EX-99 2 a170125-99_1.htm 99.1 EXCERPTS FROM NOVARTIS ANNUAL REPORT 2016 99.1 Excerpts from Novartis Annual Report 2016


Corporate governance


Contents

Letter from the Chairman


Dear shareholder,

In 2016, we refreshed our Board with new members, focused on the new operating model of Novartis, and further strengthened our corporate governance.

The mandate of our Board
Our Board is accountable for stewardship, governance and oversight, and for setting the strategic direction to deliver sustainable value. We achieve this by setting a clear strategy for Novartis and through an effective governance.
Our Board is also responsible for appointing our CEO and the other Executive Committee members. We assert independent judgment and work closely with our Executive Committee to ensure our strategy is properly implemented, our ethical standards are applied, and our performance is optimized.
Board composition
To be effective and independent, our Board must have the right composition, structure and processes, and a clear understanding of its role and responsibilities. Our Board meets these requirements.
Our Board is comprised of 12 non-executive, independent members with diverse education, experience, nationalities and interpersonal skills. This diversity was further strengthened when Ton Buechner and Liz Doherty joined in February 2016, reinforcing our Board’s expertise in finance and accounting, as well as in leadership and management. With this, we achieved a substantial Board refreshment. Two-thirds of our Board members have a tenure of less than six years, balancing the benefits of continuity and experience with refreshment, without applying a mandatory term limit.
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In line with committee succession plans, Liz joined our Audit and Compliance Committee (ACC), and was designated as Financial Expert. Subject to their re-election at the Annual General Meeting of Shareholders (AGM) 2017, Liz will take over the chairmanship of the ACC from Srikant Datar; Srikant will remain an ACC member, designated as second Financial Expert; and he will take over the chairmanship of the Risk Committee from Andreas von Planta, who has already taken over the chairmanship of the Governance, Nomination and Corporate Responsibilities Committee (GNCRC) from Pierre Landolt.
All Board members are non-executive and independent, as defined by our own rules and those of the Swiss Code of Best Practice for Corporate Governance. We have established processes to ensure our Board functions effectively, promoting efficient and balanced decision-making, and enabling our Board to effectively fulfill its duties in the best interest of our shareholders, employees and other stakeholders.
We emphasize training, performance evaluation and ongoing improvement of our Board and its members, as well as succession planning. To get an outside view on where we could improve further, we initiate a performance and effectiveness evaluation by an independent expert on a regular basis, with the most recent external review being completed during 2014.
The focus of our Board in 2016
The key areas that our Board focused on in 2016 were structural, cultural and leadership changes, as well as the corporate responsibility programs, compliance and the compensation system.
We re-evaluate the strategic direction of Novartis each year and make necessary changes in line with our mandate to create sustainable value.
Last year, a key strategic topic for our Board was the continuing transformation of Novartis. This began in 2014 when we focused our company on our core businesses and created a more integrated organization to facilitate collaboration, drive efficiency, and support productivity gains. In 2016, in close cooperation with our Executive Committee, we implemented additional structural changes aimed at positioning our company for future growth. They included creating Global Drug Development and manufacturing organizations to further enhance efficiency and effectiveness. As a result of these actions, in just over three years, Novartis has transformed from a strongly divisionalized organization to a more integrated, streamlined company focused on key segments and able to take advantage of its global scale. For details on our strategy and structure, please see pages 14 – 19. We also strengthened our focus on the corporate culture of Novartis as defined by the Novartis Values and Behaviors.
The GNCRC also reviewed progress on Novartis Access, our portfolio of 15 on- and off-patent medicines offered to governments and public-sector customers in low- and lower-middle-income countries at a price of USD 1 per treatment per month, which completed its first year of implementation. The Novartis Malaria Initiative, the Healthy Family social business, and our corporate volunteering program were also reviewed. The GNCRC also reviewed Novartis’ performance in key sustainability ratings and discussed the potential for introducing more robust reporting on the social impact of our activities. For further information on our corporate responsibility efforts, please see the Corporate Responsibility chapter, beginning on page 60, and our Corporate Responsibility Performance Report on the Novartis website: www.novartis.com/about-us/corporate-responsibility.
To meet the increasing expectations of patients and society in a way that makes us proud, we also took further steps in the compliance area. We enhanced our core compliance processes and strengthened our Integrity & Compliance function. Further, we evolved the way we work to increase access to evidence-based information about our products and services, with the aim of helping doctors deliver the best possible care for patients. We will continue to focus on further strengthening leaders’ accountability at all levels of the organization for compliance.
And, finally, we continued to refine our compensation system in line with best practice principles. For further information, please see our Compensation Report, beginning on page 110.
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Role of the Chairman
As independent, non-executive Chairman, I am responsible for the leadership of the Board, ensuring its effectiveness in all aspects of its role. I also make sure we effectively collaborate with our CEO and the Executive Committee.
I ensure that our Board and its committees work effectively, setting the agenda, style and tone of Board discussions. I promote constructive challenge and debate, as well as effective decision-making, while ensuring that our performance is regularly evaluated and that our members are provided with appropriate support, education and advice.
In addition, I support, mentor and challenge our CEO, without interfering in the operational management of Novartis.
I am supported in my tasks by our Vice Chairman, Enrico Vanni, who would lead the Board if I were incapacitated.
Strengthened governance framework
During the last two years, we took steps to further strengthen our corporate governance, implementing the rules of the Ordinance against Excessive Compensation in Stock Exchange Listed Companies. We introduced annual elections of the Chairman of the Board, of all Board members, and of Compensation Committee members. We also introduced yearly binding shareholder votes on the aggregate compensation of our Board and Executive Committee, as well as a yearly non-binding shareholder vote on the Compensation Report.
Last year we also addressed the question of auditor rotation. We concluded that, at this stage, continuing with the yearly assessment of PwC’s objectivity, effectiveness and independence, and with the regular rotation of the audit partner in charge, is in the best interest of Novartis, its investors and other stakeholders.
Importance of shareholder engagement
Engagement with our shareholders is critical to our company’s long-term success. Our Board is committed to continuous shareholder engagement. We strive to exchange views with our shareholders in an atmosphere of trust and respect that promotes a collaborative dialogue, with views and positions expressed openly to enhance mutual understanding. As part of these efforts, based on a structured annual program, our governance specialists meet regularly with their peers from shareholder groups, and I personally meet with many of our shareholders, discussing strategy and governance. Our shareholder engagement meaningfully contributes to the continuing evolution of our governance framework.
Joerg Reinhardt
Chairman of the Board of Directors
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Summary of our corporate governance approach

Governance bodies General Meeting of ShareholdersApproves operating and financial review, Novartis Group consolidated financial statements and financial statements of Novartis AG; decides appropriation of available earnings and dividend; approves compensation of Board and Executive Committee; elects Board members, Chairman, Compensation Committee members, Independent Proxy and external auditors; adopts Articles of IncorporationExternal auditorProvides opinion on compliance of Novartis Group consolidated financial statements and the financial statements of NovartisAG with applicable standards and Swiss law, on compliance of the Compensation Report with applicable law, on effectiveness of internal control over financial reporting, and on the corporate responsibility reporting of NovartisBoard of DirectorsAudit and Compliance CommitteeCompensation CommitteeGovernance, Nomination and Corporate Responsibilities CommitteeResearch & Development CommitteeRisk CommitteeSets strategic direction of Novartis, appoints and oversees key executives, approves major transactions and investmentsExecutive CommitteeResponsible for operational management of Novartis
Leadership structure
Independent, non-executive Chairman and separate CEO
Board governance
Structure
All Board members are non-executive and independent, as defined by our rules. The Board has assigned responsibilities to five committees:
— Audit and Compliance Committee
— Compensation Committee
— Governance, Nomination and Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee
Composition
Board members have diverse education, experience, nationalities and interpersonal skills. Their biographies (beginning on page 94) describe their specific qualifications.
Processes
The Board’s processes significantly influence its effectiveness. The Board has implemented best practices for all such processes. Important elements include Board meeting agendas (to address all important topics), information submitted to the Board (to ensure the Board receives sufficient information from management to perform its supervisory duty and to make decisions that are reserved for it), and boardroom behavior (to promote an efficient and balanced decision-making process).
Board and Executive Committee compensation
Information on Board and Executive Committee compensation is outlined in our Compensation Report, beginning on page 110.
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Our shares and our shareholders

Our shares
Share capital of Novartis AG
As of December 31, 2016, the share capital of Novartis AG is CHF 1 313 557 410 fully paid-in and divided into 2 627 114 820 registered shares, each with a nominal value of CHF 0.50 (Novartis share). Novartis AG has neither authorized nor conditional capital. There are no preferential voting shares; all Novartis shares have equal voting rights. No participation certificates, non-voting equity securities (Genussscheine), or profit-sharing certificates have been issued.
Novartis shares are listed on the SIX Swiss Exchange (ISIN CH0012005267, symbol: NOVN), and on the New York Stock Exchange (NYSE) in the form of American depositary receipts (ADRs) representing Novartis American depositary shares (ADSs) (ISIN US66987V1098, symbol: NVS).
The holder of an ADR has the rights enumerated in the deposit agreement (such as the right to give voting instructions and to receive dividends). The ADS depositary of Novartis AG – JPMorgan Chase Bank, New York – holding the Novartis shares underlying the ADRs is registered as a shareholder in the Novartis Share Register. An ADR is not a Novartis share and an ADR holder is not a Novartis AG shareholder. ADR holders exercise their voting rights by instructing the depositary to exercise their voting rights. Each ADR represents one Novartis share.
Changes in share capital
During the last three years, the following changes were made to the share capital of Novartis AG:
In 2014, the share capital of Novartis AG did not change. In 2015, Novartis AG reduced its share capital by CHF 14.6 million (from CHF 1 353 096 500 to CHF 1 338 496 500) by canceling 29.2 million Novartis shares repurchased on the second trading line during 2013 and 2014. In 2016, Novartis AG reduced its share capital by CHF 24.9 million (from CHF 1 338 496 500 to CHF 1 313 557 410) by canceling 49.9 million Novartis shares repurchased on the second trading line during 2015.
Capital changes
Number of shares

Year

As of Jan 1
Changes
in shares

As of Dec 31
Changes
in CHF
2014
2 706 193 000
2 706 193 000
2015
2 706 193 000
– 29 200 000
2 676 993 000
– 14 600 000
2016
2 676 993 000
– 49 878 180
2 627 114 820
– 24 939 090
A table with additional information on changes in the Novartis AG share capital can be found in Note 8 to the financial statements of Novartis AG.
Convertible or exchangeable securities
Novartis AG has not issued convertible or exchangeable bonds, warrants, options or other securities granting rights to Novartis shares, other than options (and similar instruments such as stock appreciation rights) granted under or in connection with equity-based participation plans of Novartis associates. Novartis AG does not grant any new stock options under these plans.
Share repurchase programs
At the Annual General Meeting (AGM) in February 2008, shareholders approved the sixth share repurchase program authorizing the Board to repurchase Novartis shares up to a maximum of CHF 10 billion via a second trading line on the SIX Swiss Exchange. In 2008, a total of 6 million Novartis shares were repurchased at an average price of CHF 49.42 per Novartis share, and canceled in 2009. In April 2008, the share repurchases were suspended in favor of debt repayment. In December 2010, the Board announced the reactivation of the share repurchases. In 2011, 39 430 000 Novartis shares were repurchased at an average price of CHF 52.81 per Novartis share, and canceled in 2012. In 2012, no Novartis shares were repurchased. In 2013, 2 160 000 Novartis shares were repurchased at an average price of CHF 70.58 per Novartis share. In 2014, 27 040 000 Novartis shares were repurchased at an average price of CHF 81.18 per Novartis share. In 2015, 29 200 000 Novartis shares repurchased in 2013 and 2014 were canceled. In the same year, 49 878 180 Novartis shares were repurchased at an average price of CHF 93.24 per Novartis share, and canceled in 2016. With those repurchases, the sixth share repurchase program was completed.
At the AGM in February 2016, shareholders approved the seventh share repurchase program authorizing the Board to repurchase Novartis shares up to a maximum of CHF 10 billion. In 2016, a total of 10 270 000 Novartis shares were repurchased at an average price of CHF 74.67 per Novartis share.
Share developments
Share developments in 2016
— Swiss-listed Novartis shares decreased 14.6% to CHF 74.10
— ADRs decreased 15.3% to USD 72.84
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Novartis shares finished at CHF 74.10, a decrease of 14.6% from the 2015 year-end closing price of CHF 86.80. Novartis ADRs decreased in 2016 by 15.3% to USD 72.84 from USD 86.04. The Swiss Market Index (SMI), in comparison, decreased by 6.8% in 2016, whereas the world pharmaceutical index (MSCI) decreased by 12.0% during the year. Total shareholder return for Novartis shares in 2016 was -11.4% in CHF and -13.8% in USD. The disappointing Alcon performance, the slow uptake of Entresto and the patent expiration of Gleevec in US weighed on our share price in 2016. Over a longer-term period, Novartis AG has consistently delivered a solid performance, providing a 8.7% compounded annual total shareholder return between January 1, 1996 and December 31, 2016, exceeding the 8.4% compounded returns of its large pharmaceutical peers (see page 115; “benchmark companies”), or the returns of 8.3% of the MSCI.
The market capitalization of Novartis AG based on the number of Novartis shares outstanding (excluding Novartis treasury shares) amounted to USD 172 billion as of December 31, 2016, compared to USD 208 billion as of December 31, 2015.
Continuously rising dividend since 1996
The Board proposes a 2% increase in the dividend payment for 2016 to CHF 2.75 per Novartis share (2015: CHF 2.70) for approval at the AGM on February 28, 2017. This represents the 20th consecutive increase in the dividend paid per share since the creation of Novartis AG in December 1996, which reflects the successful execution of the Group’s strategy as well as the performance of the Executive Committee and all Novartis associates. If the 2016 dividend proposal is approved by shareholders, dividends to be paid out will total approximately USD 6.4 billion (2015: USD 6.5 billion). This will result in an expected payout ratio of 96% of net income from continuing operations (2015: 92% and 36% of net income attributable to shareholders of Novartis AG). Based on the 2016 year-end share price of CHF 74.10, the dividend yield will be 3.7% (2015: 3.1%). The dividend payment date has been set for March 6, 2017.
Direct Share Purchase Plan
As of June 20, 2016, Novartis no longer provides a Direct Share Purchase Plan. All participants were informed about the termination through a letter, which also included details about available options and the modalities of the closure.
Novartis 2016 share price movement(based on USD amounts)115110105100 95 90 85 80Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov DecNovartisPeersMSCI World MarketsMSCI World PharmaSource: Datastream; data are converted into US dollars and re-based to 100 at January 1, 2016. ­Currency fluctuations have an influence on the representation of the relative performance of Novartis vs. indices and peers.
Novartis 1996–2016 total shareholder return(based on USD amounts)800700600500400300200100  096 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16NovartisPeersMSCI World MarketsMSCI World PharmaSource: Datastream; data are converted into US dollars and re-based to 100 at January 1, 1996. ­Currency fluctuations have an influence on the representation of the relative performance of Novartis vs. indices and peers.
Key Novartis share data
2016
2015
2014
Issued shares
2 627 114 820
2 676 993 000
2 706 193 000
Treasury shares 1
253 055 807
303 098 183
307 566 743
Outstanding shares at December 31
2 374 059 013
2 373 894 817
2 398 626 257
Weighted average number of shares outstanding
2 378 474 555
2 402 806 352
2 425 782 324
 1  Approximately 135 million treasury shares (2015: 137 million; 2014: 153 million) are held in entities that restrict their availability for use.
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Per-share information1
2016
2015
2014
Basic earnings per share (USD) from continuing operations
2.82
2.92
4.39
Basic earnings per share (USD) from discontinued operations
4.48
– 0.18
Total basic earnings per share (USD)
2.82
7.40
4.21
Diluted earnings per share (USD) from continuing operations
2.80
2.88
4.31
Diluted earnings per share (USD) from discontinued operations
4.41
– 0.18
Total diluted earnings per share
2.80
7.29
4.13
Operating cash flow (USD) from continuing operations
4.82
5.03
5.73
Year-end equity for Novartis AG shareholders (USD)
31.52
32.46
29.50
Dividend (CHF) 2
2.75
2.70
2.60
 1  Calculated on the weighted average number of shares outstanding, except year-end equity
 2  2016: proposal to shareholders for approval at the Annual General Meeting on February 28, 2017
Key ratios – December 31
2016
2015
2014
Price/earnings ratio 1
25.7
11.9
22.2
Price/earnings ratio from continuing operations 1
25.7
30.1
21.3
Enterprise value/EBITDA from continuing operations
13
16
15
Dividend yield (%) 1
3.7
3.1
2.8
 1  Based on the Novartis share price at December 31 of each year
Key data on ADRs issued in the US
2016
2015
2014
Year-end ADR price (USD)
72.84
86.04
92.66
High 1
86.21
106.12
96.65
Low 1
67.59
83.96
78.20
Number of ADRs outstanding 2
315 349 314
299 578 398
307 623 364
 1  Based on the daily closing prices
 2  The depositary, JPMorgan Chase Bank, holds one Novartis AG share for every ADR issued.
Share price (CHF)
2016
2015
2014
Year-end share price
74.10
86.80
92.35
High 1
86.45
102.30
93.80
Low 1
68.15
82.20
70.65
Year-end market capitalization (USD billions) 2
172.0
208.3
223.7
Year-end market capitalization (CHF billions) 2
175.9
206.1
221.5
 1  Based on the daily closing prices
 2  Market capitalization is calculated based on the number of shares outstanding (excluding treasury shares).
Our shareholders
Significant shareholders
According to the Novartis Share Register, as of December 31, 2016, the following registered shareholders (including nominees and the ADS depositary) held more than 2% of the total share capital of Novartis AG, with the right to vote all these Novartis shares based on an exemption granted by the Board (see page 84):1
— Shareholders: Novartis Foundation for Employee Participation, with its registered office in Basel, holding 2.6%; Emasan AG, with its registered office in Basel, holding 3.4%; and UBS Fund Management (Switzerland) AG, with its registered office in Basel, holding 2.1%
— Nominees: Chase Nominees Ltd., London, holding 8.5%; Nortrust Nominees, London, holding 3.9%; and The Bank of New York Mellon, New York, holding 4.4% through its nominees, The Bank of New York Mellon, Everett, holding 1.8%, and The Bank of New York Mellon, Brussels, holding 2.6%
— ADS depositary: JPMorgan Chase Bank, New York, holding 12.0%
According to a disclosure filed with Novartis AG, Norges Bank (Central Bank of Norway), Oslo, held 2.02% of the share capital of Novartis AG as of December 31, 2016.
 
According to disclosure notifications filed with Novartis AG and the SIX Swiss Exchange, each of the following shareholders held between 3% and 5% of the share capital of Novartis AG as of December 31, 2016:
— Capital Group Companies Inc., Los Angeles
— BlackRock Inc., New York
Disclosure notifications pertaining to shareholdings in Novartis AG that were filed with Novartis AG and the SIX Swiss Exchange are published on the latter’s electronic publication platform, and can be accessed via:
www.six-exchange-regulation.com/en/home/publications/significant-shareholders.html.
Cross shareholdings
Novartis AG has no cross shareholdings in excess of 5% of capital, or voting rights with any other company.
 
1 Excluding 4.5% of the share capital held as treasury shares by Novartis AG and its entities that restrict their availability for use
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Distribution of Novartis shares
The information in the following tables relates only to registered shareholders and does not include holders of unregistered shares. Also, the information provided in the tables below cannot be assumed to represent the entire Novartis AG investor base because nominees and JPMorgan Chase Bank, as ADS depositary, are registered as shareholders for a large number of beneficial owners.
As of December 31, 2016, Novartis AG had approximately 171 000 registered shareholders.
Number of shares held

As of December 31, 2016
Number of
registered
shareholders

% of registered
share capital
1–100
25 153
0.06
101–1'000
103 217
1.66
1'001–10'000
38 138
4.03
10'001–100'000
3 427
3.40
100'001–1'000'000
481
5.47
1'000'001–5'000'000
71
5.53
5'000'001 or more 1
35
50.12
Total registered shareholders/shares
170 522
70.27
Unregistered shares
29.73
Total
100.00
 1  Including significant registered shareholders as listed above
Registered shareholders by type
As of December 31, 2016
Shareholders in %
Shares in %
Individual shareholders
96.24
13.28
Legal entities 1
3.70
35.11
Nominees, fiduciaries and ADS depositary
0.06
51.61
Total
100.00
100.00
 1  Excluding 4.5% of the share capital held as treasury shares by Novartis AG and its entities that restrict their availability for use
Registered shareholders by country
As of December 31, 2016
Shareholders in %
Shares in %
Belgium
0.14
4.08
France
2.37
0.49
Germany
5.27
2.00
Japan
0.16
0.73
Switzerland 1
88.60
42.53
United Kingdom
0.47
23.43
United States
0.31
23.93
Other countries
2.68
2.81
Total
100.00
100.00
Registered shares held by nominees are shown in the country where the company/affiliate entered in the Novartis Share Register as shareholder has its registered seat.
 1  Excluding 4.5% of the share capital held as treasury shares by Novartis AG and its entities that restrict their availability for use
Shareholder rights
Shareholders have the right to receive dividends, to vote and to execute all other rights as granted under Swiss law and the Articles of Incorporation.
Right to vote
Each Novartis share registered with the right to vote entitles the holder to one vote at General Meetings of Shareholders (General Meetings). Novartis shares can only be voted if they are registered with voting rights in the Novartis Share Register by the third business day before the General Meeting (for shareholder registration and voting restrictions, see page 84).
ADR holders may vote by instructing JPMorgan Chase Bank, the ADS depositary, to exercise the voting rights attached to the registered Novartis shares underlying the ADRs. JPMorgan Chase Bank exercises the voting rights for registered Novartis shares underlying ADRs for which no voting instructions have been given by providing a discretionary proxy to an uninstructed independent designee. Such designee has to be a Novartis AG shareholder.
Powers of General Meetings of Shareholders
The following powers are vested exclusively in the General Meeting:
— Adoption and amendment of the Articles of Incorporation
— Election and removal of the Chairman of the Board, Board and Compensation Committee members, the Independent Proxy and external auditors
— Approval of the management report (if required) and of the consolidated financial statements
— Approval of the financial statements of Novartis AG, and decision on the appropriation of available earnings shown on the balance sheet, including dividends
— Approval of the maximum aggregate amounts of compensation of the Board (for the period from an AGM until the next AGM) and of the Executive Committee (for the financial year following the AGM)
— Grant of discharge to Board and Executive Committee members
— Decision of other matters that are reserved by law or by the Articles of Incorporation to the General Meeting of Shareholders
Resolutions and elections at General Meetings
The General Meeting passes resolutions and elections with the absolute majority of the votes represented at the meeting. However, under the Articles of Incorporation (www.novartis.com/corporate-governance), the approval of two-thirds of the votes represented at the meeting is required for:
— An alteration of the purpose of Novartis AG
— The creation of shares with increased voting powers
— An implementation of restrictions on the transfer of registered shares, and the removal of such restrictions
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— An authorized or conditional increase of the share capital
— An increase of the share capital out of equity, by contribution in kind, for the purpose of an acquisition of property or the grant of special rights
— A restriction or suspension of rights or options to subscribe
— A change of location of the registered office of Novartis AG
— The dissolution of Novartis AG
In addition, the law provides for a qualified majority for other resolutions, such as a merger or spin-off.
Other shareholder rights
Shareholders representing at least 10% of the Novartis share capital may request that an extraordinary General Meeting be convened. Shareholders representing Novartis shares with an aggregate nominal value of at least CHF 1 million may request that an item be included in a General Meeting agenda. Such requests must be made in writing at least 45 days before the meeting, specify the agenda item to be included, and contain the proposal on which the shareholder requests a vote.
Shareholders can vote their Novartis shares by themselves or appoint another shareholder or the Independent Proxy to vote on their behalf. All shareholders (who are not yet registered on the online platform; see below) receive a General Meeting invitation letter with a proxy appointment form for the appointment of the Independent Proxy. On this form, shareholders can instruct the Independent Proxy to vote on alternative or additional motions related to the agenda items either (i) according to the motions of the Board for such alternative or additional motions, or (ii) against such alternative or additional motions. They can also abstain from voting.
Novartis AG offers shareholders the opportunity to use an online platform (the Sherpany Platform) to receive notices of future General Meetings exclusively by email and to electronically give their instructions to the Independent Proxy, grant powers of attorney to other shareholders, and order their admission cards online. The General Meeting registration form enables shareholders who are not yet registered on the Sherpany Platform to order detailed documents related to opening a Sherpany account. They may also do so by contacting the Novartis Share Registry. Shareholders can deactivate their online account at any time and again receive invitations in paper form.
Other rights associated with a registered Novartis share may only be exercised by the shareholder, its legal representative, another shareholder with the right to vote, the Independent Proxy, an usufructuary (a person who is not the owner of the share but who is entitled to exercise shareholder rights), or a nominee who is registered in the Novartis Share Register.
Shareholder registration
Only shareholders, usufructuaries or nominees registered in the Novartis Share Register with voting rights may exercise their voting rights. To be registered with voting rights, a shareholder must declare that he or she acquired the shares in his or her own name and for his or her own account. According to the Articles of Incorporation, the Board may register nominees with the right to vote. For restrictions on the registration of nominees, please see below.
The Articles of Incorporation provide that no shareholder shall be registered with the right to vote for more than 2% of the registered share capital. The Board may, upon request, grant an exemption from this restriction. Considerations include whether the shareholder supports the Novartis goal of creating sustainable value and has a long-term investment horizon. In 2016, the Board approved an exemption requested by UBS Fund Management (Switzerland) AG based on the fulfilment of the requirements as disclosed above. Further exemptions are in force for the registered significant shareholders listed on page 82 under Our Shareholders – Significant Shareholders, and for Norges Bank (Central Bank of Norway), Oslo, which as of December 31, 2016, was not registered in the share register but according to disclosure notification filed with Novartis AG, held 2.02% of the share capital of Novartis AG.
The same registration and voting restrictions indirectly apply to holders of ADRs.
Given that shareholder representation at General Meetings traditionally has been rather low in Switzerland, Novartis AG considers registration restrictions necessary to prevent a minority shareholder from dominating a General Meeting.
The Articles of Incorporation provide that no nominee shall be registered with the right to vote for more than 0.5% of the registered share capital. The Board may, upon request, grant an exemption from this restriction if the nominee discloses the names, addresses and number of shares of the individuals for whose account it holds 0.5% or more of the registered share capital. Exemptions are in force for the nominees listed on page 82 under Our Shareholders – Significant Shareholders, and for the nominee Citi Bank, London, which in 2015 requested an exemption, but as of December 31, 2016, was not registered in the Novartis Share Register.
The same restrictions indirectly apply to holders of ADRs.
Registration restrictions in the Articles of Incorporation may only be removed through a resolution of the General Meeting, with approval of at least two-thirds of the votes represented at the meeting.
Shareholders, ADR holders, or nominees who are linked to each other or who act in concert to circumvent registration restrictions are treated as one person or nominee for the purposes of the restrictions on registration.
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No restrictions on trading of shares
No restrictions are imposed on the transferability of Novartis shares. The registration of shareholders in the Novartis Share Register or in the ADR register kept by JPMorgan Chase Bank does not affect the tradability of Novartis shares or ADRs. Registered Novartis shareholders or ADR holders may therefore purchase or sell their Novartis shares or ADRs at any time, including before a General Meeting, regardless of the record date. The record date serves only to determine the right to vote at a General Meeting.
Change-of-control provisions
No opting up, no opting out
According to the Swiss Federal Act on Financial Infrastructures, anyone who – directly, indirectly or acting in concert with third parties – acquires equity securities exceeding 33 1/3% of the voting rights of a company (whether or not such rights are exercisable) is required to make an offer to acquire all listed equity securities of that company. A company may raise this threshold up to 49% of the voting rights (“opting up”) or may, under certain circumstances, waive the threshold (“opting out”). Novartis AG has not adopted any such measures.
Change-of-control clauses
In accordance with good corporate governance and the rules of the Ordinance against Excessive Compensation in Listed Companies, there are no change-of-control clauses and “golden parachute” agreements benefiting Board members, Executive Committee members, or other members of senior management. Furthermore, employment contracts with Executive Committee members do not contain notice periods or contract periods exceeding 12 months, or commissions for the acquisition or transfer of enterprises or severance payments.
General compensation provisions
Non-executive members of the Board of Directors
Compensation of non-executive members of the Board includes fixed compensation elements only. In particular, non-executive members of the Board shall receive no company contributions to any pension plan, no performance-related elements, and no financial instruments (e.g., options).
Members of the Executive Committee
The members of the Executive Committee receive fixed and variable, performance-related compensation. Fixed compensation is comprised of the base salary and may include other elements and benefits such as contributions to pension plans. Variable compensation may be structured into short-term and long-term compensation elements. Short-term variable compensation elements shall be governed by performance metrics that take into account the performance of Novartis and/or parts thereof, and/or individual targets. Achievements are generally measured based on the one-year period to which the short-term compensation relates. The long-term compensation plans are based on performance metrics that take into account strategic objectives of Novartis (such as financial, innovation, shareholder return and/or other metrics). Achievements are generally measured based on a period of not less than three years.
Additional Amount
If the maximum aggregate amount of compensation already approved by the General Meeting is not sufficient to cover the compensation of newly appointed or promoted Executive Committee members, Novartis may pay out compensation, in a total amount up to 40% of the total maximum aggregate amount last approved for the Executive Committee per compensation period, to newly appointed or promoted Executive Committee members.
For detailed information on the compensation of the Board and the Executive Committee, see the Compensation Report, beginning on page 110.
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Our Board of Directors

