Compensation Report summary

Novartis delivered a solid performance in 2020 as we continue our transformation into a leading, focused medicines company powered by advanced therapy platforms and data science. Feedback from shareholder engagement prior to our last Annual General Meeting and toward the end of 2020 suggested that shareholders were in agreement that our current compensation system is aligned with the company’s purpose, strategy and culture. No changes are therefore proposed for 2021.

2020 financial performance

Financial performance in 2020 was solid despite the impact of the global pandemic. Net sales to third parties for Novartis continuing operations grew 3% in reported terms and 3% measured in constant currencies (cc), which removes the impact of exchange rate movements. Growth was mainly driven by Cosentyx (USD 4.0 billion in sales), Entresto (USD 2.5 billion), Promacta/Revolade (USD 1.7 billion), and Zolgensma (USD 0.9 billion). Other recently launched products, including Kisqali, Piqray and Kymriah, also contributed. However, this was below our ambitious net sales plan, as COVID-19 weighed on certain therapeutic areas, most notably dermatology and ophthalmology, and the Sandoz Retail Generics business. The safety updates on Beovu also impacted the business.

Operating income grew 19% versus the prior year (cc), and net income grew 20% versus the prior year (cc). Core operating income grew 13% versus the prior year (cc), exceeding the target, driven by improved productivity in marketing and sales as well as research and development, and Novartis Technical Operations (NTO) network transformation initiatives. Core operating income margin increased to 31.7% (+2.8 percentage points cc versus the prior year, and +1.5 percentage points cc versus target), with Innovative Medicines core margin reaching 35%.

Free cash flow amounted to USD 11.7 billion. The target, as a percentage of sales, was slightly overachieved due to continued strong cash collection despite higher legal fee payouts.

2020 strategic performance

Within the CEO’s strategic objectives, we continue to integrate environmental, social and governance (ESG), a priority for the Novartis Board of Directors and the Executive Committee, across our operations. Novartis focuses on four strategic ESG pillars: ethical standards, pricing and access, global health challenges and corporate citizenship. Great progress was made across all areas, including the environment, patient reach in low-and middle-income countries, diversity and inclusion, and our approach to ethics. We also issued the first sustainability-linked bond of its kind in the healthcare industry.

In response to the pandemic, we increased our focus on associates’ health and well-being by implementing a number of support programs. No government assistance (e.g., subsidies, furloughs) was sought by the company, and no COVID-19-related associate redundancies were made. To help tackle the issues caused by the pandemic directly, Novartis also made a number of commitments, collaborating with healthcare peers and other organizations on anti-COVID-19 programs, including the rollout of treatments to the developing world.

2020 CEO realized compensation

Having assessed financial and strategic performance, the Board of Directors determined that no adjustments were required to the incentive payouts. Overall, the Board determined that the CEO will be awarded a 2020 Annual Incentive of CHF 2 636 550, which is 100% of target, within the payout range of 0% to 200%. The 2018-2020 Long-Term Incentive (LTI) plans comprise the Long-Term Performance Plan (LTPP) and the Long-Term Relative Performance Plan (LTRPP). The 2018-2020 LTPP delivered strong results. The Cash Value Added target – which has continued to increase for the last three cycles – was exceeded, and innovation was above target. For the 2018-2020 LTRPP, Novartis was above median, ranking No. 7 out of a total of 15 global healthcare peers (including Novartis) on three-year relative total shareholder return (TSR). Overall, when considering both plans, the Board of Directors awarded the CEO a total LTI payout of CHF 8 054 923, corresponding to a 126% payout against a maximum of 200%. No Annual Incentive or LTI targets were adjusted as a result of the pandemic.

These incentive performance outcomes, combined with base salary and other benefits, pension, Alcon Keep Whole awards and dividend equivalents, resulted in 2020 total realized compensation for the CEO of CHF 12 724 166. The higher total realized compensation for the CEO compared to 2019 can be largely attributed to the vesting of his first LTI granted after his promotion to CEO in 2018, which was partly offset by the lower performance incentive payouts for cycles ending in 2020.

