One Global Company, 20 Different Plans: Bringing New Order to Novartis Growing Share Plan Landscape

Transcription

1 One Global Company, 20 Different Plans: Bringing New Order to Novartis Growing Share Plan Landscape Britta Schmitt, Executive Director, EY Dennis Weinhold, Head of Equity Programs, Novartis International AG

2 Executive Summary Key issues: Complex plan landscape to be turned into a globally harmonized plan landscape Need to ensure local compliance for global plans Streamlined administration required Alignment with best practice required Plan Harmonization: Harmonize terms of existing plans with the new LTIP (LTIP as umbrella plan or amending clauses of stand alone plans) Consider local and global requirements Sell to Cover: To meet Novartis global payroll withholding and reporting obligations and use plan administrator automation capabilities Pre-assessment Existing Plans ESOP (CH) ROW CH N. America Stock Incentive Plan N. America (SIP) Long-Term Performance Plan (LTPP) Special Grants 2014 New Plans Long Term Incentive Plan (LTIP), incl. LTRPP Deferred Share Bonus Plan (DSBP) Annual Incentive Plan All plans had different format and terminology Plan Harmonization 2015 Preparation & Implementation of Sell to Cover processes across 33 countries worldwide Select LSSP* RS RSU ROW RS CH RS ROW French qualified Option CH Option ROW Option N. America CEO Grant Stand-alone Plan aligned to LTIP Deliverables Long Term Incentive Plan (LTIP) incl. LTRPP Schedules of the LTIP Equity Plan Select Stock Incentive Plan N. America (SIP) Long-Term Performance Plan (LTPP) Special Grants Deferred Share Bonus Plan (DSBP) Annual Incentive Plan ESOP (CH) Stock Incentive Plan N. America (SIP) Leverages Share Savings Plans (LSSP) * Leveraged Share Savings Plan

3 Key Challenges Structure Reduce complexity of the plan landscape Manage local compliance for global plans Improve alignment with best practice Manage mobility - policy for international transfers In 2014, Novartis HQ in CH had 10 compensation plans in operation; governed by 20 plan documents with country specific sub plans: Switzerland, France and the US or North America Several plans rolled out globally, some with local sub-plans to benefit from local tax regimes (e.g. Switzerland or France) or to comply with specific requirements (e.g. USA S409A) New plans implemented using current best practice which vary greatly to existing plans: Leavers, ECN regulations, Clawbacks, CoC Clauses etc. More than 1,500 internationally mobile employees IA / ILHs* subject to different policies re tax equalization Key Aims Globally harmonized plan landscape Multitude of corporate objectives - balanced with the legal, regulatory, and tax issues at Parent company and locally Maintain Novartis core corporate philosophy while adapting to local cultural concerns No detrimental treatment for participants Process Introduce global Sell to Cover process There was no Sell to Cover process in place globally to meet Novartis global payroll withholding and reporting obligations Streamline administration * International Assignees and International Local Hires

4 PART 1: PLAN HARMONIZATION Reduce complexity and streamline administration

5 Overview of Plan Harmonization Key harmonization steps Preparation & Implementation of Sell to Cover processes across 33 countries worldwide Pre-assessment Select LSSP* Existing Plans ESOP (CH) ROW CH N. America RS RSU ROW RS CH RS ROW French qualified Option CH Option ROW Option N. America Stock Incentive Plan N. America (SIP) Long-Term Performance Plan (LTPP) Special Grants CEO Grant New Plans Long Term Incentive Plan (LTIP), incl. LTRPP Deferred Share Bonus Plan (DSBP) Annual Incentive Plan Plan Harmonization Stand-alone Plan aligned to LTIP Deliverables Long Term Incentive Plan (LTIP) incl. LTRPP Schedules of the LTIP Equity Plan Select Stock Incentive Plan N. America (SIP) Long-Term Performance Plan (LTPP) Special Grants Deferred Share Bonus Plan (DSBP) Annual Incentive Plan ESOP (CH) Stock Incentive Plan N. America (SIP) Leverages Share Savings Plans (LSSP) Review and harmonize clauses: Leaver External joiner Change of control Claw back Forced Sell to Cover Draft transfer policy Language review Legal review Key structural amendments Corporate compliance: Minder / VegüV ECN US compliance French compliance Social Partners sign-off Harmonize Award Agreements Use LTIP as umbrella plan for Select, LTPP, Special Grants (applying most LTIP clauses but maintaining plan specific requirements) Maintain stand alone plans for the ESOP, LSSP and SIP (US) and other US or North America awards, harmonizing clauses as appropriate and where possible under plan requirements