Composition of the Board of Directors and its committees (as per December 31, 2016)Board of DirectorsChairman: J. ReinhardtVice Chairman: E. VanniN. AndrewsD. AzarT. BuechnerS. DatarE. DohertyA. FudgeP. LandoltA. von PlantaC. SawyersW. WintersAudit and Compliance CommitteeS. Datar (Chairman)D. AzarE. DohertyA. von PlantaE. VanniCompensation CommitteeE. Vanni (Chairman)S. DatarA. FudgeW. WintersGovernance, Nominat­ion and Corporate Respons­ibilities CommitteeA. von Planta (Chairman)A. FudgeP. LandoltC. SawyersE. VanniResearch & Development CommitteeJ. Reinhardt (Chairman)N. AndrewsD. AzarC. SawyersRisk CommitteeA. von Planta (Chairman)N. AndrewsS. DatarA. Fudge
Election and term of office
Board members, the Chairman, and Compensation Committee members are elected annually and individually by shareholders at the General Meeting. Board members whose term of office has expired are immediately eligible for re-election.
The average tenure of Board members is seven years, with two-thirds of Board members having a tenure of less than six years. A Board member must retire after reaching age 70. Under special circumstances, shareholders may grant an exemption from this rule and re-elect a Board member for additional terms of office. There is no mandatory term limit for Board members so as to not lose the value of the insight and knowledge of the company’s operations and practices that long-serving Board members have developed.

Name

Nationality

Year of birth
First election
at AGM
Last election
at AGM
End of
current term
Joerg Reinhardt, Ph.D.
D
1956
2013
2016
2017
Enrico Vanni, Ph.D.
CH
1951
2011
2016
2017
Nancy C. Andrews, M.D., Ph.D.
US
1958
2015
2016
2017
Dimitri Azar, M.D.
US
1959
2012
2016
2017
Ton Buechner
NLD
1965
2016
2016
2017
Srikant Datar, Ph.D.
US
1953
2003
2016
2017
Elizabeth Doherty
GB
1957
2016
2016
2017
Ann Fudge
US
1951
2008
2016
2017
Pierre Landolt, Ph.D.
CH
1947
1996
2016
2017
Andreas von Planta, Ph.D.
CH
1955
2006
2016
2017
Charles L. Sawyers, M.D.
US
1959
2013
2016
2017
William T. Winters
GB/US
1961
2013
2016
2017
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Board profile
Board composition
The composition of the Board must align with our status as a listed company as well as our business portfolio, geographic reach and culture. The Board must be diverse in all aspects. Knowledge and experience in the following fields must be represented on the Board: leadership and management; healthcare, life sciences and medicine; research and development; engineering and technology; marketing; banking, finance and accounting; human resources; legal and public affairs; and risk management.
Individual Board member profile
Board members should have the following personal qualities:
— Interact with other Board members to build an effective and complementary Board
— Establish trusting relationships
— Apply independence of thought and judgment
— Be challenging but supportive in the boardroom
— Influence without creating conflict by applying a constructive, non-confrontational style
— Listen well and offer advice based on sound judgment
— Be able and willing to commit adequate time to Board and committee responsibilities
— Be open to personal feedback and seek to be responsive
— Do not have existing board memberships or hold other positions that could lead to a permanent conflict of interest
— Understand and respect the boundaries of the role, leaving the operational management of the company to the CEO and his Executive Committee
Board members’ biographies (pages 94–97) highlight the specific qualifications that led the Board to conclude members are qualified to serve on the Board, which is diverse in terms of background, credentials, interests and skills.
Board diversity
The diversity of a board of directors is critical to its effectiveness. When the Governance, Nomination and Corporate Responsibilities Committee (GNCRC) of Novartis identifies new Board member candidates to be proposed to shareholders for election, the maintenance and improvement of the Board’s diversity is an important criterion. The Board’s aspiration is to have a diverse Board in all aspects. This includes nationality, gender, background and experience, age, tenure, viewpoints, interests, and technical and interpersonal skills.
DiversityNationalityAmerican42 %Swiss25 %British17 %German8 %Dutch8 %GenderMale75 %Female25 %Background/experienceLeadership management26 %Medicine/healthcare/R&D26 %Finance/accounting21 %Engineering/technology11 %Law11 %Marketing5 %Age<558 %55–6042 %61–6542 %>668 %Tenure<3 y25 %3–6 y42 %7–9 y8 %>9 y25 %
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Role of the Board and its committees
The Board is responsible for the overall direction and supervision of management, and holds the ultimate decision-making authority for Novartis AG, with the exception of decisions reserved for shareholders.
The Board has delegated certain responsibilities to five committees, as set out below. Responsibilities described with the terms “overseeing” or “reviewing” are subject to final Board approval. The committees enable the Board to work in an efficient and effective manner, ensuring a thorough review and discussion of issues, while giving the Board more time for deliberation and decision-making. Moreover, committees ensure that only Board members who are independent oversee audit and compliance, governance and compensation – as only independent Board members are delegated in the respective committees.
ResponsibilitiesMembersNumber of meetings held in 2016/approximate average duration (hrs) ofeach meeting/attendanceDocuments/LinkBoard of Directors11/7:00The primary responsibilities of the Board of Directors include:—Setting the strategic direction of the Group—Appointing, overseeing and dismissing key executives, and planning their succession —Approving major transactions and investments—Determining the organizational structure and governance of the Group—Determining and overseeing financial planning, accounting, reporting and controlling—Approving annual financial statements and corresponding financial results releasesJoerg Reinhardt1Enrico VanniNancy C. AndrewsDimitri AzarTon Buechner3Srikant Datar Elizabeth Doherty3Ann FudgePierre Landolt Andreas von Planta Charles L. SawyersWilliam T. Winters111111117118111111910Articles of Incorporation of Novartis AG Regulations of the Board of Directors, its Committees and the Executive Committee of Novartis AG (Board regulations)www.novartis.com/corporate-governanceAudit and Compliance Committee7/3:00The primary responsibilities of this committee include:—Supervising external auditors, and selecting and nominating external auditors for election by the meeting of shareholders—Overseeing internal auditors—Overseeing accounting policies, financial controls, and compliance with accounting and internal control standards—Approving quarterly financial statements and financial results releases—Overseeing internal control and compliance processes and procedures—Overseeing compliance with laws, and external and internal regulations The Audit and Compliance Committee has the authority to retainexternal consultants and other advisors.Srikant Datar1,2Dimitri AzarElizabeth Doherty2,3Andreas von PlantaEnrico Vanni77577Charter of the Audit and Compliance Committee www.novartis.com/corporate-governanceCompensation Committee6/3:00The primary responsibilities of this committee include:—Designing, reviewing and recommending to the Board compensation policies and programs—Advising the Board on the compensation of Board members and the CEO—Deciding on the compensation of Executive Committee members —Preparing the Compensation Report and submitting it to the Boardfor approvalThe Compensation Committee has the authority to retain external consultants and other advisors.Enrico Vanni1Srikant DatarAnn FudgeWilliam T. Winters6666Charter of the Compensation Committeewww.novartis.com/corporate-governance1Chairman2Audit Committee Financial Expert as defined by the US Securities and Exchange Commission3As of AGM February 2016
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ResponsibilitiesMembersNumber of meetings held in 2016/approximate average duration (hrs) ofeach meeting/attendanceDocuments/LinkGovernance, Nomination andCorporate Responsibilities Committee3/2:00The primary responsibilities of this committee include:—Designing, reviewing and recommending to the Board corporate governance principles —Identifying candidates for election as Board members—Assessing existing Board members and recommending to the Board whether they should stand for re-election —Preparing and reviewing the succession plan for the CEO —Developing and reviewing an onboarding program for new Boardmembers, and an ongoing education plan for existing Board members—Reviewing on a regular basis the Articles of Incorporation, with a view to reinforcing shareholder rights—Reviewing on a regular basis the composition and size of the Board and its committees—Reviewing annually the independence status of each Board member—Reviewing directorships and agreements of Board members forconflicts of interest, and dealing with conflicts of interest—Overseeing the company's strategy and governance on corporateresponsibilityThe Governance, Nomination and Corporate Responsibilities Committeehas the authority to retain external consultants and other advisors.Andreas von Planta1Ann FudgePierre LandoltCharles L. SawyersEnrico Vanni33333Charter of the Governance, Nomination and Corporate Responsibilities Committee www.novartis.com/corporate-governanceResearch & Development Committee4/8:00The primary responsibilities of this committee include:—Monitoring research and development, and bringing recommendations to the Board—Assisting the Board with oversight and evaluation related to research and development—Informing the Board on a periodic basis about the research and development strategy, the effectiveness and competitiveness of the research and development function, emerging scientific trends and activities critical to the success of research and development,and the pipeline—Advising the Board on scientific, technological, and research and development matters—Providing counsel and know-how to management in the area of research and development —Reviewing such other matters in relation to the company's research and development as the committee may, in its own discretion, deem desirable in connection with its responsibilitiesThe Research & Development Committee has the authority to retainexternal consultants and other advisors.Joerg Reinhardt1Nancy C. AndrewsDimitri AzarCharles L. Sawyers4444Charter of the Research & Development Committeewww.novartis.com/corporate-governanceRisk Committee6/2:00The primary responsibilities of this committee include:—Ensuring that Novartis has implemented an appropriate and effective risk management system and process —Ensuring that all necessary steps are taken to foster a cultureof risk-adjusted decision-making without constraining reasonable risk-taking and innovation —Approving guidelines and reviewing policies and processes—Reviewing with management, internal auditors and external auditors the identification, prioritization and management of risks; theaccountabilities and roles of the functions involved in riskmanagement; the risk portfolio; and the related actions implemented by managementThe Risk Committee has the authority to retain external consultantsand other advisors.Andreas von Planta1Nancy C. AndrewsSrikant DatarAnn Fudge6566Charter of the Risk Committee www.novartis.com/corporate-governance1Chairman
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The Novartis corporate culture and role of the Board
The corporate culture of Novartis is becoming a key focus of the Board. The Board works to ensure that the Novartis strategy, operating model and compensation system are aligned with Novartis’ Values and Behaviors, as endorsed by the Board and that the Novartis compensation system supports the desired corporate culture of Novartis. The Board will also review a regular evaluation of the corporate culture throughout Novartis.
Functioning of the Board
The Board takes decisions as a whole, supported by its five committees. Each committee has a written charter outlining its duties and responsibilities, and is led by a Board-elected Chairman.
The Board and its committees meet regularly throughout the year. The chairs set their meeting agendas. Any Board member may request a Board or committee meeting, and the inclusion of an agenda item. Before meetings, Board members receive materials to help them prepare the discussions and decision-making.
Chairman
Joerg Reinhardt has been the independent, non-executive Chairman since August 1, 2013. He has both industry and Novartis experience, and meets the company’s independence criteria. As independent Chairman, he can lead the Board to represent the interests of all stakeholders, being accountable to them and creating sustainable value through effective governance, the right strategy, and delivery of the expected level of performance. The independent chairmanship also ensures an appropriate balance of power between the Board and the Executive Committee.
In this role, Mr. Reinhardt:
— Provides leadership to the Board
— Supports and mentors the CEO
— Supported by the GNCRC, ensures effective succession plans for the Board and the Executive Committee
— Ensures that the Board and its committees work effectively
— Sets the agenda, style and tone of Board discussions, promoting constructive dialogue and effective decision-making
— Supported by the GNCRC, ensures that all Board committees are properly established, composed and operated
— Ensures that the Board’s performance is annually evaluated
— Ensures onboarding programs for new Board members, and continuing education and specialization for all Board members
— Ensures effective communication with the company’s shareholders
— Promotes effective relationships and communication between Board and Executive Committee members
Vice Chairman
Enrico Vanni has been the independent, non-executive Vice Chairman since February 22, 2013.
In this role, Mr. Vanni:
— Leads the Board in case and as long as the Chairman is incapacitated
— Chairs the sessions of independent Board members, and leads independent Board members if and as long as the Chairman is not independent
— Leads the yearly session of the Board members evaluating the performance of the Chairman, during which the Chairman is not present
Board meetings
The Board has meetings with Executive Committee members, as well as private meetings without them.
In 2016, there were 11 Board meetings. Because all Board members are independent, no separate meetings of the independent Board members were held in 2016.
Key activities of our Board and committees in 2016
In 2016, the Board addressed in its meetings among others the following key standard topics: strategy; Group targets; mergers and acquisitions, business development and licensing review; financial and business reviews; major projects; investments and transactions; governance; and corporate culture. Topics addressed during private meetings included Board self-evaluation and the performance assessment of the Executive Committee members, as well as CEO and Executive Committee succession planning.
In addition, in 2016 our Board and its committees focused on a number of special topics, including:
Board of Directors:
Compliance; the Alcon turnaround; the creation of the new Innovative Medicines Division with two separate business units, Pharmaceuticals and Oncology; and the new operating model of Novartis
Audit and Compliance Committee:
Specific accounting and compliance questions, compensation disclosure; and the legal and regulatory environment concerning the rotation of external auditors
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Compensation Committee:
Novartis peer groups; potential risks within the compensation systems for executives and other associates, including the sales force; clawback and malus; and shareholder feedback from the corporate governance roadshow
Governance, Nomination and Corporate Responsibilities Committee:
Shareholder feedback from our corporate governance roadshow; emerging corporate governance practices and whether to adopt them; succession planning for the Board, Board committees, and committee chairs; the search profile for and discussion of potential new Board members; and reviews of our corporate responsibility activities
Research & Development Committee:
The Novartis portfolio of research and development projects in oncology and dermatology; efforts to discover new drug discovery targets; high throughput screening for target and drug discovery; the long term strategy for NIBR after the appointment of new leadership; and incentives and compensation-related topics for the R&D organization
Risk Committee:
The Novartis Integrity & Compliance organization, key business risks in the manufacturing organization; foreign exchange risk management; IT security; and risks potentially arising out of the compensation system
Honorary Chairmen
Dr. Alex Krauer and Dr. Daniel Vasella have been appointed Honorary Chairmen in recognition of their significant achievements on behalf of Novartis. They are not provided with Board documents and do not attend Board meetings.
Independence of Board members
The independence of Board members is a key corporate governance issue. An independent Board member is one who is independent of management and has no business or relationship that could materially interfere with the exercise of objective, unfettered and independent judgment. Only with a majority of Board members being independent can the Board fulfill its obligation to represent the interests of shareholders, being accountable to them and creating sustainable value through the effective governance of Novartis. Accordingly, Novartis established independence criteria based on international best practice standards as outlined on the Novartis website:
www.novartis.com/investors/governance-documents.shtml.
— The majority of Board members and any member of the Audit and Compliance Committee, the Compensation Committee, and the GNCRC must meet the company’s independence criteria. These include, inter alia, (i) a Board member not having received direct compensation of more than USD 120 000 per year from Novartis, except for dividends or Board compensation, within the last three years; (ii) a Board member not having been an employee of Novartis within the last three years; (iii) a family member not having been an executive officer of Novartis within the last three years; (iv) a Board member or family member not being employed by the external auditor of Novartis; (v) a Board member or family member not being a board member, employee or 10% shareholder of an enterprise that has made payments to, or received payments from, Novartis in excess of the greater of USD 1 million or 2% of that enterprise’s gross revenues. For members of the Audit and Compliance Committee and the Compensation Committee, even stricter rules apply.
— In addition, Board members are bound by the Novartis Conflict of Interest Policy, which prevents a Board member’s potential personal interests from influencing the decision-making of the Board.
— The GNCRC annually submits to the Board a proposal concerning the determination of the independence of each Board member. For this assessment, the committee considers all relevant facts and circumstances of which it is aware – not only the explicit formal independence criteria. This includes an assessment of whether a Board member is truly independent, in character and judgment, from any member of senior management and from any of his/her current or former colleagues.
— In its meeting on December 15, 2016, the Board determined that all of its members are independent.
Relationship of non-executive Board members with Novartis
No Board member is or was a member of the management of Novartis AG or of any other Novartis Group company in the last three financial years up to December 31, 2016. There are no significant business relationships of any Board member with Novartis AG or with any other Novartis Group company.
Mandates outside the Novartis Group
No Board member may hold more than 10 additional mandates in other companies, of which no more than four shall be in other listed companies. Chairmanships of the boards of directors of other listed companies count as two mandates. Each of these mandates is subject to Board approval.
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The following mandates are not subject to these limitations:
a) Mandates in companies that are controlled by Novartis AG
b) Mandates that a Board member holds at the request of Novartis AG or companies controlled by it. No Board member shall hold more than five such mandates.
c) Mandates in associations, charitable organizations, foundations, trusts and employee welfare foundations. No Board member may hold more than 10 such mandates.
“Mandates” means those in the supreme governing body of a legal entity that is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
The Board may issue regulations that determine additional restrictions, taking into account the position of the respective member.
Loans and credits
No loans or credits shall be granted to members of the Board.
Board performance and effectiveness evaluation
Process
The Board conducts an annual review to evaluate its performance and that of individual committees and members. As part of this process, each Board member completes a questionnaire on the performance and effectiveness of the Board and the Chairman, and on his/her committees, which lays the groundwork for a qualitative review led by the Chairman. The Chairman has discussions with each Board member, and then with the entire Board. Also, the Board, without its Chairman, discusses the performance of the Chairman. Further, the committee evaluations are discussed by the respective committees, and the results are debriefed to the Board. Any suggestion for improvement is recorded and actions are agreed upon.
Periodically, this process is conducted by an independent consultant. In 2014, an independent performance and effectiveness evaluation of the Board and its committees, including an individual Board member assessment, was conducted by the independent expert company Russell Reynolds Associates. In 2015 and 2016, the performance evaluation was conducted internally.
Content and results
The performance review examines the performance and effectiveness, and strengths and weaknesses, of individual Board members and of the full Board and each Board committee.
This review covers topics including Board composition; purpose, scope and responsibilities; processes and governance of the Board and its committees; meetings and pre-reading material; team effectiveness; and leadership and culture.
The review also evaluates the ability and willingness of each Board member to commit adequate time and effort to his/her responsibilities as provided for in the charter of the GNCRC.
The results were discussed at the January 2017 meetings. It was concluded that the Board and its committees operate effectively.
Information and control systems of the Board vis-à-vis management
Information on management
The Board ensures that it receives sufficient information from the Executive Committee to perform its supervisory duty and to make decisions that are reserved for it. The Board obtains this information through several means:
— The CEO informs the Board regularly about current developments.
— Executive Committee meeting minutes are made available to the Board.
— Meetings or teleconferences are held as required between Board members and the CEO.
— The Board regularly meets with all Executive Committee members.
— The Board receives detailed, quarterly updates from each Division Head.
— By invitation, other members of management attend Board meetings to report on areas of the business for which they are responsible.
— Board members are entitled to request information from Executive Committee members or any other Novartis associate, and they may visit any Novartis site.
Board committees
Board committees regularly meet with management and, at times, outside consultants, to review the business, better understand applicable laws and policies affecting the Group, and support the Board and management in meeting the requirements and expectations of stakeholders and shareholders.
In particular, the Chief Financial Officer (CFO), the Group General Counsel, and representatives of the external auditors are invited to Audit and Compliance
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Committee meetings. Additionally, the heads of Internal Audit, Financial Reporting & Accounting, Compliance and Quality, as well as the Head of the Global Business Practices Office, report on a regular basis to the Audit and Compliance Committee. This committee reviews financial reporting processes on behalf of the Board. For each quarterly and annual release of financial information, the Disclosure Review Committee is responsible for ensuring the accuracy and completeness of disclosures. The Disclosure Review Committee, which is a management committee, is chaired by the CFO and includes the CEO; the Group General Counsel; the heads of the divisions, Novartis Operations, and the Novartis Institutes for BioMedical Research (NIBR), as well as their finance heads; and the heads of the following corporate functions: Treasury, Tax, Financial Reporting & Accounting, Internal Audit and Investor Relations. The Audit and Compliance Committee reviews decisions made by the Disclosure Review Committee before the quarterly and annual releases are published.
The Risk Committee oversees the risk management system and processes, and also reviews the risk portfolio of the Group to ensure appropriate and professional risk management. For this purpose, the Group Risk Office and the risk owners of the divisions report on a regular basis to the Risk Committee. The Group General Counsel, the Head of Group Risk, the Head of Internal Audit, the Head of Ethics and Compliance, and other senior executives are invited to these meetings on a regular basis.
Novartis management information system
Novartis produces comprehensive, consolidated (unaudited) financial statements on a monthly basis for the total Group and its operating divisions. These are typically available within 10 days of the end of the month, and include the following:
— Consolidated income statement of the month, quarter-to-date and year-to-date in accordance with International Financial Reporting Standards (IFRS), as well as adjustments to arrive at core results, as defined by Novartis. The IFRS and core figures are compared to the prior-year period and targets in both USD and on a constant currency basis.
— Consolidated balance sheet as of the month-end in accordance with IFRS in USD
— Consolidated cash flow on a monthly, quarter-to-date and year-to-date basis in accordance with IFRS in USD
— Supplementary data on a monthly, quarterly and year-to-date basis such as free cash flow, gross and net debt, headcount, personnel costs, working capital, and earnings per share on a USD basis where applicable
Constant currencies, core results, free cash flow, net debt and related target figures are non-IFRS measures. An explanation of non-IFRS measures can be found on pages 171 – 175 of the operating and financial review 2016.
This information is made available to Board members on a monthly basis. An analysis of key deviations from the prior year or target is also provided.
Two times per year, the Board also receives an outlook of the full-year results in accordance with IFRS and “core” (as defined by Novartis) along with related commentary prior to the release of the results.
On an annual basis, in the fourth quarter of the year, the Board receives and approves the operating and financial targets for the following year.
In the middle of the year, the Board also reviews and approves the strategic plan for the next five years, which includes a projected consolidated income statement in USD prepared in accordance with IFRS and “core.”
The Board does not have direct access to the company’s financial and management reporting systems but can, at any time, request more detailed financial information on any aspect that is presented to it.
Internal audit
The Internal Audit function carries out operational and system audits in accordance with an audit plan approved by the Audit and Compliance Committee. This function helps organizational units accomplish objectives by providing an independent approach to the evaluation, improvement and effectiveness of their internal control framework. It prepares reports on the audits it has performed, and reports actual or suspected irregularities to the Audit and Compliance Committee and to the CEO. The Audit and Compliance Committee regularly reviews the internal audit scope, audit plans and results.
Risk management
The Group Risk Office is overseen by the Board’s independent Risk Committee. The Compensation Committee works closely with the Risk Committee to ensure that the compensation system does not lead to excessive risk-taking by management (for details, see our Compensation Report, beginning on page 110).
Organizational and process measures have been designed to identify and mitigate risks at an early stage. Organizationally, the responsibility for risk assessment and management is allocated to the divisions, organizational units, and functions, with specialized Corporate functions, such as Group Finance, Group Legal, Group Quality Assurance, Corporate Health, Safety and Environment, Business Continuity Management, Integrity and Compliance and the Business Practices Office, providing support and controlling the effectiveness of the risk management in these respective areas.
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Board of Directors

