Compensation Report summary

In 2021, we continued our transformation into a leading, focused medicines company powered by technology, leadership in research and development, world-class commercialization, global access and data science. Feedback from shareholder engagement prior to our last Annual General Meeting (AGM) suggested that shareholders were in agreement that our current compensation system is aligned with the company’s purpose, strategy and culture. No major changes are therefore proposed for 2022.

2021 changes to compensation system and disclosures

The year completes the first three-year performance cycle of the new Long-Term Performance Plan (LTPP), following the combination of the previous LTPP and the Long-Term Relative Performance Plan (LTRPP), as communicated in our 2018 Compensation Report. The combined plan focuses on four equally weighted performance metrics: net sales compound annual growth rate (CAGR), core operating income CAGR, innovation, and relative total shareholder return (TSR).

In 2021, we reviewed our Compensation Report format with a view to increase its accessibility while maintaining its depth of disclosure. We chose to develop our “compensation at a glance” section to incorporate a more graphical illustration of the 2021 CEO pay outcomes and a summary of our executive compensation framework for 2022. In addition, we provide further visibility into the 2019-2021 LTPP targets, showing the threshold, target and maximum opportunity for each performance metric.

2021 performance highlights

2021 was a year of solid performance, with growth across sales, profits, margins and cash flow. Sales growth drivers, were Entresto (USD 3.5 billion), Cosentyx (USD 4.7 billion), and Zolgensma (USD 1.4 billion), along with therapies like Kesimpta, Promacta/Revolade, Kisqali and Jakavi. While overall sales performance was on target, COVID-19 continued to impact parts of our business, specifically Oncology and Sandoz.

We continued to deliver innovation to patients in 2021 with 21 approvals, including Leqvio (US, EU) and Scemblix (US), and 34 submissions made across our top four markets. However, the year was not without setbacks, as some clinical trials of experimental compounds – including Kymriah for blood cancer, ACZ885 (canakinumab) for lung cancer, and CFZ533 (iscalimab) in kidney transplant patients – did not meet their primary goals.

We progressed our efforts to deliver next-generation medicines while driving our environmental, social and governance (ESG) agenda. Pursuing new health equity initiatives in clinical trial diversity, advancing access to medicines, and using data and digital technologies in underserved regions in Africa, South America and Asia are examples of our long-term commitment to transform global health. More details on our ESG efforts are provided earlier in this report.

Performance against the incentive targets, combined with base salary and other benefits, pension, Alcon Keep Whole awards and dividend equivalents, resulted in 2021 total realized compensation for the CEO of CHF 11 224 727. This is a reduction of 11.8% compared to 2020. Overall, while the financial and operational targets were met or surpassed, some of the innovation targets were missed, which led to a reduction in long-term growth potential. This is reflected in a TSR performance below the peer group median. The reduced contribution of innovation and relative TSR to the 2019-2021 LTPP cycle were the main drivers of the lower total realized compensation in 2021 versus 2020. Full details of the 2019-2021 LTPP performance can be found in the Compensation Report of our 2021 Annual Report.

Alignment with company strategy

Our strategy is to build a focused medicines company powered by technology, leadership in research and development, world-class commercialization, global access and data science. We foster a company culture that is inspired, curious and unbossed. We believe these elements drive continued innovation and will support the creation of value over the long term for our company, society and shareholders. To continue to align the compensation system with this strategy and to ensure that Novartis is a high-performing organization, the company operates both a short-term Annual Incentive plan and a Long-Term Incentive (LTI) plan with a balanced set of measures and targets. The Board of Directors determines specific, measurable and time-bound performance measures for the Annual Incentive and LTI plans. The Compensation Committee has reviewed the existing compensation system and determined that it continues to support our strategy.

2021 Executive Committee compensation system

 

2021 fixed pay and benefits

Performance-related variable pay

 

Annual base salary

Pension and other benefits

2021 Annual Incentive

Long-Term Incentive awards cycle 2021-2023 LTPP1

Purpose

Reflects responsibilities, experience and skill sets

Provide retirement and risk insurances (tailored to local market practices/regulations)

Rewards for performance against short-term financial and strategic objectives, and Values and Behaviors

Rewards long-term shareholder value creation and innovation in line with our strategy

Form of payment

Cash

Country/individual-specific and aligned with other employees

50% cash 50% equity2 deferred for three years3

Equity, vesting following a three-year performance period

Performance measures

–

–

Balanced scorecard comprising:

  • Financial measures (60%)
  • Strategic objectives4 (40%)
  • Net sales growth CAGR (25%)
  • Core operating income CAGR (25%)
  • Innovation (25%)
  • Relative TSR (25%)

1

LTPP = Long-Term Performance Plan

2

Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash.

3

The Annual Incentive deferred in equity is granted under the Deferred Share Bonus Plan (DSBP).

4

Strategic objectives are aligned with the five strategic pillars: innovation, operational excellence, data and digital, people and culture, and building trust with society.

