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

 

2019 fixed pay and benefits

Performance-related variable pay

 

Annual base salary

Pension and other benefits

2019 Annual Incentive

Long-Term Incentive awards cycle 2017-2019

 

LTPP1

LTRPP2

1

LTPP = Long-Term Performance Plan

2

LTRPP = Long-Term Relative Performance Plan

3

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

4

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

5

For the 2017-2019 performance cycle, the peer group comprises 16 global healthcare companies, including Novartis.

Purpose

Reflects responsibilities, experience and skill sets

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

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

Form of payment

Cash

Country/individual-specific and aligned with other employees

50% cash
50% equity3 deferred for three years

Equity, vesting following a three-year performance period

Performance measures

–

–

Balanced scorecard comprising:

  • Financial measures (60%)
  • Strategic objectives4 (40%)
  • Novartis Cash Value Added (75%)
  • Innovation milestones (25%)
  • Relative TSR versus global sector peers (100%)5

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

Compensation of CEO

Board of Directors

Compensation of other Executive Committee members

Compensation Committee
Executive Committee compensation risk management principles
  • Rigorous performance management process
  • Balanced mix of short-term and long-term variable compensation elements
  • Performance evaluation under the Annual Incentive includes an individual balanced scorecard
  • 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 limited to a maximum of 12 months from the end of employment. Resulting compensation is limited to the annual base salary plus 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

2019 CEO pay for performance – outcomes

(XLS:) XLS

2019 Annual Incentive

Measure

Target1

Achievement versus target

1

For performance evaluation purposes, Target as well as Actual financial KPIs excluded the results of the Sandoz US dermatology business and generic US oral solids portfolio, which was expected to be divested to Aurobindo. The transaction is now expected to close in the first quarter of 2020 pending regulatory approval.

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

 

Group net sales (cc) (30%)

USD 45 384 million

Significantly above

Group operating income (cc) (30%)

USD 8 129 million

Significantly above

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

24.8%

Significantly above

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

7.9%

Above

Overall assessment of Group financial targets in constant currencies

Significantly above

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

 

Innovation (20%)

 

Significantly above

Operational excellence (20%)

 

Significantly above

Data and digital (20%)

 

Above

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

 

Above

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

 

Met

Overall assessment of strategic objectives

Above

Overall assessment of CEO balanced scorecard

Outstanding

TOTAL Annual Incentive:

160% of target (payout range 0% – 200%)

(XLS:) XLS

2017-2019 Long-Term Incentives

Measure

Target1

Achievement versus target

1

For performance evaluation purposes, Target as well as Actual financial KPIs excluded the results of the Sandoz US dermatology business and generic US oral solids portfolio, which was expected to be divested to Aurobindo. The transaction is now expected to close in the first quarter of 2020 pending regulatory approval.

Long-Term Performance Plan (LTPP)

 

 

Novartis Cash Value Added (cc) (75%)

USD 6.1 billion

Significantly above

Key innovation milestones (25%)

 

Above

TOTAL LTPP:

164% of target (payout range 0% – 200%)

Long-Term Relative Performance Plan (LTRPP)

 

 

Relative TSR against a global healthcare peer group (USD)

 

Above threshold

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.

(XLS:) XLS

 

Fixed pay and benefits

Variable pay performance-related

 

CHF 000s

Annual base salary1

Pension and other benefits

2019 Annual Incentive

LTPP 2017-20191

LTRPP 2017-20191

Total realized compensation

1

The shown amounts represent the underlying share value of the total number of shares vested (including dividend equivalents) to the CEO for the LTPP and LTRPP performance cycle 2017-2019.

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.

(XLS:) XLS

CHF 000

AGM 2019-2020, annual fee

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
  • Research & Development 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
  • Research & Development Committee
  • Risk Committee

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.