Joerg Reinhardt, Ph.D.
Chairman of the Board of Directors
German, age 60
Joerg Reinhardt, Ph.D., has been Chairman of the Board of Directors since 2013. He is also Chairman of the Research & Development Committee and Chairman of the Board of Trustees of the Novartis Foundation.
Mr. Reinhardt previously was chairman of the board of management and the executive committee of Bayer HealthCare, Germany. Prior to that, he was Chief Operating Officer of Novartis from 2008 to 2010, and Head of the Vaccines and Diagnostics Division of Novartis from 2006 to 2008. He was also Chairman of the Board of the Genomics Institute of the Novartis Research Foundation in the United States from 2000 to 2010, a member of the supervisory board of MorphoSys AG in Germany from 2001 to 2004, and a member of the board of directors of Lonza Group AG in Switzerland from 2012 to 2013.
Mr. Reinhardt graduated with a doctorate in pharmaceutical sciences from Saarland University in Germany. He joined Sandoz Pharma Ltd. in 1982 and held various positions at Sandoz and later Novartis, including Head of Development.
Enrico Vanni, Ph.D.
Vice Chairman of the Board of Directors
Swiss, age 65
Enrico Vanni, Ph.D., has been a member of the Board of Directors since 2011 and qualifies as an independent Non-Executive Director. He is Vice Chairman of the Board of Directors and Chairman of the Compen­sation Committee. He is also a member of the Audit and Compliance Committee and the Governance, Nomination and Corporate Responsibilities Committee.
Since his retirement as director of McKinsey & Company in 2007, Mr. Vanni has been an independent consultant. He is a board member of several companies in industries from healthcare to private banking – including Advanced Oncotherapy PLC in the United Kingdom, and non-listed companies such as Lombard Odier SA, Banque Privée BCP (Suisse) SA, Eclosion2, and Denzler & Partners SA, all based in Switzerland.
Mr. Vanni holds an engineering degree in chemistry from the Federal Polytechnic School of Lausanne, Switzerland; a doctorate in chemistry from the University of Lausanne; and a Master of Business Administration from INSEAD in Fontainebleau, France. He began his career as a research engineer at the International Business Machines Corp. (IBM) in California, United States, and joined McKinsey in Zurich in 1980. He managed the Geneva office for McKinsey from 1988 to 2004, and consulted for companies in the pharmaceutical, consumer and finance sectors. He led McKinsey’s European pharmaceutical practice and served as a member of the firm’s partner review committee prior to his retirement in 2007. As an independent consultant, Mr. Vanni has continued to support leaders of pharmaceutical and biotechnology companies on core strategic challenges facing the healthcare industry.
Nancy C. Andrews, M.D., Ph.D.
Member of the Board of Directors
American, age 58
Nancy C. Andrews, M.D., Ph.D., has been a member of the Board of Directors since February 2015. She qualifies as an inde­pendent Non-Executive Director and is a member of the Research & Development Committee and the Risk Committee.
Dr. Andrews is dean of the Duke University School of Medicine and vice chancellor for academic affairs at Duke University in the United States. She is also a professor of pediatrics, pharmacology and cancer biology at Duke, and was elected as a fellow of the American Association for the Advancement of Science and to membership in the US National Academy of Sciences, the National Academy of Medicine, and the American Academy of Arts and Sciences. She is former president of the American Society for Clinical Investigation and serves on the council of the National Academy of Medicine, the board of directors of the American Academy of Arts and Sciences, and the Scientific Management Review Board of the US National Institutes of Health.
Dr. Andrews holds a doctorate in biology from the Massachusetts Institute of Technology, and a doctor of medicine from Harvard Medical School, both in the US. She completed her residency and fellowship trainings in pediatrics and hematology/oncology at Boston Children’s Hospital and the Dana-Farber Cancer Institute, also in the US, and served as an attending physician at Boston Children’s Hospital. Prior to joining Duke, Dr. Andrews was director of the Harvard/MIT M.D.-Ph.D. Program, and dean of basic sciences and graduate studies as well as professor of pediatrics at Harvard Medical School. From 1993 to 2006, she was a biomedical research investigator at the Howard Hughes Medical Institute in the US. Her research expertise is in iron homeostasis and mouse models of human diseases.
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Dimitri Azar, M.D.
Member of the Board of Directors
American, age 57
Dimitri Azar, M.D., has been a member of the Board of Directors since 2012. He qualifies as an independent Non-Executive Director and is a member of the Audit and Compliance Committee and the Research & Development Committee.
Dr. Azar is dean of the College of Medicine and professor of ophthalmology, bioengineering and pharmacology at the University of Illinois at Chicago in the United States, where he formerly was head of the Department of Ophthalmology and Visual Sciences. He is a member of the American Ophthalmological Society, former president of the Chicago Ophthalmological Society, and president-elect of the Chicago Medical Society. Additionally, he is on the board of the Tear Film and Ocular Surface Society, the board of Verb Surgical, and the scientific advisory board of Verily.
Dr. Azar began his career at the American University of Beirut Medical Center in Lebanon, and completed his fellowship and residency training at the Massachusetts Eye and Ear Infirmary at Harvard Medical School in the US. His research on matrix metalloproteinases in corneal wound healing and angiogenesis has been funded by the US National Institutes of Health since 1993. Dr. Azar practiced at the Wilmer Eye Institute at the Johns Hopkins Hospital School of Medicine in the US, and then returned to the Massachusetts Eye and Ear Infirmary as director of cornea and external disease. He became professor of ophthalmology with tenure at Harvard Medical School in 2003. Dr. Azar holds an Executive Master of Business Administration from the University of Chicago Booth School of Business in the US.
Ton Buechner
Member of the Board of Directors
Dutch, age 51
Ton Buechner has been a member of the Board of Directors since February 23, 2016. He qualifies as an independent Non-Executive Director.
Since 2012, Mr. Buechner has served as chairman and CEO of the executive board of Dutch multinational AkzoNobel. Prior to joining AkzoNobel, he spent almost two decades at the Sulzer Corporation in Switzerland, where he was appointed divisional president in 2001 and served as president and CEO from 2007 to 2011. Mr. Buechner’s early career was spent in the oil and gas construction industry, and included roles at Allseas Engineering in the Netherlands and at Aker Kvaerner in Singapore. He is a member of the supervisory board of Voith GmbH.
Mr. Buechner is an engineer by training. He received his master’s degree in civil engineering from Delft University of Technology in the Netherlands in 1988, specializing in offshore construction technology and coastal engineering. Mr. Buechner holds a Master of Business Administration from IMD business school in Lausanne, Switzerland. 
Srikant Datar, Ph.D.
Member of the Board of Directors
American, age 63
Srikant Datar, Ph.D., has been a member of the Board of Directors since 2003 and qualifies as an independent Non-Executive Director. He is Chairman of the Audit and Compliance Committee, and a member of the Risk Committee and the Compensation Committee. The Board of Directors has appointed him as Audit Committee Financial Expert.
Mr. Datar is the Arthur Lowes Dickinson professor of business administration, faculty chair of the Harvard Innovation Lab, and senior associate dean for university affairs at Harvard Business School in the United States. He is also a member of the boards of directors of ICF International Inc., Stryker Corp. and T-Mobile US, all in the US.
Mr. Datar graduated in 1973 with distinction in mathematics and economics from the University of Bombay in India. He is a chartered accountant, and holds two master’s degrees and a doctorate from Stanford University in the US. Mr. Datar has worked as an accountant and planner in industry, and as a professor at Carnegie Mellon University, Stanford University and Harvard University, all in the US. His research interests are in the areas of cost management, measurement of productivity, new product development, innovation, time-based competition, incentives and performance evaluation. He is the author of many scientific publications and has received several academic awards and honors. Mr. Datar has also advised and worked with numerous companies in research, development and training.
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Board of Directors (continued)

Elizabeth (Liz) Doherty
Member of the Board of Directors
British, age 59
Elizabeth (Liz) Doherty has been a member of the Board of Directors since February 23, 2016. She qualifies as an independent Non-Executive Director and is a member of the Audit and Compliance Committee. The Board of Directors has appointed her as Audit Committee Financial Expert.
Ms. Doherty is a non-executive director and chairman of the audit committee of Dunelm Group PLC in the United Kingdom, and a member of the supervisory board and audit committee of Corbion NV in the Netherlands. She is a fellow of the Chartered Institute of Management Accountants, a non-executive board member of the UK Ministry of Justice, and a non-executive board member of Her Majesty’s Courts and Tribunals Service in the UK. She previously served as a non-­executive director and audit committee member at Delhaize Group in Belgium and Nokia Corp. in Finland, and as a non-executive director at SABMiller PLC in the UK.
Ms. Doherty received her bachelor’s degree in liberal studies in science (physics) from the University of Manchester in the UK. She began her career as an auditor and has held senior finance and accounting roles at Unilever PLC and Tesco PLC. Additionally, she was chief financial officer of both Brambles Ltd. and Reckitt Benckiser Group PLC.
Ann Fudge
Member of the Board of Directors
American, age 65
Ann Fudge has been a member of the Board of Directors since 2008. She qualifies as an independent Non-Executive Director and is a member of the Risk Committee; the Compensation Committee; and the Governance, Nomination and Corporate Responsibilities Committee.
Ms. Fudge is vice chairman and senior independent director of Unilever NV, London and Rotterdam. She is also chair of the United States Program Advisory Panel of the Bill & Melinda Gates Foundation, a director of Northrop Grumman Corporation in the US, and a trustee of Boston-based WGBH public media.
Ms. Fudge received her bachelor’s degree from Simmons College in the US and her Master of Business Administration from Harvard Business School, also in the US. She is former chairman and CEO of Young & Rubicam Brands, New York. Before that, she served as president of the Beverages, Desserts and Post Division of Kraft Foods Inc. in the US.
Pierre Landolt, Ph.D.
Member of the Board of Directors
Swiss, age 69
Pierre Landolt, Ph.D., has been a member of the Board of Directors since 1996. He qualifies as an independent Non-Executive Director and is a member of the Governance, Nomination and Corporate Responsibilities Committee.
Mr. Landolt is chairman of the Sandoz Family Foundation, overseeing its development in several investment fields. He is also chairman of the Swiss private bank Landolt & Cie SA. In Switzerland, he is chairman of Emasan AG and Vaucher Manufacture Fleurier SA, and vice chairman of Parmigiani Fleurier SA. Additionally, he is vice chairman of the Montreux Jazz Festival Foundation and a board member of Amazentis SA, Switzerland, and the Eneas Fund, Cayman Islands. In Brazil, Mr. Landolt is president of AxialPar Ltda. and Moco Agropecuaria Ltda., the Instituto Fazenda Tamanduá and the Instituto Estrela de Fomento ao Microcrédito.
Mr. Landolt graduated with a bachelor’s degree in law from the University of Paris-Assas. From 1974 to 1976, he worked for Sandoz Brazil. In 1977, he acquired an agricultural estate in the semi-arid Northeast Region of Brazil, and within several years he converted it into a model farm in organic and biodynamic production. Since 1997, Mr. Landolt has been associate and chairman of AxialPar Ltda., Brazil, an investment company focused on sustainable development. In 2000, he co-founded Eco-Carbone SAS, a company active in the design and development of carbon sequestration pro­­cesses. In 2007, he co-founded ­Amazentis SA, a startup company active in the convergence space of medication and nutrition. In 2011, Mr. Landolt received the title of Docteur des Sciences Économiques Honoris Causa from the University of Lausanne in Switzerland.
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Andreas von Planta, Ph.D.
Member of the Board of Directors
Swiss, age 61
Andreas von Planta, Ph.D., has been a member of the Board of Directors since 2006. He qualifies as an independent Non-Executive Director and is Chairman of the Risk Committee and the Governance, Nomination and Corporate Responsibilities Committee. He is also a member of the Audit and Compliance Committee.
Mr. von Planta is a board member of Helvetia Holding AG in Switzerland, and also serves on the boards of various Swiss subsidiaries of foreign companies and other non-listed Swiss companies, including Burberry (Suisse) SA, Lenz & Staehelin AG, A.P. Moller Finance SA, HSBC Private Bank (Suisse) SA, Socotab Frana SA and Raymond Weil SA. Additionally, he is chairman of the regulatory board of the SIX Swiss Exchange AG.
Mr. von Planta holds a doctorate in law from the University of Basel in Switzerland, and a Master of Laws from Columbia Law School in the United States. He passed his bar examinations in Basel in 1982. Since 1983, he has lived in Geneva and worked for the law firm Lenz & Staehelin, where he became a partner in 1988. His areas of specialization include corporate law, corporate governance, corporate finance, company reorganizations, and mergers and acquisitions.
Charles L. Sawyers, M.D.
Member of the Board of Directors
American, age 57
Charles L. Sawyers, M.D., has been a member of the Board of Directors since 2013. He qualifies as an independent Non-Executive Director and is a member of the Research & Development Committee and the Governance, Nomination and Corporate Responsibilities Committee.
In the United States, Dr. Sawyers is chair of the Human Oncology and Pathogenesis Program at Memorial Sloan Kettering Cancer Center, professor of medicine and of cell and developmental biology at the Weill Cornell Graduate School of Medical Sciences, and an investigator at the Howard Hughes Medical Institute. He was appointed to US President Barack Obama’s National Cancer Advisory Board, and is former president of the American Association for Cancer Research and of the American Society for Clinical Investigation. He is also a member of the US National Academy of Sciences, the Institute of Medicine, and the scientific advisory board of Agios Pharmaceuticals Inc. in the US.
Dr. Sawyers received his doctor of medicine from the Johns Hopkins University School of Medicine in the US, and worked at the Jonsson Comprehensive Cancer Center at the University of California, Los Angeles for nearly 18 years before joining Memorial Sloan Kettering in 2006. An internationally acclaimed cancer researcher, he co-developed the Novartis cancer drug Gleevec/Glivec and has received numerous honors and awards, including the Lasker-DeBakey Clinical Medical Research Award in 2009.
William T. Winters
Member of the Board of Directors
British/American, age 55
William T. Winters has been a member of the Board of Directors since 2013. He qualifies as an independent Non-Executive Director and is a member of the Compensation Committee.
Mr. Winters is CEO and a board member of Standard Chartered, based in London. He also serves on the board of Colgate University in the United States, and on the boards of the International Rescue Committee, the Young Vic theater and the Print Room theater in the United Kingdom.
Mr. Winters received his bachelor’s degree from Colgate University and his Master of Business Administration from the Wharton School of the University of Pennsylvania in the US. He previously ran Renshaw Bay, an alternative asset management firm, and was co-CEO of JPMorgan’s investment bank from 2003 to 2010. He joined JPMorgan in 1983 and has held management roles across several market areas and in corporate finance. Additionally, he was a commissioner on the UK Independent Commission on Banking in 2010 and 2011, and was awarded the title of Commander of the Order of the British Empire in 2013.
Honorary Chairmen
Alex Krauer, Ph.D.
Daniel Vasella, M.D.
Corporate Secretary
Charlotte Pamer-Wieser, Ph.D.
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Our management

Composition of the Executive CommitteeJoseph JimenezChief Executive OfficerSteven BaertHuman ResourcesFelix R. EhratGeneral CounselHarry KirschChief Financial OfficerAndré WyssNovartis OperationsJames BradnerBiomedical ResearchVasant NarasimhanGlobal Drug DevelopmentPaul HudsonInnovative Medicines:PharmaceuticalsBruno StriginiInnovative Medicines:OncologyF. Michael BallAlconRichard FrancisSandoz
Executive Committee composition
The Executive Committee is headed by the CEO. Its members are appointed by the Board.
There are no contracts between Novartis and third parties whereby Novartis would delegate any business management tasks to such third parties.
Executive Committee role and functioning
The Board has delegated to the Executive Committee overall responsibility for and oversight of the operational management of Novartis. This includes:
— Developing policies and strategic plans for Board approval, and implementing those approved
— Submitting to the Board and its committees proposed changes in management positions of material significance, investments, financial measures, acquisitions and divestments, contracts of material significance, and targets – and implementing those approved
— Preparing and submitting quarterly and annual reports to the Board and its committees
— Informing the Board of all matters of fundamental significance to the businesses
— Recruiting, appointing and promoting senior management
— Ensuring the efficient operation of the Group and the achievement of optimal results
— Promoting an active internal and external communications policy
— Dealing with any other matters delegated by the Board
The Executive Committee is supported by a sub-committee: The Disclosure Committee (members are the CEO, CFO and Group General Counsel) determines whether an event constitutes information that is material to the Group, determines the appropriate disclosure and update of such information, and reviews media releases concerning such information.
CEO
In addition to other Board-assigned duties, the CEO leads the Executive Committee, building and maintaining an effective executive team. With the support of the Executive Committee, the CEO:
— Is responsible for the operational management of Novartis
— Develops strategy proposals to be recommended to the Board, and ensures that approved strategies are implemented
— Plans human resourcing to ensure that Novartis has the capabilities and means to achieve its plans, and that robust management succession and management development plans are in place and presented to the Board
— Develops an organizational structure, and establishes processes and systems to ensure the efficient organization of resources
— Ensures that financial results, business strategies and, when appropriate, targets and milestones are communicated to the investment community – and generally develops and promotes effective communication with shareholders and other stakeholders
— Ensures that the business performance is consistent with business principles, as well as with high legal and ethical standards, and that the culture of Novartis is consistent with the Novartis Values and Behaviors
— Leads the Innovative Medicines Division
— Develops processes and structures to ensure that capital investment proposals are reviewed thoroughly, that associated risks are identified, and that appropriate steps are taken to manage these risks
— Develops and maintains an effective framework of internal controls over risk in relation to all business activities of the company
— Ensures that the flow of information to the Board is accurate, timely and clear
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Mandates outside the Novartis Group
No Executive Committee member may hold more than six additional mandates in other companies, of which no more than two additional mandates shall be in other listed companies. Each of these mandates is subject to Board approval. Executive Committee members are not allowed to hold chairmanships of the boards of directors of other listed companies.
The following mandates are not subject to these limitations:
a) Mandates in companies that are controlled by Novartis AG
b) Mandates that an Executive Committee member holds at the request of Novartis AG or companies controlled by it. No Executive Committee member shall hold more than five such mandates.
c) Mandates in associations, charitable organizations, foundations, trusts and employee welfare foundations. No Executive Committee member may hold more than 10 such mandates.
“Mandates” means those in the supreme governing body of a legal entity that is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
The Board may issue regulations that determine additional restrictions, taking into account the position of the respective member.
Loans and credits
No loans or credits shall be granted to members of the Executive Committee.
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Executive Committee

Joseph Jimenez
Chief Executive Officer of Novartis
American, age 57
Joseph Jimenez has been Chief Executive Officer (CEO) of Novartis since 2010.
Mr. Jimenez previously held the position of Division Head, Novartis Pharmaceuticals. He joined Novartis in 2007 as Division Head, Novartis Consumer Health. Before that, he served as president and CEO of the North American and European businesses for the H.J. Heinz Company. He also served on the board of directors of Colgate-Palmolive Co. from 2009 to 2015, and of AstraZeneca PLC from 2002 to 2007.
Mr. Jimenez is a member of the board of directors of General Motors Co. He gradu­ated in 1982 with a bachelor’s degree from Stanford University and in 1984 with a Master of Business Administration from the University of California, Berkeley, both in the United States.
Steven Baert
Head of Human Resources of Novartis
Belgian, age 42
Steven Baert has been Head of Human Resources (CHRO) of Novartis since 2014. He is a member of the Executive Committee of Novartis.
Mr. Baert joined Novartis in 2006 as Head of Human Resources Global Functions in Switzerland. He has held several other senior HR roles, including Head of Human Resources for Emerging Growth Markets, and Global Head, Human Resources, Oncology. Mr. Baert also served as Head of Human Resources, United States and Canada, for Novartis Pharmaceuticals Corporation. Prior to joining Novartis, he held HR positions at Bristol-Myers Squibb Co. and Unilever.
Mr. Baert represents Novartis on the board of the GSK Consumer Healthcare joint venture. He holds a Master of Business Administration from the Vlerick Business School in Belgium and a Master of Laws from the Katholieke Universiteit Leuven, also in Belgium. Additionally, he has a Bachelor of Laws from the Katholieke Universiteit Brussels.
F. Michael (Mike) Ball
CEO, Alcon
American, age 61
F. Michael (Mike) Ball was appointed CEO of Alcon on February 1, 2016. He is a member of the Executive Committee of Novartis.
Mr. Ball previously served as CEO of Hospira from 2011 to 2015. At Hospira, a world leader in injectable pharmaceuticals and infusion devices, he successfully turned the company around and grew it by focusing on product and quality improvements, and expanding its global footprint. Prior to Hospira, Mr. Ball held a number of senior leadership positions at Allergan, beginning in 1995. He served as president from 2006 to 2011 after having led the strategy and execution of global commercial activities for a wide range of businesses, including eye care pharmaceuticals, over-the-counter products and surgical devices. Before joining Allergan, Mr. Ball held roles of increasing responsibility in marketing and sales at Syntex Corporation and Eli Lilly. He began his career in the healthcare industry in 1981.
Mr. Ball holds a Bachelor of Science and a Master of Business Administration from Queen’s University in Canada.
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James (Jay) Bradner, M.D.
President of the Novartis Institutes for BioMedical Research (NIBR)
American, age 44
James (Jay) Bradner, M.D., joined Novartis on January 1, 2016 and became President of the Novartis Institutes for BioMedical Research (NIBR) on March 1, 2016. He is a member of the Executive Committee of Novartis.
Prior to joining Novartis, Dr. Bradner was on the faculty of Harvard Medical School in the Department of Medical Oncology at the Dana-Farber Cancer Institute in the United States. He was also associate director of the Center for the Science of Therapeutics at the Broad Institute of MIT and Harvard. Dr. Bradner is a co-founder of five biotechnology companies and has co-authored more than 150 scientific publications and 30 US patent applications.
Dr. Bradner is a graduate of Harvard University and the University of Chicago Medical School in the US. He completed his residency in medicine at Brigham and Women’s Hospital and his fellowship in medical oncology and hematology at the Dana-Farber Cancer Institute. He has been honored with many awards and was elected into the American Society for Clinical Investigation in 2011 and the Alpha Omega Alpha Honor Medical Society in 2013.
Felix R. Ehrat, Ph.D.
Group General Counsel of Novartis
Swiss, age 59
Felix R. Ehrat, Ph.D., has been Group General Counsel of Novartis since 2011. He is a member of the Executive Committee of Novartis.
Mr. Ehrat is a leading practitioner of corporate, banking, and mergers and acquisitions law, as well as an expert in corporate governance and arbitration. He started his career as an associate at Bär & Karrer Ltd. in Zurich in 1987, became partner in 1992, and advanced to senior partner (2003 to 2011) and executive chairman of the board (2007 to 2011). Mr. Ehrat is chairman of Globalance Bank AG in Switzerland, and chairman of SwissHoldings (the federation of industrial and service groups in Switzerland). He is a board member of Geberit AG and Avenir Suisse (a think tank for economic and social issues), and previously served as chairman and board member of several listed and non-listed companies.
Mr. Ehrat was admitted to the Zurich bar in 1985 and received his doctorate in law from the University of Zurich in Switzerland in 1990. He received his Master of Laws from McGeorge School of Law in the United States in 1986. Some of his past memberships include the International Bar Association, where he was co-chair of the Corporate and M&A Law Committee from 2007 to 2008, and Association Internationale des Jeunes Avocats, where he was president from 1998 to 1999.
Richard Francis
CEO, Sandoz
British, age 48
Richard Francis has been CEO of Sandoz since 2014. He is a member of the Executive Committee of Novartis.
Mr. Francis joined Novartis from Biogen Idec, where he held global and country leadership positions during his 13-year career with the company. Most recently, he was senior vice president of the company’s United States commercial organization. From 1998 to 2001, he was at Sanofi in the United Kingdom, and held various marketing roles across the company’s urology, analgesics and cardiovascular products. He has also held sales and marketing positions at Lorex Synthélabo and Wyeth.
Mr. Francis received a Bachelor of Arts in economics from Manchester Metropolitan University in the UK.
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Executive Committee (continued)