6 LTIP is basis of harmonization Work Life events Work Life Event LTIP rules to apply to existing equity awards as of January 1, 2015 External Joiners Good Leavers Bad Leavers Involuntary termination or Transfer of Business Retirement and early retirement (according to local laws or practice e.g. 55/10 in the US) Death and disability Resignation, termination for cause Award granted at any time in the calendar year prorated for time Time vesting awards: Vesting prorated for time on normal vesting date Performance-vesting awards: Vesting prorated for time, subject to performance, on normal vesting date Time vesting awards: Full vesting on normal vesting date Performance-vesting awards: Full vesting, subject to performance, on normal vesting date Prorated for time if retirement within 12 months of grant Immediate full vesting Note: For ECN members, pro-rata if within 12 months of grant Forfeiture of all unvested awards

7 LTIP is basis of harmonization Corporate events Corporate Event LTIP rules to apply to existing equity awards as of January 1, 2015 Change of Control and variations of share capital at Novartis AG level Clawback Forced Sell to Cover Time vesting awards: Immediate full vesting Performance-vesting awards: Immediate full vesting subject to performance Prorated for time if within 12 months of grant (except for ECN members) Forfeiture of unvested awards, or pay back of vested awards in certain circumstances Force the sale of a portion of the award to cover employee payroll withholding taxes and social security Swiss specific Blocking period treatment Specific features of ESOP and LSSP CH Harmonization of blocking periods Leaver treatment for blocked shares under Swiss local / sub plans

8 LTIP is basis of harmonization Corporate compliance Corporate Compliance LTIP rules to apply to existing equity awards as of January 1, 2015 Minder / VegüV rules ECN Schedule US Compliance French Qualified awards Awards can be adjusted to the extent necessary to comply with the Minder provisions ECN Schedule included for specific rules relating to ECN members Revision or edits of rules for improved compliance with US tax laws and other legal provisions (e.g. 409A) Inclusion of US Schedule governing awards to US participants French legal drafting of a Schedule for French qualified awards

9 Other plan harmonization key steps Transfer policy Policy for the treatment of awards in the event of a new hire, modified target, assignment or transfer within the Group Reference in all plan documents First time implementation of global transfer policy Clear regulations on the treatment of different transfer cases/scenarios and other work-life events between local and global plans Avoids individual treatment of cases and develops a globally streamlined approach Applicable to more than 1,500 internationally mobile employees Applicable to all local employees where their roles change Language review Harmonize the language Apply consistent terminology and definitions throughout (e.g., consistent use of Company and Novartis AG) Award agreements Review award agreements to ensure consistency with new plan landscape Draft new award agreements where appropriate Legal & Social Partners review Novartis internal legal review Novartis Social Partners review External Swiss legal review External US legal review External French legal review for the purposes of French qualified awards Plan Administrator setup Set up new Plan rules e.g. new leaver rules on allocation level, electronic award agreements and acceptance process

10 Impact of Harmonization of Plan Rules Achieved without any negative impact on Participant or Company Impact regarding rules for: Impact for participant Impact for Company External Joiners No change No change Good Leavers Involuntary termination or Transfer of Business Retirement and early retirement (according to local laws or practice e.g. 55/10 in the US) New clearer rules that are consistent between plans ensures equality of treatment between participants Not disadvantaged by changes (Either the same or better treatment for good leavers and retirees only) New clearer rules that are consistent between plans leads to a simplified governance process that is easier to apply, with reduced risk of litigation Minimal cost impact (In practice the Company already applies the pro-rata vesting for involuntary terminations in the absence of rules) Death and disability Bad Leavers Resignation, termination for cause No change No change

