Novartis Dumps $78 Million Bonus to CEO

Novartis Dumps $78 Million Bonus to CEO

February 19th, 2013 // 3:51 pm @ jmpickett

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In a rare instance in which outrage over executive compensation sparked a change of heart, Novartis unexpectedly canceled a six-year payout worth up to $78 million that was to have been paid outgoing chairman Dan Vasella as part of a new non-compete agreement. The basic terms of the deal had been disclosed over the weekend, but anger over the amount of money prompted the drugmaker to scrap the agreement this morning.

In justifying its original decision, Novartis (NVS) explained that the non-compete arrangement was designed to “protect” the drugmaker and that Vasella was required to “refrain from making his knowledge and know-how available to competitors who may take advantage of his experience with the company. Dr. Vasella knows the company’s business intimately, having built the leading R&D organization and personally recruited most of the top executives.”

Vasella had unexpectedly resigned from the Novartis board after a 17-year run (back story), but his planned departure occurred just as Switzerland plans a nationwide vote March 3 on an initiative that would look to level the playing field by giving citizens a chance to decide whether shareholders should have more say in executive compensation (read this). Reports indicate that about 60 percent of the public supports the proposal.

Vasella, you may recall, has been the proverbial lightning rod for criticism over ceo pay for many years. Last year, for instance, the Ethos shareholder activist group slammed him for his $14 million package at a time when the drugmaker was planning to close facilities and eliminate thousands of jobs, including some in Switzerland. Although Novartis conducted a say-on-pay shareholder vote three years ago, the drugmaker does not do so annually, according to Ethos, which is influential because it makes recommendations for Swiss pension funds (see here and here).

In an effort to mute expected criticism, Vasella indicated the “net amount” he received would be donated to unspecified philanthropic activities. But some Novartis shareholders, who will vote February 22 on a new executive remuneration system for next year, were not pleased. “We’re not overly happy with the 72 million,” Birgit Kulhoff, a fund manager with Rahn & Bodmer in Zurich who holds Novartis shares, tells Bloomberg News. “Paying fair compensation for services is OK. However, this is a compensation for which Daniel Vasella has to do nothing.”

Trying to appear contrite, Vasella issued a statement today in which he says “I have understood that many people in Switzerland find the amount of the compensation linked to the non-compete agreement unreasonably high, despite the fact I had announced my intention to make the net amount available for philanthropic activities. That is why I have recommended to the Board that I forgo all payments linked to the non-compete agreement.”

“We continue to believe in the value of a non-compete, however, we believe the decision to cancel the agreement and all related compensation addresses the concerns of shareholders and other stakeholders. The board understands the importance of full transparency and will strengthen its efforts in this regard,” says Ulrich Lehner, who is serving as interim chairman until August 1.

Once again, the Novartis board has illustrated it has a tin ear. Last year, Vasella received more than double the compenstion given the rest of the board combined, as Bloomberg notes. After repeated complaints about compensation given Vasella and the upcoming vote, one would think the board might have hesitated before approving such a deal. The incident underscores, however, that corporate boards are often indifferent to the impressions they create and the concerns of shareholders. And perhaps only referendums in other countries, if possible, will change such practices.