Paul Hudson
CEO, Novartis Pharmaceuticals
British, age 49
Paul Hudson has been CEO of Novartis Pharmaceuticals since July 1, 2016. He is a member of the Executive Committee of Novartis.
Mr. Hudson joined Novartis from AstraZeneca, where he most recently was president, AstraZeneca United States and executive vice president, North America. He also served as representative director and president of AstraZeneca K.K. in Japan; as president of AstraZeneca’s business in Spain; and as vice president and primary care director, United Kingdom. Before AstraZeneca, Mr. Hudson held roles of increasing responsibility at Schering-Plough, including leading biologics global marketing. He began his career in sales and marketing roles at GlaxoSmithKline UK and Sanofi-­Synthélabo UK.
Mr. Hudson holds a degree in economics from Manchester Metropolitan University in the UK and a diploma in marketing from the Chartered Institute of Marketing, also in the UK.
Harry Kirsch
Chief Financial Officer of Novartis
German, age 51
Harry Kirsch has been Chief Financial Officer (CFO) of Novartis since 2013. He is a member of the Executive Committee of Novartis.
Mr. Kirsch joined Novartis in 2003 and, prior to his current position, served as CFO of the company’s Pharmaceuticals Division. Under his leadership, the division’s core operating income margin increased, in constant currencies, every quarter of 2011 and 2012 despite patent expirations. At Novartis, he also served as CFO of Pharma Europe, and as Head of Business Planning & Analysis and Financial Operations for the Pharmaceuticals Division. Mr. Kirsch joined Novartis from Procter & Gamble (P&G) in the United States, where he was CFO of P&G’s global pharmaceutical business. Prior to that, he held finance positions in various categories of P&G’s consumer goods business, technical operations, and Global Business Services organization.
Mr. Kirsch represents Novartis on the board of the GSK Consumer Healthcare joint venture. He holds a diploma degree in industrial engineering and economics from the University of Karlsruhe in Germany.
Vasant (Vas) Narasimhan, M.D.
Global Head of Drug Development and
Chief Medical Officer for Novartis
American, age 40
Vasant (Vas) Narasimhan, M.D., has been Global Head of Drug Development and Chief Medical Officer for Novartis since February 1, 2016. He is a member of the Executive Committee of Novartis.
Dr. Narasimhan joined Novartis in 2005 and has held numerous leadership positions in development and commercial functions. His most recent role was Global Head of Development for Novartis Pharmaceuticals, overseeing the entire general medicines pipeline. He previously served as Global Head of the Sandoz Biopharmaceuticals and Oncology Injectables business unit, overseeing the division’s biosimilars pipeline, and as Global Head of Development for Novartis Vaccines. Dr. Narasimhan has also held commercial and strategic roles at Novartis, including North America Region Head for Novartis Vaccines, and United States Country President for Novartis Vaccines and Diagnostics. Before joining Novartis, he worked at McKinsey & Company.
Dr. Narasimhan received his medical degree from Harvard Medical School in the US and obtained a master’s degree in public policy from Harvard’s John F. Kennedy School of Government. He received his bachelor’s degree in biological sciences from the University of Chicago, also in the US. He is an elected member of the US National Academy of Medicine.
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Bruno Strigini
CEO, Novartis Oncology
French, age 55
Bruno Strigini has been CEO of Novartis Oncology since July 1, 2016. He is a member of the Executive Committee of Novartis.
Mr. Strigini joined Novartis in 2014 as President of Oncology. Prior to Novartis, he was president of MSD for Europe and Canada (Merck & Co. in the United States and Canada). He previously worked at Schering-Plough, UCB Celltech and SmithKline Beecham, and his roles included president of international operations, president of Japan and Asia-Pacific, head of global marketing and business development, and managing director positions.
Mr. Strigini holds a Master of Business Administration from IMD business school in Switzerland, a doctorate in pharmacy from the University of Montpellier in France, and a master’s degree in microbiology from Heriot-Watt University in the United Kingdom. He is an elected member of the French National Academy of Pharmacy, and in 2014, he was awarded a doctor honoris causa from Universidad Internacional Menéndez Pelayo in Spain.
André Wyss
President of Novartis Operations and Country President for Switzerland
Swiss, age 49
André Wyss has been President of Novartis Operations since February 1, 2016, and is responsible for manufacturing, shared services and public affairs. He is also Country President for Switzerland and a member of the Executive Committee of Novartis.
Mr. Wyss joined Novartis in 1984 as a chemistry apprentice in manufacturing. Before being appointed President of Novartis Operations, he served as Head of Novartis Business Services, building and implementing a shared services organization across Novartis. Prior to that, he held several other leadership positions, including US Country Head and President of Novartis Pharmaceuticals Corporation; Head of the Pharmaceu­ticals Division for the AMAC region (Asia-­Pacific, Middle East and African countries); Group Emerging Markets Head; and Country President and Head of Pharmaceuticals, Greece.
Mr. Wyss received a graduate degree in economics from the School of Economics and Business Administration (HWV) in Switzerland in 1995. He is a member of the board of economiesuisse.
Secretary
Bruno Heynen
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Our independent external auditors

Duration of the mandate and terms of office of the auditors
Based on a recommendation by the Audit and Compliance Committee, the Board nominates an independent auditor for election at the AGM. PricewaterhouseCoopers (PwC) assumed its existing auditing mandate for Novartis in 1996. Bruno Rossi, auditor in charge, began serving in his role in 2013, and Stephen Johnson, global relationship partner, began serving in his role in 2014. PwC ensures that these partners are rotated at least every five years.
Information to the Board and the Audit and Compliance Committee
PwC is responsible for providing an opinion on whether the consolidated financial statements comply with IFRS and Swiss law, and whether the separate parent company financial statements of Novartis AG comply with Swiss law. Additionally, PwC is responsible for opining on the effectiveness of internal control over financial reporting, on the Compensation Report and on the corporate responsibility reporting of Novartis.
The Audit and Compliance Committee, acting on behalf of the Board, is responsible for overseeing the activities of PwC. In 2016, this committee held 7 meetings. PwC was invited to 6 of these meetings to attend during the discussion of agenda items that dealt with accounting, financial reporting or auditing matters and any other matters relevant to its audit.
On an annual basis, PwC provides the Audit and Compliance Committee with written disclosures required by the US Public Company Accounting Oversight Board, and the committee and PwC discuss PwC’s independence from Novartis.
The Audit and Compliance Committee recommended to the Board to approve the audited consolidated financial statements and the separate parent company financial statements of Novartis AG for the year ended December 31, 2016. The Board proposed the acceptance of these financial statements for approval by the shareholders at the next AGM.
The Audit and Compliance Committee regularly evaluates the performance of PwC, and once a year determines whether PwC should be proposed to the shareholders for election. Also once a year, the auditor in charge and the global relationship partner report to the Board on PwC’s activities during the current year and on the audit plan for the coming year. They also answer any questions or concerns that Board members have about the performance of PwC, or about the work it has conducted or is planning to conduct.
To assess the performance of PwC, the Audit and Compliance Committee holds private meetings with the CFO and the Head of Internal Audit and, if necessary, obtains an independent external assessment. Criteria applied for the performance assessment of PwC include an evaluation of its technical and operational competence; its independence and objectivity; the sufficiency of the resources it has employed; its focus on areas of significant risk to Novartis; its willingness to probe and challenge; its ability to provide effective, practical recommendations; and the openness and effectiveness of its communications and coordination with the Audit and Compliance Committee, the Internal Audit function, and management.
Approval of audit and non-audit services
The Audit and Compliance Committee approves a budget for audit services, whether recurring or non-recurring in nature, and for audit-related services not associated with internal control over financial reporting. PwC reports quarterly to the Audit and Compliance Committee regarding the extent of services provided in accordance with the applicable pre-approval, and the fees for services performed to date. The Audit and Compliance Committee individually approves all audit-related services associated with internal control over financial reporting, tax services and other services prior to the start of work.
Audit and additional fees
PwC charged the following fees for professional services rendered for the 12-month periods ended December 31, 2016 and December 31, 2015:
2016
USD million
20151
USD million
Audit services
26.7
25.9
Audit-related services
2.9
1.1
Tax services
0.7
0.0
Other services
1.3
0.7
Total
31.6
27.7
 1  Amounts for 2015 have been reclassified in line with the new 2016 classification criteria to allow comparison with 2016 amounts.
Audit services include work performed to issue opinions on consolidated financial statements and parent company financial statements of Novartis AG, to issue opinions relating to the effectiveness of the Group’s internal control over financial reporting, and to issue reports on local statutory financial statements. Also included are audit services that generally can only be provided by the statutory auditor, such as the audit of the Compensation Report, audits of non-recurring transactions, audits of the adoption of new accounting policies, audits of information systems and the related control environment, reviews of quarterly financial results, as well as procedures required to issue consents and comfort letters.
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Audit-related services include other assurance services provided by the independent auditor but not restricted to those that can only be provided by the statutory auditor. They include services such as audits of pension and other employee benefit plans, contract audits of third-party arrangements, corporate responsibility assurance, and other audit-related services.
Tax services represent tax compliance, assistance with historical tax matters, and other tax-related services.
Other services include procedures related to corporate integrity agreements, training in the finance area, benchmarking studies, and license fees for use of accounting and other reporting guidance databases.

Our corporate governance framework

Laws and regulations
Novartis AG is subject to the laws of Switzerland, in particular Swiss company and securities laws, and to the securities laws of the US as applicable to foreign private issuers of securities.
In addition, Novartis AG is subject to the rules of the SIX Swiss Exchange, including the Directive on Information Relating to Corporate Governance.
Novartis AG is also subject to the rules of the NYSE as applicable to foreign private issuers of securities. The NYSE requires Novartis AG to describe any material ways in which its corporate governance differs from that of domestic US companies listed on the exchange. These differences are:
— Novartis AG shareholders do not receive written reports directly from Board committees.
— External auditors are appointed by shareholders at the AGM, as opposed to being appointed by the Audit and Compliance Committee.
— While shareholders cannot vote on all equity compensation plans, they are entitled to hold separate, yearly binding shareholder votes on Board and Executive Committee compensation.
— The Board has set up a separate Risk Committee that is responsible for business risk oversight, as opposed to delegating this responsibility to the Audit and Compliance Committee.
— The full Board is responsible for overseeing the performance evaluation of the Board and Executive Committee.
— The full Board is responsible for setting objectives relevant to the CEO’s compensation and for evaluating his performance.
Swiss Code of Best Practice for Corporate Governance
Novartis applies the Swiss Code of Best Practice for Corporate Governance.
Novartis corporate governance standards
Novartis has incorporated the aforementioned corporate governance standards described above into the Articles of Incorporation and the Regulations of the Board of Directors, its Committees and the Executive Committee of Novartis AG (www.novartis.com/corporate-governance).
The GNCRC regularly reviews these standards and principles, taking into account best practices, and recommends improvements to the corporate governance framework for consideration by the full Board.
Additional corporate governance information can be found on the Novartis website: www.novartis.com/corporate-governance.
Printed copies of the Novartis Articles of Incorporation, regulations of the Board, and charters of Board committees can be obtained by writing to: Novartis AG, Attn: Corporate Secretary, Lichtstrasse 35, CH-4056 Basel, Switzerland.
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Further information

Group structure of Novartis
Novartis AG and Group companies
Under Swiss company law, Novartis AG is organized as a corporation that has issued shares of common stock to investors. The registered office of Novartis AG is Lichtstrasse 35, CH-4056 Basel, Switzerland.
Business operations are conducted through Novartis Group companies. Novartis AG, a holding company, owns or controls directly or indirectly all entities worldwide belonging to the Novartis Group. Except as described below, the shares of these companies are not publicly traded. The principal Novartis subsidiaries and associated companies are listed in Note 32 to the Group’s consolidated financial statements.
Divisions
The businesses of Novartis are divided on a worldwide basis into three operating divisions: Innovative Medicines, with the two business units Novartis Pharmaceuticals and Novartis Oncology; Sandoz (generics); and Alcon (eye care). These businesses are supported by a number of global organizations including NIBR, which focuses on discovering new drugs; the Global Drug Development organization, which oversees the clinical development of new medicines; and Novartis Operations, which includes Novartis Technical Operations (the global manufacturing organization) and Novartis Business Services (which consolidates support services across Novartis).
Majority holdings in publicly-traded Group companies
The Novartis Group owns 73.4% of Novartis India Ltd., with its registered office in Mumbai, India, and listed on the Bombay Stock Exchange (ISIN INE234A01025, symbol: HCBA). The total market value of the 26.6% free float of Novartis India Ltd. was USD 74.2 million at December 31, 2016, using the quoted market share price at year-end. Applying this share price to all the shares of the company, the market capitalization of the whole company was USD 279.0 million, and that of the shares owned by Novartis was USD 204.8 million.
Significant minority shareholding owned by the Novartis Group 
The Novartis Group owns 33.3% of the bearer shares of Roche Holding AG, with its registered office in Basel, Switzerland, and listed on the SIX Swiss Exchange (ISIN CH0012032113, symbol: RO). The market value of the Group’s interest in Roche Holding AG, as of December 31, 2016, was USD 12.4 billion. The total market value of Roche Holding AG was USD 197.1 billion. Novartis does not exercise control over Roche Holding AG, which is independently governed, managed and operated.
The Novartis Group owns a 36.5% share of a joint venture created by GlaxoSmithKline PLC (GSK) and Novartis, which combined the Novartis OTC and GSK Consumer Healthcare businesses. Novartis holds four of the 11 seats on the joint venture’s board. Furthermore, Novartis has certain minority rights and exit rights, including a put option that is exercisable as of March 2, 2018.
Political contributions
Novartis makes political contributions to support the political dialogue on issues of relevance to the company.
Political contributions made by Novartis are not intended to give rise to any obligations of the party receiving it, or with the expectation of a direct or immediate return for Novartis. Such contributions are fully compliant with applicable laws, regulations and industry codes. Novartis only makes political contributions in countries where such contributions from corporations are considered to reflect good corporate citizenship. Moreover, Novartis only makes modest political contributions so as to not create any dependency from the political parties receiving these contributions.
In 2016 Novartis issued a guideline on Responsible Lobbying, describing the overarching principles of transparency in lobbying activities. For more information on responsible lobbying see the public policy and advocacy section of the Novartis website (https://www.novartis.com/about-us/corporate-responsibility/doing-business-responsibly/public-policy-advocacy).
In 2016, Novartis made political contributions totaling approximately USD 1.0 million, thereof approximately USD 620 000 in Switzerland, USD 250 000 in the US, USD 110 000 in Australia and USD 10 000 in the UK. In addition, in the US, a political action committee established by Novartis used funds received from Novartis employees (but not from the company) to make political contributions totaling approximately USD 240 000.
In Switzerland, Novartis supports political parties that have a political agenda and hold positions that support the strategic interests of Novartis, its shareholders and other stakeholders. Swiss political parties are completely privately financed, and the contributions of companies are a crucial part thereof. This private financing of parties is a deeply-rooted trait of the Swiss political culture, and contributing to that system is an important element of being a good corporate citizen.
Shareholder relations
The CEO, with the CFO and Investor Relations team, supported by the Chairman, are responsible for ensuring effective communication with shareholders to keep them informed of the company’s strategy, prospects, business operations and governance. Through communication, the Board also learns about and addresses shareholders’ expectations and concerns.
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Novartis communicates with its shareholders through the AGM, meetings with groups of shareholders and individual shareholders, and written and electronic communications.
At the AGM, the Chairman, CEO and other Executive Committee members, as well as representatives of the external auditors, are present and can answer shareholders’ questions. Other meetings with shareholders may be attended by the Chairman, CEO, CFO, Executive Committee members, and other members of senior management.
Topics discussed with shareholders may include strategy, business performance and corporate governance, while fully respecting all applicable laws and stock exchange rules.
Information for our stakeholders
Introduction
Novartis is committed to open and transparent communication with shareholders, financial analysts, customers, suppliers and other stakeholders. Novartis aims to disseminate material developments in its businesses in a broad and timely manner that complies with the rules of the SIX Swiss Exchange and the NYSE.
Communications
Novartis publishes this Annual Report to provide information on the Group’s results and operations. In addition, Novartis prepares an annual report on Form 20-F that is filed with the US Securities and Exchange Commission (SEC). Novartis discloses quarterly financial results in accordance with IFRS, and issues press releases from time to time regarding business developments.
Novartis furnishes press releases relating to financial results and material events to the SEC via Form 6-K. An archive containing recent Annual Reports, annual reports on Form 20-F, quarterly results releases, and all related materials – including presentations and conference call webcasts – is on the Novartis website at www.novartis.com/investors.
Novartis also publishes a consolidated Corporate Responsibility Performance Report, available on the Novartis website at www.novartis.com/about-us/corporate-responsibility, which details progress and demonstrates the company’s commitment to be a leader in corporate responsibility. This report reflects the best-in-class reporting standard, the Global Reporting Initiative’s G4 guidelines, and fulfills the company’s reporting requirement as a signatory of the UN Global Compact.
Information contained in reports and releases issued by Novartis is only correct and accurate at the time of release. Novartis does not update past releases to reflect subsequent events, and advises against relying on them for current information.
Investor Relations program
An Investor Relations team manages the Group’s interactions with the international financial community. Several events are held each year to provide institutional investors and analysts with various opportunities to learn more about Novartis.
Investor Relations is based at the Group’s headquarters in Basel. Part of the team is located in the US to coordinate interaction with US investors. Information is available on the Novartis website: www.novartis.com/investors. Investors are also welcome to subscribe to a free email service on this site.
Website information
Topic
Information
Share capital
Articles of Incorporation of Novartis AG
www.novartis.com/corporate-governance
Novartis key share data
www.novartis.com/key-share-data
Shareholder rights
Articles of Incorporation of Novartis AG
www.novartis.com/corporate-governance
Investor Relations information
www.novartis.com/investors
Board regulations
Board regulations
www.novartis.com/corporate-governance
Executive Committee
Executive Committee
www.novartis.com/executive-committee
Novartis code for senior financial officers
Novartis Code of Ethical Conduct for CEO and Senior Financial Officers
www.novartis.com/corporate-governance
Additional information
Novartis Investor Relations
www.novartis.com/investors
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Compensation Report


Contents

Compensation Committee Chairman’s letter


Dear shareholder,

As Chairman of the Compensation Committee of the Board of Directors, I am pleased to share with you the 2016 Compensation Report of Novartis AG.

Our strategy at Novartis is to use science-based innovation to deliver better outcomes for patients in growing areas of healthcare. Our executive compensation system is aligned with our success in implementing that strategy, as well as with the interests of our shareholders.
We introduced our new compensation system in 2014 with a combination of performance-related incentives, including a short-term Annual Incentive and two new Long-Term Incentive plans with three-year performance-periods. For the first time in 2016, the three-year performance-period for the two Long-Term Incentive plans has concluded.
In the interests of shareholders and proxy advisors, while remaining compliant with the Ordinance against Excessive Compensation in Listed Companies, the Compensation Committee has worked to further enhance, on a voluntary basis, our compensation disclosures. Additional information has been provided on the process for setting compensation targets for the Executive Committee, and the payout outcomes affecting realized compensation of the CEO. We believe this is a meaningful way to illustrate the alignment of the Compensation Committee’s decisions on CEO pay for performance with our shareholders’ interests.
Engagement with shareholders
The Compensation Committee would like to acknowledge the strong shareholder support at the 2016 Annual General Meeting (AGM) for all compensation-related resolutions, and express appreciation for the opportunity to meet many of our shareholders during 2016 to discuss various compensation topics.
Based on their feedback, in 2016 the Compensation Committee continued to evaluate the effectiveness of our compensation programs and concluded that they are well aligned with our strategic objectives and business priorities. However, with the evolution of the healthcare industry both in Europe and the US, as well as the emergence of large US biotechnology companies, the Compensation Committee has introduced a revised global healthcare peer group for performance-periods starting in 2017. This revised peer group will be used as the primary benchmark for determining the compensation opportunities of the CEO and other key executives, and for evaluating relative Total Shareholder Return (TSR) performance and ranking under the LTRPP. Further detail is provided on page 136.
In 2016, to strengthen integrity and compliance across the company and in line with the expectations of our shareholders, the Compensation Committee held a joint meeting with the Risk Committee focused on doing
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business responsibly. The Committees endorsed new policies, systems and governance, including sales force compensation, to support the highest ethical conduct at all levels of the organization. While it will take time for the organization to truly embed our Values and Behaviors, the Board believes that these changes support our ­culture of delivering high performance with integrity and long-term sustainable value to shareholders.
2016 company performance
Novartis delivered in most of its key priority areas despite a challenging year. The company achieved solid financials absorbing US Gleevec loss of exclusivity. Operationally, in constant currencies, the company was slightly below its sales target, met its free cash flow target, and was below its net income target. Innovative Medicines delivered strong performance, Sandoz’s was solid, outperformed peers and gained market share, while Alcon negatively impacted consolidated results.
Novartis achieved several breakthrough innovations and drove the growth products including the successful launch of Cosentyx and the steady growth of Entresto following positive treatment guidelines in the US and Europe. Significant changes to the company structure were implemented effective from July 1, 2016 to improve effectiveness by increasing the scale of the key functions, while at the same time lowering costs. Important progress has also been made in embedding a culture of integrity. Compliance failures mainly related to legacy issues.
2016 CEO realized compensation
The Compensation Committee focused on the CEO’s performance compared to his financial and strategic objectives, our Values and Behaviors, and the overall performance of Novartis. The Compensation Committee used its judgment and support from an independent external compensation advisor to make decisions about individual compensation elements, variable compensation payouts (which can vary between 0%–200% of the target) and total compensation. Compensation Committee members also considered a variety of qualitative factors, including the business environment in which 2016 results were achieved.
— The CEO was awarded a 2016 Annual Incentive of CHF 2 835 010, representing 90% of target, based on a combination of our company’s performance and his own performance. Half of the Annual Incentive is delivered in cash, and the remainder in restricted share units with a three-year vesting period.
— The three-year performance-period for the two new Long-Term Incentive plans introduced in 2014 was completed in 2016. For the first – our Long-Term Performance Plan (LTPP) – following the assessment of performance against the three-year Novartis Cash Value Added (NCVA) and Group innovation targets, the Compensation Committee approved a payout of 112% of target for the CEO. For the second – our Long-Term Relative Performance Plan (LTRPP) – following the assessment of the Novartis three-year TSR against the Novartis global healthcare peer group, the Compensation Committee noted that Novartis ranked 10th out of 13 companies. Considering our TSR was flat in USD, and was up +15% in CHF, over the three-year performance-period 2014–2016, the Compensation Committee approved a payout of 20% of ­target.
In light of the above, 2016 CEO realized total compensation was CHF 10 556 685 including his fixed compensation, his 2016 Annual Incentive, and the vesting of his LTPP and LTRPP awards for the performance-period 2014–2016. The total LTPP and LTRPP payout was CHF 5 392 347 including CHF 528 346 of dividend equivalents accrued over the three-year performance-­period.
2017 AGM
We will continue to exchange views with our shareholders in an atmosphere of trust and respect that promotes a collaborative dialogue. Shareholder engagement is critical to our long-term success, and the Compensation Committee is committed to continue meeting with our shareholders. In line with our Articles of Incorporation, shareholders will be asked to approve the total maximum amount of Board compensation from the 2017 AGM to the 2018 AGM, the Executive Committee compensation for financial year 2018, and to endorse this Compensation Report in an advisory vote.
On behalf of Novartis and the Compensation Committee, I would like to thank you for your continued support and ­feedback, which I consider extremely valuable in driving improvements in our compensation systems and practices. I invite you to send your comments to me at the ­following email address: investor.relations@novartis.com.
 