The 2019-2021 cycle is the first vesting of the new LTPP plan, when the metrics were transformed into four equally weighted measures: net sales CAGR, core operating income CAGR, innovation and relative TSR.

Executive Committee compensation governance

A summary of the compensation decision authorization levels within the parameters set by the AGM is shown below, along with an overview of the risk management principles.

Decision on

Decision-making authority

Compensation of CEO

Board of Directors

Compensation of other Executive Committee members

Compensation Committee
Executive Committee compensation risk management principles
  • Rigorous performance management process, with approval of targets and evaluation of performance for the CEO by the Board of Directors
  • Balanced mix of short-term and long-term variable compensation elements
  • Values and Behaviors are a key component of the Annual Incentive and are embedded in our culture
  • Performance-based Long-Term Incentives, with three-year cycles
  • All variable compensation is capped at 200% of target
  • Contractual notice period of 12 months
  • Post-contractual non-compete period is limited to a maximum of 12 months from the end of employment. Resulting compensation is limited to the annual base salary plus the prior-year Annual Incentive as per contract, if applicable
  • Good and bad leaver provisions apply to the variable compensation of leavers
  • No severance payments or change-of-control clauses
  • Clawback and malus principles apply to all elements of variable compensation
  • Share ownership requirements; no hedging or pledging of Novartis share ownership position

2021 CEO pay for performance – outcomes

2021 Annual Incentive

Measure

Target

Achievement versus target

Financial measures – 60% of total Annual Incentive, comprising:

 

Group net sales (cc) (30%)

USD 50 010 million

Met

Group operating income (cc) (30%)

USD 10 805 million

Above

Group free cash flow as a % of sales (cc) (20%)

24.9%

Above

Share of peers for Novartis Group (USD) (20%)

8.1%

Below

Overall assessment of Group financial targets in constant currencies

Met

 

 

 

Strategic objectives – 40% of total Annual Incentive, comprising:

 

Innovation (20%)

Below

Operational excellence (20%)

Above

Data and digital (20%)

Met

People and culture (including Values and Behaviors) (20%)

Met

Building trust with society (including access to healthcare, reputation and other ESG topics) (20%)

Met

Overall assessment of strategic objectives

Met

Overall assessment of CEO balanced scorecard

Met

TOTAL Annual Incentive:

100% of target (payout range 0% – 200%)
2019-2021 Long-Term Incentives

Measure

Target

Achievement versus target

Long-Term Performance Plan (LTPP)

 

 

Net sales CAGR (25%)

4.3%

Above

Core operating income CAGR (25%)

7.0%

Above

Innovation (25%)

 

Above

Relative TSR (25%)

 

Below threshold

TOTAL LTPP:

107% of target (payout range 0% – 200%)

2021 total realized compensation for the CEO

The 2021 total realized compensation for the CEO was CHF 11 224 727. It includes payouts of the Annual Incentive and LTPP based on actual performance assessed for cycles concluding in 2021.

 

Fixed pay and benefits

Variable pay:
performance-related

 

CHF

Annual base salary

Pension and other benefits

2021 Annual Incentive

LTPP 2019-20211

Total realized compensation

Vasant Narasimhan

1 769 200

442 132

2 657 267

6 356 128

11 224 727

1

The shown amount represents the underlying share value of the total number of shares vested (including dividend equivalents of CHF 581 198 and Alcon Keep Whole awards of 612 696) to the CEO for the 2019-2021 LTPP performance cycle.

2021 Board of Directors compensation

All fees to Board members are delivered at least 50% in equity and the remainder in cash. Board members receive no variable or performance-based compensation, no share options, and no additional fees for attending meetings. Board members do not receive any company pension or insurance benefits.

CHF 000

2021-2022 AGM, annual fee1

Compensation of Chairman

3 800

Board membership

280

Vice Chairman

50

Chair of the Audit and Compliance Committee

130

Chair of the Compensation Committee

90

Chair of the following committees:

  • Governance, Nomination and Corporate Responsibilities Committee
  • Science & Technology Committee
  • Risk Committee

70

Membership of the Audit and Compliance Committee

70

Membership of the following committees:

  • Compensation Committee
  • Governance, Nomination and Corporate Responsibilities Committee
  • Science & Technology Committee
  • Risk Committee

40

1

No additional compensation was paid for the Lead Independent Director role.

Total actual compensation earned by Board members in the 2021 financial year was CHF 3 804 560 for the Chairman of the Board and CHF 4 764 354 for the other members of the Board.

Shareholder votes on compensation at the 2022 AGM

In line with our Articles of Incorporation, at the 2022 AGM, shareholders will be asked to approve the maximum aggregate amount of compensation for the members of the Executive Committee of CHF 91 million. This is the same as the amount requested last year. For the Board of Directors, the maximum aggregate amount proposed to shareholders is CHF 8.6 million, which is in line with the prior term. This amount includes an annual fixed fee of CHF 20 000 for the Lead Independent Director role. Full details on compensation for the CEO, other Executive Committee members and Board members can be found in the Compensation Report of our 2021 Annual Report, and in the compensation votes at the 2022 AGM.