Compensation Report

In 2022, we continued to make progress in transforming Novartis into a focused medicines company. Feedback received prior to our last Annual General Meeting (AGM) indicated that shareholders agreed our compensation system is aligned with our purpose, strategy and culture.

2022 performance highlights

2022 was a year of solid financial performance, with growth in constant currencies across sales, core profits and core margins. The performance was driven by key in-market and launch products, including Entresto, Kesimpta, Kisqali, Cosentyx, and Pluvicto.

In April 2022, we announced the introduction of a new organizational model designed to support our next phase of innovation, growth, and productivity as a focused medicines company. The restructuring is expected to deliver USD 1.5 billion in savings by 2024.

There was nonetheless an immediate impact on Operating Income that, along with unfavorable fair value adjustments on financial assets, impacted operating income growth.

We continued to deliver high value medicines to patients with 23 approvals, including a novel radioligand therapy, Pluvicto, and 24 submissions across our priority geographies. We also had several important clinical data readouts, for example iptacopan, for the treatment of paroxysmal nocturnal hemoglobinuria. However, we also had disappointments as some clinical trials of experimental compounds did not meet their primary endpoints, including ACZ885 (canakinumab) in lung cancer and UNR844 in presbyopia.

Novartis also continued to deliver on its commitments to broaden access to medicines and tackle major global health challenges. We pledged further investment for research into malaria and neglected tropical diseases, increased access to our innovative medicines low- and middle-income countries (LMICs) and formed new collaborations to strengthen healthcare systems.

Performance against incentive targets, combined with base salary and other benefits and pension, resulted in 2022 total realized compensation for the CEO of CHF 8 452 176. This is a reduction of 24.7% compared to 2021, driven mainly by lower payout of the Long-Term Performance Plan (LTPP). More details on CEO performance and compensation are available in the Compensation Report of our 2022 Annual Report.

Changes to Executive Committee compensation system and disclosures

During the year, we reviewed our Executive Committee compensation system, with the aim of simplification and increased transparency.

Effective as of the 2022-2024 cycle of the LTPP, we strengthened the assessment of research and early development performance under the Innovation metrics, to ensure that targets are focused more directly on activities that create long-term value. From this cycle, the Science & Technology Committee sets targets that take into account the expected Net Present Value (eNPV) of programs transitioning to late-stage clinical development.

Effective from performance year 2023, we will remove “Share of Peers” as a financial performance measure for the Annual Incentive plan. The weighting of the three remaining financial measures, Group Net Sales, Group Operating Income and Group Free Cash Flow will be 40%, 30% and 30%, respectively. In addition, we will fold division specific financial targets, where applicable, into individual strategic objectives (40% weighting) of the related Executive Committee member. All Executive Committee
members will be evaluated, with a 60% weighting, against the performance of Group financial measures mentioned above.

During the year, we announced our intention to separate our Sandoz generics and biosimilars Division into a new publicly traded standalone company, by way of a 100% spin-off, subject to approval of the Novartis AG Board of Directors and  shareholders. Based on the planned completion of the spin-off in 2023, the Compensation Committee made some initial decisions on the 2023 compensation elements related to the spin-off.

Alignment with company strategy

In 2022 we refocused our strategy to deliver high-value medicines that alleviate society’s greatest disease burdens through technology leadership in research and development and novel access approaches. In line with this refocused strategy, we updated our strategic priorities to target innovation power, sales growth, delivering both margin and total shareholder returns, and sector leadership in material ESG factors.

This resulted in some enhancements to the Annual Incentive plan and LTPP plans as explained earlier.

Shareholder votes on compensation at the 2023 AGM

In line with our Articles of Incorporation, at the 2023 AGM, shareholders will be asked to approve the maximum aggregate amount of compensation for the members of the Executive Committee of CHF 90 000 000. This is lower than the prior term primarily due to the stepping down of the CEO, Sandoz from the Executive Committee. For the Board of Directors, the maximum aggregate amount proposed to shareholders is CHF 8 750 000, which is slightly higher than the prior term, due to change in committee memberships. Full details on compensation for the CEO, other Executive Committee members and Board members can be found in the Compensation Report of our 2022 Annual Report, and in the compensation votes at the 2023 AGM.

2022 Executive Committee compensation system

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.

2022 CEO pay for performance – outcomes

2022 total realized compensation for the CEO

The 2022 total realized compensation for the CEO was CHF 8 452 176. It includes payouts of the Annual Incentive and LTPP based on actual performance assessed for cycles concluding in 2022.

2022 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.

Total actual compensation earned by Board members in the 2022 financial year was CHF 3 803 670 for the Board Chair and CHF 4 702 585 for the other members of the Board.