Ethos cannot approve the remuneration system of Novartis put to the vote at the annual general meeting of the company to be held on 22 February 2011. Executive remuneration is not in the long term interests of shareholders. In particular, the variable remuneration of executive management is too high compared to the fixed remuneration. In addition, the various incentive plans are not described in sufficient detail to allow the establishment of a clear link between remuneration received and achievement of pre-defined performance targets.
For the first time, Novartis implements an advisory vote of its remuneration system. Last year, Ethos welcomed the amendment of the articles of association introducing the advisory vote. To allow an assessment of executive remuneration, the company published a detailed report on the remuneration of the board of directors and executive management.
In 2010, the total remuneration paid to the members of the board of directors and the executive management amounted to CHF 82 million. Certain remunerations are particularly high: The chairman of the board (Dr. Daniel Vasella) received CHF 25 million and the CEO (Joe Jimenez) received CHF 13 million at market value.
Several elements of Novartis' remuneration system raise concerns:
- The variable remuneration of executive management is too high in terms of the base salary. For example, in 2010, 87% of the CEO's total remuneration was variable.
- More than 80% of variable remuneration rewards performance measured over a single year. Best practice recommends that a large part be contingent upon the achievement of pre-defined performance objectives tested over several years.
- In Novartis' remuneration report, the share based payments are disclosed at fiscal value and not at market value which underestimates the amounts paid. Moreover, the on target variable remuneration from most incentive plans is not disclosed. This does not allow establishing a clear link between remuneration received and achievement of pre-defined performance targets.
- The board of directors has too much discretion in making awards, such as the one-time contribution to Dr. Vasella's pension of CHF 12 million in the form of an insurance policy upon leaving his CEO position in February 2010.
In light of all the above, Ethos recommends that shareholders OPPOSE the remuneration system of Novartis at the general meeting to be held on 22 February 2011.