Withdrawn Novartis Noncompete May Nix Business Chances to Deflect Swiss Binding Pay Vote

February 21, 2013

Mere weeks before Swiss voters head to the polls to vote on a March 3rd referendum which would impose one of the most restrictive executive pay regulations, the revelation that Swiss-based pharmaceutical company Novartis AG had agreed to pay its outgoing Chairman, Daniel Vasella, a $78 million noncompete agreement ignited fierce public outrage, causing the company to cancel the agreement.  If approved, the upcoming Swiss referendum would give shareholders a binding say on pay vote and ban golden handshake and golden parachute payments.  The episode is a good reminder that in structuring executive compensation arrangements that may make good business sense, companies and boards must also evaluate how they will be perceived in the broader context.   

The exit payment for outgoing Chairman Daniel Vasella, who stepped down today at the company's annual meeting, was part of a six-year noncompete agreement which the company said was necessary to prevent Vasella from going to work for a competitor.  Drug companies frequently use noncompete agreements to protect trade secrets, especially at the senior executive and scientist levels, although they tend to be shorter than six years.  Despite Novartis's justifications, the deal was greeted with vehement criticism, not only from top-ranking politicians, investor activists, the public and the media, which would have been expected, but also from leading companies and the business group Economiesuisse, which is lobbying against the referendum.  According to Financial Times, Ursula Fraefel, who is running the group’s lobbying campaign against the referendum, said “[w]e welcome the withdrawal of the payout, but from our perspective it would have been better if he had never accepted the payment in the first place.”  A poll this week put support for the referendum at 64 percent.