Compensation Report summary
Novartis delivered a strong performance in 2019 as we continue our transformation into a leading, focused medicines company, powered by advanced therapy platforms and data science. We continued to engage with shareholders and proxy advisors to gather feedback on our compensation systems and practices. This feedback helped shape further enhancements and simplifications in our compensation system.
2019 CEO pay for performance
Financial performance significantly exceeded targets set at the beginning of the year, which enabled the company to raise its guidance every quarter. Net sales to third parties for Novartis continuing operations grew 6% in reported terms and 9% measured in constant currencies (cc) to remove the impact of exchange rate movements. Core operating income grew by 12% (17% cc) and free cash flow amounted to USD 12.9 billion (+15%), mainly driven by higher operating income. The Alcon eye care business was successfully spun off on April 9, 2019, creating significant value for shareholders.
In addition to delivering a strong financial year, there were significant achievements across all our strategic pillars. Highlights include performing above target on the delivery of our innovation pipeline; strong commercial execution; accelerating our push into data and digital, including through collaborations with major technology companies; further embedding an inspired, curious and unbossed culture across the organization; continuing to improve operational efficiency in Novartis Technical Operations and Novartis Business Services; and returning more to society through access strategies for all new products.
The 2019 total realized compensation for the CEO was CHF 10 615 740. The Board assessed the performance of the CEO in his second year and determined that he will be awarded a 2019 Annual Incentive of CHF 4 017 639, which is 160% of target, within the payout range of 0% to 200%. Also included is CHF 4 618 769 of Long-Term Incentive (LTI) income. This comprises the 2017-2019 Long-Term Performance Plan (LTPP) award vesting at 164% of target and, as a result of Novartis ranking 6 out of 16 among our global healthcare peer group for the relative TSR measure, the 2017-2019 Long-Term Relative Performance Plan (LTRPP) vesting at 138% of target. Both plans have a payout range of 0% to 200%.
Executive Committee compensation system
During 2019, the Compensation Committee continued to engage with shareholders and proxy advisors to gather feedback on the compensation system for the Executive Committee and our disclosures. In response to this feedback, and in order to better align with the interests of shareholders, we have introduced a mandatory holding period of two years beyond the vesting date for all LTI awards (after applicable taxes) to the CEO and CFO granted from 2020 onwards.
Reflecting our commitment to shareholders regarding transparency in executive compensation, we would like to draw attention to the following changes and enhanced disclosures:
- Increased disclosure on the balanced scorecard for the CEO’s Annual Incentive, in particular, on targets related to environmental, social and governance (ESG) metrics
- Increased transparency on innovation metrics for the 2019-2021 Long-Term Performance Plan (LTPP) by taking them from published Novartis filing charts in the Annual Report
- Added an interim update of how performance is tracking against targets for all metrics relating to the ongoing 2018-2020 and 2019-2021 LTPP performance cycles to provide an upfront indication of ongoing performance
- Provided explanations of pension benefits for members of the Executive Committee, which are fully aligned with the pensions of all other associates at Novartis
Current Executive Committee compensation system
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2019 fixed pay and benefits |
Performance-related variable pay |
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Annual base salary |
Pension and other benefits |
2019 Annual Incentive |
Long-Term Incentive awards cycle 2017-2019 |
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LTPP1 |
LTRPP2 |
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Purpose |
Reflects responsibilities, experience and skill sets |
Provides retirement and risk insurances (tailored to local market practices/ |
Rewards for performance against shortterm 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/ |
50% cash |
Equity, vesting following a three-year performance period |
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Performance measures |
– |
– |
Balanced scorecard comprising:
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As disclosed in the 2018 Compensation Report, from cycle 2019-2021, the LTRPP plan is discontinued and the LTPP metrics are transformed into four equally weighted measures: net sales compound annual growth rate, core operating income compound annual growth rate, innovation and relative TSR.
Alignment with company strategy
Our strategy is to become a leading, focused medicines company powered by advanced therapy platforms 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 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 and an 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 plan. The Compensation Committee has reviewed the existing compensation system and determined that it continues to support our new strategy.
Executive Committee compensation governance
A summary of the compensation decision authorization levels within the parameters set by the Annual General Meeting (AGM) is shown below, along with an overview of the risk management principles.
Decision on |
Decision-making authority |
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Compensation of CEO |
Board of Directors |
Compensation of other Executive Committee members |
Compensation Committee |
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2019 CEO pay for performance – outcomes
Measure |
Target1 |
Achievement versus target |
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Financial measures – 60% of total Annual Incentive, comprising: |
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Group net sales (cc) (30%) |
USD 45 384 million |
Significantly above |
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Group operating income (cc) (30%) |
USD 8 129 million |
Significantly above |
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Group free cash flow as a % of sales (cc) (20%) |
24.8% |
Significantly above |
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Share of peers for Novartis Group (USD) (20%) |
7.9% |
Above |
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Overall assessment of Group financial targets in constant currencies |
Significantly above |
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Strategic objectives – 40% of total Annual Incentive, comprising: |
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Innovation (20%) |
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Significantly above |
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Operational excellence (20%) |
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Significantly above |
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Data and digital (20%) |
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Above |
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People and culture (including Values and Behaviors) (20%) |
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Above |
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Building trust with society (including access to healthcare and reputation and other ESG topics) (20%) |
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Met |
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Overall assessment of strategic objectives |
Above |
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Overall assessment of CEO balanced scorecard |
Outstanding |
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TOTAL Annual Incentive: |
160% of target (payout range 0% – 200%) |
Measure |
Target1 |
Achievement versus target |
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Long-Term Performance Plan (LTPP) |
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Novartis Cash Value Added (cc) (75%) |
USD 6.1 billion |
Significantly above |
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Key innovation milestones (25%) |
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Above |
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TOTAL LTPP: |
164% of target (payout range 0% – 200%) |
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Long-Term Relative Performance Plan (LTRPP) |
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Relative TSR against a global healthcare peer group (USD) |
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Above threshold |
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TOTAL LTRPP: |
138% of target (payout range 0% – 200%) |
2019 total realized compensation for the CEO
The 2019 total realized compensation for the CEO was CHF 10 615 740, and includes the payouts of the Annual Incentive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2019.
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Fixed pay and benefits |
Variable pay performance-related |
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CHF 000s |
Annual base salary1 |
Pension and other benefits |
2019 Annual Incentive |
LTPP 2017-20191 |
LTRPP 2017-20191 |
Total realized compensation |
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Vasant Narasimhan |
1 653 |
326 |
4 018 |
3 511 |
1 108 |
10 616 |
2019 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 |
AGM 2019-2020, annual fee |
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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:
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70 |
Membership of the Audit and Compliance Committee |
70 |
Membership of the following committees:
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40 |
Total actual compensation earned by Board members in the 2019 financial year was CHF 3 804 373 for the Chairman of the Board and CHF 4 386 628 for the other 12 members of the Board (one of whom stepped down at the 2019 AGM).
Shareholder votes on compensation at the 2020 Annual General Meeting
In line with our Articles of Incorporation, at the 2020 AGM, shareholders will be asked to approve the maximum aggregate amount of compensation for the members of the Executive Committee of CHF 93 million. This is broadly the same level as 2019. For the Board of Directors, the maximum aggregate amount proposed to shareholders is in line with the prior term, except for a reallocation of committee memberships and the increase from 12 to 14 proposed Board members compared to last year. Full details on compensation for the CEO, other Executive Committee members and Board members can be found in the Compensation Report of our Annual Report 2019, and in the compensation votes at the 2020 Annual General Meeting.