Novartis Compensation System Continues To Irk Investors
First Published Tuesday, 22nd February 2011 02:10 pm - © 2011 Dow Jones
By Goran Mijuk
Of Dow Jones NEWSWIRES
ZURICH -(Dow Jones)- Novartis AG (NVS) Tuesday narrowly won investor backing for its compensation system amid persistent shareholder calls for the Swiss drug giant to change its remuneration practices and curb payouts.
At the company's annual general meeting in Basel, 61% of Novartis shareholders backed the company's compensation plan, while more than 38% of present voters rejected the scheme, which was put on the agenda for the first time.
Novartis Chairman Daniel Vasella and the company's upper management, including Chief Executive Joe Jimenez, were criticized for their high salaries and that a substantial part of their pay package wasn't linked to the long-term performance of the company.
Shareholder backing of less than 70% is considered to be weak and often prompts the board and management to initiate changes. Under similar shareholder pressure Nestle SA's (NESN.VX) former chief executive and current chairman Peter Brabeck had to give up his double mandate at the helm of the world's largest food maker several years ago.
Vasella noted during the meeting that a majority of shareholders had backed the compensation plan, saying that high salaries are the norm in the pharmaceuticals industry. In future, Novartis' general meeting will vote consultatively on every significant change to the compensation system, but at least every three years.
The item was included after continuous shareholder pressure. During the past few years Vasella has faced repeated public criticism over his high salary, which usually topped 20 million francs, or more than $21 million. The longtime Novartis manager, who helped create the Swiss drug giant and set up a diversified concern that includes a pharma division but also a vaccines, generics and eyecare treatment business, is one of Switzerland's best paid managers.
"The strong opposition to Novartis' remuneration system shows that many shareholders don't agree with the amounts and the structure of remuneration," said Dominique Biedermann, executive director at Swiss shareholder activist Ethos. "We urge the board of directors to review the remuneration system and to submit it again to the vote at the 2012 annual general meeting of shareholders."
Ethos, which helped generate the pressure to force Brabeck to give up his dual role at Nestle, noted that more than 80% of the variable remuneration reward's performance targets were measured only over a single year. It said that a significant component of remuneration should be dependent on targets tested over several years.
It also noted that share-based payments to Novartis' top brass were disclosed at fiscal value and not at market value, which underestimates the amounts paid. According to Ethos's calculation, Vasella earned around 25 million francs in 2010. According to Novartis's annual report, Vasella earned a total of about 8 million francs last year, including cash and stock. Separately, Vasella also received a one-time retirement benefit worth 12 million francs.
U.S. proxy advisory firm ISS and other shareholders such as Swiss activist group Actares rejected Novartis' remuneration plan. Actares president Rudolf Meyer said that pay packages were still too high, calling Vasella's retirement package "scandalous". He said the payment ammounted to a golden parachute.
High executive salaries and compensation packages have stirred shareholder emotions in the past in Switzerland. When former ABB Ltd (ABB) chief executives Percy Barnevik and Goeran Lindahl in 2002 paid themselves more than $100 million in pension payments, shareholder rules were changed, forcing listed Swiss companies to disclose salaries of their top brass.
The recent troubles surrounding UBS AG (UBS), which had to write down some $50 billion in assets during the financial crisis, and its highly-paid executives such as ousted chairman Marcel Ospel have also triggered a debate about a potential cap on executive and board member salaries in the country. A referendum is planned but no date has been set yet amid political pressure to water down the plan for salary limits, which are feared to hurt economic prospects.
-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; firstname.lastname@example.org