11 Impact of Harmonization of Plan Rules Achieved without any negative impact on Participant or Company Impact regarding rules for: Impact for participant Impact for Company Change of Control and variations of share capital at Novartis AG level Clawback Forced sell to cover US Compliance New clear rules are in line with best practice, and provide certainty regarding treatment Clarity regarding the link between the Code of Conduct and Clawback Removes the likelihood of a large tax bill following tax assessment Improved individual compliance, in line with recently updated laws New clear rules are in line with best practice and ensure compliance with Minder Compliance with Code of Conduct required by virtue of plan rules, makes clawback provisions enforceable Compliance with payroll withholding and reporting requirements Improved Company compliance in line with recently updated laws

12 Key Challenges Harmonization Summary Discontinuation of NVS Options Different plans for different target populations and from different authors - all different styles, languages and terminology Make plans US compliant which had not been drafted with any US participants in mind, but reality is you will always need a US compliant plan Legal separateness concept in Novartis ADRs in the US not shares Final leaver rules were only set late in the project and beforehand the approach changed For the local Swiss plan, changes had to be agreed with the Swiss social partners The minimum invasive approach originally agreed had to change due to NVS internal legal request for more extensive harmonization / language changes Implementation of a full automated employee lifecycle and STC process (incl. mobile employee tracking) Implementation of a global force Sell to Cover process

13 PART 2: SELL TO COVER Implementation of a global Sell to Cover process utilizing EYSMS and EquatePlus technology

14 Background & Benefits Prior to 1 June 2014, participants received the full value of their LTI awards with no taxes retained by Equatex Any taxes due on Novartis LTI awards were supposed to be collected by the local payrolls Local payrolls struggled with the collection process especially for internationally mobile employees In 2014, the Novartis HR board agreed to implement the tax recovery process Sell to Cover for all equity programs Sell to Cover was implemented in 33 countries worldwide for all outstanding equity retroactive application, where tax withholding is required. Further, it was implemented in all locations where hypothetical tax withholding is required under Novartis global mobility policy using EYSMS s tax calculation capabilities for cross border employees Allows selling of shares for taxes for (permanent) insiders The implementation of the Sell to Cover process means that Novartis and its payroll employees now benefit from:

15 Key Achievements of the Sell to Cover process Roll-out to all 33 countries in two months Utilization of EY s cross border tax calculations for mobile employees and automatic data feed into Equatex system Full utilization of Equatex share plan administration platform and automated processes Best use of IT platform by giving access to reporting functionalities in Equatex for HR and Payrolls globally and automated fund distribution through Equatex system Connection of the HR Core system to be able to directly download and process award information in the payrolls (reducing manual handling and error margins) Utilization of Equatex processes Utilization of IT platform Global roll-out

16 Global Roll-out to 33 / 70 countries Rollout to the withholding tax countries in the Novartis world In addition, all IAs are subject to withholding tax for hypothetical taxes. No implementation in Switzerland due to blocking features for local (sub) plans

17 Sell to Cover for RSUs/RS How it works, step-by-step The Sell to Cover process for RSUs and RS is as follows: (1) An employee s RSUs or RS vest (2) Equatex provides calculation of estimated withholdings/ taxes due (3) Equatex sells necessary number of shares to cover estimated withholdings/ taxes due* (4) Cash from the sale is wired to payroll account (5) Payroll refunds any excess tax to participant s private bank account * Net shares/funds remain in participant s Equatex account

18 Sell to Cover for Options How it works, step-by-step The Sell to Cover process for Options is as follows: (1) An employee s Options vest or are exercised (2) Equatex provides calculation of estimated withholdings /taxes due (3) Equatex sells necessary number of shares to cover withholding/ taxes due (4) Cash from the sale is wired to payroll account (5) Equatex transfers remaining cash proceeds to participant- s private bank account (6) Payroll refunds excess tax to participant- s private bank account

19 Tax Rates Applicable tax rates per country for tax and hypotax withholdings The marginal tax rates for the Sell to Cover countries: Country Marginal tax rate (in %) Argentina Austria Bangladesh Chile Colombia Costa Rica Ecuador Egypt Finland France (NL) 8.85 Germany Country Marginal tax rate (in %) Guatemala 4.83 India Indonesia Ireland Israel Italy Kenya Malaysia Mexico Netherlands Norway Country Marginal tax rate (in %) Pakistan Peru Philippines Republic of Korea Romania Slovak Republic South Africa Spain Sweden Turkey UK 47.00

20 Thank You Dennis Weinhold Novartis International AG Britta Schmitt EY