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Xylem Inc.2020 Proxy Statement Notice of Annual Meeting of Shareholders May 13, 2020

1 International Drive

Rye Brook, NY 10573

Dear Xylem Shareholders,

Writing to you each year is a welcome opportunity to reflect on Xylem’s progress, and to look forward to the opportunities ahead.

This year, reflecting on the last twelve months is a different kind of task. The events of 2020 changed our world. Everyone has been affected, whether by the big shifts that have cut across society, or by the intimate tragedy of personal loss. Long-held certainties about markets, logistics, ways of working – even our customers’ and stakeholders’ priorities – changed faster than previously thought possible.

Yet, we come into this year inspired – especially by the team we are so privileged to lead. Xylem colleagues around the world responded to 2020’s shocks by coming together in ways that have made our company, our customers and our communities more resilient. Thanks to them, Xylem is in a strong position entering 2021, with resurgent growth momentum and robust financial foundations. 

Xylem’s business and mission have never been more relevant than today. With essential services in the spotlight – and water on the front-line of the world’s public health defenses – the economic and social value of critical infrastructure is more apparent than ever.

Our Colleagues

Because our business is global, we felt the impact of COVID-19 early. With the safety of our colleagues as our first concern, we learned quickly from our China team, and activated an enterprise-wide COVID-19 Response Team. The team promptly globalized our implementation of expanded safety and health protocols.

Remote working wasn’t an option for team members in factories that supply mission -critical infrastructure or those who support customers in the field. So, we put extensive infection controls in place, alongside additional resources and premium pay for all colleagues classified as essential workers. As we reduced executive and director compensation temporarily, we also expanded paid leave to support Xylem colleagues and their families directly affected by COVID-19, and extended healthcare and medical benefits.

Incredibly, the COVID-19 Response Team has just marked a year of service. Throughout, it has earned high marks from colleagues and external firms for providing a continuous flow of timely information and support to teams around the world. We are so proud of these efforts. They exemplify our mission, purpose and values as an organization.

Our Customers

As the pandemic intensified, utilities worked heroically to keep essential services flowing to every home and hospital. Our people, our suppliers and our partners stepped up to help with incredible resolve. Supply chain, manufacturing, logistics and service teams kept our customers supplied and serviced through the pandemic’s peak with remarkably few interruptions.

With lock-downs preventing various types of site-based work, our teams created dozens of new ways to help customers remotely. We pivoted to online training and certification, so utility operators could keep working. And we now commission engineered solutions by videoconference whenever it’s in the customer’s best interests.

Our teams also offered innovative ways for utilities to meet the new challenges presented by the pandemic. As customers faced challenges putting crews in the field, greater operational flexibility and resilience became imperatives. Customer inquiries about our digital capabilities, from remote monitoring and automated operations to smart infrastructure more broadly, accelerated through the year.

Xylem responded to our customers’ challenges with innovative solutions. The backlog for our advanced digital solutions is up significantly versus the past year. This puts us in a very attractive position as we grow not only in software platforms but in all the digitally-enabled aspects of our portfolio. We’re excited about the opportunity to work with our customers to build the digital water and energy networks, now, that will make them more resilient, and support their communities into the future.

Our Communities: Local and Global

Some observers imagined that the cause of sustainability would suffer severe set-backs from the economic hardships of 2020. Instead of a retreat, however, we saw an advance: a broad and energetic global embrace of sustainability, spanning environmental, social, and governance (ESG) issues. The general public, customers, investors and, certainly, our Xylem colleagues are all aligned in seeking meaningful, positive impact on our communities and the world around us.

In our local communities, Xylem colleagues delivered. In Wuhan, our China team donated equipment and expertise to emergency hospital builds. Xylem Watermark, our corporate social responsibility program, extended support to our non-profit partners – like Americares and UNICEF – for front-line COVID response. And we expanded our community-based grant program to help Xylem customers, distributors and partners get relief to their communities.

Aware of the infection risks faced by utility crews, our manufacturing teams re-purposed a portion of production to make personal protective equipment (PPE). We ultimately donated more than 100,000 units to water operators and healthcare workers around the world. And our partnership with Planet Water recently achieved the goal of bringing clean water and WASH education (Water, Sanitation & Hygiene) to more than a million people in underserved communities.

As an enterprise, we also took several bold steps toward our signature 2025 sustainability goals. Most notably, we put sustainability at the heart of Xylem’s financing strategy with our $1 billion green bond offering. The first of its kind for a US industrial company, it was over-subscribed by more than five times and at preferential rates. At the same time, we advanced our sustainability leadership position by establishing a Chief Sustainability Officer. And in 2021 we are continuing to augment sustainability-linked compensation for all named executive officers, including the Chief Executive Officer, as well as a broader group of executives and employees.

Our commitment and action has put us in a leadership position, both in the water sector and beyond. We have achieved an ESG rating of AAA from MSCI and the top Sustainalytics score in the industrial machinery sector. These achievements are gratifying, and a tribute to the team. But we are squarely focused on the work ahead of us to deliver on our mission.

Your Company

As a result of the team’s exceptional work, your company entered 2021 having demonstrated the agility required to meet the challenges of a sometimes volatile, uncertain and complex world. 

The team adapted to the past year’s challenges by focusing on what it could control. We took difficult but decisive cost actions, improved productivity, and delivered positive bottom-line outcomes even in unfavorable conditions. The team corrected for the market’s changes so quickly, in fact, we delivered free cash flow conversion of over 180%, and more than in the previous year. We have an even more robust financial foundation, now, than pre-pandemic.

We are moving forward in 2021 with strong momentum. The year began on the back of fourth quarter sequential gains in every segment and every end-market. And while different geographies will continue to recover at different paces, we are encouraged by early signs of market recovery. The ramp-up of vaccination programs offers hope for a return to normalcy – and growth. Our China business – the first to feel the pandemic’s impact, and also the first to recover – actually grew in 2020.

From the shocks of the last year, the world has turned toward what is essential, the need for greater resilience, and the imperative of a sustainable world. Our mission, our business and our values are more relevant than ever. And we are on course to capitalize on our increased competitiveness, financial strength, and commercial momentum.

On October 31, 2021, we will celebrate the ten-year anniversary of Xylem. Some of you have invested in us more recently, but some have been with us for a decade. Together, we have been privileged to make significant improvements in our communities and in people’s lives, while also nearly quadrupling Xylem’s market capitalization. And we are excited to contribute more.

We are grateful to all of you for your confidence in our company and our team, and for joining with us in our mission to solve water. We look forward to the great work, and value, ahead.

Sincerely,

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1 International Drive

Rye Brook, NY 10573

Notice of 2021 Annual Meeting of Shareholders

March 30, 2021

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Proxy Statement Summary

This Proxy Statement was prepared in connection with the solicitation of proxies by the Board of Directors of Xylem Inc. (“Xylem” or the “Company”) for the 2021 Annual Meeting of Shareholders (the “Annual Meeting”). Below are highlights of certain information in this Proxy Statement. We encourage you to read the entire Proxy Statement and 2020 Annual Report on Form 10-K for the year ended December 31, 2020 before you vote.

2021 ANNUAL MEETING OF SHAREHOLDERS

Agenda Items:

In light of the continuing public health crisis resulting from the coronavirus (“COVID-19”) pandemic and concerns for the safety of our shareholders, director nominees, officers and employees, Xylem’s 2021 Annual Meeting will be held exclusively online via a live webcast. Shareholders of record as of the close of business on March 15, 2021 (the record date) will be able to attend the virtual Annual Meeting, vote their shares electronically, submit questions and view the list of shareholders as of the record date, by visiting www.virtualshareholdermeeting.com/XYL2021. To log into the meeting, use the 16-digit control number included on your Notice, proxy card or the instructions that accompanied your proxy materials. We designed the format of this year’s virtual Annual Meeting to ensure that our shareholders who attend will be afforded the same rights and opportunities to participate as they would have had had the meeting been held in person. For additional information, please see “How do I attend and participate in the online Annual Meeting?” in the “Voting and Meeting Information” section.

Beginning on March 30, 2021, the Notice of Annual Meeting and the 2021 Proxy Statement are being mailed and made available to shareholders of record as of March 15, 2021.

HOW TO VOTE YOUR SHARES

You may vote using any of the following methods if you were a shareholder as of the close of business on March 15, 2021

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CORPORATE GOVERNANCE - HIGHLIGHTS

We are committed to sound corporate governance that promotes the long-term interests of our shareholders and other stakeholders, strengthens Board and management accountability, and helps build trust in the Company. The “Corporate Governance” section describes our governance framework, which includes the following highlights:

We value the views of our shareholders and believe that fostering positive relationships with our shareholders is critical to our long-term success. To help management and the Board understand and consider the issues that matter most to our shareholders, we regularly engage with shareholders on a range of topics related to the Company's performance, strategy for long-term growth, governance profile, compensation philosophy, and efforts regarding sustainability and social value creation. See “Shareholder Engagement Program” in the “Corporate Governance” section for more information.

Our 2021 Director Nominees¹

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OUR STRATEGY

Our strategy is to help customers solve the world's greatest water and resource challenges with innovative products, services and solutions to deliver sustainable economic, social and environmental benefits. The following five strategic pillars guide where and how we focus our efforts and resources to implement this strategy:

While our strategy will evolve in response to the changing world, our four core values are the enduring principles that go to the heart of who we are and guide how we conduct ourselves each day:

Respect, Responsibility, Integrity and Creativity

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OUR RESPONSE TO THE COVID-19 PANDEMIC

As the COVID-19 pandemic began to unfold in the first quarter of 2020, the Company focused on a set of guiding principles to help us manage through the crisis:

Our Board of Directors and management worked diligently to assess the impact of the pandemic on all facets of the Company, closely monitoring the health and well-being of our employees; and examining the pandemic’s macroeconomic and financial impacts, the effects of governmental mandates to combat the pandemic on the Company’s customers and operations, the resilience of the Company’s supply chain, investors’ perspectives and the Company’s business continuity strategy.

