Vasella drops massive and controversial payout

Finally listening? Daniel Vasella had been severely criticised for his CHF72 million payout Keystone

Outgoing Novartis chairman Daniel Vasella has chosen to forego a CHF72 million ($78 million) payout to prevent him from working for a rival, giving in to pressure from public opinion and shareholders who threatened to torpedo executive pay.

The Novartis board and Vasella agreed to cancel the so-called non-compete agreement and all related compensation, the company said on Tuesday in a statement. The deal was to take effect after Vasella steps down as chairman at the company’s annual general meeting on Friday.

“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,” Vasella said in the release. “That is why I have recommended to the Board that I forgo all payments linked to the non-compete agreement.”

The non-compete accord required that Vasella refrain from making his knowledge and know-how available to competitors. The agreement provided for an annual payout of up to CHF12 million for six years.

Shareholders, politicians and even business representatives had in the past criticised Vasella, one of the highest-paid executives in Switzerland, for his salary and the amount of the payout.

Social Democrat Simonetta Sommaruga has trouble seeing Vasella’s renunciation as something positive. “His late insight does not change the fact that the board of Novartis approved a CHF72 million agreement,” the justice minister said in a written statement. When Sommaruga had learned about the initial agreement last week she told Swiss public television that she was speechless.

Protest

In protest, shareholder groups had warned that they would refuse to grant discharge to Novartis executives and lawyer Hans-Jacob Heitz announced Monday that he had filed a lawsuit against Novartis. In the end, Vasella and Novartis yielded to the pressure.

“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,” said current Vice Chairman Ulrich Lehner. “The board understands the importance of full transparency and will strengthen its efforts in this regard.”

Heitz said on Tuesday that he welcomed the decision. He said it confirmed that it was worth putting pressure on Vasella, but added that the “issue is too grave to be over.”

The shareholder foundation Ethos, however, acknowledges Novartis’ efforts to become more transparent. “The board assumes responsibility, which it has not done before,” said Ethos spokesman Christophe Hans.

Up until now, Ethos recommended not to grant discharge to the board, but now decided to approve the actions of the directors and executives.

“The damage is done. The image and reputation of Novartis suffered worldwide,” said Actares president Rudolf Meyer.

Fat cats

The planned payment to Vasella had further undermined the cause of campaigners fighting an initiative calling for curbs on executive pay in Switzerland. The initiative is the brain child of businessman-turned politician, Thomas Minder, who blames highly-paid “fat cats” for contributing to the financial crisis.

Swiss voters will have the final say on Minder’s proposal on March 3. The main political parties are divided over the issue. The centre-left has come out in favour, the right is split down the middle, while the centre-right parties reject the initiative, opting for parliament’s counter-proposal.

Minder challenged Vasella’s about-turn. “You cannot forego something that you are not due,” he told the Swiss News Agency.

Pascal Gentinetta, president of Swiss Business Federation economiesuisse, which fights the fat cat initiative, said that Vasella would have been better off to drop the payment immediately. But the business federation welcomes today’s decision.

Vasella’s salary including shares and stock options rose to as much as CHF40 million per year, according to estimates by Ethos. Last year, Vasella’s salary as president was about CHF13 million. It is estimated that he earned a total of almost CHF400 million at Novartis from 2000.

Even Abbot Martin Werlen of Einsiedeln Benedictine monastery, who has received advice on financial matters by Vasella, had told Zurich daily Tages-Anzeiger that Vasella and Novartis should reconsider the planned payout.