Respectfully,
Enrico Vanni, Ph.D.
Chairman of the Compensation Committee
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Compensation at a glance


Executive Committee compensation
Executive Committee compensation system (pages 116–120)
Annual basecompensationPension and other benefitsAnnual IncentiveLong-Term Performance Plan(LTPP)Long-Term Relative Performance Plan (LTRPP)PurposeReflects associates'responsibilities,job characteristics, experience and skill setsEstablishes a level ofsecurity for associates and their dependents tailored to local market practices and regulationsRewards performance against key short-term targets, and Values and BehaviorsRewards long-term shareholder value creation and long-terminnovationRewards relative total shareholder returnPerformance periodn/an/a1 year3 years3 yearsPerformancemeasuresn/an/aBased on a payout matrix made up of:—Individual Balanced Scorecard, including financial targets and individual objectives—Assessed Valuesand BehaviorsBased on:—75% Novartis CashValue Added —25% divisional long-term innovationmilestonesBased on Novartis' relative total shareholder return vs. our peer group of global healthcare companies1Delivery (at the endof the performanceperiod for variablecompensation)CashCountry-specific50% cash50% deferred equity2 (3-year holding of restricted shares/restricted share units)Equity(includes dividend equivalents)Equity(includes dividendequivalents)Total variable compensationCEO variableopportunity3n/an/aTarget: 150%Target: 200%Target: 125%4Target: 475%Other Executive Committeemembers' variable opportunity3n/an/aTarget: 90-120%Target: 140-190%Target: 30-80%Target: 260%-390%1For the performance period 2016-2018, the companies in our global healthcare peer group consist of Abbott, AbbVie, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmithKline, Johnson & Johnson, Merck & Co., Pfizer, Roche and Sanofi.2Executive Committee members may elect to receive more of their Annual Incentive in equity instead of cash.3The shown information represents the variable compensation opportunity as a percentage of annual base compensation. The payout range for each element is 0-200% of target.4Effective from the performance-period 2016-18 (previously 100%).
2016 CEO realized compensation (pages 124–126)
The following table provides a summary of the 2016 CEO realized compensation in relation to the performance periods ended December 31, 2016. We believe reporting realized compensation provides a meaningful way to transparently illustrate the alignment between the Compensation Committee’s decisions on CEO pay for performance and shareholders’ interests. In addition, this complements the disclosures required by the Ordinance against Excessive Compensation in Listed Companies (pages 129–135).
The CEO realized compensation includes the payouts, based on actual performance assessed, from the two Long-Term Incentive plans newly introduced in 2014 following the conclusion of their first three-year performance-period 2014–2016.
Annual basecompensationPension and other benefits2016 Annual IncentiveLong-Term Performance Plan(LTPP) 2014–20161Long-Term Relative Performance Plan (LTRPP) 2014–20161Total realizedcompensationJoseph Jimenez (CEO)2093417235911228350104950334442013105566851The shown amounts represent the underlying share value of the total number of shares vested (including dividend equivalents) to the CEO for the LTPP and LTRPP performance-period 2014-2016.2Includes an amount of CHF 4 336 for mandatory employer contributions for the CEO paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 1 144 673, and provides a right to the maximum future insured government pension benefit.
2017 Executive Committee compensation system (page 136)
The Executive Committee compensation system will remain unchanged in 2017 with the exception of a revised global healthcare peer group and corresponding LTRPP payout matrix.
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Board compensation
2016 Board compensation system (page 137)
Delivery: 50% cash/50% equity (up to 100% equity at the option of each Board member)
(CHF)
Annual fee
Chairman of the Board
3 800 000
Board membership
300 000
Vice Chairman
50 000
Chairman of the Audit and Compliance Committee
120 000
Chairman of the following committees:
— Compensation Committee
— Governance, Nomination and Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee




60 000
Membership of the Audit and Compliance Committee
60 000
Membership of the following committees:
— Compensation Committee
— Governance, Nomination and Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee




30 000
2016 Board compensation (pages 138–140)
Amounts earned for financial year 2016
(CHF)
Cash
Equity
Other benefits 1
Total
Chairman Dr. Joerg Reinhardt 2
1 900 000
1 900 000
4 336
3 804 336
Other Board members active on December 31, 2016
1 625 000
2 540 000
12 147
4 177 147
Other Board members who stepped down at the 2016 AGM
27 500
27 500
579
55 579
Total
3 552 500
4 467 500
17 062
8 037 062 3
 1  Includes an amount of CHF 17 062 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 387 308, and provides a right to the maximum future insured government pension benefit for the Board member.
 2  The Chairman of the Board also received payment for the loss of other entitlements at his previous employer totaling EUR 2 665 051, staggered in three installments from 2014 to 2016. In January 2016, the Chairman of the Board received the third and final installment. No additional committee fees for chairing the Research & Development Committee were delivered to the Chairman of the Board.
 3  Please see page 139 for a reconciliation between the amount reported in this table and the amount approved by shareholders at the 2016 AGM to be used to compensate Board members for the period from the 2016 AGM to the 2017 AGM. The amount paid is within the maximum amount approved by shareholders.
2017 Board compensation system
The Board compensation system will remain unchanged in 2017.

Compensation governance
Governance and risk management (pages 141–142)
Decision on
Decision making authority
Compensation of Chairman and other Board members
Board of Directors
Compensation of CEO
Board of Directors
Compensation of other Executive Committee members
Compensation Committee
Executive Committee compensation risk management principles
— Rigorous performance management process
— Balanced mix of short-term and long-term variable compensation elements
— Matrix approach to performance evaluation under the Annual Incentive, including an individual Balanced Scorecard and assessed Values and Behaviors
— Performance-based Long-Term Incentives only, with three-year overlapping cycles
— All variable compensation is capped at 200% of target
— Contractual notice period of 12 months
— Post-contractual non-compete limited to a ­maximum of 12 months (annual base compensation and Annual Incentive of the prior year only)
— No severance payments or change-of-control clauses
— Clawback principles apply to all elements of variable compensation
— Share ownership requirements; no hedging or pledging of Novartis share ownership position
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Executive Committee compensation philosophy and principles

Novartis compensation philosophy
Our compensation philosophy aims to ensure that the Executive Committee is rewarded according to its success in implementing the company strategy and to its contribution to company performance. The Executive Committee compensation system is designed in line with the following key elements:
Pay for performanceVariable compensation is tied directly to the achievement of strategic company targets.Shareholder alignmentA significant part of our incentives are equity-based. Also, the LTRPP rewards on the basis of relative total shareholder return.Balanced rewards to create sustainable valueMix of targets are based on financial metrics, innovation, individual objectives, Values and Behaviors, and performance vs. competitors.Business ethicsThe Values and Behaviors are an integral part of our compensation system.Competitive compensationCompensation competitive to relevant benchmarks ensures we are able to attract and retain the most talented global Executive Committee members.Target number of PSUsxPerformance factor=Realized PSUs+dividend equivalents
Alignment with company strategy
The Novartis strategy is to use science-based innovation to deliver better patient outcomes. We aim to lead in growing areas of healthcare focusing on innovative pharmaceuticals and oncology medicines, generics and biosimilars, and eye care. To align the compensation system with this strategy, and to ensure that Novartis is a high-performing organization over the long term, the Board of Directors determines specific, measurable and time-bound performance metrics for both the short-term Annual Incentive and the Long-Term Incentive plans. The targets include financial metrics such as sales, profit and cash flow, as well as non-financial metrics in areas such as quality, talent, integrity and reputation, which are reinforced by our Values and Behaviors. The CEO and the other Executive Committee members are compensated according to the extent to which the targets are achieved.
Executive Committee compensation benchmarking
To attract and retain key talent, it is important for us to offer competitive compensation opportunities.
The Compensation Committee reviews the competitiveness of the compensation of the CEO and Executive Committee members on a regular basis. For this purpose, the Compensation Committee uses benchmark data from publicly available sources, as well as reputable market data providers where appropriate. All data is reviewed and evaluated by the Compensation Committee’s independent advisor, who also provides independent research and advice regarding the compensation of the CEO and the other Executive Committee members.
While benchmarking information regarding executive pay is considered by the Compensation Committee, any decisions on compensation are ultimately based on the specific business needs of Novartis and on the executive’s experience, skill sets and performance.
Executives meeting their objectives are generally awarded target compensation in line with the market median benchmark for comparable roles within a peer group of global competitors in the healthcare industry. Our peer group is made up of companies that are similar in size to Novartis and that also have similar business models and needs for talent and skills. In the event of under- or over-performance by an executive, the actual compensation may be lower or higher than the benchmark median.
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The Compensation Committee considers the global healthcare peer group the most relevant benchmark given the fierce competition within the pharmaceutical and biotechnology industries for top executive talent with deep expertise and competences. The composition of the peer group accurately reflects the competitive landscape of Novartis. Although Novartis is headquartered in Switzerland, more than a third of sales come from the US market and the US will remain a significant recruitment talent pool for the company (e.g., all current Executive Committee members have extensive experience with the US). In addition to providing a benchmark for compensation, the global healthcare peer group is used to evaluate relative total shareholder return (TSR) performance and ranking under the Long-Term Relative Performance Plan (LTRPP), as a reference point for pay and performance alignment as well as for compensation plan design and practices.
Global healthcare peer group for 20161AbbottAbbVieAmgenAstraZenecaBristol-Myers SquibbEli Lilly & Co. GlaxoSmithKlineJohnson & JohnsonMerck & Co.PfizerRocheSanofi1This global healthcare peer group is used as the basis for the TSR comparator group featured in the LTRPP for the performance periods 2014-2016, 2015-2017 and 2016-2018.
The Compensation Committee reviews the companies in our global healthcare peer group annually and considers adjustments over time in line with the evolution of the competitive environment in the healthcare industry.
Following the latest review, the Compensation Committee approved changes to the global healthcare peer group for 2017 onwards, which are reflected on page 136.
The Compensation Committee also uses a cross-industry peer group of European-headquartered multi national companies as an additional reference point to assess regional pay practices and trends. These companies were selected on the basis of comparability in size, scale, global scope of operations, and economic influences to Novartis. This European cross-industry peer group is comprised of five global companies focusing exclusively on healthcare – AstraZeneca, GlaxoSmithKline, Novo Nordisk, Roche and Sanofi – and 10 companies selected from the STOXX® All Europe 100 Index representing all sectors (excluding financial services, energy and utilities, apparel, media, and real estate investment trusts): Anheuser-Busch, Bayer, BMW, Daimler, Danone, Heineken, L’Oréal, Merck KgaA, Nestlé and Unilever.
Novartis comparison to peer group median
Against the global healthcare peer group, Novartis is among the largest in key dimensions including market capitalization, sales and operating income. The table below compares our market capitalization, sales and operating income to the median market capitalization, sales and operating income for our global healthcare peer group.

(USD billions)


Novartis
Median of
global healthcare
peer group for 2016 3
Market capitalization 1
172.0
103.0
Net sales 2
48.5
30.8
Operating income 2
8.3
7.0
 1  Market capitalization at December 31, 2016 is calculated based on the number of shares outstanding (excluding treasury shares).
 2  Continuing operations
 3  Data source: Bloomberg database; most recently disclosed (as of January 18, 2017) trailing 12-month net sales and operating income.
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2016 Executive Committee compensation system

The 2016 Executive Committee compensation system consists of the following components:
Fixed compensation and benefitsAnnual base compensationPension and other benefitsVariable compensationAnnual IncentiveLong-Term Performance Plan (LTPP)Long-Term Relative Performance Plan (LTRPP)
Fixed compensation and benefits
Annual base compensation
The level of annual base compensation reflects each associate’s key responsibilities, job characteristics, experience and skill sets. It is paid in cash, typically monthly.
Annual base compensation is reviewed regularly, and any increase reflects merit based on performance, as well as market movements.
Pension and other benefits
The primary purpose of pension and insurance plans is to establish a level of security for associates and their dependents with respect to age, health, disability and death. The level and scope of pension and insurance benefits provided are country-­specific, influenced by local market practices and regulations.
Company policy is to change from defined benefit pension plans to defined contribution pension plans. All major pension plans have now been aligned with this policy as far as reasonably practicable. Please also see Note 25 to the Group’s audited consolidated financial statements (page 226).
Novartis may provide other benefits in a specific country – such as a company car, and tax and financial planning services – according to local market practices and regulations. Executive Committee members who have been transferred on an international assignment also receive benefits (such as tax equalization) in line with the company’s international assignment policies.
Variable compensation
Annual Incentive
For the Annual Incentive of the CEO and other Executive Committee members, a target incentive is defined as a percentage of annual base compensation at the beginning of each performance year. The target incentive is 150% of annual base compensation for the CEO, and ranges from 90% to 120% for the other Executive Committee members. It is delivered half in cash and half in equity deferred for three years.
The formula for the target Annual Incentive is outlined below.
Annual Incentive formula
Annual base compensationTarget incentive %Target Annual Incentive value
Performance measures
The Annual Incentive payout is based on a matrix made up of two elements: a balanced scorecard and our Values and Behaviors, which are described in more detail below.
Balanced Scorecard
The first element used to determine the payout of the Annual Incentive is a balanced scorecard within which Group, divisional or unit targets are weighted 60%, and individual objectives are weighted 40%. For more details on the target-setting and performance management process, please refer to pages 121–122.
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Group, divisional and unit targets
Within the Group, divisional and unit targets, each measure is weighted individually. The CEO and corporate function heads share the same Group financial targets (further described below). In place of the Group targets, division and business unit heads have targets that include divisional or business unit sales, operating income, free cash flow as a percentage of sales, and market share of peers. Organizational unit heads have financial and non-financial targets specific to their organization. The Board of Directors sets the Group, divisional and unit targets at the start of each performance year in constant currencies, where applicable, and evaluates achievement against these targets at the end of that year.
Individual objectives
Individual objectives differ for each Executive Committee member depending on their responsibilities, and may include additional financial and non-financial targets. Examples of additional financial targets are implementation of growth, productivity and development initiatives. Non-financial targets may include leadership as well as people and talent management, workforce diversity, quality, social initiatives such as access to medicines, and ethical business practices.
By way of illustration, the balanced scorecard measures used for the CEO in 2016 are set out in the table below.
2016 balanced scorecard measures used for the CEO
Performance
measures

Weight

Breakdown of performance measures
Group financial
targets
60%
Group net sales
Corporate net result
Group net income
Group free cash flow as % of sales
CEO
individual
objectives
40%
Additional financial targets (e.g., EPS)
Innovation and growth
Cross-divisional synergies
High-performing organization
Overall total
100%
Our Values and Behaviors
The second element used to determine the payout of the Annual Incentive ensures that the performance of all Novartis associates, including Executive Committee members, is achieved in line with our Values and Behaviors. Associates are held accountable to demonstrate innovation, quality, collaboration, performance, courage and integrity. All Novartis associates are expected to live up to these on a daily basis, and to align and energize other associates to do the same. Detailed descriptors are used to assess performance against our Values and Behaviors.
Performance evaluation and payout determination
Following a thorough review of the two elements that compose the Annual Incentive – performance against the balanced scorecard objectives and an assessment against our Values and Behaviors – a rating from 1 to 3 is assigned to each.
The following payout matrix shows how the Annual Incentive performance factor is derived using a combination of performance against the balanced scorecard and demonstration of our Values and Behaviors. The Board of Directors for the CEO, and the Compensation Committee for the other Executive Committee members, determine the final payout factor, taking into account the ranges shown. Payouts are capped at 200% of target.
2016 Annual Incentive payout matrix
% PayoutPerformance vs. Balanced ScorecardExceeding expectations360 – 90%130 – 160%170 – 200%Meetingexpectations20 – 70%90 – 120%130 – 160%Partially meetingexpectations10%0 – 70%60 – 90%123Partially meeting expectationsMeetingexpectationsExceedingexpectationsValues and Behaviors assessment
The payout matrix for the Annual Incentive equally recognizes performance against the objectives in the balanced scorecard and demonstration of our Values and Behaviors.
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Form and delivery of the award
The Annual Incentive is paid 50% in cash in the first quarter of the year following the performance-period, and 50% in Novartis restricted shares or restricted share units (RSUs) that are deferred and vest after three years. Each restricted share is entitled to voting rights and payment of dividends during the vesting period. Each RSU is equivalent in value to one Novartis share but does not carry any dividend, dividend equivalent or voting rights. Following the vesting period, settlement of RSUs is made in unrestricted Novartis shares or American Depositary Receipts (ADRs).
If a participant leaves Novartis due to voluntary resignation or misconduct, unvested restricted shares and RSUs are forfeited. The Board of Directors and the Compensation Committee retain accountability for ensuring that the plan rules are applied correctly, and for determining whether a different treatment should apply in exceptional circumstances. This is necessary to ensure that the treatment of any award in the event of cessation of employment is appropriate.
Executives may choose to receive all or part of the cash portion of their Annual Incentive in Novartis shares or ADRs (US only) that will not be subject to forfeiture conditions. In the US, awards may also be delivered in cash under the US-deferred compensation plan.
Long-Term Incentive plans
Novartis operates two Long-Term Incentive plans (the Long-Term Performance Plan and the Long-Term Relative Performance Plan) for the Executive Committee members, which are granted under the same plan rules, differing only with respect to the performance conditions applied.
Grant of Long-Term Incentive plans
At the beginning of every performance-period, Executive Committee members are granted a target number of performance share units (PSUs) under each of the Long-Term Incentive plans according to the following formula:
STEP 1Annual base compensationTarget incentive %Grant valueSTEP 2Grant valueShare priceTarget number of PSUs
Vesting of Long-Term Incentive plans
At the end of the three-year performance-period, the Compensation Committee adjusts the number of PSUs realized based on actual performance.
Long-Term Incentive plans payout formula
Target number of PSUsxPerformance factor=Realized PSUs+dividend equivalents
The performance factor can range from 0% to 200% of target. Each realized PSU is converted into one Novartis share at the vesting date. PSUs do not carry voting rights, but do accrue dividend equivalents that are reinvested in additional PSUs and delivered at vesting to the extent that performance conditions have been met. In the US, awards may also be delivered in cash under the US-deferred compensation plan.
If a participant leaves Novartis due to voluntary resignation or termination by the company for misconduct, none of the awards vest. When a member is terminated by the company for reasons other than performance or conduct, the award vests on a pro-rata basis for time spent with the company during the performance-period. In such a case, the award will vest on the regular vesting date (no acceleration), will be subject to performance should an evaluation be possible, and will also be subject to other conditions such as observing the conditions of a non-compete agreement. Executives leaving Novartis due to approved retirement, including approved early retirement, death or disability, will receive full vesting of their award on the normal vesting date (acceleration will only apply in the case of death). The award will be subject to performance, should an evaluation be possible, and will also be subject to other conditions such as observing the conditions of a non-compete agreement. Further details can be found in Note 26 to the Group’s audited consolidated financial statements (page 229).
The Board of Directors and the Compensation Committee retain accountability for ensuring that the plan rules are applied correctly, and for determining whether different treatment should apply in ­exceptional circumstances. This is necessary to ensure that the treatment of any award in the event of cessation of employment is appropriate.
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Long-Term Performance Plan (LTPP)
This is the first of the two Long-Term Incentive plans.
Overview
The LTPP, as described below, was granted for the first time to the CEO and other Executive Committee members in 2014, and the first payout under this plan for performance-period 2014–2016 is disclosed on page 127. The LTPP target incentive is 200% of annual base compensation for the CEO, and ranges from 140% to 190% for the other Executive Committee members.
Performance measures
Awards under the LTPP are based on three-year ­performance objectives and split as follows:
MeasureCEO, corporate function and certain organizational unit headsCommercial division and unit heads, and head of research unit75% financialNovartis Cash Value Added100% Group25% innovationUp to 10 key innovation milestonesWeighted average of divisional/unit performance100% divisional/unit performance
Financial measure (Novartis Cash Value Added): 75% of LTPP
The Novartis Cash Value Added (NCVA) is a metric that incentivizes sales growth and margin improvement as well as asset efficiency. A summary of the calculation is below.
Calculation formula for NCVA
in constant currenciesOperating income+ Amortization, impairments and adjusting for gains/losses from non-operating financial assets–  Taxes–  Capital charge (based on WACC1) on gross operational assets= NCVA21WACC = weighted average cost of capital2NCVA = (cash flow return on investment % – WACC1) x gross operational assets
The NCVA targets are determined considering expected growth rates in sales, operating income, and return from invested capital (under foreseen economic circumstances).
At the end of the performance-period, the NCVA performance factor is calculated using results in constant currencies. The NCVA performance factor is based on a 1:3 payout curve, where a 1% deviation in realization versus target leads to a 3% change in payout (for example, a realization of 105% leads to a payout factor of 115%). Accordingly, if performance over the three-year vesting period falls below 67% of target, no ­payout is made for this portion of the LTPP. If performance over the three-year vesting period is above 133% of target, payout for this portion of the LTPP is capped at 200% of target.
The calculated performance realization is adjusted for unplanned major events during the performance-period (e.g., significant merger and acquisition transactions).
Innovation measure: 25% of LTPP
Innovation is a key element of the Novartis strategy. Divisional and unit innovation targets are set at the beginning of the performance-period, comprised of up to 10 target milestones that represent the most important research and development project milestones for each division and unit. These milestones are chosen because of the expected future impact to Novartis in terms of potential revenue, or due to their qualitative potential impact to science, medicine, and the treatment or care of patients.
A payout matrix has been established for this metric that allows a 0–150% payout for the achievement of target milestones. A 150–200% payout may be awarded for extraordinary additional achievement. The CEO and corporate function heads receive the weighted average of divisional and unit innovation payouts.
The Research & Development Committee assists the Board of Directors and the Compensation Committee in setting the innovation targets and reviewing achievements at the end of the performance-period.
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Long-Term Relative Performance Plan (LTRPP)
This is the second of the two Long-Term Incentive plans.
Overview
The LTRPP was granted for the first time to the CEO and other Executive Committee members in 2014, and the first payout under this plan for performance-period 2014–2016 is disclosed on page 128. As of 2016, the target incentive is 125% of annual base compensation for the CEO (a 25 percentage-point increase from 2015), and ranges from 30% to 80% for the other Executive Committee members.
Performance measure
The LTRPP is based on the achievement of long-term relative TSR versus the global healthcare peer group over rolling three-year performance-periods. TSR is calculated in USD as share price growth plus dividends over the three-year performance-period. The calculation is based on Bloomberg standard published TSR data, which is publicly available.
The peer group for the 2016–2018 performance-period is the same as for benchmarking the compensation of the CEO and other Executive Committee members and is comprised of: Abbott, AbbVie, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly & Co., GlaxoSmithKline, Johnson & Johnson, Merck & Co., Pfizer, Roche and Sanofi.
At the end of the performance-period, all companies are ranked in order of highest to lowest TSR, and the position in the peer group determines the payout range as follows:
LTRPP payout matrix
Position in peer group
Payout range
Positions 1–3
160–200%
Positions 4–6
100–140%
Positions 7–10
20–80%
Positions 11–13
0%
The Compensation Committee uses its discretion to determine the payout factor within the ranges shown, and takes into consideration factors such as absolute TSR, overall economic conditions, currency fluctuations and other unforeseeable situations. The Compensation Committee believes that the LTRPP payout matrix is aligned with the company’s pay-for-performance principle, including a very significant reduction in the actual payout relative to target payout if the company’s TSR is below the median of the peer group. The LTRPP payout matrix is aligned with practices at the companies in our global healthcare peer group.
Target disclosure
To allow shareholders to assess the link between company performance and compensation, Novartis is committed to disclosing in the Compensation Report the targets of our compensation programs at the end of each performance-period – including judgment used in assessing actual performance versus targets. In line with this principle, the targets and achievements of the CEO for the 2016 Annual Incentive, the LTPP and the LTRPP for the performance-period 2014–2016 can be found on pages 124–126.
This approach is proposed to our shareholders given that disclosing our short- and long-term targets under our compensation programs before the end of the relevant performance-period would give substantial insight into the company’s confidential, forward-looking strategies, and could therefore place the company and its shareholders at a competitive disadvantage.
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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. Novartis associates, including the CEO and other Executive Committee members, are subject to a formal three-step process.
Objective settingPerformance evaluationCompensation determination
CEO objective setting
This section describes the objective-setting process to determine the stretch targets of our Annual Incentive plan and the LTPP. No objective setting is required for the LTRPP.
individual targets of the CEO annual incentive
The CEO discusses his individual objectives for the coming year directly with the Chairman of the Board of Directors prior to the start of the performance-period. The Chairman reviews the CEO’s individual objectives before they are discussed and approved by the Board of Directors. The agreed individual objectives are also part of the CEO’s balanced scorecard and laid out as Novartis priorities for the coming year.
GRoup financial targets of the CEO annual incentive and ltpp
The Board of Directors and the Compensation Committee use a rigorous process to establish Group financial targets for the Annual Incentive and the LTPP. The objective-setting process for Group financial targets begins with bottom-up input from our commercial and organizational divisions and units by country and brands. The bottom-up input process takes into account both internal and external market and regulatory factors, such as new product launches, patent expiries, pricing pressures, changes in the healthcare environment, investments in capital expenditure, and resource allocation decisions. The Group financial targets support our ambition to be a leader in the healthcare industry without encouraging unnecessary or excessive risk taking, while being fully in line with Group compliance, conduct and accounting standards.
The financial targets are reviewed and challenged at the country, regional and Group levels as well as by the Executive Committee before they are proposed in December – prior to the start of the performance-period – to the Board of Directors.
The Board of Directors reviews and assesses the proposed financial targets in detail to ensure that they are set at levels that are sufficiently and appropriately challenging. This review takes into account a variety of relevant information including internal business plans, external market consensus, strategic choices to be made by the company, and industry expectations for the companies of our global healthcare peer group. Following this thorough review by the Board of Directors, the final objectives are approved early in the year and incorporated into the CEO Annual Incentive balanced scorecard and the LTPP.
Innovation targets of LTPP
Each year, the divisions and units evaluate their long-term strategic plans to develop recommendations for innovation targets that are focused on challenging milestones of critical importance to the long-term success of the business, and that should be the best- or first-in-class development projects that can significantly advance treatment outcomes for patients worldwide. These targets are presented by the Global Head of Drug Development and Chief Medical Officer for Novartis as well as the President of the Novartis Institutes for BioMedical Research (NIBR) at a joint meeting of the Research & Development Committee and the Compensation Committee. Both Committees review, discuss and challenge the targets before they are finalized and approved by the Board of Directors. The innovation targets of the LTPP are largely aligned with the major development projects outlined in the pipeline schedule of the Annual Report (see page 52).
CEO performance evaluation
The Board of Directors periodically assesses Group business performance, as well as the CEO’s progress against his objectives and incentive plan targets. At the mid-year performance review, the performance of the CEO is reviewed by the Chairman of the Board of Directors.
For the year-end review, the CEO prepares and presents to the Chairman of the Board of Directors, and later to the full Board of Directors, the actual results against the previously agreed-upon objectives, taking into account the financial results as well as an assessment against our ­Values and Behaviors. At the year-end review, the Board of Directors discusses the performance of the CEO without him being present. The Board of Directors evaluates the degree to which the set objectives have been achieved and – to the extent possible – compares these results with peer industry companies, taking into account general economic and financial criteria as well as industry developments. The Board of Directors later shares its assessment with the CEO.
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CEO compensation determination
As part of the review of CEO compensation, the Compensation Committee considers a competitive analysis of CEO target compensation prepared by its independent advisor and, based on competitive factors as well as individual and company performance, determines any recommendations for changes to target compensation for the coming year.
At its January meeting, following a recommendation from the Compensation Committee, the Board of Directors approves the CEO’s variable compensation for the prior performance-periods and the target compensation for the coming year. This meeting takes place without the CEO being present. The Board of Directors later shares its decisions with the CEO.
Performance management process for the other Executive Committee members (excluding the CEO)
The other Executive Committee members propose the financial and non-financial targets for their division or unit for review, challenge and approval by the CEO and, subsequently (as previously described), by the Board of Directors and Compensation Committee. In addition, each Executive Committee member agrees on individual objectives with the CEO, who also reviews each member’s performance at mid-year and year-end.
Following the year-end evaluation, the CEO meets with the Chairman of the Board of Directors, who reviews the performance of each Executive Committee member. Subsequently, the CEO presents and discusses at the Board of Directors meeting the recommended performance rating for each Executive Committee member.
Shortly after year-end, the CEO proposes a payout for the Annual Incentive for each Executive Committee member based on the performance ratings and corresponding to the payout matrix. The Compensation Committee discusses each member’s performance with the CEO and approves the Annual Incentive payouts for the prior year as well as any changes to target compensation for the coming year. The Compensation Committee informs the Board of Directors of its final decisions, and the CEO later shares these decisions with each Executive Committee member.
Assessment of Values and Behaviors at Novartis
Values and Behaviors have been an integral part of the company’s compensation system since its foundation. In 2015, to reinforce the culture of the company, Novartis rolled out six new Values and Behaviors – which are innovation, quality, collaboration, performance, courage and integrity.
What we value
Observed behaviors
Innovation
Experiment
and deliver
solutions
— Experiment and encourage others to do so
— Take smart risks that benefit patients
and customers
— Deliver new solutions with speed and simplicity
Quality
Take pride
in doing ordinary
things extra-
ordinarily well
— Look for better ways to do things
— Do not compromise on quality and safety;
strive for excellence
— Always work on your strengths and weaknesses
Collaboration
Champion
high-performing
teams with
diversity
and inclusion
— Champion working together
in high-performing teams
— Know yourself and your impact on others
— Welcome diversity and inclusion of styles,
ideas and perspectives
Performance
Prioritize
and make
things happen
with urgency
— Show passion to achieve goals; go the extra mile
— Put team results before your own success;
acknowledge the contributions of others
— Prioritize, make decisions,
and make things happen with urgency
Courage
Speak up, and
give and
receive feedback
— Speak up and challenge the norm
— Acknowledge when things do not work; learn
— Give and accept constructive feedback
Integrity
Advocate
and apply
high ethical
standards
every day
— Operate with high ethical standards
— Be humble and caring, and show trust,
respect and empathy to others
— Live by the Code of Conduct
even when facing resistance or difficulties
These values are embedded in all aspects of employees’ lives at Novartis, including recruitment, development and promotions; performance assessments through 360-degree evaluations and organizational employee surveys; and Annual Incentive awards; to measure individual and organizational performance against our values. As part of the Annual Incentive award process, training programs and toolkits were established to evaluate behavior related to the six new values. They are one of the elements used to assess associates’ performance.
In 2015 and again in 2016, we further improved the framework for measuring individual performance against our values, ensuring that fair, objective assessments can be made in a uniform way across all levels of the organization. The assessment is part of a rigorous management process review in which observed Values and Behaviors are evaluated based on globally-defined principles. The assessment initially takes place during a discussion between associates and line managers, followed by a calibration and validation at multiple levels of the organization to allow for a fair, consistent, objective and transparent evaluation. During the calibration sessions, line managers share the proposed ratings of their direct reports with management peers to ensure all apply a common framework, and they seek input and feedback on observed behaviors.
The Values and Behaviors assessments for the CEO and other Executive Committee members are made and calibrated by the Board of Directors.
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2016 CEO compensation