In March 2020, the Company deployed a COVID-19 Response Team, which is responsible for Xylem's Pandemic Plan, to aid in prevention, preparedness, response and recovery at our sites and across the Company. From the outset, Xylem has taken measures to protect the health and safety of our employees and work with our customers to minimize potential disruptions. In the first quarter of 2020, we implemented a support pay program for employees impacted by COVID-19, and an essential services premium pay program for the benefit of employees whose roles are classified as an “essential service” and, as such, are required to work either onsite at a Xylem facility or in the field supporting customers during periods of mandated stay at home or similar measures. These programs remain in place through the first quarter of 2021 and will be evaluated for continuation as necessary going forward. In addition, our leadership team held listening sessions with employees who were also caregivers to understand their unique challenges and evolve our support accordingly. In order to maintain a safe work environment for our employees, our production facilities spread out operations over multiple shifts and implemented other protective measures, such as temperature screening and social distancing, while maintaining operational capabilities. Many of our offices globally have transitioned to substantially remote work from home status, with no significant disruption to operations, financial reporting systems, internal control over financial reporting or disclosure controls and procedures. And as public health officials ease recommendations and regulations regarding stay at home measures, our COVID-19 Response Team is applying a set of Xylem “Return to Workplace” health and safety guidelines for remote workers returning to our facilities.

As detailed in the “Commitment to Sustainability” section, Xylem is committed to empowering and assisting the communities in which we live and work. Through Xylem Watermark, our corporate social responsibility program, we supported our communities in addressing the challenges posed by the global pandemic via partnerships with Americares and UNICEF, as well as the expansion of our Partner Community Grants program and other philanthropic commitments.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic and in addition to the actions described above, in the second quarter of 2020, we committed to restructuring activities across our businesses and functions globally that are designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and better serve our customers. In addition, in May 2020 the Board approved a temporary 20% reduction in the base salary of the Company’s CEO and all officer-level direct reports to the CEO, as well as a temporary 20% reduction in the annual cash retainer fees payable to our directors. These temporary reductions were effective from June 1, 2020 through December 31, 2020.

EXECUTIVE COMPENSATION – HIGHLIGHTS

We provide our named executive officers (“NEOs”) with short- and long-term compensation opportunities that encourage performance to enhance shareholder value while avoiding excessive risk-taking. Our Leadership Development & Compensation Committee (“LDCC”) aligns our NEOs’ compensation with shareholder interests through a balanced and competitive equity program design that uses a mix of restricted stock units, performance share units and stock options. A significant portion of our NEOs’ pay is performance-based, capped and not guaranteed, and in

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2020 made up approximately 87% of total direct compensation for our CEO and approximately 74% of total direct compensation for our other NEOs (see charts below). In 2020, we received a high level of shareholder support (91%) in our say on pay advisory vote. See “2020 Advisory Vote to Approve Executive Compensation” in the “Compensation Discussion and Analysis” section.

2020 NEO Total Direct Compensation Mix*:

*Percentage of pay is based on annual target compensation (base salary, target annual incentive compensation and target long-term incentive compensation) and excludes any one-time awards granted upon hire.

Highlights of our executive compensation include:

OUR COMMITMENT TO SUSTAINABILITY - HIGHLIGHTS

At Xylem, sustainability is at the center of who we are and what we do.  As a leading global water technology company, we address one of the world’s most urgent sustainability challenges – responsible stewardship of our shared water resources. Technology is playing an increasingly important role in helping the world solve water issues. We have a long history of innovation, and are focusing on the powerful capabilities of smart technology, integrated management and data analytics.

Xylem approaches sustainability as a way to generate economic value while also creating value for society. Accordingly, we leverage sustainability in our decision-making toward long-term value creation for our shareholders, customers, employees and the communities in which we operate. Xylem is helping to create a water-secure world while creating economic and social value in the following three ways:

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Serving Our Customers  We provide innovative technologies, solutions and expertise that help  our customers solve major water challenges like water affordability, scarcity and resilience.   Building a Sustainable  Company   We know that in order to be a company that advances sustainability, we need a strong foundation and to execute with discipline today while also focusing on the future. We adhere to and champion responsible business practices, including promoting diversity and inclusion, and look to be a standard-setter in all that we do.  Empowering Communities  We are a company that is committed to creating both economic and social value. We strive every day to have a social impact and solve water for communities in need, including those affected by water-related disasters, recognizing that water challenges dramatically affect the quality of life and economic prospects for millions of people around the globe every day.  

This shared value approach is designed to generate increased economic and social value and requires our business, environmental and social aims to mutually thrive. To this end, we are focused on minimizing negative environmental and social impacts from our operations and creating programmatic and alternative business model strategies that benefit society and the communities in which they are implemented. In addition, the mission of Xylem Watermark, our corporate social responsibility program, is to provide education and access to safe water to enable healthy lives and build resilient communities. We are proud of the program’s expanded strategy to engage a larger ecosystem of stakeholders, as well as the fact that approximately 7,500 of our employees participated in volunteerism activities in 2020, despite significant challenges posed by social distancing requirements globally as a result of the COVID-19 pandemic. This approach is a key lever for our overall human capital strategy, including attracting, retaining and motivating our employees.

In 2020, we completed a $1 billion Green Bond offering, further aligning our sustainability and financing strategies. This follows our 2019 execution of the first sustainable improvement loan in the US General Industrial Sector, which ties the Company’s borrowing rates to our Sustainalytics rating, an important barometer of Xylem’s continued commitment to sustainability. A portion of the individual component of the 2020 Annual Incentive Compensation for both our President & Chief Executive Officer and our Senior Vice President, Chief Sustainability Officer was tied to Xylem’s sustainability performance as rated by Sustainalytics. In addition, the individual component of the 2020 Annual Incentive Compensation for our segment Presidents included the safety performance of their businesses as measured by injury frequency and risk reduction index. In 2021, the Company is augmenting its sustainability-linked compensation for all of our NEOs, as well as a broader group of executives, with a special, one-time grant of performance share units with goals that are based on 5 of our strategically transformative 2025 sustainability goals.

Xylem’s ongoing commitment to sustainability and the results we have achieved have led to our inclusion on several of the world’s most prestigious sustainability equity indexes, as well as several other notable sustainability recognitions. We are also proud signatories to a number of important sustainability compacts, pledges and mandates, and are committed to continuous improvement against the core elements of each and better understanding and managing our own opportunities and risks in the ESG arena.

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Cautionary Note Regarding Forward-Looking Statements

The statements included in this Proxy Statement regarding future performance and results, expectations, plans, strategies, priorities, commitments, and other statements that are not historical facts are forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements are based upon current beliefs, expectations, and assumptions and are subject to significant risks, uncertainties, and changes in circumstances that could cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. Readers of this Proxy Statement are cautioned not to rely on these forward-looking statements, since there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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PROPOSALS TO BE VOTED ON AT THE 2021 ANNUAL MEETING

We are a global water technology company committed to solving critical water and infrastructure challenges with innovation.  Our Board, through its Nominating & Governance Committee, regularly reviews the experience, skills and qualifications needed to properly oversee the interests of the Company and its shareholders, taking into account the Company's short- and long-term strategies and evolving global operations. The Nominating & Governance Committee then compares those attributes to those of the current directors and potential director candidates. The Nominating & Governance Committee conducts targeted efforts to identify and recruit individuals that have the requisite experience, skills and qualifications, keeping in mind our commitment to actively seek qualified women and individuals from minority groups to include in the pool of candidates from which directors are selected. Directors and candidates should be persons of the highest personal and professional ethics, integrity and values, with significant accomplishments and recognized stature, and who bring a diversity of backgrounds and perspectives to the Board and are committed to representing the long-term interests of the shareholders. Our Board believes that the director nominees have the appropriate mix of experience, skills, qualifications and attributes needed to lead the Company at the Board level.

* = Financial Expert          

C = Committee Chair        

¹ Retiring from the Board of Directors with his term ending at the 2021 Annual Meeting

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irector Tenure  0-2 1  3-6 2  7-10 7   Director Age    Diversity – Gender & Ethnicity  Women 2  Ethnic Diversity 2   Diversity –  Glob

*Tenure and age as of May 12, 2021; gender, ethnicity and global origin as identified by the director nominees

All director nominees will be elected for a one-year term.

The Board has determined that each nominee, other than our CEO, Mr. Decker, is independent from the Company and management.  Each nominee brings experience, expertise and diverse perspectives that will contribute to the overall strength of the Board in its oversight role. Each of the nominees currently serves on our Board, and each nominee was elected by our shareholders with the exception of Ms. Tretikov and Mr. Yadav, who were appointed by the Board in July 2020. Ms. Tretikov and Mr. Yadav were each identified by a search firm retained by the Nominating & Governance Committee. Each nominee agreed to be named in this Proxy Statement and to serve as a director, if elected.  In the event that a director nominee should become unavailable for election, the persons named as proxy will have the right to use their discretion to vote for a substitute, or the Board may reduce the number of directors.  For more information regarding director nominations and qualifications, see the “Board Composition and Refreshment” section. The following are summaries of the business experience and other qualifications of each of the director nominees.

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Our Audit & Finance Committee has appointed Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2021. Deloitte has served as the Company’s independent auditor since 2011.

The Audit & Finance Committee periodically considers the rotation of the Company’s independent auditor because the Committee believes it is important for the registered public accounting firm to maintain independence and objectivity. In 2016, the Audit & Finance Committee conducted a comprehensive request for proposals from Deloitte and other large, nationally-recognized public accounting firms with respect to the audit engagement.

