by Michael Connor
Shareholders of Swiss pharmaceutical giant Novartis indicated significant unhappiness with the company’s executive compensation plan at the company’s annual meeting in Zurich, voting 38.3 percent of its shares against the current pay scheme.
While the Novartis vote was advisory and non-binding – and only a majority was required to approve the proposal – some corporate governance experts believe that a favorable shareholder vote of less than 80 percent reflects sufficient dissent to cause a board to rethink its compensation program.
Shareholder critics had expressed particular concern over the size and structure of payouts for senior management, particularly Novartis Chairman Daniel Vasella, who has in recent years been awarded a package with an estimated market value of about $21 million annually.
In a statement following approval of the plan, Novartis said: “Today’s consultative vote shows the Novartis compensation system is supported by the majority of our shareholders. The Board of Directors regularly reviews the compensation plans and levels and will evaluate how we can further ensure that our compensation system drives sustainable performance and aligns the interests of associates with those of our shareholders.”
The vote followed a campaign critical of Novartis by eight Swiss pension funds and the Ethos Foundation, a Geneva-based foundation which represents 111 institutional investors in promoting sustainable development principles and corporate governance best practices.
Dominique Biedermann, Ethos’ executive director said: “The strong opposition to Novartis’ remuneration system shows that many shareholders do not agree with the amounts and the structure of remuneration. 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.”
Among other criticisms, Ethos argues that the variable component of Novartis executive pay plan should be smaller when compared to base salary and should be based on achievement over several years, not one. According to Ethos, in 2010 the variable remuneration of the CEO was 87% of total remuneration. “A very high variable remuneration can lead to risk taking decisions that are not in the long-term interests of the shareholders,” Ethos said.