This section provides information on the CEO target compensation followed by the 2016 CEO realized compensation on a voluntary basis.
1. 2016 CEO target compensation
Following a competitive analysis of the CEO’s compensation and an evaluation of the CEO’s performance in 2015, the Compensation Committee approved an increase in the CEO’s target compensation effective for 2016. The target compensation is the amount that the CEO is eligible to receive if there is 100% achievement of all short-term and long-term targets for the respective performance-periods, excluding any dividend equivalents and share price movement.
Among other things, the Compensation Committee considered that the CEO’s target compensation had not been increased in three years and that his compensation was falling further below the median level of our global healthcare peer group. In recognition of this, the Compensation Committee approved:
— An increase in annual base compensation from CHF 2 060 500 to CHF 2 100 000 with effect from March 1, 2016
— A 25 percentage-point increase in CEO LTRPP ­target from 100% to 125% of annual base compensation as from the 2016–2018 performance-period to increase the competitiveness of the CEO’s target total compensation versus peers through the incentive vehicle most aligned to shareholders’ interests
In 2016, at target value, the CEO’s compensation included Annual Incentive at 150%, LTPP at 200% and LTRPP at 125% of annual base compensation. The payout range for all of these plans can vary between 0%–200% of the target. Therefore the total target compensation for the CEO is CHF 12 075 000 and can range from a minimum of CHF 2 100 000 to a maximum of CHF 22 050 000 (excluding pension and other benefits, any share price movements and any accrued dividend equivalents), based on the extent to which financial and strategic objectives for payout of short-term Annual Incentive and Long-Term Incentive plans are achieved. As a result, the 2016 CEO’s compensation at target was comprised of 19% fixed compensation (i.e. annual base compensation, pension and other benefits), 26% Annual Incentive, and 55% Long-Term Incentives.
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2. 2016 CEO realized compensation
This section provides a detailed summary and breakdown by component of the total realized compensation of the CEO in relation to the performance-periods ended December 31, 2016. This includes, for the first time, reporting of CEO realized total compensation in a single table.
To give context to the 2016 CEO realized compensation, within this section, we include details of the CEO’s achievements against his balanced scorecard targets along with the achievements under the LTPP (NCVA and Group Innovation) and LTRPP for the performance-period 2014–2016.
Reporting compensation at realized value in this way provides enhanced transparency to shareholders of the CEO’s compensation. We also consider that this approach is an important method of demonstrating the alignment between the Compensation Committee’s decisions on CEO pay for performance and shareholders’ interests.
2016 CEO realized total compensation breakdown
The Compensation Committee believes it is critical to assess performance against a mix of targets (both short-term and long-term) for compensation-related purposes to reflect the full operational performance of the organization and to ensure that results are delivered with high integrity and long-term financial sustainability. The Compensation Committee uses its judgment when determining final compensation outcomes and any discretionary adjustments, positive or negative.
The CEO’s 2016 realized total compensation was CHF 10 556 685. This amount is comprised of 2016 annual base compensation, pension and other benefits, Annual Incentive and, for the 2014–2016 performance-period, the vesting of his LTPP and LTRPP awards including accrued dividend equivalents.
A detailed breakdown by component of the 2016 CEO realized compensation is set out below.
Annual base compensation
The CEO annual base compensation paid in 2016 was CHF 2 093 417 (representing a 1.6% increase from 2015).
Pension and other benefits
The CEO received pension benefits of CHF 160 283 and other benefits of CHF 75 628 during 2016.
Annual Incentive
Given the 2016 CEO balanced scorecard and assessed Values and Behaviors, the Annual Incentive award was CHF 2 835 010.
Following the performance evaluation of the CEO by the Board of Directors, the Compensation Committee thoroughly reviewed the assessment against the previously agreed objectives as set out in the 2016 CEO balanced scorecard (see following page).
In reaching its recommendation to the Board of Directors on the CEO’s 2016 Annual Incentive payout factor of 90% (which was subsequently approved by the Board of Directors), the Compensation Committee recognized that overall he met expectations, was successful in achieving significant milestones in innovation, and that Novartis met its free cash flow target while it was slightly below its sales target in a year of absorbing Gleevec US LOE. Group net income was below target mainly due to Alcon performance.
Among the major achievements in 2016 were Cosentyx reaching blockbuster status, Gilenya delivering double digit growth, Sandoz biopharmaceuticals reaching USD 1 billion of sales, and Entresto receiving positive treatment guidelines in the US and Europe.
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2016 CEO Balanced Scorecard
The Annual Incentive performance is measured in constant currencies to reflect the operational performance that can be influenced.
Performance metrics for continuing operationsTarget1Achievement vs. target(weight)(in constant currencies)Groupfinancial targets(60%)Group net sales (30%)|USD49540 m|Slightly belowCorporate net result2 (20%)|USD 1675m|Slightly aboveGroup net income (30%)|USD7203m|BelowGroup free cash flow as % of sales (20%)|18.8%|At targetAchievement of Group financial targetsSlightly belowIndividualobjectives(40%)Additional financial targets for continuing operationsBelowIn constant currencies, core operating income and EPS were below target. Core EPS was slightly below. Divisional share of peers (Innovative Medicines and Sandoz) were ahead of target while Alcon was behind. Innovation and growth|ExceededThe company continued to strengthen its pipeline, with the NIBR unit producing 13 new Proof of Concepts (above target). In total, Novartis secured 14 approvals in Innovative Medicines, as well as 15 major submissions. Progress was made with the biosimilars pipeline at Sandoz, with the FDA approval of Etanercept and filing of Rituximab with the EMA. LEE011 (ribociclib) achieved FDA breakthrough therapy designation. Growth Products contributed USD17.1 billion or 35% of net sales, up 20% (USD) over the prior year. Cosentyx was ahead of target, and reached blockbuster status. Entresto continued to grow steadily following positive treatment guidelines in the US and Europe.Cross-divisional synergies|At targetIn January 2016, Novartis announced plans to further focus its divisions to better leverage our development and marketing capabilities. Novartis Business Services (NBS) continued to leverage the global scale of Novartis to streamline and consolidate operations. Novartis Technical Operations completed the organizational integration including a more efficient utilization of functional capabilities and resources. Novartis completed the creation of its new Global Drug Development (GDD) organization to further streamline drug development. A total of 38000 associates realigned to new business organizations with effect from July 1, 2016 with minimal business disruption. All these actions will increase the productivity of the company and provide a solid foundation for the future growth and profitability of Novartis.High-performing organization (e.g., quality, talent)|At targetNovartis continues to proactively drive compliance, reliable product quality and sustainable efficiency as part of the quality strategy. Compliance issues which were uncovered and remediated mainly related to legacy failures. A total of 206 global health authority inspections were completed in 2016, 26 of which were conducted by the FDA. All but 4 out of 206 inspections were deemed good or acceptable. Corrective and preventative actions to address all observations have been defined and are being implemented. In 2016, Novartis combined several innovative Access programs into a single portfolio under unified leadership. The Group was successful in filing approximately three quarters of its Novartis Top Leader roles (the company’s 360 most senior executives) internally. Women in management increased to 42% and Novartis continues to be recognized in the market for its efforts in diversity and inclusion. Our Values and Behaviors continued to progress in employee pulse surveys and have been embedded in all aspects of associates’ lives at Novartis and significant progress has been made in embedding a culture of integrity in a sustainable way.Achievement of individual objectivesAt target1The target was set using July 2015 forward currency exchange rates.2Includes corporate cost, income from associated companies, net financial income and income taxes.
As a result of the CEO’s achievements as described above, a payout factor of 90% was approved for the CEO and the value of his 2016 Annual Incentive award was determined as follows:
Annual base compensation1 CHF thousands
x
Target incentive % of annual base compensation
x
Performance factor % of target
=
Final award CHF thousands
2016 Annual Incentive
2 100
x
150%
x
90%
=
2 835 2
 1  As per plan rules, the Annual Incentive is calculated based on the annual base compensation effective March 1, 2016
 2  50% of the Annual Incentive is paid in cash and the other 50% as 19 867 RSUs, which have a three-year vesting period.
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Outcome of the LTPP performance-period 2014–2016
The LTPP payout for the CEO for performance-period 2014–2016 is CHF 4 950 334, including CHF 485 037 of ­dividend equivalents. The LTPP payout factor for the CEO was 112% based on the outcome of the performance objectives below.
MeasureWeightTargets and achievementsNovartis Cash Value Added(NCVA)75%Over the three-year performance period, 2014 to 2016, Novartis performed 4.4% ahead of the USD10.1 billion NCVA target in constant currencies. This was mainly due to over achievements in the beginning of the performance-period driven by stronger than anticipated performance of Gleevec and the successful launch of Cosentyx. NCVA was negatively impacted by Alcon underperformance at the end of the cycle. Overall this corresponded to a payout of 113% following the application of the 1:3 payout curve. In arriving at the NCVA performance score, the Compensation Committee excluded, as a major item, the favorable impact from lower cost of capital.GroupInnovation25%Novartis delivered strong innovation performance over the period 20142016 despite usual attrition rates inherent to pharmaceutical drug development. The majority of innovation targets were achieved by our divisions and units many of which will have a significant positive impact for both the company and patient outcomes. The company successfully achieved major innovation milestones, including Entresto (approved in the US and the EU), Cosentyx (approved for AS and PsA in EU and in the US) and submissions of biosimilar etanercept and pegfilgrastim. Zarxio (filgrastim) was the first biosimilar approved in the US under the BPCIA pathway. Based on the evaluation performed by the R&D Committee, the Board of Directors approved, in line with a recommendation from the Compensation Committee, a payout factor for group innovation of 107% applicable to the CEO. This corresponds to the weighted average of divisional and unit innovation payouts.
Outcome of the LTRPP performance-period 2014–2016
The LTRPP payout for the CEO for performance-period 2014–2016 is CHF 442 013, including CHF 43 309 of dividend equivalents. The LTRPP payout factor applicable to the CEO was 20% based on Novartis TSR rank position, in USD, being 10th in the comparator group of 13 healthcare companies (Novartis and 12 other companies).
In USD our TSR was flat for the three-year period 2014–2016 while in CHF TSR was up +15%. In reaching its decision on the payout factor, the Compensation Committee exercised its discretion within the boundaries of the LTRPP payout matrix (see page 120) and decided that the minimum of the payout range should apply.
2016 CEO realized total compensation table
The following table is newly introduced to aid shareholders’ understanding of 2016 realized total compensation of the CEO. It reports, the aggregate fixed and variable compensation in the year, including the LTPP and the LTRPP payouts for performance-period 2014–2016 following their respective completed performance assessments.
Equity relating to the 2016 Annual Incentive is disclosed using the underlying value of Novartis shares on the date of grant, while the realized value for the LTPP and LTRPP payouts (including dividend equivalents) is calculated using the share price on the date of vest. In both cases the applicable date is January 17, 2017 and the share price was CHF 71.35 per Novartis share.
2016 base compensation
2016 pension benefits
2016 Annual Incentive
Realized LTPP 2014–2016 period
Realized LTRPP 2014–2016 period
Other 2016 compensation
Total realized compensation


Currency

Cash
(amount)


Amount 1

Cash
(amount)
Equity
(value at
grant date) 2
Shares
(value at
vesting date) 3
Shares
(value at
vesting date) 3


Amount 4


Amount 5
Joseph Jimenez (CEO)
CHF
2 093 417
160 283
1 417 500
1 417 510
4 950 334
442 013
75 628
10 556 685
 1  Includes service costs of pension and post-retirement healthcare benefits accumulated in 2016, in accordance with IAS19. It also includes an amount of CHF 4 336 for mandatory employer contributions for the CEO paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 1 144 673, and provides a right to the maximum future insured government pension benefit.
 2  The portion of the Annual Incentive delivered in RSUs is rounded up to the nearest share.
 3  For the performance-period 2014-2016, the accrued dividend equivalent amounts were CHF 485 037 and CHF 43 309 respectively for the LTPP and the LTRPP.
 4  Includes any other perquisites and benefits in kind.
 5  All amounts are before deduction of the employee's social security contribution and income tax due by the CEO.
2015 CEO realized compensation
It should be noted that a direct year over year comparison to the 2016 realized compensation is not possible given the changes made in 2014 to our Long-Term Incentive plans from the Old LTPP (OLTPP) to the LTPP and LTRPP, and the fact that OLTPP awards did not accrue dividend equivalents.
However, using the 2016 methodology for reporting realized compensation, the CEO’s 2015 realized total compensation is calculated as CHF 10 911 330 (with no dividend equivalents accrued, per the OLTPP rules), including CHF 5 496 351 OLTPP payout for the performance-period 2013–2015.
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CEO and other Executive Committee members’ 2014–2016 Long-Term Incentive plans vesting

Overview
In this section, the tables reconcile the target values at grant date with the total value of shares delivered to the CEO and other Executive Committee members (including dividend equivalents) following the vesting of the first performance-period 2014–2016 for the LTPP and the LTRPP respectively. Details of the LTPP and the LTRPP can be found on pages 118–120.
We recognize the importance to our shareholders of being able to easily reconcile the payout of our Long-Term Incentive plans against the original amounts granted. It allows an assessment of pay for performance decisions by the Compensation Committee.
The Long-Term Incentive plans’ payout outcomes for the other Executive Compensation members is determined using an approach closely aligned to the methodology used for the CEO described on page 126. For the LTPP, the NCVA measure applies to the other Executive Committee members as it does for the CEO. However, the innovation measure is specific to the performance of the respective division or unit. To determine the LTRPP payout, the same principles apply as for the CEO.
Payout schedule for the LTPP performance-period 2014–20161
PSUs at grant
Shares delivered at vesting



PSUs
(target number)

PSUs
(target value
at grant date)
(CHF)2


Payout factor
for LTPP
(% of target)


Performance shares
delivered at vesting
(number)

Performance shares
delivered at vesting
(value at vesting date)
(CHF)3

Dividend
equivalent shares
delivered at vesting
(number)4
Dividend
equivalent shares
delivered at vesting
(value at vesting date)
(CHF)
Total shares
delivered at vesting
(value at
vesting date)
(CHF)
Joseph Jimenez (CEO)
55 878
4 121 003
112%
62 583
4 465 297
6 798
485 037
4 950 334
Other 7 members of the Executive Committee who were active members on December 31, 2016 5
75 962
5 602 506
107%-114%
84 539
6 030 352
9 080
647 739
6 678 091
Subtotal
131 840
9 723 509
147 122
10 495 649
15 878
1 132 776
11 628 425
Other 3 members of the Executive Committee members who stepped down during 2016
72 699
5 366 905
106%-115%
81 651
5 799 375
9 150
649 864
6 449 239
Total
204 539
15 090 414
228 773
16 295 024
25 028
1 782 640
18 077 664
 1  For those who joined the Executive Committee in the course of the performance-period 2014-2016, the information disclosed reflects the pro-rata LTPP 2014-2016 payout attributable to the period they were a member of the Executive Committee. Includes 3 039 target PSUs granted to Vasant Narasimhan under the OLTPP for the performance-period 2014-2016. The payout factor for the OLTPP 2014-2016 is 113% of target.
 2  The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance-period 2014-2016 based on the closing share price on the grant date (January 22, 2014) of CHF 73.75 per Novartis share and USD 80.79 per ADR.
 3  The shown amounts represent the underlying share value of the target number of PSUs vested for the performance-period 2014-2016 based on the closing share price on the vesting date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per ADR.
 4  Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received based on the actual number of shares delivered at the end of the performance-period 2014-2016. At vesting, the dividend equivalents are credited in shares or ADRs.
 5  Excludes F. Michael Ball, James Bradner and Paul Hudson, who joined the Executive Committee in 2016 and have not participated in the LTPP for the performance-period 2014-2016
For the CEO and other Executive Committee members, including those who stepped down during the year, the combined impact of the performance factor and share price movements over the performance-period to determine the value of performance shares delivered at vesting, compared to the target value at grant date, was CHF 1.2 million excluding dividend equivalents. Of that amount, the impact of the share price movement over the performance-period was CHF –583 548.
127
Payout schedule for the LTRPP performance-period 2014–20161
PSUs at grant
Shares delivered at vesting



PSUs
(target number)

PSUs
(target value
at grant date)
(CHF)2


Payout factor
for LTRPP
(% of target)


Performance shares
delivered at vesting
(number)
Performance shares
delivered at vesting
(value at
vesting date)
(CHF)3

Dividend
equivalent shares
delivered at vesting
(number)4
Dividend
equivalent shares
delivered at vesting
(value at vesting date)
(CHF)
Total shares
delivered at vesting
(value at
vesting date)
(CHF)
Joseph Jimenez (CEO)
27 939
2 060 501
20%
5 588
398 704
607
43 309
442 013
Other 6 members of the Executive Committee who were active members on December 31, 2016 5
20 043
1 478 226
20%
4 008
285 926
435
31 033
316 959
Subtotal
47 982
3 538 727
9 596
684 630
1 042
74 342
758 972
Other 3 members of the Executive Committee members who stepped down during 2016
30 042
2 218 214
20%
6 008
426 414
677
48 048
474 462
Total
78 024
5 756 941
15 604
1 111 044
1 719
122 390
1 233 434
 1  For those who joined the Executive Committee in the course of the performance-period 2014-2016, the information disclosed reflects the pro-rata LTRPP 2014-2016 payout attributable to the period they were a member of the Executive Committee.
 2  The shown amounts represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance-period 2014-2016 based on the closing share price on the grant date (January 22, 2014) of CHF 73.75 per Novartis share and USD 80.79 per ADR.
 3  The shown amounts represent the underlying share value of the target number of PSUs vested for the performance-period 2014-2016 based on the closing share price on the vesting date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per ADR.
 4  Dividend equivalent shares are calculated on the dividend each member of the Executive Committee would have received based on the actual number of shares delivered at the end of the performance-period 2014-2016. At vesting, the dividend equivalents are credited in shares or ADRs.
 5  Excludes F. Michael Ball, James Bradner, Paul Hudson and Vasant Narasimhan, who joined the Executive Committee in 2016 and have not participated in the LTRPP for the performance-period 2014-2016
For the CEO and other Executive Committee members, including those who stepped down during the year, the combined impact of the performance factor and share price movements over the performance-period to determine the value of performance shares delivered at vesting, compared to the target value at grant date, was CHF –4.6 million excluding dividend equivalents. Of that amount, the impact of the share price movement over the performance-period was CHF –40 285.
128

CEO and other Executive Committee members’ compensation at grant value

In accordance with the Ordinance against Excessive Compensation in Listed Companies in Switzerland we continue to disclose, in this section, total compensation at grant value for the CEO and other Executive Committee members.
In 2016, Novartis implemented organizational changes to pursue its growth and innovation strategy with the following appointments to the Executive Committee:
— Effective February 1, 2016, F. Michael Ball was appointed CEO of Alcon following the departure of Jeff George. In line with the company’s priorities for 2016, Mr. Ball received a one-off performance-­based Long-Term Incentive award linked to Alcon-specific growth targets over a three-year period to further incentivize him to return the division to growth, accelerate innovation and sales, strengthen customer relationships, and improve basic operations.
— Also effective February 1, 2016, Dr. Vasant Narasimhan was appointed Global Head of Drug Development and Chief Medical Officer to lead our drive to improve resource allocation and standards in drug development across divisions and business units.
— On March 1, 2016, as previously announced in the 2015 Compensation Report, Dr. James Bradner became President of NIBR when Dr. Mark Fishman retired. Prior to joining Novartis, Dr. Bradner was on the faculty of Harvard Medical School in the Department of Medical Oncology at the Dana-Farber Cancer Institute in the US. Dr. Bradner also advised and served on the boards of several scientific companies he founded, and served on the supervisory board of another company. As previously disclosed, in reaching the terms of the offer for Dr. Bradner, the Board of Directors recognized the need to make up compensation that he forfeited by joining Novartis.
— On July 1, 2016, Novartis created two separate business units, Novartis Pharmaceuticals and Novartis Oncology, which together form the Innovative Medicines Division. As part of this reorganization, Bruno Strigini was appointed CEO of Novartis Oncology, and Paul Hudson was appointed CEO of Novartis Pharmaceuticals. Prior to joining Novartis, Mr. Hudson served as an executive at another company. In reaching the terms of the offer for Mr. Hudson, the Board of Directors recognized the need to make up compensation that he forfeited by joining Novartis. With these changes, David Epstein, former Division Head of Novartis Pharmaceuticals, stepped down from the Executive Committee on June 30, 2016. In accordance with the terms of his retirement agreement as well as his employment contract, Mr. Epstein will leave the company in July 2017 after the expiry of his contractual 12-month notice period.
 