The Audit & Finance Committee annually reviews and considers Deloitte’s performance of the Company’s independent audit in determining whether to reappoint the firm. The Audit & Finance Committee carefully considers performance factors including:

Based on this evaluation, the Audit & Finance Committee has determined that the continued retention of Deloitte as our independent auditor for 2021 is in the best interests of the Company and its shareholders.

In conjunction with the mandated rotation every five years of the independent auditor’s lead engagement partner, in 2020 the Audit & Finance Committee participated in the selection of the new lead engagement partner for the 2021 fiscal year. The selection process commenced with Company interviews of candidates who met professional, industry and personal criteria, including diversity of thought and background, experience with complex global clients, and industry-specific experience, among others. Management recommended a finalist candidate to the Committee. The Committee Chair then interviewed the finalist and, in consultation with the Committee, concurred with management’s recommendation to engage the new lead audit engagement partner for 2021.

The appointment of Deloitte for 2021 is being submitted for shareholder ratification with a view toward soliciting the opinion of shareholders which shall be taken into consideration in future deliberations. If the shareholders do not ratify the appointment, the Audit & Finance Committee will reconsider the appointment and also consider this fact when it appoints the independent auditor for the fiscal year ending December 31, 2022.

Representatives of Deloitte attended all meetings of the Audit & Finance Committee in 2020. Representatives of Deloitte are expected to be present during the online Annual Meeting, will have the opportunity to make a statement, if desired, and are expected to be available to respond to pertinent questions.

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Fees of Audit and Other Services

The aggregate fees for professional services rendered by Deloitte, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (“Deloitte and related affiliates”) for the years ended December 31, 2020 and 2019 were approximately as follows:

The increase in audit service fees between 2019 and 2020 is attributable to: a) an agreed-to fee increase for 2020, b) the filing of a registration statement and public offering of Senior notes during 2020, and c) incremental audit services for statutory purposes.

Pre-Approval of Audit and Non-Audit Services

Our Audit & Finance Committee pre-approves all audit and permissible non-audit services provided by the independent auditor. The Audit & Finance Committee has adopted a policy for the pre-approval of certain services provided by the independent auditor. Under the policy, pre-approval is generally provided for specific categories of audit, audit-related, tax and other services incremental to the normal auditing function. These categories include, among others, the following: employee benefit plan audits; acquisition and disposition services, including due diligence; audits of subsidiaries and other attest services unrelated to the consolidated audit; tax compliance and certain tax planning advice work; accounting consultations and support related to generally accepted accounting principles in the United States; and reviews and consultations on internal control matters.

Audit, audit-related and non-audit services that have not been pre-approved under the policy must be specifically      pre-approved by the Audit & Finance Committee. In addition, if fees for any audit or non-audit services pre-approved under the policy exceed a pre-determined threshold during any fiscal year, any additional proposed audit or non-audit services to be performed by the independent auditors must be specifically pre-approved by the Audit & Finance Committee. The Committee Chair is authorized to pre-approve audit and non-audit services up to $100,000 on behalf of the Committee between meetings, provided such decisions are presented to the full Committee at its next regularly-scheduled meeting.  All audit, audit-related and non-audit services described above were pre-approved by the Audit & Finance Committee. The Committee considers non-audit fees and services when assessing auditor independence.

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AUDIT & FINANCE COMMITTEE REPORT

Xylem’s Audit & Finance Committee reports to and acts on behalf of the Board of Directors. The Committee operates under a written charter adopted by the Board, which can be found on the Company’s website, www.xylem.com, under “About Xylem,” then ““Investors” and then “Corporate Governance.” The Committee reviews and assesses the adequacy of its charter at least annually and, when appropriate, recommends to the Board changes to reflect the evolving role of the Committee. A description of the primary responsibilities of the Audit & Finance Committee is included under “Board Committees — Audit & Finance Committee” (see page 36).

Overview of Committee’s Key 2020 Topics and Actions. The Audit & Finance Committee met eight times in 2020. Meeting agendas are established by the Audit & Finance Committee Chair. During 2020, the Committee fulfilled each of its duties and responsibilities as outlined in its charter, including, among other things:

Selection and Oversight of the Independent Registered Public Accounting Firm. The Audit & Finance Committee assists the Board with its oversight of Xylem’s independent registered public accounting firm, including assessment of the firm’s qualifications, performance and independence. The Committee is responsible for appointing, compensating, and overseeing the work of the independent auditor, including periodically reviewing and evaluating the performance of the lead audit engagement partner, overseeing the required rotation of the lead audit engagement partner every five years, and reviewing and considering the selection of the new lead audit engagement partner commencing with the 2021 fiscal year. Deloitte has served as Xylem’s independent registered public accounting firm since 2011.

The Audit & Finance Committee recognizes the importance of maintaining the independence of Xylem’s auditor. In 2020, the Committee received and reviewed the written disclosures and letter from Deloitte required by the PCAOB regarding Deloitte’s communications with the Committee around independence. The Audit & Finance Committee also discussed with Deloitte the firm’s independence from Xylem and management, including a review of the nature and amount of fees paid to Deloitte for non-audit services and the compatibility of such services with maintaining Deloitte’s independence (see page 18 for details on Deloitte’s 2020 fees for audit and non-audit services). The Committee concurs with Deloitte’s conclusion that they are independent from Xylem and its management. As detailed in Proposal 2,

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the Audit & Finance Committee has appointed Deloitte as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2021.

Review and Recommendation Regarding Financial Statements. Management has primary responsibility for the preparation, presentation and integrity of the Company’s financial statements, the application of accounting and financial reporting principles and internal controls, and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Xylem’s independent auditor, Deloitte, is responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with generally accepted accounting principles in the United States, as well as expressing an opinion on the Company’s internal controls over financial reporting.

The Audit & Finance Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2020 with management and Deloitte. The Committee also discussed with Deloitte the matters required to be discussed by applicable PCAOB standards. In addition, the Committee has received from Deloitte the written disclosures required by the PCAOB concerning independence, and has discussed with Deloitte its independence.

Based on the reviews and discussions described above, the Audit & Finance Committee recommended to the Board that the audited financial statements for the year ended December 31, 2020 be included in the Company’s Annual Report on Form 10-K for 2020 which was filed with the U.S. Securities and Exchange Commission.

Audit & Finance Committee of the Company’s Board of Directors:

Victoria D. Harker, Chair Markos I. Tambakeras

Jorge M. GomezUday Yadav

Sten E. Jakobsson

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Our Board is committed to excellence in governance and recognizes the interest our shareholders have in our executive compensation.  As part of that commitment, and as required pursuant to Section 14A of the Securities Exchange Act of 1934, as amended, our shareholders are being asked to approve a non-binding advisory resolution on the compensation of our named executive officers ("NEOs") as disclosed in this Proxy Statement. This proposal provides shareholders the opportunity to express their views on our 2020 executive compensation program and policies. In considering your vote, you should review the information on our compensation policies and decisions regarding the NEOs presented in the “Compensation Discussion and Analysis” section.

At our 2020 Annual Meeting of Shareholders, our shareholders overwhelmingly approved our NEO compensation, with approximately 91% of votes cast in favor of the proposal. We value this endorsement by our shareholders and believe that the outcome signals our shareholders’ support of our executive compensation program. Similarly, during our annual outreach of shareholders to solicit their input on a range of topics related to executive compensation and governance matters, our top shareholders expressed strong support of our executive compensation program. As a result, we continued our general approach to our executive compensation program through fiscal year 2020.

The Company’s Leadership Development & Compensation Committee (“LDCC”) considers the following when designing the executive compensation:

The Board recommends you vote FOR the following resolution:

RESOLVED, that the shareholders approve, on an advisory basis, the compensation paid to the Company’s NEOs as disclosed in this Proxy Statement, including the Compensation Discussion and Analysis, compensation tables, and narrative discussion.

While the results of the vote are advisory in nature, the Board and the LDCC value feedback from shareholders and will carefully consider the outcome of the vote as part of the ongoing evaluation of the Company’s executive compensation philosophy and design. For a description of our annual shareholder outreach efforts regarding compensation and governance, see “Shareholder Engagement Program” in the “Corporate Governance” section.

The Board has adopted a policy of providing for annual advisory votes on executive compensation. Unless the Board modifies its policy on the frequency of holding such advisory votes, the next such advisory vote will occur in 2022.

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The following proposal was submitted by one of our individual shareholders and will be voted on during the online Annual Meeting if it is properly presented.  Such shareholder's name, address, and number of shares of Xylem common stock may be obtained by a shareholder on written request to our Corporate Secretary.

PROPOSAL 4 — SHAREHOLDER PROPOSAL REQUESTING AMENDMENTS TO PROXY ACCESS

Proposal 4 - Improve Our Catch-22 Proxy Access

Shareholders request that our board of directors take the steps necessary to enable as many shareholders as may be needed to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to enable shareholder proxy access.

The current arbitrary ration of 20 shareholders to initiate shareholder proxy access can be called Catch-22 Proxy Access. In order to assemble a group of 20 shareholders, who have owned 3% of company stock for an unbroken 3-years, one would reasonably need to start with 60 activist shareholders who own 9% of company stock for an unbroken 3-years because initiating proxy access is a complicated process that is easily susceptible to errors. It is a daunting process that is also highly susceptible to dropouts.

The 60 activist shareholders could then be whittled down to 40 shareholders because some shareholders would be unable to timely meet all the paper chase requirements. After the 40 shareholders submit their paperwork to management - then management might arbitrarily claim that 10 shareholders do not meet the requirements (figuring that shareholders do not want a battle in court) and management might convince another 10 shareholders to drop out - leaving 20 shareholders. But the current bylaws do not allow 40 shareholders to submit their paperwork to management to end up with 20 qualified shareholders.

