Swiss pharmaceutical company Novartis was to pay its outgoing chairman $78 million for a six-year consulting and non-compete agreement. No longer! Now both the company and chairman Daniel Vasella have changed their minds.
“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,” said Vasella, who was CEO of Novartis from 1996 to 2010, after which he became board chairman.
That’s largely because of the uproar that followed after the New York Times reported the “golden handshake” deal on Monday. The amount was “beyond evil,” according to Christophe Darbellay, president of the Christian Democratic Popele’s Party, as a Swiss federal judge found the sum to be an “enormous blow for the social cohesion of our country.”
The timing on this was pretty bad. Vasella has “long [been] a lightening rod for criticism of executive pay in Switzerland,” reports Reuters. And on Friday, Novartis will hold its general meeting with shareholders. More critically, though, in two weeks, Switzerland will vote on a referendum to give shareholders decision-making power over executive pay. If the March 3 referendum passes, the heads of companies like Novartis, Roche and Nestle could see their compensation set by shareholders. Though other countries have non-binding “say on pay” laws, Switzerland would be the first country to enforce shareholder decisions (paywall).
In backing down on the $78 million, did Vasella take one for the Swiss corporate team? Probably—but as Ursula Fraefel, head of the Swiss business lobby group that opposes the referendum, hinted when speaking to the FT (paywall), it would have been more helpful if Vasella had declined the contract in the first place.
Like Fraefel, Novartis wants the right to issue non-compete contracts in order to “protect” itself from having its former employees share its secrets with competitors. John Gapper argues that that’s nonsense, though, given that most secrets about Novartis products that Vasella might claim can also be deduced from analyzing a given drug in a lab, which is why there’s patent protection. Says Gapper:
[Non-compete payments] smack of special treatment for insiders by boards that are under their influence. They also have flaws in principle – not only may they be a waste of money but they restrict legitimate competition. A non-compete deal should have a specific and clear purpose, not be a general payoff to a senior executive of a company for loyalty. In most occupations, that is expected to come with the territory.
Whether Novartis’ decision sets a precedent on non-compete agreements will depend on what Swiss voters decide at the ballot box on March 3. For the last year, the country has hotly debated executive pay, including non-compete agreements—particularly because five of Europe’s 20 best-paid CEOs work for a Swiss company. A January survey showed that some 65% of voters support the referendum, even as opponents of the law argue that it will make it harder to attract companies to Switzerland, hurting the country’s tax revenues. Yet a binding “say on pay” measure would devolve authority to shareholders, who at least have a stake in setting effective incentives for their company’s management. And as Novartis and Vasella have discovered, having to answer to Swiss activists, media and politicians who have little or no investment in the company’s performance is potentially worse.