The tables below disclose for the CEO and the other Executive Compensation members the fixed compensation (e.g., base compensation and pension benefits), variable compensation (e.g., the cash portion of the 2016 Annual Incentive and the granted share based compensation of the 2016 Annual Incentive, and the LTPP and LTRPP for the performance-period 2016–2018), plus other compensation. Other 2016 compensation includes the full amount of compensation for lost entitlements from former employers either paid in cash or granted in equity in the year.
PSUs awarded under the Long-Term Incentive plans are reported at target value on the respective grant dates (i.e. assuming the PSUs will vest at 100% achievement and excluding any dividend equivalents that may be accrued during the performance-period). The actual payout outcomes for the PSUs will be assessed after the relevant performance-periods complete, with a payout range of 0–200% of the target value.
129
CEO and other Executive Committee members’ compensation at grant value for financial year 2016
Fixed compensation and pension benefits
Variable compensation
Actual compensation paid or granted for 2016
Long-Term Incentive 2016 grants at target
2016 base compensation
2016 pension benefits
2016 Annual Incentive
LTPP 2016–2018 period
LTRPP 2016–2018 period
Other 2016 compensation
Total compensation


Currency

Cash
(amount)


Amount 1

Cash
(amount)
Equity
(value at
grant date) 2
PSUs
(target value
at grant date) 3
PSUs
(target value
at grant date) 3


Amount 4


Amount 5
Executive Committee members active on December 31, 2016 6
Joseph Jimenez (CEO)
CHF
2 093 417
160 283
1 417 500
1 417 510
4 200 031
2 625 079
75 628
11 989 448
Steven Baert
CHF
721 667
147 442
554 730
554 746
1 050 048
350 042
139 159
3 517 834
F. Michael Ball (from February 1, 2016) 7
USD
1 012 308
60 574
553 574
553 603
1 742 284
762 269
4 040 748
8 725 360
James Bradner (from March 1, 2016) 8
USD
888 462
58 859
579 393
579 448
1 687 473
794 195
1 155 169
5 742 999
Felix R. Ehrat
CHF
915 833
148 122
202 400
809 680
1 564 033
552 002
14 852
4 206 922
Richard Francis
CHF
786 667
188 738
520 000
520 070
1 280 062
480 033
1 116 054
4 891 624
Paul Hudson (from July 1, 2016) 9
CHF
475 000
108 818
288 945
288 968
0
0
3 090 313
4 252 044
Harry Kirsch
CHF
1 025 000
141 510
736 450
736 475
1 751 009
824 018
51 361
5 265 823
Vasant Narasimhan (from February 1, 2016)
CHF
764 993
157 348
537 531
537 551
1 093 245
364 468
102 868
3 558 004
Bruno Strigini (from July 1, 2016)
CHF
445 000
109 057
211 863
211 910
1 074 442
268 670
45 696
2 366 638
André Wyss
CHF
830 834
146 289
0
1 275 025
1 360 001
425 040
95 595
4 132 784
Subtotal 10
CHF
9 931 091
1 425 275
5 585 643
7 468 241
16 751 942
7 422 814
9 850 656
58 435 662
Executive Committee members who stepped down during 2016 11
David Epstein (until June 30, 2016) 12
USD
699 767
290 385
428 400
428 412
1 285 264
642 632
4 529 809
8 304 669
Mark C. Fishman (until February 29, 2016) 13
USD
175 154
107 706
195 000
0
0
0
126 454
604 314
Jeff George (until January 31, 2016) 14
USD
80 000
18 558
44 000
43 986
0
0
2 996 905
3 183 449
Subtotal 10
CHF
940 809
410 492
657 537
465 417
1 266 270
633 135
7 540 067
11 913 726
Total 10
CHF
10 871 900
1 835 767
6 243 180
7 933 658
18 018 212
8 055 949
17 390 723
70 349 389
See page 131 for 2015 compensation figures
  1  Includes service costs of pension and post-retirement healthcare benefits accumulated in 2016, in accordance with IAS19. It also includes an amount of CHF 75 216 for mandatory employer contributions for all Executive Committee members paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 263 989, and provides a right to the maximum future insured government pension benefit for the Executive Committee member.
  2  The portion of the Annual Incentive delivered in equity is rounded up to the nearest share based on the closing share price on the grant date (January 17, 2017) of CHF 71.35 per Novartis share and USD 71.99 per ADR.
  3  The shown amounts represent the underlying share value of the target number of PSUs granted to Executive Committee members for the performance-period 2016-2018 based on the closing share price on the grant date (January 20, 2016) of CHF 79.70 per Novartis share and USD 80.49 per ADR. For F. Michael Ball, who joined Novartis on February 1, 2016, the target PSUs were granted on February 1, 2016, at the closing share price of the same date (USD 77.27 per ADR).
  4  Includes any other perquisites, benefits in kind, and international assignment benefits as per the global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). Tax equalization benefits included for David Epstein, Richard Francis and Jeff George are USD 478 904, CHF 862 101 and USD 961 519, respectively.
  5  All amounts are before deduction of the social security contribution and income tax due by the Executive Committee member.
  6  For those members who joined the Executive Committee in 2016, the information under the columns "Base compensation," "Pension benefits" and "Annual Incentive" includes their pro-rata compensation from the date they joined the Executive Committee to December 31, 2016. The information under "LTPP" and "LTRPP" reflects their pro-rata compensation at target for the period to December 31, 2018.
  7  F. Michael Ball received 50 000 target PSUs, mainly subject to the achievement of Alcon’s sales and core operating income growth targets, as well as successful launches of new products and solving critical supply issues. The total target value at grant date was USD 3.9 million. The 50 000 target PSUs are subject to performance conditions assessed annually in three tranches of 16 667, 16 667 and 16 666 for the calendar years 2016, 2017 and 2018, respectively. The PSUs vest on February 1, 2019, provided the relevant performance conditions are met and he remains employed with Novartis on that date. Subject to the extent to which the performance conditions are fulfilled, between 0% and 200% of the target PSUs may vest. The full value of the target PSUs is included under the column "Other 2016 compensation."
  8  James Bradner received 3 607 RSUs for lost entitlements in connection with his former supervisory board mandate, with a total value at grant date of USD 309 300. The vesting of the RSUs will be staggered based on the original vesting period of the lost entitlements, in January 2018 and January 2020, provided that he remains employed with Novartis on the respective vesting dates. In addition, Dr. Bradner received as compensation for lost entitlements at one of his former scientific companies a cash payment of USD 844 250. Both awards, made in 2016, are included in full under the column "Other 2016 compensation" and were previously disclosed in the 2015 Annual Report.
  9  Paul Hudson received a cash payment of CHF 191 300 in July 2016. In addition, he received 2 992 RSUs and 31 510 target PSUs, with total target value at grant date of CHF 2.8 million. These amounts are for lost entitlements at his former employer. The vesting of the RSUs will be staggered based on the original vesting period of the lost entitlements, between March 2017 and March 2019. The vesting of the target PSUs will be subject to the achievement of performance conditions under the Novartis LTPP, and staggered based on the original vesting period of the lost entitlements, between March 2017 and December 2023. Both awards will vest provided he remains employed with Novartis on the respective vesting dates. The full value of the cash payment and the awards is included under the column "Other 2016 compensation."
10  Amounts in USD for Mr. Ball, Dr. Bradner, Mr. Epstein, Mark C. Fishman and Mr. George were converted at a rate of CHF 1.00 = USD 1.015, which is the same average exchange rate used in the Group's 2016 consolidated financial statements.
11  For those members who left the Executive Committee in 2016, the information under the columns "Base compensation," "Pension benefits," "Annual Incentive," "LTPP" and "LTRPP" reflects the pro-rata compensation during 2016 for the period they were an Executive Committee member. The information under the column "Other 2016 compensation" includes, inter alia, their pro-rata compensation from the date they stepped down from the Executive Committee to December 31, 2016.
12  Mr. Epstein stepped down from the Executive Committee on June 30, 2016. In accordance with the contractual notice period of his employment agreement, he will leave the company in July 2017. Until the end of the notice period, he will receive further contractual compensation that includes the base salary, pension and other benefits, and the vesting of his incentive awards under the approved early retirement conditions of the Novartis plan rules.
13  Dr. Fishman stepped down from the Executive Committee on February 29, 2016 and retired from Novartis. Until the retirement date, he received further contractual compensation that included base salary, pension and other benefits, and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. As of March 1, 2016, Dr. Fishman provided certain consulting services to Novartis for which he is compensated for a period of up to two years until February 28, 2018. The fees for these services are capped at USD 250 000 p.a. and are in line with those for other scientists who provide consultancy services to the NIBR organization. In 2016, no payments were made in relation to such services.
14  Mr. George stepped down from the Executive Committee on January 31, 2016. In accordance with the contractual notice period of his employment agreement, he will leave the company in January 2017. Until the end of the notice period, he will receive further contractual compensation that includes the base salary, pension and other benefits, and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. Mr. George was not granted LTPP and LTRPP awards for the performance-period 2016-2018. In accordance with the applicable plan rules, the LTPP and LTRPP awards for the performance-period 2015-2017 will be eligible to vest on the normal vesting date pro-rata based on the number of months of Novartis employment during the performance-period. The vesting of these awards is subject to performance conditions assessed at the end of the period.
130
CEO and other Executive Committee members’ compensation at grant value for financial year 20151 (comparative information)
Fixed compensation and pension benefits
Variable compensation
Actual compensation paid or granted for 2015
Long-Term Incentive 2015 grants at target
2015 base compensation
2015 pension benefits
2015 Annual Incentive
LTPP 2015–2017 period
LTRPP 2015–2017 period
Other 2015 compensation
Total compensation


Currency

Cash
(amount)


Amount 2

Cash
(amount)
Equity
(value at
grant date) 3
PSUs
(target value
at grant date) 4
PSUs
(target value
at grant date) 4


Amount 5


Amount 6
Executive Committee members active on December 31, 2015
Joseph Jimenez (CEO)
CHF
2 060 500
175 289
1 545 375
1 545 383
4 121 054
2 060 527
88 432
11 596 560
Steven Baert
CHF
653 333
158 099
543 900
543 953
960 048
256 030
94 716
3 210 079
Felix R. Ehrat
CHF
892 500
153 054
648 875
648 917
1 521 517
447 565
12 669
4 325 097
David Epstein
USD
1 400 000
362 819
1 428 000
1 428 054
2 520 001
1 260 050
569 737
8 968 661
Mark C. Fishman 7
USD
990 000
248 910
861 300
861 323
1 881 089
891 021
129 825
5 863 468
Richard Francis
CHF
716 667
193 635
599 400
599 424
1 080 054
360 018
954 170
4 503 368
Jeff George
USD
956 539
200 946
158 400
158 404
1 536 056
576 009
1 260 286
4 846 640
Harry Kirsch
CHF
950 000
160 431
757 625
757 628
1 480 074
647 575
51 476
4 804 809
André Wyss
CHF
735 000
127 237
0
1 176 053
1 102 513
294 083
83 688
3 518 574
Subtotal 8
CHF
9 225 826
1 749 163
6 448 733
7 624 994
15 974 055
6 687 990
3 169 620
50 880 381
Executive Committee members who stepped down during 2015
Brian McNamara (until March 1, 2015) 9
USD
131 154
69 008
115 100
0
58 361
11 751
40 670
426 044
Andrin Oswald (until March 1, 2015) 9
CHF
138 333
27 634
136 500
0
64 580
13 899
283 236
664 182
Subtotal 8
CHF
264 443
93 988
247 173
0
120 696
25 198
322 342
1 073 840
Total 8
CHF
9 490 269
1 843 151
6 695 906
7 624 994
16 094 751
6 713 188
3 491 962
51 954 221
As published in the 2015 Compensation Report, with the exception of the tabular format
  1  Does not include reimbursement for travel and other necessary business expenses incurred by Executive Committee members in the performance of their services, as these amounts are not considered compensation
  2  Includes service costs of pension and post-retirement healthcare benefits accumulated in 2015, in accordance with IAS19. It also includes an amount of CHF 58 757 for mandatory employer contributions paid by Novartis to governmental social security systems. This amount is out of total employer contributions of CHF 3 457 097, and provides a right to the maximum future insured government pension benefit for the Executive Committee member.
  3  The portion of the Annual Incentive delivered in shares is rounded up to the nearest share based on the closing share price on the grant date (January 20, 2016). The closing share price on this date was CHF 79.70 per Novartis share and USD 80.49 per ADR.
  4  The shown amounts in these columns represent the underlying share value of the target number of PSUs granted to each Executive Committee member for the performance cycle 2015-2017 based on the closing share price on the grant date (January 21, 2015). The closing share price on this date was CHF 84.75 per Novartis share and USD 98.75 per ADR.
  5  Includes any other perquisites, benefits in kind and international assignment benefits as per global mobility policy (e.g., housing, international health insurance, children's school fees, tax equalization). Tax equalization benefits included for David Epstein, Richard Francis, Jeff George and Andrin Oswald are USD 305 867, CHF 739 086, USD 1 153 361 and CHF 249 728, respectively.
  6  All amounts are before deduction of social security contribution and income tax due by the Executive Committee member.
  7  Mark C. Fishman, President of NIBR and Executive Committee member, will step down from the Executive Committee on February 29, 2016 and retire from Novartis. He will receive further contractual compensation that includes the base salary, pension and other benefits (pro-rata until February 29, 2016) and the vesting of his incentive awards in accordance with the terms of the Novartis plan rules. As of March 1, 2016, Dr. Fishman will provide certain consulting services to Novartis for which he will be compensated for a period of up to two years until February 28, 2018. The fees for these services are capped at USD 250 000 p.a. and are in line with those paid to other scientists who provide consultancy services to the NIBR organization.
  8  Amounts in USD for Mr. Epstein, Dr. Fishman, Mr. George and Mr. McNamara were converted at a rate of CHF 1.00 = USD 1.040, which is the same average exchange rate used in the Group's 2015 consolidated financial statements.
  9  Brian McNamara (Division Head of Novartis OTC) and Andrin Oswald (Division Head of Novartis Vaccines) transitioned to the GlaxoSmithKline (GSK) group on March 2, 2015 following the completion of the Novartis OTC and Vaccines transactions with GSK. The information disclosed under columns "LTPP" and "LTRPP" in the table above reflects their pro-rata compensation at target. Following their transition to GSK, and in accordance with the applicable plan rules, the LTPP and LTRPP awards for the performance-period 2015-2017 (as well as for those granted for the performance-period 2014-2016) will be eligible to vest on the normal vesting date and on a pro-rata basis based on the number of months worked with Novartis during the performance-period. The vesting of these awards is subject to performance conditions assessed at the end of the performance-period.
131
Number of equity instruments awarded at grant value to the CEO and other Executive Committee members for financial year 20161
The table below provides the number of equity instruments awarded to the CEO and other Executive Committee members for financial year 2016, and the awards for 2015 are on the next page for comparison purposes.
Variable compensation
2016 Annual Incentive
LTPP 2016–2018 period
LTRPP 2016–2018 period
Other
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
Equity/PSUs
(number)
Executive Committee members active on December 31, 2016
Joseph Jimenez (CEO)
19 867
52 698
32 937
0
Steven Baert
7 775
13 175
4 392
0
F. Michael Ball (from February 1, 2016)
7 690
22 548
9 865
50 000
James Bradner (from March 1, 2016)
8 049
20 965
9 867
3 607
Felix R. Ehrat
11 348
19 624
6 926
0
Richard Francis
7 289
16 061
6 023
0
Paul Hudson (from July 1, 2016) 4
4 050
0
0
34 502
Harry Kirsch
10 322
21 970
10 339
0
Vasant Narasimhan (from February 1, 2016)
7 534
13 717
4 573
0
Bruno Strigini (from July 1, 2016)
2 970
13 549
3 388
0
André Wyss
17 870
17 064
5 333
0
Subtotal
104 764
211 371
93 643
88 109
Executive Committee members who stepped down during 2016
David Epstein (until June 30, 2016)
5 951
15 968
7 984
29 902
Mark C. Fishman (until February 29, 2016) 4
0
0
0
0
Jeff George (until January 31, 2016) 4
611
0
0
6 724
Subtotal
6 562
15 968
7 984
36 626
Total
111 326
227 339
101 627
124 735
See next page for 2015 compensation figures
 1  The values of the awards are reported in the table "CEO and other Executive Committee member's compensation at grant value for financial year 2016" on page 130.
 2  Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance-period 2016
 3  Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance-period 2016-2018
 4  Paul Hudson, Mark C. Fishman and Jeff George were not granted LTPP and LTRPP awards for the performance-period 2016-2018.
132
Number of equity instruments awarded at grant value to the CEO and other Executive Committee members for financial year 20151 (comparative information)
Variable compensation
2015 Annual Incentive
LTPP 2015–2017 period
LTRPP 2015–2017 period
Equity
(number) 2
PSUs
(target number) 3
PSUs
(target number) 3
Executive Committee members active on December 31, 2015
Joseph Jimenez (CEO)
19 390
48 626
24 313
Steven Baert
6 825
11 328
3 021
Felix R. Ehrat
8 142
17 953
5 281
David Epstein
17 742
25 519
12 760
Mark C. Fishman
10 701
19 049
9 023
Richard Francis
7 521
12 744
4 248
Jeff George
1 968
15 555
5 833
Harry Kirsch
9 506
17 464
7 641
André Wyss
14 756
13 009
3 470
Subtotal
96 551
181 247
75 590
Executive Committee members who stepped down during 2015
Brian McNamara (until March 1, 2015) 4
0
591
119
Andrin Oswald (until March 1, 2015) 4
0
762
164
Subtotal
0
1 353
283
Total
96 551
182 600
75 873
As published in the 2015 Compensation Report, with the exception of the tabular format
 1  The values of the awards included in this table are reported in the table "CEO and other Executive Committee members' compensation at grant value for financial year 2015."
 2  Vested shares, restricted shares and/or RSUs granted under the Annual Incentive for performance-period 2015
 3  Target number of PSUs granted under the LTPP and LTRPP as applicable for the performance-period 2015-2017
 4  Target number of PSUs granted under the LTPP and LTRPP is reported on a pro-rata basis. See footnote 9 of the table "CEO and other Executive Committee members' compensation at grant value for financial year 2015."
CEO and other Executive Committee members’ base compensation and variable compensation mix for financial year 20161
Base
compensation
Variable
compensation 2
Joseph Jimenez (CEO)
17.8%
82.2%
Steven Baert
22.3%
77.7%
F. Michael Ball
21.9%
78.1%
James Bradner
19.6%
80.4%
Felix R. Ehrat
22.6%
77.4%
Richard Francis
21.9%
78.1%
Paul Hudson
45.1%
54.9%
Harry Kirsch
20.2%
79.8%
Vasant Narasimhan
23.2%
76.8%
Bruno Strigini
20.1%
79.9%
André Wyss
21.4%
78.6%
Total
21.1%
78.9%
 1  Excludes pension and other benefits. Also excludes David Epstein, Mark C. Fishman and Jeff George, who stepped down from the Executive Committee during 2016
 2  See the table "CEO and other Executive Committee members' compensation at grant value for financial year 2016" on page 130 with regard to the disclosure principles of variable compensation.
133
Additional information
This part provides additional disclosures, including information about the shareholdings of the CEO and the other Executive Committee members, collectively referred to in this section as Executive Committee members.
Share ownership requirements for Executive Committee members
Executive Committee members are required to own at least a minimum multiple of their annual base compensation in Novartis shares, RSUs or share options within five years of hire or promotion, as set out in the table below.
In the event of a substantial rise or drop in the share price, the Board of Directors may, at its discretion, amend that time period accordingly.
Function
Ownership level
CEO
5 x base compensation
Other Executive Committee members
3 x base compensation
The determination of equity amounts against the share ownership requirements is defined to include vested and unvested Novartis shares or ADRs, as well as RSUs acquired under our compensation plans. However, unvested matching shares granted under the Leveraged Share Savings Plan (LSSP), the Employee Share Ownership Plan (ESOP), and any unvested PSUs are excluded. The determination also includes other shares as well as vested options of Novartis shares or ADRs that are owned directly or indirectly by “persons closely linked” to an Executive Committee member. The Compensation Committee reviews compliance with the share ownership guideline on an annual basis.
As at December 31, 2016, all members who have served at least five years on the Executive Committee have met or exceeded their personal Novartis share ownership requirements.
Shares, ADRs, equity rights and share options owned by Executive Committee members
The following table shows the total number of shares, ADRs, and other equity rights owned by Executive Committee members and “persons closely linked” to them as at December 31, 2016.
As at December 31, 2016, no members of the Executive Committee together with “persons closely linked” to them owned 1% or more of the outstanding shares (or ADRs) of Novartis. As at the same date, no members of the Executive Committee held any share options to purchase Novartis shares, with the exception of André Wyss who held 373 000.
Shares, ADRs and other equity rights owned by Executive Committee members1
Vested shares
and ADRs
Unvested shares
and other equity rights 2
Total at
December 31, 2016
Joseph Jimenez (CEO)
347 278
273 930
621 208
Steven Baert
11 111
50 827
61 938
F. Michael Ball
0
49 081
49 081
James Bradner
0
14 479
14 479
Felix R. Ehrat
137 290
122 196
259 486
Richard Francis
22 424
49 550
71 974
Paul Hudson
0
24 027
24 027
Harry Kirsch
47 437
108 686
156 123
Vas Narasimhan
7 271
79 703
86 974
Bruno Strigini
4 310
92 383
96 693
André Wyss
61 475
92 875
154 350
Total 3
638 596
957 737
1 596 333
 1  Includes holdings of "persons closely linked" to Executive Committee members (see definition on page 135)
 2  Includes restricted shares, RSUs and target number of PSUs. Matching shares under the ESOP and LSSP, and target number of PSUs are disclosed pro-rata to December 31, unless the award qualified for full vesting under the relevant plan rules. Awards under all other incentive plans are disclosed in full.
 3  David Epstein, Mark C. Fishman and Jeff George stepped down from the Executive Committee in 2016. At the time they stepped down from the Executive Committee, Mr. Epstein owned 116 027 vested shares, and 250 225 unvested shares and other equity rights; Dr. Fishman owned 117 792 vested shares, and 83 311 unvested shares and other equity rights; and Mr. George owned 144 368 vested shares, 141 396 vested share options, and 74 189 unvested shares and other equity rights.
134
Other payments to Executive Committee members
During 2016, no other payments or waivers of claims other than those set out in the tables (including their footnotes) contained in this Compensation Report were made to Executive Committee members or to “persons closely linked” to them.
Payments to former Executive Committee members
Under the former Executive Committee members’ contracts and in line with the company’s Long-Term Incentive plan rules, payments were made to five former members of the Executive Committee totaling CHF 5 243 670. The payments related to the vesting of Long-Term Incentives for the 2014–2016 performance-period based on actual performance outcomes plus any dividend equivalents. In addition, in line with the company’s policies, a total amount of CHF 87 780 was paid by the company for tax, financial services and tax equalization provided to two former Executive Committee members. With the exception of the above amounts, during 2016, no other payments (or waivers of claims) were made to former Executive Committee members or to “persons closely linked” to them.
Loans to Executive Committee members
No loans were granted to current or former Executive Committee members or to “persons closely linked” to them in 2016. In addition, no such loans were outstanding as of December 31, 2016.
Persons closely linked
“Persons closely linked” are (i) their spouse, (ii) their children below age 18, (iii) any legal entities that they own or otherwise control, and (iv) any legal or natural person who is acting as their fiduciary.
Note 27 to the Group’s audited consolidated financial statements
The total expense for the year for the compensation awarded to Executive Committee and Board members using International Financial Reporting Standards (IFRS) measurement rules is presented in the Financial Report in Note 27 on page 233 to the Group’s audited consolidated financial statements.
Award and delivery of equity to Novartis associates
During 2016, 13.1 million unvested restricted shares (or ADRs), RSUs and target PSUs were granted, and 10.4 million Novartis vested shares (or ADRs) were delivered to Novartis associates under various equity-based participation plans. Current unvested equity instruments (restricted shares, RSUs and target PSUs) – as well as outstanding equity options held by associates – represent 2.2% of issued shares. Novartis delivers treasury shares to associates to fulfill these obligations, and aims to offset the dilutive impact from its equity-based participation plans.
135

2017 Executive Committee compensation system

The Compensation Committee has evaluated the Executive Committee compensation system and has decided that it will remain largely unchanged in 2017, with the exception of the revised LTRPP payout matrix to reflect the new global healthcare peer group effective from performance-periods starting in 2017, as described below. The Compensation Committee believes that the compensation system is operating as intended, supports the company’s strategy, and is aligned with market and best practices.
Global healthcare peer group for 2017
With effect from performance-periods starting in 2017, our global healthcare peer group will consist of 15 global pharmaceutical and biotechnology companies, factoring the following changes:
— Removed Abbott Laboratories, as this company’s core business is primarily in medical devices and nutrition
— Added Celgene, Biogen, Gilead and Novo Nordisk, reflecting the evolution of the healthcare industry and the emergence of large and global biotechnology companies with which we directly compete for executive talent
Global healthcare peer group for 2017AbbVieAmgenAstraZenecaBiogenBristol-Myers SquibbCelgeneEli Lilly & Co.Gilead SciencesGlaxoSmithKlineJohnson & JohnsonMerck & Co.Novo NordiskPfizerRocheSanofi
In accordance with the above global healthcare peer group, a new LTRPP payout matrix for performance-periods 2017–2019 has been developed, which can be found below.
LTRPP payout matrix for performance-period 2017–2019
Position in peer group
Payout range
Positions 1–4
160–200%
Positions 5–8
100–150%
Positions 9–12
20–80%
Positions 13–16
0%
136