And 60 shareholders who own 9% of company for an unbroken 3-years might determine that they own 51% of company stock when length of unbroken stock ownership is factored out.

But how does one begin to assemble a group of 60 potential participants if potential participants cannot even be guaranteed participant status after following the tedious rules that are 3800-words of legalese with the directors having the last word on interpreting the 3800-words - because a single shareholder always takes the risk that one will be the 21^st shareholder that could be voted off the island after a substantial investment of time by the arbitrary ration of 20 shareholders.

More emphasis should be given to improving proxy access because we do not have the right to act by written consent due to backward provisions of lndiana law. It also takes a high 30% of shares that typically cast ballots at the annual meeting to call for a special shareholder meeting.

Plus the shareholder right to call a special meeting has taken a big hit due to the avalanche of online shareholder meetings that can be tightly controlled bare bones meetings where all challenging questions and comments are screened out by management.  This has paved the way for a future special shareholder meeting to unfortunately be an online meeting.

Please vote yes:

Improve Our Catch-22 Proxy Access - Proposal 4

Board of Directors’ Statement of Opposition

The Board recommends a vote AGAINST Proposal 4. The Board takes a holistic approach to corporate governance and believes that this proposal is unnecessary in light of the existing proxy access right of our shareholders, the Board’s record of making corporate governance changes that promote the accountability of management and the Board to shareholders, and Xylem’s other strong governance practices, commitment to sustainability, and robust shareholder engagement program, as detailed below:

We adopted a proxy access right that reflects a balanced approach to enhancing shareholder rights and protecting the interests of all shareholders.  In February 2016, we amended our By-laws to allow a group of up to 20 shareholders (counting certain groups of funds as one shareholder for this purpose) owning at least 3% of the

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Company’s outstanding shares of common stock continuously for at least 3 years to nominate and include in the Company’s proxy materials director nominees constituting up to 20% of our existing Board (but not less than 2 nominees), subject to the requirements of our By-laws.

Prior to the adoption of this right, we closely monitored proxy access developments and reached out to shareholders representing approximately 57% of the Company’s outstanding shares, engaging in discussions on this topic with shareholders representing approximately 40% of the Company’s outstanding shares.  After taking into account the feedback provided during these discussions and following the Board’s deliberations on proxy access, we adopted what we believe is an appropriate proxy access framework that is consistent with market practice and provides a meaningful proxy access right to shareholders, while balancing the need to protect the interests of all our shareholders.

Since then, we have continued to regularly engage with our largest shareholders to discuss our governance profile and proxy access, including conversations with shareholders representing more than 20% of our outstanding shares in 2021.  These shareholders generally continue to support the 20-shareholder limit on nominating group size.

In addition to best serving the interests of our shareholders, the proxy access framework described above, including the 20-shareholder limit on nominating group size, reflects proxy access provisions that are consistent with practices of other significant U.S. public companies with proxy access rights and that are widely endorsed in the voting policies of institutional investors.  Specifically, the 20-shareholder limit on nominating group size, which is used by more than 90% of U.S. public companies that have adopted proxy access, strikes an appropriate balance between empowering shareholders with a meaningful right to nominate individuals to the board, while mitigating the risk of abuse as well as the risk of chaotic and unmanageable circumstances arising shortly before the Company must distribute its proxy materials.  This limitation also helps to ensure that the proxy access mechanism is not driven by a large number of shareholders, no single one of which has a substantial economic stake in the Company.

The proponent’s requested change to our proxy access By-law would place no limit on the number of shareholders that may aggregate their holdings to reach the required 3% ownership threshold.  However, as noted above, our current By-laws provide shareholders with significant flexibility to aggregate related funds in determining nominating group size (with a group of investment funds under common management and investment control or under common management and funded primarily by a single employer counting as a single shareholder), so we do not believe there is a need to increase this limit, particularly in light of the composition of the Company’s shareholder base.  As of December 31, 2020, 6 shareholders each own more than 3% of our outstanding shares, and our 20 largest shareholders collectively own more than 48% of the Company’s common stock.  With our ownership structure as of such date, it is also possible to assemble a group of 20 shareholders that owns at least 3% of our shares and does not include any of our largest 89 institutional shareholders (assuming each holder has owned its shares for 3 years).  These facts demonstrate that limiting the size of the nominating group to no more than 20 shareholders provides shareholders with an appropriate opportunity to use proxy access while avoiding the administrative burden that would result from eliminating any limit on the potential group size.  Moreover, our 2021 shareholder outreach confirmed strong support for maintaining a 20-member nominating group limit.  

In addition to adopting a proxy access right, our Board has a history of making corporate governance changes that promote accountability of management and our Board to our shareholders:

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In addition, the Company maintains strong and effective practices that reflect our ongoing commitment to corporate governance:

Given the existence of a balanced and meaningful proxy access right that serves the best interests of our shareholders and our demonstrated and continuing commitment to effective corporate governance, as evidenced by our corporate governance changes and practices described above, the Board believes that this proposal is unnecessary.

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CORPORATE GOVERNANCE

Our Board values the input and insights of the Company’s shareholders and believes that effective Board-shareholder communication strengthens its role as an active, informed and engaged fiduciary. Our Board views engagement as a year-round conversation with shareholders about creating long-term sustainable value. Accordingly, the Board seeks to maintain a framework for deep, frequent, and productive conversations with the Company’s shareholders.

We engage with a wide range of constituents, including institutional shareholders, retail shareholders, proxy advisory firms, ESG rating firms and industry thought leaders. We pursue multiple avenues for engagement, including the Annual Meeting of Shareholders, in-person and virtual meetings (though since March 2020 shareholder engagement meetings have been limited to a virtual format due to the pandemic), quarterly earnings calls and other investor conferences and presentations. We participate in corporate governance organizations and other associations that provide valuable opportunities to convene with a variety of investors, peer companies, policy makers and other interested parties in promoting knowledge and positive dialogue around corporate governance policy and practices, including the World Economic Forum, the Business Roundtable, the National Association of Corporate Directors, and the Society for Corporate Governance. In addition, we periodically hold Investor and Analyst Days to meet with investors and present and discuss our long-term strategy and financial objectives. Our engagement program involves members of our Board of Directors and senior management, as well as employees from a number of different functions in the Company, including Investor Relations, Legal, Executive Compensation and Sustainability.

In December 2020, we invited our largest shareholders to engagement meetings.

These engagement meetings are an opportunity to discuss key aspects of the Company’s governance profile, compensation philosophy, and performance around sustainability and social value creation, among other things.  These meetings also provide a forum for management to solicit feedback regarding the practices and policies that are important to our shareholders. Topics discussed in these engagement meetings included:

Board Composition, Diversity and Succession Board Evaluation Process Corporate Governance Profile Policy on Outside Directorships Board Oversight of Risk, including Cybersecurity Board Oversight of Strategy CEO and Senior leadership succession Sustainability Goals and Social Value Creation Diversity and Inclusion Board-Shareholder Engagement Disclosure and Transparency Executive Compensation Philosophy and Metrics Share Ownership Threshold to Call Special Meetings

A number of these engagement meetings included our independent Board Chair, who provided our shareholders with the Board's perspective on corporate governance, including board succession, composition and diversity, and the Board's oversight of critical areas such as risk management, cybersecurity, strategy and corporate transactions.

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Management reviews the key themes and insights from all shareholder engagement meetings, as well as broader governance trends, with the Board, which the Board considers in making decisions regarding our governance practices and policies and executive compensation. We may from time to time hold follow-up conversations with shareholders to address important issues that will be considered at the annual shareholders meeting. The outreach and engagement by our management team may also include additional director participation when the topic or the nature of the shareholder request makes this a more meaningful outreach approach.

Role of The Board

Key Responsibilities of the Board Oversee the interests of all shareholders in the long-term health and overall success of the Company’s business and financial strength Serve as the ultimate decision-making body of the Company, except for those matters reserved to or shared with the shareholders Oversee the Company’s strategy and risk Oversee the proper safeguarding of the Company’s assets, the maintenance of appropriate financial and their internal controls, and the Company’s compliance with applicable laws and regulations

Oversight of Strategy

One of the Board’s key responsibilities is overseeing the Company’s strategy. The Board has deep knowledge and expertise in this area and regularly discusses our strategic priorities and businesses, believing that oversight of our strategy is a continuous process that includes the following:

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Our directors also have the opportunity to understand and assess how we are communicating our strategy to investors through updates during shareholder engagement and periodic Investor and Analyst Days.

While the Board and its committees oversee the development and evolution of corporate strategy, management is responsible for executing the strategy. Our strategy is approached with a long-term mindset and a focus on assessing both the opportunities for, and risks to, the Company and its stakeholders.

Oversight of Risk

Management is responsible for day-to-day management of the Company’s risks, including the creation of appropriate risk management programs, policies and practices. Management conducts an enterprise risk management (“ERM”) program, which is an evergreen process using a widely-accepted framework to identify, assess, monitor and communicate the Company’s strategic, operational, financial, compliance and reputational risks. We seek to identify and mitigate risks, and enable improved decision-making and prioritization. The Board and its committees work with management, our independent and internal auditors, as well as other external advisors, to incorporate ERM into corporate strategy and business operations.

As an integral and ongoing part of its work, the Board oversees management’s approach to risk management and execution of its risk management responsibilities. This oversight includes the following:

The Board has delegated responsibility for oversight of certain risk categories to its committees based on each committee’s expertise and applicable regulatory requirements, as summarized below. Each committee regularly receives updates on these matters from management and reports on them to the full Board so that the Board has information necessary to fulfill its risk oversight responsibilities.