Current Executive Committee compensation system

 

2020 fixed pay and benefits

Performance-related variable pay

 

Annual base salary

Pension and other benefits

2020 Annual Incentive

Long-Term Incentive awards cycle 2018-2020

 

LTPP1

LTRPP2

Purpose

Reflects responsibilities, experience and skill sets

Provides 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% 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

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 2018-2020 performance cycle, the peer group comprises 15 global healthcare companies, including Novartis.

The 2018-2020 cycle will be the last vesting of the LTRPP plan, which was discontinued as of grants made in 2019. The LTPP metrics were subsequently 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 build 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 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

2020 CEO pay for performance – outcomes

2020 Annual Incentive

Measure

Target1

Achievement versus target

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

 

Group net sales (cc) (30%)

USD 50 781 million

Below

Group operating income (cc) (30%)

USD 9 745 million

Significantly Above

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

24.3%

Above

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

8.3%

Met

Overall assessment of Group financial targets in constant currencies

Met

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

 

Innovation (20%)

 

Met

Operational excellence (20%)

 

Met

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%)

 

Significantly Above

Overall assessment of strategic objectives

Met

Overall assessment of CEO balanced scorecard

Met

TOTAL Annual Incentive:

100% of target (payout range 0% – 200%)

1

For performance evaluation purposes, target as well as actual financial KPIs included the results of the Sandoz US dermatology business and generic oral solids portfolio, which were expected to be divested to Aurobindo Pharma USA Inc. This deal was later terminated by mutual agreement with Aurobindo.

2018-2020 Long-Term Incentives

Measure

Target1

Achievement versus target

Long-Term Performance Plan (LTPP)

 

 

Novartis Cash Value Added (cc) (75%)

USD 8.3 billion

Above

Key innovation milestones (25%)

 

Above

TOTAL LTPP1:

143% of target (payout range 0% – 200%)

Long-Term Relative Performance Plan (LTRPP)

 

 

Relative TSR against a global healthcare peer group (USD)

 

Above median

TOTAL LTRPP1:

100% of target (payout range 0% – 200%)

1

For performance evaluation purposes, target as well as actual financial KPIs included the results of the Sandoz US dermatology business and generic oral solids portfolio, which were expected to be divested to Aurobindo Pharma USA Inc. This deal was later terminated by mutual agreement with Aurobindo.

1

Combined LTI payout is 126% of target.

2020 total realized compensation for the CEO

The 2020 total realized compensation for the CEO was CHF 12 724 166, and includes the payouts of the Annual Incentive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2020.

 

Fixed pay and benefits

Variable pay performance-related

 

CHF

Annual base salary1

Pension and other benefits

2020 Annual Incentive

LTPP 2018-20201

LTRPP 2018-2020

Total realized compen­sation

Vasant Narasimhan

1 743 750

288 943

2 636 550

5 605 100

2 449 823

12 724 166

1

The shown amounts represent the underlying share value of the total number of shares vested (including dividend equivalents of CHF 660 900 and Alcon Keep Whole awards of 784 497) to the CEO for the LTPP and LTRPP performance cycle 2018-2020.

2020 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

2020-2021 AGM, 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
  • 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

Total actual compensation earned by Board members in the 2020 financial year was CHF 3 804 501 for the Chairman of the Board and CHF 4 924 947 for the other 13 members of the Board.

Shareholder votes on compensation at the 2021 AGM

In line with our Articles of Incorporation, at the 2021 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 lower than 2020 due to a reduction from 13 to 12 members. For the Board of Directors, the maximum aggregate amount proposed to shareholders is CHF 8.6 million, which is lower than last year due to a reduction from 14 to 13 members. 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 2020, and in the compensation votes at the 2021 AGM.