2016 Board compensation system

Board compensation philosophy and benchmarking
The Board of Directors sets compensation for its members at a level that allows for the attraction and retention of high-caliber individuals with global experience, including a mix of Swiss and international members. Board members do not receive variable compensation, underscoring their focus on corporate strategy, supervision and governance.
The Board of Directors sets the level of compensation for its Chairman and the other members to be in line with relevant benchmark companies, which include other large Swiss-headquartered multinational companies: ABB, Credit Suisse, LafargeHolcim, Nestlé, Roche, Syngenta and UBS. This peer group has been chosen for Board compensation due to the comparability of Swiss legal requirements, including broad personal and individual liabilities under Swiss law (and new criminal liability under the Swiss rules regarding compensation of Board and Executive Committee members related to the Ordinance against Excessive Compensation in Listed Companies), and under US law (due to the company’s secondary listing on the New York Stock Exchange).
The Board of Directors reviews the compensation of its members, including the Chairman, each year based on a proposal by the Compensation Committee and on advice from its independent advisor, including relevant benchmarking information.
Compensation of the Chairman of the Board of Directors
As Chairman, Dr. Joerg Reinhardt receives total annual compensation valued at CHF 3.8 million. The total compensation is comprised equally of cash and shares, as follows:
— Cash compensation: CHF 1.9 million per year
— Share compensation: annual value equal to CHF 1.9 million of unrestricted Novartis shares
Dr. Reinhardt also received compensation for lost entitlements at his former employer, with a total value of EUR 2.6 million, as reported in previous Compensation Reports. Payments were staggered based on the ­vesting period at his former employer during the period 2014–2016, provided that he remained in office as ­Chairman at the respective due dates. On January 31, 2016, he received the final installment of EUR 1 045 800 in cash.
For 2016, the Chairman voluntarily waived the increase in compensation to which he is contractually entitled, which is an amount not lower than the average annual compensation increase awarded to associates based in Switzerland (1% for 2016). For the year 2017, the Chairman will also voluntarily waive this increase.
Compensation of the other Board members
The annual fee rates for Board membership and additional functions are included in the table below. These were approved by the Board of Directors with effect from the 2014 AGM, and align our aggregate Board compensation with the current levels of other large Swiss companies.
2016 Board member annual fee rates
Annual fee (CHF)
Chairman of the Board
3 800 000
Board membership
300 000
Vice Chairman
50 000
Chairman of the Audit and Compliance Committee
120 000
Chairman of the following committees:
— Compensation Committee
— Governance, Nomination and
Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee





60 000
Membership of the Audit and Compliance Committee
60 000
Membership of the following committees:
— Compensation Committee
— Governance, Nomination and
Corporate Responsibilities Committee
— Research & Development Committee
— Risk Committee





30 000
In addition, the following policies apply regarding Board compensation:
— 50% of compensation is delivered in cash, paid on a quarterly basis in arrears. Board members may choose to receive more of their compensation in shares instead of cash.
— At least 50% of compensation is delivered in shares in two installments: one six months after the AGM and one 12 months after the AGM.
— Board members bear the full cost of their employee social security contributions, if any, and do not receive share options or pension benefits.
The Board compensation system will remain unchanged in 2017.
137

2016 Board compensation

Board member compensation tables
The following tables disclose the 2016 Board member compensation and prior-year comparative information. Board compensation is reported as the amount earned in the financial year.
Board member compensation earned for financial year 2016
Board membership
Vice Chairman
Audit and Compliance Committee
Compensation Committee
Governance, Nomination and Corporate Responsibilities Committee
Research & Development Committee
Risk Committee
Shares (number) 1
Cash (CHF) (A)
Shares (CHF) (B)
Other (CHF) (C) 2
Total (CHF) (A)+(B)+(C) 3
Board members active on December 31, 2016
Joerg Reinhardt 4
Chair
Chair
25 020
1 900 000
1 900 000
4 336
3 804 336
Enrico Vanni
•
•
•
Chair
• 5
• 6
3 291
250 000
250 000
4 336
504 336
Nancy Andrews
•
•
• 5
2 265
177 500
177 500
– 
355 000
Dimitri Azar
•
•
•
2 567
195 000
195 000
– 
390 000
Ton Buechner (from February 24, 2016)
•
1 864
– 
250 000
– 
250 000
Srikant Datar
•
Chair
•
•
3 159
240 000
240 000
– 
480 000
Elizabeth Doherty (from February 24, 2016)
•
•
1 118
150 000
150 000
– 
300 000
Ann Fudge
•
•
•
•
2 567
195 000
195 000
– 
390 000
Pierre Landolt 7
•
• 8
4 553
– 
335 000
3 475
338 475
Andreas von Planta
•
•
Chair 5
Chair
3 055
237 500
237 500
4 336
479 336
Charles L. Sawyers
•
•
•
2 369
180 000
180 000
– 
360 000
William T. Winters
•
•
4 344
– 
330 000
– 
330 000
Subtotal
56 172
3 525 000
4 440 000
16 483
7 981 483
Board members who stepped down at the 2016 AGM
Verena A. Briner (until February 23, 2016)
•
•
1 147
27 500
27 500
579
55 579
Subtotal
1 147
27 500
27 500
579
55 579
Total
57 319
3 552 500
4 467 500
17 062
8 037 062
See next page for 2015 compensation figures
  1  The shown amounts represent the gross number of shares delivered to each Board member in 2016 for the respective Board member’s service period. The number of shares reported in this column represent: (i) the second and final equity installment delivered in February 2016 for the services from the 2015 AGM to the 2016 AGM, and (ii) the first of two equity installments delivered in August 2016 for the services from the 2016 AGM to the 2017 AGM. The second and final equity installment for the services from the 2016 AGM to the 2017 AGM will take place in February 2017.
  2  Includes an amount of CHF 17 062 for mandatory employer contributions for all Board members paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 387 308, and provides a right to the maximum future insured government pension benefit for the Board member.
  3  All amounts are before deduction of the social security contribution and income tax due by the Board member.
  4  Does not include EUR 1 045 800 paid to Joerg Reinhardt on January 31, 2016 for lost entitlements at his former employer. This amount is the third and final of three installments totaling EUR 2 665 051, which compensates him for lost entitlements at his former employer. The lost entitlements of EUR 2 665 051 were included in full on page 124 of the 2014 Compensation Report. No additional committee fees for chairing the Research & Development Committee were delivered to Dr. Reinhardt.
  5  From February 24, 2016
  6  Until February 23, 2016
  7  According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.
  8  Until February 23, 2016, Chair of the Governance, Nomination and Corporate Responsibilities Committee
138
Board member compensation earned for financial year 20151 (comparative information)
Board membership
Vice Chairman
Audit and Compliance Committee
Compensation Committee
Governance, Nomination and Corporate Responsibilities Committee
Research & Development Committee
Risk Committee
Shares (number) 2
Cash (CHF) (A)
Shares (CHF) (B)
Other (CHF) (C) 3
Total (CHF) (A)+(B)+(C) 4
Board members active on December 31, 2015
Joerg Reinhardt 5
Chair
Chair
19 397
1 900 000
1 900 000
29 197
3 829 197
Enrico Vanni
•
•
•
Chair
•
2 552
250 000
250 000
4 357
504 357
Nancy Andrews (from February 27, 2015)
•
•
812
137 500
137 500
– 
275 000
Dimitri Azar
•
•
•
2 712
172 250
217 750
– 
390 000
Verena A. Briner
•
•
1 684
165 000
165 000
4 357
334 357
Srikant Datar
•
Chair
•
•
2 450
240 000
240 000
– 
480 000
Ann Fudge
•
•
•
•
1 990
195 000
195 000
– 
390 000
Pierre Landolt 6
•
Chair
3 674
– 
360 000
3 492
363 492
Andreas von Planta
•
•
•
Chair
2 296
225 000
225 000
4 357
454 357
Charles L. Sawyers
•
• 7
•
1 757
177 500
177 500
– 
355 000
William T. Winters
•
• 7
3 210
– 
325 000
– 
325 000
Subtotal
42 534
3 462 250
4 192 750
45 760
7 700 760
Board members who stepped down at the 2015 AGM
Ulrich Lehner (until February 26, 2015)
•
•
•
•
•
1 242
39 167
39 167
582
78 916
Subtotal
1 242
39 167
39 167
582
78 916
Total
43 776
3 501 417
4 231 917
46 342
7 779 676
As published in the 2015 Compensation Report, with the exception of the tabular format
  1  Does not include reimbursement for travel and other necessary business expenses incurred by Board members in the performance of their services, as these are not considered compensation
  2  The shown amounts represent the gross number of shares delivered to each Board member in 2015 for the respective Board member's service period. The number of shares reported in this column represent: (i) the second and final equity installment delivered in February 2015 for the services from the 2014 AGM to the 2015 AGM, and (ii) the first of two equity installments delivered in August 2015 for the services from the 2015 AGM to the 2016 AGM. The second and final equity installment for the services from the 2015 AGM to the 2016 AGM will take place in February 2016.
  3  Includes an amount of CHF 21 502 for mandatory employer contributions paid by Novartis to Swiss governmental social security systems. This amount is out of total employer contributions of CHF 429 806, and provides a right to the maximum future insured government pension benefit for the Board member.
  4  All amounts are before the deduction of the social security contribution and income tax due by the Board member.
  5  Does not include EUR 871 251 paid to Joerg Reinhardt on January 31, 2015 for lost entitlements at his former employer. This amount is the second of three installments totaling EUR 2 665 051, which compensates him for lost entitlements at his previous employer that were due to him on joining Novartis. The third and last installment of EUR 1 045 800 will be delivered on January 31, 2016, provided that he remains in office as our Chairman at the due dates. The lost entitlements of EUR 2 665 051 were included in full in the 2013 Board compensation table on page 124 of the 2014 Compensation Report based on our disclosure policy to report compensation for lost entitlements in full in the year the member of the Board or Executive Committee joined Novartis.
  6  According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the compensation.
  7  From February 27, 2015
Reconciliation between the reported Board compensation and the amount approved by shareholders at the AGM
(CHF)
Compensation earned for the respective financial year (A) 1
Compensation earned for the period from January 1 to the AGM (2 months) of the financial year (B)
Compensation to be earned for the period from January 1 to the AGM (2 months) in the year following the financial year (C)
Total compensation earned from AGM to AGM (A)-(B)+(C)
Amount approved by shareholders at the respective AGM
Amount within the amount approved by shareholders at the respective AGM
2016
January 1, 2016 to 2016 AGM
January 1, 2017 to 2017 AGM 2
2016 AGM to 2017 AGM
2016 AGM
2016 AGM
Joerg Reinhardt
3 804 336
633 334
633 334
3 804 336
3 805 000
Yes
Other Board members
4 232 726
653 334
713 334
4 292 726
4 355 000
Yes
Total
8 037 062
1 286 668
1 346 668
8 097 062
8 160 000
Yes
2015
January 1, 2015 to 2015 AGM
January 1, 2016 to 2016 AGM
2015 AGM to 2016 AGM
2015 AGM
2015 AGM
Joerg Reinhardt
3 829 197
658 174
633 334
3 804 357
3 805 000
Yes
Other Board members
3 950 479
667 250
653 334
3 936 563
3 940 000
Yes
Total
7 779 676
1 325 424
1 286 668
7 740 920
7 745 000
Yes
  1  See previous page for 2016 Board member compensation.
  2  To be confirmed and reported in the 2017 Compensation Report
139
Loans to Board members
No loans were granted to current or former members of the Board of Directors or to “persons closely linked” to them during 2016. In addition, no such loans were outstanding as of December 31, 2016.
Other payments to Board members
During 2016, no payments (or waivers of claims) other than those set out in the Board member compensation table (including its footnotes) on page 138 were made to current members of the Board of Directors or to “persons closely linked” to them.
Payments to former Board members
During 2016, no payments (or waivers of claims) were made to former Board members or to “persons closely linked” to them, except for the following amounts:
— Dr. William R. Brody and Dr. Rolf M. Zinkernagel, who stepped down from the Board of Directors at the 2014 AGM, received delegated Board membership fees for their work on the Boards of the Novartis Institute for Tropical Diseases (Dr. Zinkernagel) and the Genomics Institute of the Novartis Research Foundation (Dr. Brody and Dr. Zinkernagel). During 2016, an amount of CHF 25 000 and CHF 50 000 was paid to Dr. Brody and Dr. Zinkernagel, respectively, for their work on these Boards. No further payments related to these Board memberships will be made to Dr. Brody and Dr. Zinkernagel, as their respective mandates have ended.
— The payments reported in Note 27 to the Group’s audited consolidated financial statements (page 233)
Share ownership requirements for Board members
The Chairman is required to own a minimum of 30 000 Novartis shares, and other members of the Board of Directors are required to own at least 4 000 Novartis shares within three years after joining the Board of Directors, to ensure their interests are aligned with shareholders’. Board members are prohibited from hedging or pledging their ownership positions in Novartis shares that are part of their guideline share ownership requirement, and are required to hold these shares for 12 months after retiring from the Board of Directors. As at December 31, 2016, all members of the Board of Directors who have served at least three years on the Board, as well as former members who stepped down from the Board at the 2016 AGM, have complied with the share ownership requirements.
Shares, ADRs and share options owned by Board members
The total number of vested Novartis shares and ADRs owned by members of the Board of Directors and “persons closely linked” to them as of December 31, 2016 is shown in the table below.
As of December 31, 2016, no members of the Board of Directors together with “persons closely linked” to them owned 1% or more of the outstanding shares (or ADRs) of Novartis. As of the same date, no members of the Board of Directors held any share options to ­purchase Novartis shares.
Shares and ADRs owned by Board members1
Number of shares 2
At
December 31,
2016


Joerg Reinhardt
497 762
Enrico Vanni
17 853
Nancy Andrews
2 308
Dimitri Azar
11 217
Ton Buechner
1 398
Srikant Datar
34 998
Elizabeth Doherty
839
Ann Fudge
17 530
Pierre Landolt 3
58 061
Andreas von Planta
127 740
Charles L. Sawyers
6 029
William T. Winters
9 257
Total 4
784 992
 1  Includes holdings of "persons closely linked" to Board members (see definition on page 135)
 2  Each share provides entitlement to one vote.
 3  According to Pierre Landolt, the Sandoz Family Foundation is the economic beneficiary of the shares.
 4  Verena A. Briner stepped down from the Board of Directors on February 23, 2016. On February 23, 2016, Dr. Briner owned 7 507 shares.
140

Compensation governance

Legal framework
The Swiss Code of Obligations and the Corporate Governance Guidelines of the SIX Swiss Exchange require listed companies to disclose certain information about the compensation of Board and Executive Committee members, their equity participation in the Group, and loans made to them. This Annual Report fulfills that requirement. In addition, the Annual Report is in line with the principles of the Swiss Code of Best Practice for Corporate Governance of the Swiss Business Federation (economiesuisse).
Compensation decision-making authorities
Authority for decisions related to compensation is governed by the Articles of Incorporation, Board regulations and the Compensation Committee Charter, which are all published on the company website: www.novartis.com/corporate-governance.
The Compensation Committee serves as the supervisory and governing body for compensation policies and plans within Novartis, and has overall responsibility for determining, reviewing and proposing compensation policies and plans for approval by the Board of Directors in line with the Compensation Committee Charter. A summary of discussions and conclusions of each committee meeting is delivered to the full Board of Directors. A summary of the compensation decision-making authorities is set out below.
Compensation authorization levels within the parameters set by the shareholders’ meeting
Decision on
Decision making authority
Compensation of Chairman and other Board members
Board of Directors
Compensation of CEO
Board of Directors
Compensation of other Executive Committee members
Compensation Committee
Committee member independence
The Compensation Committee is composed exclusively of members of the Board of Directors who meet the independence criteria set forth in the Board regulations. From the 2016 AGM, the Compensation Committee had the following four members: Ann Fudge, Srikant Datar, Enrico Vanni and William Winters. Mr. Vanni has served as member since 2011 and as Chair since 2012.
Role of the Compensation Committee’s independent advisor
The Compensation Committee retained Frederic W. Cook & Co. Inc. as its independent external compensation advisor for 2016. The advisor was hired directly by the Compensation Committee in 2011, and the Compensation Committee has been fully satisfied with the performance and independence of the advisor since its engagement. Frederic W. Cook & Co. Inc. is independent of management and does not perform any other consulting work for Novartis. In determining whether or not to renew the engagement with the advisor, the Compensation Committee evaluates, at least annually, the quality of the consulting service, the independence of the advisor, and the benefits of rotating advisors.
Compensation Committee meetings held in 2016
In 2016, the Compensation Committee held six formal ­meetings, and two additional joint meetings with the Research & Development Committee to review and endorse for approval by the Board of Directors the innovation targets and achievements of our LTPP. It also held one additional joint meeting with the Risk Committee to review risk within the compensation systems for executives and other associates, including the sales force. The Compensation Committee conducted a performance self-evaluation and a review of its charter in 2016, as it does every year.
141
Compensation governance and risk management
The Compensation Committee, with support from its independent advisor, reviews market trends in compensation and changes in corporate governance rules. Together with the Risk Committee, it also reviews the Novartis compensation systems to ensure that they do not encourage inappropriate or excessive risk taking, and instead encourage behaviors that ­support sustainable value creation.
A summary of the risk management principles is outlined below.
Risk management principles
—Rigorous performance management process, with approval of targets and evaluation of performance for the CEO by the Board of Directors—Balanced mix of short-term and long-term variable compensation elements—Balanced scorecard approach to performance evaluation under the Annual Incentive, including Values and Behaviors—Clawback principles—Performance-vesting Long-Term Incentives only, with three-year overlapping cycles—Variable compensation is capped at 200% of target—Contractual notice period of 12 months—Post-contractual non-compete limited to a maximum of 12 months (annual base compensation and Annual Incentive of the prior year only)—No severance payments or change-of-control clauses—Share ownership requirements; no hedging or pledging of Novartis share ownership position by Board and Executive Committee members
Executive Committee employment contracts provide for a notice period of up to 12 months and contain no change-of-control clauses or severance provisions (e.g., agreements ­concerning special notice periods, longer-term contracts, “golden parachutes,” waiver of lock-up periods for equities and bonds, shorter vesting periods, and additional contributions to occupational pension schemes).
Malus and clawback
Any incentive compensation paid to Executive Committee members is subject to malus and clawback rules. This means that the Board of Directors for the CEO, or the Compensation Committee for the other Executive Committee members, may decide – subject to applicable law – to not pay any unpaid or unvested incentive compensation (malus), or to seek to recover incentive compensation that has been paid in the past (clawback), where the payout has been proven to conflict with internal management standards, including company and accounting policies, or violate laws. This principle applies to both the short-term Annual Incentive and the Long-Term Incentive plans. In 2016, the Compensation Committee did not exercise malus or clawback for current or former Executive Committee members.
142

Novartis Group consolidated financial statements

Consolidated income statements
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions unless indicated otherwise)
Note
2016
2015
2014
Net sales to third parties from continuing operations
3
48 518
49 414
52 180
Sales to discontinued segments
26
239
Net sales from continuing operations
3
48 518
49 440
52 419
Other revenues
918
947
1 215
Cost of goods sold
– 17 520
– 17 404
– 17 345
Gross profit from continuing operations
31 916
32 983
36 289
Marketing & Sales
– 11 998
– 11 772
– 12 377
Research & Development
– 9 039
– 8 935
– 9 086
General & Administration
– 2 194
– 2 475
– 2 616
Other income
1 927
2 049
1 391
Other expense
– 2 344
– 2 873
– 2 512
Operating income from continuing operations
3
8 268
8 977
11 089
Income from associated companies
4
703
266
1 918
Interest expense
5
– 707
– 655
– 704
Other financial income and expense
5
– 447
– 454
– 31
Income before taxes from continuing operations
7 817
8 134
12 272
Taxes
6
– 1 119
– 1 106
– 1 545
Net income from continuing operations
6 698
7 028
10 727
Net income/loss from discontinued operations
30
10 766
– 447
Net income
6 698
17 794
10 280
Attributable to:
Shareholders of Novartis AG
6 712
17 783
10 210
Non-controlling interests
– 14
11
70
Basic earnings per share (USD) from continuing operations
2.82
2.92
4.39
Basic earnings per share (USD) from discontinued operations
4.48
– 0.18
Total basic earnings per share (USD)
7
2.82
7.40
4.21
Diluted earnings per share (USD) from continuing operations
2.80
2.88
4.31
Diluted earnings per share (USD) from discontinued operations
4.41
– 0.18
Total diluted earnings per share (USD)
7
2.80
7.29
4.13
The accompanying Notes form an integral part of the consolidated financial statements.
178
Consolidated statements of comprehensive income
(For the years ended December 31, 2016, 2015 and 2014)
(USD millions)
Note
2016
2015
2014
Net income
6 698
17 794
10 280
Other comprehensive income to be eventually recycled into the consolidated income statement:
Fair value adjustments on marketable securities, net of taxes
8.1
– 113
28
89
Fair value adjustments on deferred cash flow hedges, net of taxes
8.1
15
20
21
Total fair value adjustments on financial instruments, net of taxes
8.1
– 98
48
110
Novartis share of other comprehensive income recognized by associated companies, net of taxes
671
– 48
– 5
Currency translation effects
8.2
– 2 391
– 1 662
– 2 220
Total of items to eventually recycle
– 1 818
– 1 662
– 2 115
Other comprehensive income never to be recycled into the consolidated income statement:
Actuarial losses from defined benefit plans, net of taxes
8.3
– 515
– 147
– 822
Total comprehensive income
4 365
15 985
7 343
Attributable to:
Shareholders of Novartis AG
4 382
15 977
7 274
Continuing operations
4 382
5 238
7 820
Discontinued operations
10 739
– 546
Non-controlling interests
– 17
8
69
The accompanying Notes form an integral part of the consolidated financial statements.
179
Consolidated statements of changes in equity
(For the years ended December 31, 2016, 2015 and 2014)

(USD millions)





Note




Share
capital




Treasury
shares




Retained
earnings




Total value
adjustments
Issued share
capital and
reserves
attributable
to Novartis
shareholders



Non-
controlling
interests




Total
equity
Total equity at January 1, 2014
1 001
– 89
73 065
366
74 343
129
74 472
Net income
10 210
10 210
70
10 280
Other comprehensive income
8
– 5
– 2 931
– 2 936
– 1
– 2 937
Total comprehensive income
10 205
– 2 931
7 274
69
7 343
Dividends
9.1
– 6 810
– 6 810
– 6 810
Purchase of treasury shares
9.2
– 43
– 6 883
– 6 926
– 6 926
Exercise of options and employee transactions
9.4
23
2 377
2 400
2 400
Equity-based compensation
9.5
6
1 137
1 143
1 143
Increase of treasury share repurchase obligation under a share buyback trading plan
9.7
– 658
– 658
– 658
Changes in non-controlling interests
9.8
– 120
– 120
Total of other equity movements
– 14
– 10 837
– 10 851
– 120
– 10 971
Total equity at December 31, 2014
1 001
– 103
72 433
– 2 565
70 766
78
70 844
Net income
17 783
17 783
11
17 794
Other comprehensive income
8
– 48
– 1 758
– 1 806
– 3
– 1 809
Total comprehensive income
17 735
– 1 758
15 977
8
15 985
Dividends
9.1
– 6 643
– 6 643
– 6 643
Purchase of treasury shares
9.2
– 33
– 6 086
– 6 119
– 6 119
Reduction of share capital
9.3
– 10
15
– 5
Exercise of options and employee transactions
9.4
14
1 578
1 592
1 592
Equity-based compensation
9.5
6
809
815
815
Decrease of treasury share repurchase obligation under a share buyback trading plan
9.7
658
658
658
Changes in non-controlling interests
9.8
– 10
– 10
Fair value adjustments related to divestments
8
– 100
100
Total of other equity movements
– 10
2
– 9 789
100
– 9 697
– 10
– 9 707
Total equity at December 31, 2015
991
– 101
80 379
– 4 223
77 046
76
77 122
Net income
6 712
6 712
– 14
6 698
Other comprehensive income
8
671
– 3 001
– 2 330
– 3
– 2 333
Total comprehensive income
7 383
– 3 001
4 382
– 17
4 365
Dividends
9.1
– 6 475
– 6 475
– 6 475
Purchase of treasury shares
9.2
– 7
– 985
– 992
– 992
Reduction of share capital
9.3
– 19
25
– 6
Exercise of options and employee transactions
9.4
2
212
214
214
Equity-based compensation
9.5
5
659
664
664
Impact of change in ownership of consolidated entities
9.6
– 7
– 7
– 7
Fair value adjustments related to divestments
8
– 12
12
Total of other equity movements
– 19
25
– 6 614
12
– 6 596
– 6 596
Total equity at December 31, 2016
972
– 76
81 148
– 7 212
74 832
59
74 891
The accompanying Notes form an integral part of the consolidated financial statements.
180
Consolidated balance sheets
(At December 31, 2016 and 2015)
(USD millions)
Note
2016
2015
Assets
Non-current assets
Property, plant & equipment
10
15 641
15 982
Goodwill
11
30 980
31 174
Intangible assets other than goodwill
11
31 340
34 217
Investments in associated companies
4
14 304
15 314
Deferred tax assets
12
10 034
8 957
Financial assets
13
2 196
2 466
Other non-current assets
13
698
601
Total non-current assets
105 193
108 711
Current assets
Inventories
14
6 255
6 226
Trade receivables
15
8 202
8 180
Marketable securities, commodities, time deposits and derivative financial instruments
16
770
773
Cash and cash equivalents
16
7 007
4 674
Other current assets
17
2 697
2 992
Total current assets
24 931
22 845
Total assets
130 124
131 556
Equity and liabilities
Equity
Share capital
18
972
991
Treasury shares
18
– 76
– 101
Reserves
73 936
76 156
Issued share capital and reserves attributable to Novartis AG shareholders
74 832
77 046
Non-controlling interests
59
76
Total equity
74 891
77 122
Liabilities
Non-current liabilities
Financial debts
19
17 897
16 327
Deferred tax liabilities
12
6 657
6 355
Provisions and other non-current liabilities
20
8 470
8 044
Total non-current liabilities
33 024
30 726
Current liabilities
Trade payables
4 873
5 668
Financial debts and derivative financial instruments
21
5 905
5 604
Current income tax liabilities
1 603