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Oversight of Cybersecurity

The Board recognizes the importance of maintaining the trust and confidence of our customers, suppliers, employees and shareholders. As part of its objective to provide independent oversight of the key risks facing the Company, the Board devotes considerable time and attention to oversight of management’s approach to cybersecurity, including strategy, resources, policies, processes and practices. At least twice each year, the Board receives reports from management, including the Chief Information Officer and the Chief Information Security Officer, on the Company’s cybersecurity risk profile, assessments of the Company’s enterprise and product security programs, strategy for managing risks, status of projects to strengthen the Company’s cybersecurity posture, the emerging threat landscape, and other relevant topics.

To more effectively prevent, detect and respond to cybersecurity threats, the Company has a cybersecurity program for both enterprise and product security that is overseen by our Chief Information Security Officer. Key elements of the program are driven by the overall Company and functional strategy and include policy, standards, architecture, processes, employee education and incident response. The program is designed to protect and preserve the security, integrity and continued availability of the Company’s information technology systems and connected products, and also to protect the confidentiality and integrity of all information owned by, or in the care of, the Company. Our employees receive a variety of regular education regarding relevant cybersecurity practices and how to protect information and data against cyber threats.

Xylem’s Cyber Risk Committee, comprised of senior leaders, is responsible for overseeing the strategic and functional management of cybersecurity across the Company. Throughout the year, the committee receives presentations and reports on a broad range of topics around enterprise and product security, including updates on policies and practices, the threat landscape, periodic third-party vulnerability assessments, technology trends, regulatory developments and legal issues, and specific aspects of the Company’s evolving risk profile. The Company’s Enterprise Risk Committee, also comprised of senior leaders, is responsible for reviewing the Company’s critical risks, including cyber risk, and overseeing the Company’s identification, management and mitigation of risks and associated reports to the Board.

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Oversight of Human Capital Management, Diversity and Inclusion and Succession Planning

Our employees around the globe are united in a shared purpose – to solve water – and as such, are key to the Company’s success and strategy. Xylem’s overall success and long-term growth depend, in part, on our continued ability to attract and retain highly-skilled employees, including senior leaders and employees with skills in our strategic areas and core competencies, including engineering, innovation, digital technologies, sales excellence, and product and project management.

At Xylem, we recognize the power of diversity and inclusion to drive innovation, make us more competitive, positively impact customer satisfaction and Company performance, and create value for our shareholders and our other stakeholders. Xylem‘s culture is global and diverse. We have approximately 16,700 employees based in more than 45 countries. Fifty-five percent of our director nominees have origins outside the United States, and 55% of our director nominees also identify as diverse from a gender, ethnic or racial standpoint.

We endeavor to foster a culture that enables all employees to thrive, which means cultivating a diverse and inclusive workplace that brings together people with different perspectives, talents and experiences. We do this in a number of ways, including:

The Board, with the assistance of its committees, provides oversight of the Company’s human capital management strategy and approach, including our diversity and inclusion and talent development programs and policies, and our Board and senior leadership succession planning.

The Board, through its Nominating & Governance Committee, assesses and manages its composition and refreshment, including consideration of a diverse mix of director experiences, skills, qualifications, viewpoints and education, as well as race, ethnicity, gender and global origin. (See “Board Composition and Refreshment”). The Committee also oversees the Company’s anti-harassment, corporate social responsibility and sustainability programs.

The LDCC is responsible for overseeing the Company’s talent management programs and initiatives, including diversity and inclusion. The Company has a broad range of talent development programs to facilitate the continued professional growth and development of our colleagues, and to support development of our succession plans. These programs span across many levels, businesses and functions of the Company, including entry-level talent recruitment programs, development programs for emerging leaders, manager training and executive development.

The Board has primary responsibility for CEO succession planning, as well as oversight of succession planning for senior leadership positions. Key Board and committee activities around succession planning include:

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Corporate Governance Policies and Practices

Corporate Governance Principles

The Board has adopted Corporate Governance Principles that, together with the Company’s articles of incorporation, by-laws, Code of Conduct, and Board committee charters, provide a governance framework for the Company and set out general principles regarding the functions and responsibilities of the Board and its committees.

The Corporate Governance Principles, which are reviewed by the Board periodically and were last updated in December 2020, emphasize the importance of Board composition, including diversity and director performance and effectiveness. Among other things, our Corporate Governance Principles expressly state our commitment to actively seek highly-qualified women and individuals from minority groups to include in the pool of candidates from which Board nominees are selected as part of each Board search.

The Corporate Governance Principles provide that directors must be able to devote the time required to prepare for and attend regularly-scheduled Board and committee meetings, and participate in other matters necessary for sound corporate governance, including director continuing education, site visits and communication with management.

To help assure that directors are able to fulfill their commitments to the Company, the Corporate Governance Principles provide that directors who are executive officers of public companies may not serve on more than three public company boards, including their own board and our Board. Directors that are not executive officers of public companies, may serve on no more than four public company boards (including our Board). However, as provided in the Corporate Governance Principles, even when directors have not exceeded these guidelines, any new or proposed directorships or affiliations are reviewed with respect to conflicts, potential conflicts or other concerns, including the effect on such director’s ability to devote the time required for service on our Board.

The Corporate Governance Principles also provide that when a director retires, or his, her or their principal occupation significantly changes, that director will offer to tender his, her or their resignation.  The Nominating & Governance Committee will make a recommendation to the Board whether to accept or reject the offer to tender resignation.  The Corporate Governance Principles are available on our website at www.xylem.com, by selecting “About Xylem,” then “Investors” and then “Corporate Governance.” A copy of the Corporate Governance Principles will be provided free of charge to any shareholder upon written request to our Corporate Secretary.

Code of Conduct

Our Code of Conduct requires all of our directors, officers and employees to act ethically and honestly. The Code of Conduct is available on our website at www.xylem.com, by selecting “About Xylem” and then “Our Code of Conduct.” We will disclose within four business days any substantive changes in or waivers of, the Code of Conduct granted to our CEO, CFO or Chief Accounting Officer, or persons performing similar functions, by posting such information on our website rather than by filing a Current Report on Form 8-K. A copy of the Code of Conduct will be provided free of charge to any shareholder upon written request to our Corporate Secretary.

Related Party Transactions

We have a written policy that governs the reporting, review and approval or ratification of transactions with related parties. The policy covers, but is not limited to, the related party transactions and relationships required to be disclosed under the US Securities and Exchange Commission (“SEC”) rules. The policy supplements our Code of Conduct, which

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addresses potential conflict of interest situations. Under our policy, directors and executive officers are required to promptly notify the Chair of the Nominating & Governance Committee and our Corporate Secretary of any actual or potential related party transactions so that the transaction can be reviewed and considered for approval or ratification by the Nominating & Governance Committee.

In reviewing related party transactions, the Nominating & Governance Committee will consider the relevant facts and circumstances, including:

Any Nominating & Governance Committee member who is a related party with respect to a transaction under review may not participate in the deliberations about the transaction or vote for its approval or ratification.

The policy provides pre-approval for certain types of transactions that the Nominating & Governance Committee has determined do not pose a significant risk of conflict of interest, either because a related party would not have a material interest in a transaction of that type or due to the nature, size or degree of significance of the transaction to Xylem.

Since January 1, 2020, there have been no related party transactions that are required to be disclosed pursuant to Item 404(a) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Political Activities

Xylem believes that transparent and responsible participation in the public policy process is an important means of enhancing long-term shareholder value. Furthermore, as a thought leader and a leading, global water technology company committed to solving the world’s water challenges, Xylem believes it has a responsibility to participate in the public policy process. Therefore, we engage in public policy advocacy on issues that are core to our businesses through ongoing, constructive and transparent interactions with government officials, policymakers, industry and trade associations and other stakeholder groups. These engagements are grounded in and guided by our unwavering commitment to strong corporate governance, compliance with our Code of Conduct, and respect and adherence to applicable laws in the jurisdictions in which we operate globally.

In 2021, we implemented a Political Activities policy, which specifies, among other things, that:

We believe that involvement in industry and trade associations is beneficial to our business, and therefore we participate as a member in a number of these organizations. Our participation in an organization may be, in whole or in part, to advance collaborative and constructive approaches to industry engagement with policymakers and other stakeholders to help advance the Company’s public policy agenda and related business goals. We pay membership dues to a number of trade associations and industry groups that may use these funds at their discretion to fund political activities. Our membership in an organization, however, does not imply the Company’s endorsement of all of the policy positions of that particular group. We review these memberships annually to assess their business value and alignment with the Company’s overall public policy agenda. A copy of our Political Activities policy can be found on our website at www.xylem.com, under “About Xylem.”

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Our Corporate Governance Principles require a majority of our Board to be comprised of directors who are independent in accordance with the NYSE’s listing standards. The Board conducts an annual review and has affirmatively determined that 11 of our current 12 directors (Jeanne Beliveau-Dunn, Robert F. Friel, Jorge M. Gomez, Victoria D. Harker, Sten E. Jakobsson, Steven R. Loranger, Surya N. Mohapatra, Jerome A. Peribere, Markos I. Tambakeras, Lila Tretikov and (Uday Yadav)meet the independence requirements in the NYSE’s listing standards. Mr. Loranger, who served as our CEO from September 2013 until March 2014, meets the independence requirements in the NYSE’s listing standards because his service as CEO was on an interim basis. Curtis J. Crawford, who served as a director until May 13, 2020, was determined to be independent during the time he served on the Board. Patrick K. Decker is not independent because he serves as our President & CEO.

Board Leadership Structure

Our Board is led by our independent Chair. The Board will consider the continued appropriateness of this structure as necessary to meet the best interests of the Company and its shareholders. The Board believes that our current leadership structure strengthens the Board’s role in risk oversight of the Company. Mr. Friel currently serves as our independent Chair, and will continue in that role contingent upon his successful re-election at the 2021 Annual Meeting.

