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.
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2021 fixed pay and benefits |
Performance-related variable pay |
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Annual base salary |
Pension and other benefits |
2021 Annual Incentive |
Long-Term Incentive awards cycle 2021-2023 LTPP1 |
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Purpose |
Reflects responsibilities, experience and skill sets |
Provide retirement and risk insurances (tailored to local market practices/ |
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 |
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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 |
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Performance measures |
– |
– |
Balanced scorecard comprising:
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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 |
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2021 CEO pay for performance – outcomes
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 |
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|
|
|
Strategic objectives – 40% of total Annual Incentive, comprising: |
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|
Innovation (20%) |
Below |
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Operational excellence (20%) |
Above |
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Data and digital (20%) |
Met |
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People and culture (including Values and Behaviors) (20%) |
Met |
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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 |
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TOTAL Annual Incentive: |
100% of target (payout range 0% – 200%) |
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.
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Fixed pay and benefits |
Variable pay: |
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CHF |
Annual base salary |
Pension and other benefits |
2021 Annual Incentive |
LTPP 2019-20211 |
Total realized compensation |
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Vasant Narasimhan |
1 769 200 |
442 132 |
2 657 267 |
6 356 128 |
11 224 727 |
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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 |
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Compensation of Chairman |
3 800 |
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Board membership |
280 |
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Vice Chairman |
50 |
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Chair of the Audit and Compliance Committee |
130 |
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Chair of the Compensation Committee |
90 |
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Chair of the following committees:
|
70 |
||
Membership of the Audit and Compliance Committee |
70 |
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Membership of the following committees:
|
40 |
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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.