted EBITDA was introduced as a metric, in lieu of ROIC due to the challenge of setting three-year ROIC targets for the combined company following the acquisition of Evoqua, an also since it aligns with our efforts to build long-term value for shareholders by focusing on profitable growth. All performance metrics are based on the combined Company (legacy Xylem and Evoqua).

Key elements of the 2023 PSU awards are as follows:

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Relative TSR (rTSR): 50% of the PSUs were granted at target (100%) with actual payout (0%-175% of the target number of shares) based on three-year Xylem TSR relative to companies in the S&P 500 Index (excluding financial services companies). We believe rTSR helps us to further align with shareholder interests, and along with adjusted EBITDA and organic Revenue, provides a balanced approach to address both internal and external performance. The potential payout levels (as a percentage of the target number of shares) based on actual performance are summarized below (results are interpolated between Threshold - Target and Target - Maximum). Payouts are capped at 100% of target if Xylem’s 2023-2025 TSR is negative.

The LDCC selected the companies in the S&P 500 Index (excluding financial services companies) as the benchmark for rTSR in order to reflect the broader investment focus of our shareholders. Similar to the multiple broad-based compensation surveys in our compensation benchmarking, the S&P 500 is not a self-selected customized benchmark and provides a more comprehensive and relevant comparison for our stock price performance.

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Adjusted EBITDA: 25% of the PSUs were granted at target (100%) with actual payout (0%-175% of the target number of shares) contingent upon the achievement of a pre-set third year adjusted EBITDA target. We believe adjusted EBITDA is a metric that aligns with our efforts to build long-term value for shareholders by focusing on earnings growth. The adjusted EBITDA performance target for the 2023-2025 performance cycle was designed to be sufficiently challenging and aligned with the Company’s strategic plan and historical performance. The 2025 target adjusted EBITDA represents a 15.9% compound annual growth rate (“CAGR”) over 2022 actual performance. Potential payout levels as a percentage of target based on actual performance are summarized below (results are interpolated between Minimum - Target and Target – Maximum; no payout if results are below Minimum):

*Defined as earnings before interest, taxes, depreciation, and amortization expense, adjusted to exclude share-based compensation charges, restructuring and realignment costs, special charges and gain or loss from sale of businesses.

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Revenue: 25% of the PSUs were granted at target (100%) with actual payout (0%-175% of the target number of shares) contingent upon the achievement of a pre-set third year revenue target. We believe Revenue is a metric that aligns with our efforts to build long-term value for shareholders by focusing on growth. The Revenue performance target for the 2023-2025 performance cycle was designed to be sufficiently challenging and aligned with the Company’s strategic plan and historical performance. The 2025 target Revenue represents a 6.7% CAGR over 2022 actual performance. Potential payout levels as a percentage of target based on actual performance are summarized below (results are interpolated between Minimum - Target and Target – Maximum; no payout if results are below Minimum):

Key elements of the 2023 PSUs were as follows:

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Earned PSUs will be settled in shares upon vesting.

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Holders of PSUs do not have voting rights.

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Dividend equivalents are accrued and paid in cash only if and to the extent PSUs vest.

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If an employee resigns or their employment is terminated prior to vesting, the PSUs are forfeited entirely, including any accrued dividend equivalents.

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If an employee qualifies for retirement, dies or becomes disabled, a pro-rated portion of the PSUs vests based on actual performance.

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PSUs will vest in full (assuming target performance) upon a termination of employment by the Company without “cause” or by the employee for “good reason” within two years of a change of control, or if the buyer does not assume or replace the awards in connection with a change of control.

On March 1, 2024, the LDCC determined payouts for the 2021 PSUs for all NEOs. The 2021 PSUs were earned at 107.7% of target based on performance over the 2021-2023 performance period (excluding Evoqua) as shown below.

Status of 2021 PSU Award for Completed Performance Cycle in 2023

Restricted Stock Units

RSUs are stock awards that are settled in shares of Xylem’s common stock subject to vesting requirements.

Key elements of the 2023 RSU awards were as follows:

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RSUs awarded as part of the annual LTIP award vest in three equal annual installments.

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RSUs will be settled in shares upon vesting.

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Holders of RSUs do not have voting rights.

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Dividend equivalents are accrued and paid in cash only upon vesting/settlement of the awards.

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If an employee resigns or their employment is terminated prior to vesting, the RSUs are forfeited entirely, including any accrued dividend equivalents.

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If an employee qualifies for retirement, a pro-rated portion of the RSUs vest and applicable dividends will be paid upon retirement.

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If an employee dies or becomes disabled, the RSUs vest in full.

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RSUs will vest in full upon termination of employment by the Company without “cause” or by the employee for “good reason” within two years of a change of control, or if the buyer does not assume or replace the awards in connection with a change of control.

Stock Options

Non-qualified stock options permit participants to purchase shares of Xylem’s common stock in the future at a price equal to the stock’s value on the date the stock options were granted, which is the stock option exercise price.

Key elements of the 2023 non-qualified stock option awards were as follows:

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Stock options vest in three equal annual installments with a 10-year term and cannot be exercised prior to vesting.

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If an employee resigns or their employment is terminated prior to vesting, the unvested portions of the stock options are forfeited entirely. The vested portions of the stock options expire the earlier of three months following the termination date or the original expiration date.

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If an employee qualifies for retirement, a pro-rated portion of the unvested stock options vest and remain exercisable until the earlier of three years following the retirement date or the original expiration date.

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If an employee dies or becomes disabled, the unvested portions of the stock options vest in full and remain exercisable until the earlier of three years following the death or disability date or the original expiration date.

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The unvested stock options will vest in full upon termination of employment by the Company without “cause” or by the employee for “good reason” within two years of a change of control, or if the buyer does not assume or replace the awards in connection with a change of control.

Earnings Black-Out Period and Timing of Stock-Based Grants

The Company’s Insider Trading policy specifies a quarterly blackout period during which individuals designated as insiders under the policy are prohibited from trading in the Company’s securities. In consideration of the timing around when the Company and its insiders may be in possession of quarterly performance related material non-public information, the trading blackout period commences several weeks prior to the end of each fiscal quarter and re-opens several market trading days following our earnings releases.

The Company also follows an annual equity grant blackout calendar applicable to the award of options and other equity awards to NEOs, other executives and directors. The LDCC makes its annual compensation cycle decisions related to NEOs’ LTIP awards at the Committee’s annual first quarter meeting, typically in February. In consideration of our equity grant blackout calendar, annual LTIP awards to NEOs are granted no earlier than the second trading day following the Company’s filing of its Annual Report on Form 10-K. In addition, the Committee takes into consideration the annual equity grant blackout calendar with respect the timing of any off-cycle LTIP awards to NEOs and other executives.

The LDCC does not consider the possible possession of material non-public information when it determines the number, price or timing of LTIP awards granted to NEOs. Rather, the LDCC uses market competitive data, potential, individual performance, retention and certain other considerations when it awards equity grants to NEOs under the LTIP. In general, LTIP awards are granted to NEOs, other executives and directors on the approved grant effective date, during an open trading window and in alignment with the annual equity grant blackout calendar. For new hire NEOs, LTIP awards are granted on the later of the LDCC approval date or the start of employment, or other applicable date as required by our equity grant blackout calendar.