Board Effectiveness

The effectiveness of the Board and its committees is critical to Xylem’s success and the protection of the long-term interests of our shareholders and other stakeholders. In the spirit of continuous improvement, each year our Nominating & Governance Committee initiates a comprehensive assessment of the effectiveness of the Board and each of our committees, as well as individual directors, using a self-assessment or third-party advisor. The objective of the assessment is to identify and assess areas where the Board functions effectively, and importantly, areas where it can improve. The assessment process includes the following steps:

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On a periodic basis (generally every three years), the Nominating & Governance Committee will also engage a third-party advisor to assist with the qualitative assessment of the Board and its committees, including meeting with each director individually. The advisor presents her/his/their findings to the full Board and facilitates a robust discussion focusing on opportunities for improvement. The advisor also provides feedback to individual directors, as applicable. The most recent engagement of an independent third party advisor was for the 2018 assessment.

Board Composition and Refreshment

Board Tenure

When assessing the appropriate balance of experience, continuity and fresh perspectives with respect to director nominees and candidates, the Board considers, among other factors, length of tenure. The average tenure of the director nominees is approximately 6.3 years. Following the Annual Meeting, assuming all director nominees are elected, there will be four directors, comprising ~36% of the Board, who joined within the past four years, adding valuable fresh perspectives to the Board’s deliberations. The remaining seven directors, comprising ~64% of the Board, have served between 7 and 10 years and bring a wealth of experience and knowledge concerning Xylem.

The Board has established a retirement age policy of 72 for directors, as reflected in our Corporate Governance Principles. The Board believes that it is important to monitor its composition, skills and needs in the context of the Company’s long-term strategic goals. The Board further believes that it is important to balance refreshment with the need to retain directors who have, over time, developed significant insights into the Company, its operations and evolution, and who continue to make valuable contributions that benefit our shareholders and other stakeholders.

Board Refreshment

On a regular basis, careful consideration is given to the composition of our Board in order to maintain an appropriate mix of experiences and qualifications, introduce fresh perspectives and broaden and diversify the views and backgrounds represented on the Board. The Nominating & Governance Committee is responsible for identifying and evaluating potential director candidates, reviewing the Board and committee composition and making recommendations to the Board. The Nominating & Governance Committee seeks to identify candidates who possess the experience, skills, qualifications and attributes that will provide a broad range of personal characteristics to the Board, including diversity of thought and background, experience in technology and innovation, and global business experience. In fulfilling its refreshment responsibilities, the Board and the Nominating & Governance Committee use an evergreen process as follows:

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The Nominating and Governance Committee engages in a year-round recruitment process to identify and evaluate new director candidates. In evaluating candidates, the Committee considers whether and to what extent attributes and experiences will individually and collectively complement the existing Board. The Committee also considers the impact on Board composition from upcoming director retirements, as well as Xylem’s strategy and evolving, diverse and global businesses and operations. The Nominating & Governance Committee regularly reviews the board size, diversity profile and composition, including tenure and retirements given the Board’s mandatory retirement age of 72. The average tenure of the director nominees is approximately 7XX years. The Nominating and Governance Committee engages in a year-round recruitment process to identify and evaluate new director candidates. In evaluating candidates, the Committee considers whether and to what extent attributes and experiences will individually and collectively complement the existing Board. The Committee also considers the impact on Board composition from upcoming director retirements, as well as Xylem’s strategy and evolving, diverse and global businesses and operations. The Nominating & Governance Committee considers the periodic rotation of committee members and committee chairs in order to enhance perspectives and broaden and diversify the views and experiences. The Nominating and Governance Committee engages in a year-round recruitment process to identify and evaluate new director candidates. In evaluating candidates, the Committee considers whether and to what extent attributes and experiences will individually and collectively complement the existing Board. The Committee also considers the impact on Board composition from upcoming director retirements, as well as Xylem’s strategy and evolving, diverse and global businesses and operations. Through its annual assessment process, the Board evaluates whether the mix of directors is appropriate given the Company’s strategy and continuing evolution. The Nominating and Governance Committee engages in a year-round recruitment process to identify and evaluate new director candidates. In identifying and  evaluating candidates, the Nominating & Governance Committee considers whether and to what extent attributes and experiences will individually and collectively complement the existing Board, including . The Committee also considers the impact on Board composition from upcoming director retirements, as well as Xylem’s evolving strategy and evolving, diverse and global businesses and operations. The Nominating and Governance Committee engages in a year-round recruitment process to identify and evaluate new director candidates. In evaluating candidates, the Committee considers whether and to what extent attributes and experiences will individually and collectively complement the existing Board. The Committee also considers the impact on Board composition from upcoming director retirements, as well as Xylem’s strategy and evolving, diverse and global businesses and operations. All new directors participate in a comprehensive orientation program to provide them with a strong foundation in Xylem’s strategic and financial performance, executive compensation program, culture, approach to sustainability and corporate governance policies and practices.

Board Diversity

Xylem and its Board believe diversity in the boardroom is critical to the success of the Company and its ability to create long-term value for our shareholders and other stakeholders. As set forth in our Corporate Governance Principles, our Board actively seeks to consider a diverse group of candidates for membership on the Board, taking into account diversity in terms of viewpoints, professional experience, education and skills as well as race, ethnicity, gender and nationality. Our Board is committed to actively seeking highly-qualified women and individuals from minority groups to include in our pool of candidates from which Board nominees are selected as part of each Board search. Our Nominating & Governance Committee reviews its effectiveness in balancing diversity considerations when assessing the composition of the Board, and our entire Board considers diversity when conducting the annual Board assessment. After extensive searches, over the past four years we have added four directors that bring additional diverse and fresh perspectives as well as deep experience to our Board:

Our 11 director nominees reflect the Board’s careful approach to succession planning, resulting in a balanced mix of attributes, skills, experiences, diverse viewpoints and backgrounds in our boardroom. Approximately 55% of our nominees identify as women or as ethnically/racially diverse, and ~55% identify national origins outside the US:

The Nominating & Governance Committee considers recommendations of director candidates from many sources, including shareholders and third-party search firms. Shareholders wishing to propose a candidate for consideration may do so by submitting the proposed candidate’s full name and address, resume and biographical information to the attention of our Corporate Secretary at Xylem Inc., 1 International Drive, Rye Brook, New York 10573. The Nominating & Governance Committee and Board use the same criteria for evaluating candidates regardless of the referral source.

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Director Orientation and Continuing Education

We have a comprehensive orientation program for all new directors with respect to their role as directors and as members of the particular Board committees on which they will serve. This orientation program includes one-on-one meetings with management and extensive written materials to provide new directors with a strong foundation in Xylem’s strategic plans, industry, business, financial performance, executive compensation program and corporate governance policies and practices. The orientation program also includes visits to Xylem sites, which our newest directors, Ms. Tretikov and Mr. Yadav, look forward to once pandemic-related safety concerns and travel restrictions abate.

Our Board believes that director education is vital to the ability of its directors to fulfill their roles and supports directors’ continuous learning. Accordingly, we have continuing education programs to help directors enhance their skills and knowledge in order to better perform their duties and recognize, and deal appropriately with, issues, risks and opportunities that may arise. These programs are typically part of regular Board and committee meetings and may be provided by management or qualified third parties on various topics. The directors also periodically visit Xylem sites; such visits provide them with an opportunity to see firsthand the execution and impact of the Company’s strategy, and engage with Xylem employees to deepen their understanding of our business, products, services and solutions, competitive landscape and corporate culture. In addition, the Board encourages directors to participate in external continuing education programs. The Company pays for all reasonable expenses for directors attending such programs.

Attendance

Regular attendance at Board meetings and attendance at each annual meeting of shareholders is expected of each director. In 2020, there were 10 Board meetings and 20 committee meetings. Average attendance of our directors at Board and applicable committee meetings in 2020 (held during the period that each director served) was more than 98% and none of the director nominees attended fewer than 95% of the total number of Board and applicable committee meetings. All of our directors were present at the virtual Annual Meeting held in 2020.

Executive Sessions

The independent directors hold regularly scheduled executive sessions without Company management present. In 2020, there were six meetings during which such sessions were held; Markos I. Tambakeras, independent Board Chair through the 2020 Annual Meeting presided over three of these executive sessions; and Robert F. Friel, who assumed the role of independent Board Chair following the 2020 Annual Meeting, presided over three of these sessions. During these executive sessions, the directors discussed the Company’s management of COVID-19 impacts, strategy, management and director succession planning, and other key governance topics.

Management Participation in Board and Committee Meetings

Key members of management regularly attend and participate in Board meetings, presenting on important topics. Regular attendees include the Chief Financial Officer, the Chief Sustainability Officer, General Counsel and Corporate Secretary, the Chief Human Resources Officer, the Chief Innovation, Technology and Product Management Officer, the Chief Strategy and Digital Officer, and the segment and regional Presidents. In addition, other senior leaders and executives also participate periodically in the Board and committee meetings.

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Our Board has established four committees to assist in discharging its duties: the Audit & Finance Committee, the Innovation & Technology Committee, the Leadership Development & Compensation Committee and the Nominating & Governance Committee. Written charters for each of these committees are approved and adopted by the Board, and are reviewed at least annually and updated, as appropriate. Each committee’s charter is available on our website at www.xylem.com by selecting “Investors” and then “Corporate Governance.” Outlined below are the Board committees with brief descriptions of each committee’s membership and responsibilities.

