FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Exhibit B
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`US Securities &
`Exchange Commission
`Form 20-F
`2020
`
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Item 6. Directors, Senior Management and
`Employees
`
`6.A Directors and senior management
`
`The information set forth under “Item 6. Directors, Senior
`Management and Employees—Item 6.C Board prac-
`tices—Corporate governance—Board of Directors” and
`
`“Item 6. Directors, Senior Management and Employees—
`Item 6.C Board practices—Corporate governance—
`Executive Committee” is incorporated by reference.
`
`
`
`88
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`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`6.B Compensation
`
`Dear shareholder,
`
`I am pleased to share with you the 2020 Compensation
`Report of Novartis AG. It follows a similar structure to
`the previous year’s report, which was supported by over
`92% of shareholders.
`From the 2020 Annual General Meeting (AGM), we
` welcomed new member Bridgette Heller and permanent
`guest Simon Moroney to the Compensation Committee.
`I have been grateful for their contributions during the
`year. In addition, I would like to express my sincere grat-
`itude to Srikant Datar, who will step down from the Com-
`pensation Committee at the 2021 AGM, for his valuable
`engagement throughout his tenure with the Committee.
`Feedback from shareholders prior to our last AGM
`and, more recently, toward the end of 2020 suggested
`that shareholders were in agreement that our current
`compensation system is aligned with the Company’s
` purpose, strategy and culture. No changes are therefore
`proposed for 2021.
`
`COVID-19 pandemic
`During 2020, Novartis navigated the pandemic well. We
`increased our focus on associates’ health and well-be-
`ing by implementing a number of support programs,
`including additional paid leave, childcare assistance
`during school closures, a one-time payment for home
`office setup, a new flexible working scheme within the
`country of employment, and a one-time payment to asso-
`ciates and external contractors required to work on site
`(i.e., in our laboratories or our manufacturing units). No
`government assistance (e.g., subsidies, furloughs) was
`sought by the Company, and no COVID-19-related asso-
`ciate redundancies were made. Through these actions,
`we were able to minimize the disruption to our business
`operations and consequently were in a position to com-
`mit to making no changes to our dividend policy for 2021.
`To help tackle the issues caused by the pandemic
`directly, Novartis made a number of commitments, col-
`laborating with healthcare peers and other organizations
`on anti-COVID-19 programs, including the rollout of treat-
`ments to the developing world. More information on
`Novartis response efforts can be found in our Novartis
`in Society ESG Report 2020.
`
`2020 Company performance
`Financial performance in 2020 was solid despite the
`impact of the global pandemic. Net sales to third parties
`for Novartis continuing operations grew 3% in reported
`terms and 3% measured in constant currencies (cc),
`which removes the impact of exchange rate movements.
`Growth was mainly driven by Cosentyx (USD 4.0 billion
`in sales), Entresto (USD 2.5 billion), Promacta/Revolade
`(USD 1.7 billion), and Zolgensma (USD 0.9 billion). Other
`recently launched products, including Kisqali, Piqray and
`Kymriah, also contributed. However, this was below our
`ambitious net sales plan, as COVID-19 weighed on cer-
`tain therapeutic areas, most notably dermatology and
`
`ophthalmology, and the Sandoz Retail Generics business.
`The safety updates on Beovu also impacted the business.
`Operating income grew 19% versus the prior year
`(cc), and net income grew 20% versus the prior year (cc).
`Core operating income grew 13% versus the prior year
`(cc), exceeding the target, driven by improved produc-
`tivity in marketing and sales as well as research and
`development, and Novartis Technical Operations (NTO)
`network transformation initiatives. Core operating
`income margin increased to 31.7% (+2.8 percentage
`points cc versus the prior year, and +1.5 percentage
`points cc versus target), with Innovative Medicines core
`margin reaching 35%.
`Free cash flow amounted to USD 11.7 billion. The tar-
`get, as a percentage of sales, was slightly overachieved
`due to continued strong cash collection despite higher
`legal fee payouts.
`Financial performance determines 60% of the CEO’s
`Annual Incentive balanced scorecard. Targets for the
`financial measures were set at the start of the year, and
`the Compensation Committee determined that it would
`not adjust or apply upwards discretion to reflect the neg-
`ative impact of the pandemic or settlements of legacy
`legal cases. Overall, our aforementioned performance
`resulted in achievement meeting target for this element
`of the Annual Incentive.
`Strategic objectives determine the remaining 40% of
`the CEO’s Annual Incentive balanced scorecard. Prog-
`ress against these objectives resulted in achievement
`meeting target for this element of the CEO’s Annual
`Incentive. More details on our strategic objectives as well
`as our financial performance can be found in “—2020
`CEO balanced scorecard.”
`Two of the five strategic objectives in the CEO’s
`Annual Incentive balanced scorecard relate to environ-
`mental, social and governance (ESG) matters: “people
`and culture” and “building trust with society.” We con-
`tinue to integrate ESG, a priority for the Novartis Board
`of Directors and the Executive Committee, across our
`operations. Novartis focuses on four strategic ESG pil-
`lars: ethical standards, pricing and access, global health
`challenges and corporate citizenship. In addition to the
`COVID-19-related efforts previously mentioned, partic-
`ular achievements in 2020 included:
`• Setting ambitious long-term environmental targets for
`our entire supply chain
`• Increasing our patient reach in low- and middle-income
`countries with emerging market brands and flagship
`programs (i.e., Chagas disease, leprosy, malaria and
`sickle cell disease)
`• Continuing to make great progress on our diversity and
`inclusion strategy related to gender balance, LGBTI
`equity, disability equity, and race and ethnicity
`• Issuing a sustainability-linked bond, the first of its kind
`in the healthcare industry
`• Launching our new Code of Ethics
`
`
`
`89
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`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Significant upgrades from ESG rating agencies such
`as MSCI and Sustainalytics in the latest reporting season
`were based on closing compliance-related allegations;
`strong governance, including extensive ethics policies;
`leading programs to expand access to healthcare for
`low-income populations; and a comprehensive employee
`engagement strategy relative to peers.
`
`2020 realized compensation
`Based on the overall balanced scorecard assessment
`meeting target, the Board of Directors decided on an
`Annual Incentive resulting in a payout for the CEO
`amounting to CHF 2 636 550, which is 100% of target,
`within the range of 0–200%.
`The 2018-2020 Long-Term Incentive (LTI) plans com-
`prise the Long-Term Performance Plan (LTPP) and the
`Long-Term Relative Performance Plan (LTRPP). The
`2018-2020 LTPP delivered strong results. The Cash
`Value Added target – which has continued to increase
`for the last three cycles – was exceeded, and innovation
`was above target. For the 2018-2020 LTRPP, Novartis
`was above median, ranking 7 out of a total of 15 global
`healthcare peers (including Novartis) on three-year
` relative total shareholder return (TSR). Overall, when
`considering both plans, the Board of Directors awarded
`the CEO a total LTI payout of CHF 8 054 923, corre-
`sponding to a 126% payout against a maximum of 200%.
`No Annual Incentive or LTI targets were adjusted as
`a result of the pandemic.
`The Board determined that no adjustments were
`required to the incentive payouts, notwithstanding the
`Company’s supportive treatment of associates and
` ability to adapt to new ways of working throughout the
`pandemic, without government assistance or making any
`COVID-19-related redundancies. In addition, Novartis is
`committing to a 2021 dividend to shareholders, in line
`with its policy.
`These incentive performance outcomes, combined
`with base salary and other benefits, pension, Alcon
`Keep Whole awards and dividend equivalents, resulted
`in 2020 total realized compensation for the CEO of
`CHF 12 724 166.
`The higher total realized compensation for the CEO
`compared to 2019 can be attributed to the vesting of his
`first LTI granted after his promotion to CEO in 2018.
`The 2020 total realized compensation for the Exec-
`utive Committee members (comprising the CEO and the
`other 12 active Executive Committee members) was
`CHF 58 819 813. This is lower than the prior year due to
`the reduction in members reported (two members
`stepped down and were replaced in 2019, whereas no
`members stepped down in 2020). For more detail on the
`2020 realized pay for the CEO and ECN members,
`please see “—2020 realized compensation for the CEO
`and other Executive Committee members.”
`
`Board compensation
`In 2020, the Compensation Committee reviewed, with
`its independent advisor, the Board of Directors’ compen-
`sation system against the Swiss Market Index. Additional
`information on our Board benchmarking practices is
` provided in “—2020 Board compensation.”
`They found that the Chairman and retainer fees of
`the other Board members are well positioned and com-
`petitive among the benchmarked companies in relation
`to the Company’s size, operational complexity and
` corporate headquarters location. The Compensation
`Committee therefore proposed no changes to the Board
`of Directors’ fees for the 2021-2022 AGM.
`
`2021 AGM
`In line with our Articles of Incorporation, at the 2021 AGM,
`shareholders will be asked to approve, in a binding vote,
`the maximum aggregate amount of compensation for
`the Board of Directors from the 2021 AGM to the 2022
`AGM, and the maximum aggregate amount of compen-
`sation for the Executive Committee for the financial year
`2022. Shareholders will also be asked to endorse this
`Compensation Report in an advisory vote.
`This will be my last year as Chairman of the Compen-
`sation Committee of the Board of Directors, and I would
`like to thank you all for your support throughout my nine-
`year tenure. I will stand for election as a member of our
`Compensation Committee at the 2021 AGM to ensure a
`smooth transition to my successor. We will also ask
`shareholders to elect Simon Moroney to the Compen-
`sation Committee and, if support is received, the Board
`of Directors will then appoint him as the new Chairman
`of the Compensation Committee.
`On behalf of Novartis and the Compensation
` Committee, I would like to thank you for your continued
`engagement and feedback, which we consider extremely
`valuable in driving improvements in our compensation
`systems and practices.
`
`Respectfully,
`
`Enrico Vanni, Ph.D.
`Chairman of the Compensation Committee
`
`
`
`90
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`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Compensation at a glance
`
`Executive Committee compensation system
`
`2020 fixed pay and benefits
`
`Performance-related variable pay
`
`Annual base salary
`
`Pension and other
`benefits
`
`2020 Annual Incentive
`
`Purpose
`
`Reflects responsibil-
`ities, experience and
`skill sets
`
`Form of payment
`
`Cash
`
`Provides retirement
`and risk insurances
`(tailored to local market
`practices/regulations)
`
`Rewards for perfor-
`mance against short-
`term financial and stra-
`tegic objectives, and
`Values and Behaviors
`
`Country/individual-
`specific and aligned
`with other employees
`
`50% cash
`50% equity3 deferred
`for three years
`
`Long-Term Incentive awards
`cycle 2018-2020
`
`LTPP1
`
`LTRPP2
`
`Rewards long-term shareholder
`value creation and innovation in line
`with our strategy
`
`Equity, vesting following a three-
`year performance period
`
`Performance measures
`
`–
`
`–
`
`Balanced scorecard
`comprising:
`• Financial measures
`(60%)
`• Strategic objectives4
`(40%)
`
`• Novartis Cash
`Value Added
`(75%)
`• Innovation mile-
`stones (25%)
`
`• Relative TSR
`versus global
`sector peers
`(100%)5
`
`1 LTPP = Long-Term Performance Plan
`2 LTRPP = Long-Term Relative Performance Plan
`3 Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash.
`4 Strategic objectives are aligned with the five strategic pillars: innovation, operational excellence, data and digital, people and culture, and building trust with society.
`5 For the 2018-2020 performance cycle, the peer group comprises 15 global healthcare companies, including Novartis, as listed in “—Approach to market benchmarking.”
`
`
`Target incentive opportunity levels for the CEO are 150% and 325% of base salary for the Annual Incentive and
`LTI, respectively. Based on Novartis compensation guidelines, the other members of the Executive Committee have
`Annual Incentive and LTI target opportunity levels that range from 80% to 120%, and 160% to 270% of base sal-
`ary, respectively. The payout range remains at 0% to 200% of target opportunity based on achievement against
`performance.
` 
`The 2018-2020 cycle will be the last vesting of the LTRPP plan, which was discontinued as of grants made in 2019.
`The LTPP metrics were subsequently transformed into four equally weighted measures: net sales compound annual
`growth rate, core operating income compound annual growth rate, innovation and relative TSR.
`
`Compensation governance at a glance
`
`A summary of the compensation decision authorization levels within the parameters set by the AGM is shown below,
`along with an overview of the risk management principles.
`
`DECISION ON
`
`Compensation of Chairman and other Board members
`
`Compensation of CEO
`
`Compensation of other Executive Committee members
`
`DECISION-MAKING AUTHORITY
`
`Board of Directors
`
`Board of Directors
`
`Compensation Committee
`
`EXECUTIVE COMMITTEE COMPENSATION RISK MANAGEMENT PRINCIPLES
`
`• Rigorous performance management
`process
`• Balanced mix of short-term and
`long-term variable compensation
`elements
`• Performance evaluation under the
`Annual Incentive includes an individual
`balanced scorecard
`• Performance-based LTI, with three-year
`cycles
`
`• All variable compensation is capped at
`200% of target
`• Contractual notice period of 12 months
`• Post-contractual non-compete period
`limited to a maximum of 12 months from
`the end of employment. Resulting
`compensation is limited to the annual
`base salary plus the prior-year Annual
`Incentive as per contract, if applicable
`
`• Good and bad leaver provisions apply to
`the variable compensation of leavers
`• No severance payments or change-of-
`control clauses
`• Clawback and malus principles apply to
`all elements of variable compensation
`• Share ownership requirements; no
`hedging or pledging of Novartis share
`ownership position
`
`
`
`91
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`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`2020 CEO pay for performance – outcomes
`
`Measure
`
`Target1
`
`Achievement versus target
`
`2020 ANNUAL INCENTIVE (SEE “—2020 ANNUAL INCENTIVE”)
`
`
`
`
`
`
`
`USD 50 781 million
`
`Below
`
`USD 9 745 million
`
`Significantly above
`
`24.3%
`
`8.3%
`
`Above
`
`Met
`
`Met
`
`Financial measures – 60% of total Annual Incentive, comprising:
`
`Group net sales (cc) (30%)
`
`Group operating income (cc) (30%)
`
`Group free cash flow as a % of sales (cc) (20%)
`
`Share of peers for Novartis Group (USD) (20%)
`
`Overall assessment of Group financial targets in constant currencies
`
`
`
`
`
`
`
`1 For performance evaluation purposes, target as well as actual financial KPIs included the results of the Sandoz US dermatology business and generic oral solids portfolio, which
`were expected to be divested to Aurobindo Pharma USA Inc. This deal was later terminated by mutual agreement with Aurobindo.
`
`Strategic objectives – 40% of total Annual Incentive, comprising:
`
`Innovation (20%)
`
`Operational excellence (20%)
`
`Data and digital (20%)
`
`People and culture (including Values and Behaviors) (20%)
`
`Building trust with society (including access to healthcare, reputation and other ESG topics) (20%)
`
`
`
`
`
`
`
`
`
`
`
`Overall assessment of strategic objectives
`
`
`
`
`
`
`
`Overall assessment of CEO balanced scorecard
`
`Met
`
`Met
`
`Met
`
`Met
`
`Significantly above
`
`Met
`
`Met
`
`TOTAL Annual Incentive:
`
`100% of target (payout range 0% – 200%)
`
`2018-2020 LONG-TERM INCENTIVES (SEE “— LONG-TERM INCENTIVE PLANS, 2018-2020 CYCLE”)
`
`Long-Term Performance Plan (LTPP)
`
`Novartis Cash Value Added (cc) (75%)
`
`Key innovation milestones (25%)
`
`TOTAL LTPP1:
`
`Long-Term Relative Performance Plan (LTRPP)
`
`USD 8.3 billion
`
`
`
`Above
`
`Above
`
`143% of target (payout range 0% – 200%)
`
`Relative TSR against a global healthcare peer group (USD)
`
`
`
`Above median
`
`TOTAL LTRPP1:
`
`1 Combined LTI payout is 126% of target.
`
`100% of target (payout range 0% – 200%)
`
`2020 total realized compensation for the CEO
`
`The 2020 total realized compensation for the CEO was CHF 12 724 166. It includes payouts of the Annual Incen-
`tive, LTPP and LTRPP based on actual performance assessed for cycles concluding in 2020. More information on
`the overall assessment of the CEO by the Board of Directors can be found in “—2020 CEO balanced scorecard.”
`
`
`
`CHF
`
`
`Fixed pay and benefits
`
`Variable pay – performance-related
`
`Annual base
`salary
`
`Pension and other
`benefits
`
`2020 Annual
`Incentive
`
`LTPP 2018-2020
` cycle1
`
`LTRPP 2018-2020
` cycle1
`
`Total realized
`compensation
`
`Vasant Narasimhan
`(CEO)
`
`1 743 750
`
`
`288 943
`
`
`2 636 550
`
`
`5 605 100
`
`
`2 449 823
`
`
`12 724 166
`
`1 The shown amounts represent the underlying share value of the total number of shares vested (including Alcon Keep Whole awards of CHF 784 497 as well as dividend equivalents
`of CHF 660 900) to the CEO for the LTPP and LTRPP performance cycle 2018-2020.
`
`
`
`92
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`2020 Board compensation system
`
`The compensation system applicable to the Board of Directors is shown below and remains unchanged since the
`prior year. All fees to the Board members are delivered at least 50% in shares and the remainder in cash.
`AGM 2020-2021
`annual fee
`
`
`CHF 000s
`
`Chairman of the Board
`
`Board membership
`
`Vice Chairman
`
`Chair of the Audit and Compliance Committee
`
`Chair of the Compensation Committee
`
`Chair of the following committees:
`• Governance, Nomination and Corporate Responsibilities Committee
`• Science & Technology Committee
`• Risk Committee
`
`Membership of the Audit and Compliance Committee
`
`Membership of the following committees:
`• Compensation Committee
`• Governance, Nomination and Corporate Responsibilities Committee
`• Science & Technology Committee
`• Risk Committee
`
`2020 Board compensation
`
`3 800
`
`280
`
`50
`
`130
`
`90
`
`
`
`
`
`
`
`70
`
`70
`
`
`
`
`
`
`
`
`
`40
`
`Total actual compensation earned by Board members in the 2020 financial year is shown in the table below.
`
`
`CHF 000s
`
`Chairman of the Board
`
`Other 13 members of the Board
`
`Total
`
`2020
`total compensation 1
`
`3 805
`
`4 925
`
`8 729
`
`1 Includes an amount of CHF 26 118 for mandatory employer contributions for all Board members paid by Novartis to governmental social security systems. This amount is out of total
`employer contributions of CHF 430 023 , and provides a right to the maximum future insured government pension benefit for the Board member.
`
`
`
`93
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`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Executive Committee
`compensation philosophy and principles
`
`Novartis compensation philosophy
`
`Our compensation philosophy aims to ensure that we
`attract and retain outstanding Executive Committee
`members and that they are rewarded according to their
`success in implementing the Company strategy, and their
`contribution to Company performance and long-term
`value creation.
`
`Pay for
`
`performance
`
`Shareholder
`alignment
`
`
`
`• Variable compensation is tied directly to the
`achievement of strategic Company targets
`
`• Our incentives are significantly weighted
`toward long-term equity-based plans
`
`• Measures under the Long-Term Incentive
`plans are calibrated to promote the creation
`of shareholder value
`
`• Executive Committee members are
`expected to build and maintain substantial
`shareholdings
`
`Balanced
`rewards
`
`
`
`• Balanced set of measures to create
`sustainable value
`
`• Mix of targets based on financial metrics,
`strategic objectives, and performance versus
`our competitors
`
`Business
`ethics
`
`
`
`• The Novartis Values and Behaviors are an
`integral part of our compensation system
`
`• They underpin the assessment of overall
`performance for the Annual Incentive
`
`Competitive
`
`compensation
`
`• Total compensation must be sufficient to
`attract and retain key global talent
`
`
`
`industries. As such, external peer compensation data is
`one of a number of key reference points considered by
`the Board of Directors and the Compensation Committee
`when making decisions on executive pay, helping to
`ensure that the compensation system and compensation
`levels at Novartis remain competitive. Novartis makes the
`commitment to shareholders to confirm benchmarking
`practices, including the peer group, each year.
`The Compensation Committee believes in a rigorous
`approach to peer group construction and maintenance.
`The Compensation Committee also believes that using
`a consistent set of peers that is similar in size and scope
`enables shareholders to evaluate the compensation year
`on year and make pay-for-performance comparisons. As
`such, following a review of the benchmarking peer group,
`the Compensation Committee decided to maintain the
`same primary peer group of 14 global healthcare com-
`panies until the end of 2020 (with the exception of Cel-
`gene, which was acquired by Bristol-Myers Squibb), as
`presented below.
`
`GLOBAL HEALTHCARE PEER GROUP
`
`AbbVie
`
`Amgen
`
`AstraZeneca
`
`Biogen
`
`Bristol-Myers Squibb
`
`Eli Lilly & Co.
`
`GlaxoSmithKline
`
`Gilead Sciences
`
`Johnson & Johnson
`
`Novo Nordisk
`
`Merck & Co.
`
`Pfizer
`
`Roche
`
`Sanofi
`
`• Overarching emphasis on pay for
`performance
`
`Alignment with Company strategy
`
`Our strategy is to build a leading, focused medicines com-
`pany powered by advanced therapy platforms and data
`science. We foster a company culture that is inspired, curi-
`ous and unbossed. We believe these elements drive con-
`tinued innovation and will support the creation of value over
`the long term for our Company, society and shareholders.
`To align the compensation system with this strategy
`and to ensure that Novartis is a high-performing organiza-
`tion, the Company operates both a short-term Annual
`Incentive and an LTI plan with a balanced set of measures
`and targets. The Board of Directors determines specific,
`measurable and time-bound performance measures for
`the Annual Incentive and LTI plan. The Compensation Com-
`mittee has reviewed the existing compensation system and
`determined that it continues to support our strategy.
`
`Approach to market benchmarking
`
`There remains significant competition for top executive
`talent with deep expertise, competencies and proven per-
`formance within the pharmaceutical and biotechnology
`
`The companies in this peer group reflect our industry and
`are similar to Novartis in terms of both size and scope of
`operations. Novartis target compensation is generally
`positioned around the market median benchmark for com-
`parable roles within this group.
`Although Novartis is headquartered in Switzerland,
`more than a third of its sales come from the US market,
`and the US remains a significant talent pool for the
`recruitment of executives by the Company. It is therefore
`critical that Novartis is able to attract and retain key tal-
`ent globally, especially from the US.
`For consideration of European and local practices,
`the Compensation Committee also references a cross-in-
`dustry peer group of Europe-headquartered multina-
`tional companies, selected on the basis of comparability
`in size, scale, global scope of operations, and economic
`influence to Novartis.
`Six of these companies focus mainly on healthcare:
`AstraZeneca, GlaxoSmithKline, Merck KgaA, Novo Nor-
`disk, Roche and Sanofi. Nine companies are selected
`from the STOXX® All Europe 100 Index representing mul-
`tiple sectors: Anheuser-Busch InBev, Bayer, BMW, Daim-
`ler, Danone, Heineken, L’Oréal, Nestlé and Unilever.
`Due to the varying impact of the global pandemic on
`different companies, we believe that this year has demon-
`strated the importance of using a more homogeneous
`industry peer group, where possible.
`
`
`
`94
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Executive Committee appointments compensation policy
`
`ELEMENT OF COMPENSATION POLICY
`
`Level
`
`The overall package should be market-competitive to enable the recruitment of global executive talent with
`deep expertise and competencies.
`
`Annual base salary
`
`The Compensation Committee may appoint individuals who are new to a role on an annual base salary that
`is below the market level, with a view to increase this toward a market level over a period of three to four
`years as an individual develops in the role.
`
`This prudent approach ensures pay levels are merit-based, with increases dependent on strong
`performance and proven ability in the role over a sustained period.
`
`Incentives
`
`The ongoing compensation package will normally include the key compensation elements and incentive
`opportunities in line with those offered to current Executive Committee members.
`
`In exceptional circumstances, higher Long-Term Incentive opportunities than those offered to current
`Executive Committee members may be provided at the Compensation Committee’s discretion.
`
`Performance measures may include business-specific measures tailored to the specific role.
`
`Pension and other benefits
`
`Newly appointed Executive Committee members are eligible for a local market pension and other benefits
`in line with the wider employee group.
`
`Buyouts
`
`The Compensation Committee seeks to balance the need to offer competitive compensation opportunities
`to acquire the talent required by the business with the principle of maintaining a strong focus on pay for
`performance.
`
`As such, when an individual forfeits variable compensation as a result of an appointment at Novartis, the
`Compensation Committee may offer replacement awards in such form as the Compensation Committee
`considers appropriate, taking into account relevant factors.
`
`Relevant factors include the replacement vehicle (i.e., cash, restricted share units, restricted shares or
`performance share units), whether the award is contingent on meeting performance conditions or not, the
`expected value of the forfeited award, the timing of forfeiture (i.e., Novartis mirrors the blocking or vesting
`period of the forfeited award) and the leaver conditions, in case the recruited individual leaves Novartis
`prior to the end of the blocking or vesting period.
`
`The Compensation Committee will seek to pay no more than is required to match the commercial value or
`fair value of payments and awards forfeited by the individual.
`
`If individuals are required to relocate or be assigned away from their home location to take up their position,
`relocation support may be provided in line with our global mobility policies (i.e., relocation support, tax
`equalization).
`
`International mobility
`
`
`
`
`
`95
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Treatment of variable compensation for Executive Committee leavers
`
`ELEMENT OF COMPENSATION POLICY
`
`Annual Incentive –
`cash element
`
`Retirement, termination by the Company (for reasons other than performance or conduct), change of
`control, disability, death i.e. “good leavers”
`Pro-rata Annual Incentive is paid to reflect the portion of the year the individual was employed.
`
`Any other reason
`No Annual Incentive.
`
`Annual Incentive – mandatory
`deferral into restricted shares/
`RSUs
`
`
`
`If a participant leaves employment due to voluntary resignation or misconduct, unvested restricted shares
`and restricted share units (RSUs) are forfeited.
`
`If a participant leaves involuntarily, restricted shares and RSUs are released on the original blocking end
`date.
`
`All awards are subject to non-compete terms until the end of the three-year blocking date, starting from the
`date of grant.
`
`Awards are not subject to forfeiture during the deferral period.
`
`Annual Incentive – voluntary
`restricted shares/RSUs/ADRs
`(US associates only)
`
`
`
`Long-Term Incentives
`(LTPP/LTRPP)
`
`Voluntary resignation or termination by the Company for misconduct
`All of the award will be forfeited.
`
`Termination by the Company for reasons other than performance or conduct, and change in control
`due to divestment (including retirement)
`Awards vest on the regular vesting date, subject to performance, on a pro-rata basis for time spent with the
`Company during the performance cycle. There is no accelerated vesting.
`
`Death or long-term disability
`Accelerated vesting at target will be applied.
`
`Non-compete agreement
`All awards are subject to non-compete terms against the healthcare peer group until the vesting date.
`
`
`
`Malus and clawback
`
`Any incentive compensation paid to Executive Commit-
`tee members is subject to malus and clawback rules.
`This means that the Board of Directors for the CEO, and
`the Compensation Committee for the other Executive
`Committee members, may decide – subject to applica-
`ble law – to retain any unpaid or unvested incentive com-
`pensation (malus), or to recover incentive compensation
`
`that has been paid or has vested in the past (clawback).
`This applies in cases where the payout has resulted from
`a violation of laws or conflicts with internal management
`standards, including Company and accounting policies.
`This principle applies to both the short-term Annual
`Incentive and LTI plans.
`
`
`
`96
`
`

`

`FILED: NEW YORK COUNTY CLERK 11/12/2021 12:34 AM
`NYSCEF DOC. NO. 19
`
`Item 6. Directors, Senior Management and Employees
`
`INDEX NO. 650463/2021
`
`RECEIVED NYSCEF: 11/12/2021
`
`Executive Committee performance management process
`
`To foster a high-performance culture, the Company
`applies a uniform performance management process
`worldwide, based on quantitative and qualitative criteria,
`including our Values and Behaviors. All Novartis associ-
`ates, including the CEO and other Executive Committee
`members, are subject to a formal three-step process:
`objective setting, performance evaluation and compen-
`sation determination. This process is explained below.
`Performance targets are generally set before the
`start of the relevant performance cycle. There is a rigor-
`ous framework in place for establishing targets to ensure
`they are suitably robust and challenging, and align with
`the strategic priorities of the Group. The key factors
`taken into account when setting targets include:
`• Novartis strategic priorities
`• Internal and external market expectations
`• Regulatory factors (e.g., new launches, patent expiries)
`• Investment in capital expenditure
`• Values and Behaviors
`
`The targets are challenged at multiple stages before they
`are ultimately approved by the Board of Directors. In line
`with good governance practices, the Compensation
`Committee works to set targets that are ambitious and
`challenging but do not encourage undue risk-taking.
`Following the end of the performance cycle, the Board
`of Directors and the Compensation Committee consider
`performance against the targets originally set. The CEO
`a