UPDATED: Novartis nixes $78M non-compete with Vasella

Daniel Vasella of Novartis

The news of Daniel Vasella's $78 million payoff from Novartis couldn't have surfaced at a worse time. Once again, the Swiss drugmaker ($NVS) became a lightning rod for executive-pay watchdogs. And this time, lightning was striking just days before the Swiss vote on proposals to rein in executive compensation.

A firestorm ensued. And now, Vasella's non-compete agreement is no more. He and the rest of the Novartis board canceled the deal. "We continue to believe in the value of a non-compete," Vice Chairman Ulrich Lehner said."[H]owever, we believe the decision to cancel the agreement and all related compensation addresses the concerns of shareholders and other stakeholders."

Vasella, who's stepping down as chairman after more than 20 years at the company, will soon be on the loose in the executive marketplace. And Novartis' board believes Vasella's insider knowledge makes him a threat--so much of a threat that they had planned to pay him 72 million francs ($77.89 million) over 6 years to keep him out of the drug business.

That's only a little over a million less, on an annual basis, than the 13.1 million francs ($14.17 million) Vasella earned last year as chairman. It's roughly equal to the $12.8 million retirement payout he received in 2010, the year he gave up the CEO's job--and that payout alone raised hackles in Switzerland.

So, it's no surprise that the 72 million franc agreement was catnip for backers of the "Abzocker"--a.k.a. "fat cat"--pay proposal up for a vote March 3. Formally known as the Minder initiative, it would give shareholders a binding vote on executive pay. Organizers of the pro-Minder campaign have already flagged Novartis CEO Joe Jimenez and his $15 million-plus pay package.

But the non-compete deal also drew fire from business groups intent on smacking down the Minder plan, not least because it clouds the water for their own campaign. "I understand that everyone is revolted by it and so am I," Rudolf Wehrli, chairman of business lobby group Economiesuisse told the ATS news agency. "Such payouts and salaries amount to a real provocation even for opponents of the Minder initiative."

As the Novartis statement suggests, shareholders weren't so thrilled, either. "We're not overly happy with the 72 million," a Zurich fund manager told Bloomberg. "Paying fair compensation for services is OK. However, this is a compensation for which Daniel Vasella has to do nothing."

The Swiss government--along with groups such as Economiesuisse--have been backing a less-stringent executive pay proposal that's also up for vote March 3. "This news is a setback for the campaign," Economiesuisse's Meinrad Vetter told Bloomberg. "There will be talk of anger and excessive salaries, rather than what the initiative really means for Switzerland as a business location."

Will Novartis and Vasella's about-face repair the damage? It illustrates a point made by the Minder initiative's opponents: A shareholder vote doesn't have to be binding, because companies will respond to investor concerns. (Economiesuisse and its co-campaigners also contend hat businesses have to compete for top talent, and might abandon Switzerland if their freedom is curtailed too much.)

But this episode also shows that the big executive payout is still going strong--and that those decisions are most often made behind closed doors, without shareholder input. Apparently chastened by critics who took issue with the surprise agreement, the Novartis board promises to be more open in the future, Lehner said: "The board understands the importance of full transparency and will strengthen its efforts in this regard." The question now is whether Swiss voters prefer to keep the faith in such promises, or to force companies to comply.

- see the release from Novartis
- get the news from The Local
- read the Bloomberg story
- check out the WSJ piece (sub. req.)

Special Reports: Daniel Vasella - 2010 CEO Pay | Joseph Jimenez - Top 10 Pharma CEO Salaries of 2011

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