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Compensation Risk Oversight

To assist the Board with its risk oversight responsibilities, the LDCC regularly considers the risks associated with the Company's compensation programs.  In addition, each year our management team undertakes a comprehensive review of the Company's compensation policies and practices and presents the results of this review to the LDCC. Following the presentation of the results of the 2020 review, the LDCC concluded that the overall structure of our compensation program is designed with the appropriate balance of risk and reward in relation to our overall business strategy, and that there were no compensation-related risks reasonably likely to have a material adverse effect on the Company. The following table summarizes the risk mitigation factors for each element in our executive compensation program:

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See “Compensation Discussion and Analysis” section for additional information on the LDCC’s role and responsibilities.

LEADERSHIP DEVELOPMENT & COMPENSATION COMMITTEE REPORT

The Leadership Development & Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis included in this Proxy Statement. Based on this review and discussion, the Leadership Development & Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

Leadership Development & Compensation Committee of the Company’s Board of Directors:

Jerome A. Peribere, ChairSteven R. Loranger

Jeanne Beliveau-DunnSurya N. Mohapatra, Ph.D.

The Board has established a process to facilitate communication between shareholders and other interested parties with the Company’s independent directors. Communications intended for the Board, or for any individual member or members of the Board, should be sent by:

In general, any shareholder communication delivered to us for forwarding to the Board or specific directors will be forwarded in accordance with the shareholder’s instructions. Correspondence addressed to “Non-Employee Directors” will be forwarded to our independent Board Chair. Junk mail, advertisements, resumes, spam and surveys will not be forwarded to the Board or directors. Abusive, threatening or otherwise inappropriate materials will also not be forwarded.

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At Xylem, sustainability is at the center of who we are and what we do.  As a leading global water technology company, we address one of the world’s most urgent sustainability challenges – responsible stewardship of our shared water resources. Technology is playing an increasingly important role in helping the world solve water issues. We have a long history of innovation, and are focused on the powerful capabilities of smart technology, integrated management and data analytics.

Our Board of Directors, primarily through its Nominating & Governance Committee, provides oversight of the Company’s approach to sustainability and corporate social responsibility.  In addition, the LDCC oversees the Company’s approach to continuously improving diversity and inclusion as well as talent development. The Board and its committees regularly discuss with management our approach to sustainability, including risks and opportunities, and implications for the Company’s strategy.

Xylem approaches business sustainability as a way to generate economic value while also creating value for society, thus meeting the needs of both. We leverage sustainability in our decision-making toward long-term value creation for our shareholders, customers, employees and communities in which we operate. Xylem is helping to create a water-secure world while creating social and economic value in the following three ways:

Serving Our Customers  We provide innovative technologies, solutions and expertise that help our customers solve major water challenges like water affordability, scarcity and resilience.  Building a Sustainable Company   We know that in order to be a company that advances sustainability, we have to be a company with a strong foundation that executes with discipline today while also focusing on the future. We adhere to and champion responsible business practices, including promoting diversity and inclusion, and look to be a standard-setter in all that we do.  Empowering Communities  We are a company that is committed to creating both economic and social value. We strive every day to create social impact and solve water for communities in need, including those impacted by water-related disasters, recognizing that water challenges dramatically affect the quality of life and economic prospects for millions of people around the globe every day.  

We appreciate the important role we play in helping our customers meet their own sustainability goals. Our products and solutions allow our customers to transport, treat, and test water more sustainably than in the past. This also enables our customers to realize greater water and energy efficiencies, to have access to more affordable solutions and to build communities that are more resilient against the adverse impacts of climate change.

A shared value approach requires business, environmental and social aims to mutually thrive. Our shared value approach is designed to increase economic and social value by:

In furtherance of our shared value approach, in 2019 we announced an ambitious slate of 2025 goals against which we are measuring our progress. Our 2019 Sustainability Report: “Water for a Healthy World” is available on Xylem’s website where you can learn more about our 2025 goals. Our 2025 Sustainability goals are aligned with the United Nations Sustainable Development Goals (“UNSDGs”), not only to substantiate our contribution to achieving global

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objectives, but also to underscore our commitment to building a sustainable future. While Xylem embraces all 17 of the UNSDGs, we have a special focus on SDG6: Clean Water and Sanitation.  

Xylem is currently assessing the risks and opportunities related to the impact of climate change on our business. We are in the process of performing a climate scenario analysis under the Task Force on Climate-related Financial Disclosures (TCFD) framework, and are working to expand the Sustainability Accounting Standards Board (SASB) aligned-disclosures in our Sustainability Report.

Xylem Watermark, our corporate social responsibility program, has a mission to provide education and access to safe water to enable healthy lives and build resilient communities. With approximately 7,500 employees participating in 2020, our employee-led volunteerism enhances the Company’s commitment to employee retention, recruiting, and collaboration in the communities in which we live and work. Xylem Watermark’s expansion strategy, which includes an integrated stakeholder engagement and disaster response model, continues to position us to engage a larger ecosystem to empower communities globally. In 2020, Xylem Watermark supported communities heavily affected by COVID-19 with additional philanthropic donations, production and distribution of personal protective equipment, and partnership with industry organizations to raise awareness of the impacts COVID-19 has had on our industry.

In 2020, we completed a $1 billion Green Bond offering, the proceeds of which will be allocated to projects that help improve water accessibility, water affordability and water systems resilience, thus further aligning our sustainability and financing strategies. This follows our 2019 execution of the first sustainable improvement loan in the US General Industrial Sector, which ties the Company’s borrowing rates to our Sustainalytics rating, an important barometer of Xylem’s continued commitment to sustainability. Further underscoring Xylem’s continued commitment to sustainability, a part of the individual component of the 2020 Annual Incentive Compensation for both our President & CEO and our Senior Vice President, Chief Sustainability Officer, General Counsel and Corporate Secretary was tied to Xylem’s sustainability performance as rated by Sustainalytics. In addition, the individual component of the 2020 Annual Incentive Compensation for our segment Presidents included safety performance of their businesses as measured by injury frequency and risk reduction index. In 2021, the Company is augmenting its approach to sustainability-linked compensation for all of our NEOs, as well as a broader group of executives, with a special, one-time grant of performance share units tied to goals that are based on 5 of our strategically transformative 2025 sustainability goals.

Xylem’s ongoing commitment to sustainability and the results we have achieved have led to our inclusion on several of the world’s most prestigious sustainability equity indexes. In 2020, Xylem scored an A- from CDP in both the Climate Change and Water ratings, in recognition of our actions to optimize energy consumption and water usage, reduce CO₂ emissions and water withdrawals, and mitigate the business risks of climate change and water insecurity. In 2020, Xylem’s sustainability progress was also assessed in the MSCI and ISS indexes.

We are also proud signatories to the following:

As a signatory to each of these compacts, pledges and mandates, Xylem is committed to continuous progress against their core elements; this helps us better understand and manage our own opportunities and risks in the environmental, social and governance arena.

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STOCK OWNERSHIP

Set forth below is information regarding any person known to the Company as of February 16, 2021 to be the beneficial owner of more than five percent of our outstanding common stock as of December 31, 2020. As of December 31, 2020, the Company had 180,331,995 shares of common stock outstanding. In providing the information below, we have relied on information filed with the SEC by the beneficial owners.

The following table shows the number of shares of our common stock beneficially owned by each director and NEO, and by all current directors and executive officers as a group as of February 15, 2021. The percentage calculations below are based on an outstanding share number of 180,358,493. The number of shares beneficially owned by each director or NEO has been determined under the rules of the SEC, which provide that beneficial ownership includes any shares as to which a person has the power to vote, or the power to transfer, and any shares the person has the right to acquire within 60 days by the exercise of any stock option or other right. Unless otherwise indicated, each individual has sole voting and investment power, or shares those powers with his/her/their spouse.

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*Less than 1%

____________

Stock Ownership Guidelines

The LDCC has adopted stock ownership guidelines to encourage directors, NEOs and our most senior executives to build their ownership positions in our common stock over time. We believe that stock ownership guidelines are an important governance feature because they promote senior executive and director commitment to the Company, strengthen the alignment between executive compensation and shareholder interests, minimize excessive risk-taking to achieve short-term returns at the expense of long-term value creation, and build an ownership mentality among the Company’s senior executives and directors. Our guidelines currently provide for the stock ownership levels for directors and senior executives as follows:

It is expected that all shares acquired through the vesting of RSUs or performance share units (“PSUs”) and through the exercise of stock options will be held until the applicable ownership level is met. In addition to this expectation, the Company requires SVPs subject to the guidelines to retain a minimum of 50% of the net (after-tax) shares acquired through the vesting of RSUs and PSUs to meet the applicable ownership level.

Compliance with the guidelines is monitored periodically. We take the individual’s tenure into account in determining compliance. A director or senior executive is given 5 years from the date she/he/they first become subject to a particular level of stock ownership to meet the applicable requirement. As of February 15, 2021, all directors and senior executives have met, or are on track to meet, the ownership guidelines.

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Insider Trading Prohibition and Policy on Rule 10b5-1 Trading Plans

Our executive officers, other CEO direct reports and directors are subject to our robust insider trading policy. The policy includes earnings-related blackout periods, as well as Company-initiated blackout periods from time to time, as circumstances may warrant. Our insider trading policy allows executive officers, other CEO direct reports and directors to enter into Rule 10b5-1 trading plans for sales of Company securities.

Prohibition on Hedging, Pledging and Shorting Xylem Stock

Our insider trading policy prohibits employees, including executive officers, and directors from engaging in any hedging transactions with respect to Company securities. This includes the purchase of any financial instrument (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) designed to hedge or offset any decrease in the market value of Company securities. Our insider trading policy also prohibits short sales of Company securities and derivative or speculative transactions in Company securities and the pledging, or using as collateral, Company securities in order to secure personal loans or other obligations

DIRECTOR COMPENSATION

Our non-employee director compensation program is designed to attract and retain experienced and knowledgeable directors. Compensation for our non-employee directors is set by the Board at the recommendation of the LDCC.  

Guiding Principles

Our director compensation program is based on the following principles:

Each non-employee director receives an annual cash retainer and an annual equity award in the form of RSUs, which are granted on the annual meeting date and vest the day before the next annual meeting. To reflect their additional responsibilities, the chair of each committee receives an additional cash retainer. The independent Board Chair receives an additional retainer consisting of cash and RSUs. Mr. Decker, as an employee director, does not receive any compensation for his service as a director.

Review Process

The Board delegated to the LDCC the responsibility to review and recommend any proposed changes in non-employee director compensation. In connection with such review, the LDCC periodically engages its external compensation consultant, Pearl Meyer, to assist with benchmarking and analysis regarding non-employee director compensation (generally every three years). The compensation review consists of analysis of competitive market data from the peer group used for our executive compensation benchmarking, and a selected group of general industry companies that are similarly situated to us from a revenue and market capitalization perspective.  

The last review was conducted in 2019 and the Board decided for 2020 to increase the annual equity award from $140,000 to $150,000 to remain competitive with our peer group, and also to implement an excess meeting fee policy, under which an excess meeting fee will be paid to each non-employee director that attends more than 30 meetings per calendar year (including Board and committee meetings). No changes were made to the non-employee director compensation for the 2021 plan year.

The following table sets forth our 2020 and 2021 non-employee director compensation.

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   *In light of the uncertainty created by the COVID-19 pandemic, on May 14, 2020 the Board approved a temporary 20% reduction of the annual cash retainer fees payable to non-employee directors, including the additional cash retainer fee for service as Board Chair or a committee chair, as applicable, for service during the period from June 1, 2020 through December 31, 2020.

Director Compensation Limit Policy  

Our Board compensation policy limits the total annual compensation for non-employee directors to $750,000 per year.  This limit is inclusive of the value of the applicable annual cash retainer(s), excess meeting fees (if any) and the grant date fair value of the annual equity award.

Deferred Compensation Plan for Directors

Directors have the ability to defer their cash retainers and/or their RSUs. Directors may defer their cash retainers until a specified distribution date, or until retirement or earlier death. Directors may also choose how deferred amounts will be valued until paid; they may choose to have the deferred amount credited with a fixed rate of interest, or to have the deferred amount adjusted periodically based on the value of our common stock. Directors may defer settlement of RSUs until termination of service on the Board or an earlier date specified by the director.

Other Board Compensation

The Company reimburses directors for certain expenses incurred in connection with attending Board, committee and shareholder meetings, including travel, hotel accommodations, meals and other reasonable incidental expenses for the director (and his/her/their spouse or domestic partner, if specifically invited to attend). The Company may also from time to time provide directors and their spouses or domestic partners token gifts of nominal value. Directors are reimbursed for reasonable expenses associated with other Company-related business activities, including participation in director education programs.

Directors are eligible to participate in the Company’s matching gifts program on the same terms as our employees. Under this program, the Company will match or, in certain cases, double match, up to $10,000 in annual donations made to Xylem’s Watermark Fund or its non-profit partners.

Indemnification and Insurance

We indemnify our directors to the fullest extent permitted by law and maintain insurance to protect the directors from liabilities, including certain instances where the Company could not otherwise indemnify them. All directors are covered under a non-contributory group travel insurance policy that provides travel assistance benefits and services, including medical insurance, evacuation coverage and accidental death and dismemberment coverage.  Non-employee directors also participate in a non-contributory group life insurance plan that provides $100,000 of coverage.

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DIRECTOR COMPENSATION TABLE

DIRECTOR STOCK AND OPTION AWARDS OUTSTANDING AT 2020 FISCAL YEAR END

The following table reflects stock awards for non-employee directors outstanding as of December 31, 2020 (no stock options were outstanding).

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COMPENSATION DISCUSSION AND ANALYSIS

This section describes the compensation programs and philosophy for our Named Executive Officers (“NEOs”) in 2020:

Business Performance for 2020

*Non-GAAP financial measures that exclude certain items. For a description and reconciliation of the items excluded from these measures, other than Free Cash Flow Conversion, relative to our reported GAAP financial results, please refer to pages 33-34 of Xylem’s Annual Report on Form 10-K for the year ended December 31, 2020. For a description and reconciliation of the items excluded from Free Cash Flow Conversion relative to our GAAP financial results, please refer to pages 12 and 17 of Xylem’s Current Report on Form 8-K for the quarter and fiscal year ended December 31, 2020.

While the pandemic affected our financial performance, we raised our level of execution and continued to solve customers’ greatest water and resource challenges in their time of extreme need. We put resilient infrastructure in place to keep our colleagues safe and connected and our essential operations running. We were able to steadily improve performance through the second half of the year and achieve solid results thanks to our focus on serving customers, operational execution and cost discipline. We have many important competitive strengths that have helped us stand out, including our global presence, diversified end markets and broad portfolio of innovative offerings. Our digital solutions offer new opportunities to create impact as customers seek ways to optimize their operations and make water and energy infrastructure more affordable, efficient and resilient. We are ready to navigate ongoing uncertainty in 2021 and drive growth with our continued efforts and commitment.

In 2020, through the unprecedented challenges posted by the COVID-19 pandemic, we made meaningful progress against our strategic priorities:

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CEO Pay-for-Performance Summary

The following graph illustrates the pay-for-performance alignment of our CEO's compensation over the last five years, with Company performance measured by Total Shareholder Return (“TSR”) and the CEO’s compensation as disclosed in the Summary Compensation Table, excluding the amounts reported in the "All Other Compensation" column.

2020 Executive Compensation Highlights

Based on our executive total rewards philosophy, the LDCC took the following compensation actions in 2020:

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Actual AIP awards are described in detail in the “Our Executive Compensation Program” section in the “Annual Incentive Plan” subsection.

The 2020 LTIP awards for NEOs, as disclosed in the Summary Compensation Table, were set to generally align with market median.

2020 Advisory Vote to Approve Executive Compensation

Each year, the LDCC considers results from the annual shareholders advisory vote on executive compensation as well as feedback from shareholder engagement, when reviewing the design of executive compensation programs. At our 2020 Annual Meeting, our shareholders expressed a high level of support (91%) for the compensation of our NEOs, which  compares to prior years’ shareholder support ranging from 92% to 98% (since our spin-off in 2011). The LDCC believes this result conveyed our shareholders’ support of the existing executive compensation program designs and did not make any changes to the programs as a result of the vote.

2020 Shareholder Engagement

Our Board values the input and insights of the Company’s shareholders and believes that effective Board-shareholder communication strengthens the Board’s role as an active, informed and engaged fiduciary. We make a concerted effort to engage with shareholders throughout the year to solicit their input on a range of topics related to executive compensation and governance matters. In 2020, we reached out to shareholders representing approximately 60% of our outstanding shares, which resulted in engagement in direct dialogue with shareholders holding more than 20% of our outstanding shares. Our Board Chair participated in a number of these conversations. Our top shareholders expressed strong support for our executive compensation programs, including our emphasis on equity incentives, the balance of performance metrics in our annual and long-term incentive plans, the pay and performance alignment, and the linkage of certain executives’ compensation to sustainability performance as rated by Sustainalytics.

The Board considered feedback from shareholders through the say on pay vote and engagement and determined to maintain the key provisions of our executive compensation program.

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Best Practices

Our compensation program incorporates the following practices:

Philosophy and Objectives

Our executive compensation program is based on the following principles:

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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 2020 target compensation mix for NEOs. The percentages of total target compensation reflected in charts below were calculated using each NEO’s fiscal year 2020 base salary (without accounting for the 20% reductions in base salary that were applicable from June 1 through December 31, 2020 in response to the COVID-19 pandemic), 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: similar business mix, global presence, revenue size, market capitalization and talent pool. Our 2020 Peer Group includes the following companies:

In August 2020, the LDCC reviewed the current Peer Group and reaffirmed that they continue to meet the peer company selection criteria and did not implement any significant changes (except Ingersoll-Rand plc was replaced with Ingersoll-Rand Inc. as a result of their corporate transaction) for the 2021 fiscal year.

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. Market survey data sources include: Aon Hewitt Total Compensation Measurement, Willis Towers Watson Compensation Data Bank, and Mercer Executive Remuneration Survey. Each survey includes approximately 1,000 to 2,500 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 and may be adjusted for other factors such as outstanding performance, strategic impact, level of responsibility, tenure in the position and internal pay equity. Our NEOs’ actual compensation is intended to vary on a yearly basis in accordance with actual annual and long-term performance.

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Elements of Our Executive Compensation Program — Overview

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

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:

Base salaries are reviewed annually for potential merit increase.

In February 2020, the LDCC provided a 5% merit increase for Mr. Sabol to better align his salary to market median. Mr. Decker and Mr. Rajkowski’s base salaries were not changed. Mr. Rajkowski retired from the Company on December 31, 2020.  Messrs. Pine and Yarkadas were hired on March 16, 2020, and Ms. Rowland was hired on October 1, 2020.

In response to the changes in business and economic conditions arising as a result of the COVID-19 pandemic, in the second quarter of 2020, the Company committed to restructuring activities across our businesses and functions globally designed to support our long-term financial resilience, simplify our operations, strengthen our competitive positioning and better serve our customers. In May 2020, as part of the Company-wide cost reduction efforts, the LDCC approved a temporary 20% reduction in the base salary of the Company’s CEO and all officer-level direct reports to the CEO. These temporary reductions were effective from June 1, 2020 through December 31, 2020.

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Annual Incentive Plan

Our AIP is a cash-based incentive program designed to link compensation to the Company’s annual financial performance objectives as well as strategic priorities.

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: