Compensation And Benefit Strategy

COMPENSATION AND BENEFITS 1

Running head: COMPENSATION AND BENEFITS

Compensation and Benefits

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COMPENSATION AND BENEFITS 2

COMPENSATION AND BENEFITS

Introduction

In order to ensure that compensation and benefit are fair, it is important to have a

clear definition of job descriptions and profiles in an organization. This plays a role in

evaluating the value of job in an organization. During evaluation the human resources

department have hard task in determining the impacts of compensation and benefit

strategies. An effective compensation and benefit strategies put into a consideration of

job evaluation, job market situation, business strategy as well as preferences of the

organization. This policy enables an organization to achieve a better performance.

Compensation and benefit strategies should of transparency to the employees. The

aspect of transparency gives employees opportunity to understand the basic principles of

compensation and benefit hence much of the challenges that could have risen during

implementation are overcame. However if the strategies are not fully implemented and

employees are not fully in the range of benefit and compensation strategies, it can be

dangerous to make such strategies transparent.

This paper is focusing on the Novartis principles applied in it compensation and

benefits strategy, the challenges of the strategy as well as any contingency plans that

should be considered in trying to overcome these challenges. The compensation and

benefit program concept should be based on various objectives in order for it to be of

sound criteria, application and effective implementation. They should serve all

stakeholders, simple, identify compensation need, classify the employees properly, reflect

company culture and values to ensure effective implementation and should be flexible to

accommodate changes.

COMPENSATION AND BENEFITS 3

Compensation and benefit strategy of Novartis

The compensation strategy of Novartis is based on the principle of meritocracy. It

is designed to align the objectives of the associates with he interests of the shareholders,

creating incentives to the associates to create sustainable value for the organization and

the stakeholders, support distinct and performance oriented customs that allows Novartis

to reward people who perform well and the organization rise to be competitive with

world class companies and industry contemporaries (Novartis Report, 2010).

Some of the concerns and problems in Novartis compensation and benefit

packages include composition of senior staff members in compensation committee of the

company. This has attracted negative attention as the board of directors who set their own

compensation in this company. Therefore, in order to overcome these problems, human

resources associates should act as advisors of the committee and should not serve in the

committee. However, compensation committee should not comprise members with

personal interests in compensation strategy.

Another concern regarding compensation and benefit is the issue of some senior

associates being paid excessively for the services they offer to the company. This

problem of too much compensation and benefit of the senior associates is indicating that

the gains on investment from these compensation and benefit packages is very poor

compared to other strategies of corporate resources (Lucian and Jesse, 2006).

These issues are of great challenge to the compensation strategies. For example, a

junior member (who is a friend) in Novartis Group was complaining and pointing out that

most of the members in the committee of compensation have their personal interest and

this normally demoralize him in his effective operation to this company. He feels

COMPENSATION AND BENEFITS 4

demeaned as he perceive that some members in the committee of compensation are at

advantaged position in the group as they know all the criteria that are to be applied in the

selection. This inhibits the process of creativity and innovation for the Group in long term

aspect.

Novartis compensation principles include competitive compensation, pay for

performance, balance rewards to create sustainable value and equity ownership.

Competitive compensation plays a role in attracting and retaining talented and diverse

associates. The levels of compensation reflect total compensation for comparable

positions at relevant benchmark companies.

For example, an associate who obtains his performance objectives is awarded

compensation comparable to the median level of compensation given by relevant

benchmarking companies. Novartis take part in compensation benchmarking surveys

which analyzes various factors such as market trend and practice (Novartis Report, 2010).

Pay for performance, plays a role in promoting high performance culture.

Novartis employs a uniform People Performance Management process worldwide that is

based on quantitative and qualitative criteria. Performance and reports for managers

jointly determines performance measures and business objectives. Any incentive

compensation paid to key executives is subject to claw-back by Novartis.

Balance rewards to create sustainable value are important since the expectation of

Shareholders is get sustainable returns from their investment while on the other hand

ensure that risks are minimized. Novartis incentives have underlie a long-term strategic

planning that is important in addressing the challenges of innovation and the long

development and commercialization cycles that characterizes the industry. Having

COMPENSATION AND BENEFITS 5

appropriate objective settings coupled with incentive plan designs allow the leaders and

associates to focus on shaping the future instead of simply reacting to change. This

encourages performance, loyalty and entrepreneurship as well as creating sustainable

value which are in the interest of all stakeholders of Novartis.

On the aspect of Equity Ownership, normally investors want the leaders of the

companies in which they invest to act as owners. That configuration works best when

Board members and key executives hold meaningful equity investments in their

company. Moreover the Novartis imposes share ownership guidelines. The key

executives in Novartis are required to own at least a certain multiple of their annual base

compensation in Novartis shares. For example chief Executive officer is required to own

Novartis equity worth five times, other Executive Committee members three times and

other key executive between one to two depending on their respective base compensation

within three years of hire. In the event of a substantial drop in the share price, the board

of Directors may at its discretion extend that time period.

Compensation elements in Novartis includes, base compensation which is a fixed

annual salary, variable compensations which entails rewards for individual and business

performance and benefits which include pension, healthcare benefits and perquisites.

Base compensation in Novartis focuses on various keys areas these include areas of

responsibilities, job characteristics, seniority, experience and sets of skill. It is paid in

cash on monthly basis where by it is set according to local practice, designed to provide

the associates with fixed compensation to ensure an equitable standard of living

comparative to that offered by colleague companies. Base compensation in Novartis is

COMPENSATION AND BENEFITS 6

reviewed annually to ensure that competitive pay is maintained and undesired

fluctuations are minimized. They are also used as variable compensation determinant.

Variable compensation in Novartis is determined by the nature of the

business, role, level, and practice in the local market, business performance and associate

performance on individual aspect. Variable compensation is as result of the combination

of short-run and long-run incentives.

Novartis places special emphasis on long-run incentives to put in line the

interests of employee with those of shareholders. The emphasis on long-run incentives

focuses on innovation and the long development of the product as well as

commercialization cycles that characterize Novartis Company. The variable

compensation in Novartis era normally granted in cash, shares or share units.

There are three variable compensation plans in Novartis Group. These plans

include Short-run Incentive Plans, Equity Plan and Long-run Performance plan. Short-run

Incentive Plans are carried out each year in the company based on the target incentive

percentage of individual associate, and the performance rating of an individual at the end

of the year. Under Equity Plan a certain percentage of employees in the Norvartis group

worldwide. The grants are in form of shares or share options whereby in some

jurisdictions Restricted Share Units are granted instead of share. Long-run Performance

Plan rewards key executives who have a significant impact on the long-term success of

the group.

Benefits programs in Novartis are integral portion of the total compensation

policy and strategy that are design to meet challenges of increased global competition for

talent. Benefits programs support the overall business objectives and strategy of Novartis

COMPENSATION AND BENEFITS 7

Group. Benefits are put in line with local legislation and practices in each country and are

designed to provide a frame work of security for employees. These benefits include

pension and healthcare plans as well as perquisites. These help the associates and their

dependents in respect of age, health, disability and death by establishing the level of

security.

Novartis provide other benefits in a specific country according to local market

practice and regulations that include long serving awards and associates who have been

transferred on international assignment. However, in implementation of these

compensation is face by various challenges and impediments. Compensation of the

Executive Committee members is linked to business performance against performance

objectives.

Nevertheless, Novartis does not disclose specific objectives; this could negatively

affect some departments in the organization since it could be difficult to establish the

performance in both qualitative and quantitative aspect in some field hence the some

associate get reluctant due to perception that their situation is not put into consideration.

Some junior associates who may not be recognize by the system of selection and

have potential in innovation and long- term progress of the group feel discriminated as

their senior get the rewards of the work which these junior perceive they are the one who

have contributed. This could have long-run negative effects on the company and they end

up losing some talented associates.

Claw-back of compensation that senior executive were awarded could trigger

negative effect by resulting to some executive failing to corporate with the well laid

strategy and victimize the juniors. Requirement of the executive and some associates to

COMPENSATION AND BENEFITS 8

invest on share in the company so that they can embrace it as their own and also so that

they can enjoy some benefit on one side can pose danger to other shareholder while some

associated may work as insider trade and gain wealth at the cost of other shareholder

(Joseph, 2009).

Novartis Group setting up compensation and benefit packages, process involves

participating in various benching surveys that provide comprehensive information on

levels of salary, short term incentives and long term incentives. The standardizing group

of firms mostly included it competitors such as Syngen, Abbott, AstraZeneca, and Roche.

It also includes other companies outside pharmaceutical companies with size, stature,

scope and magnitude of complexity like that of Novartis.

Comparing the Novartis compensation and benefit packages with some of it

competitors such Syngen Group; like Novartis group strategy, Syngen Group

compensation strategy is based on three elements; fixed compensation, variable

compensation and benefit. Fixed compensation is inform of basic salary, variable

compensation is inform of short- term incentives and long term incentives like in the

Novartis Group. Short term incentives are based on the achievement of financial results

and individual performance in Syngen Group. This is the similar case in Novartis

compensation.

The fixed compensation in Syngen is set by reference to the size and scope of the

job, skills experience and performance of the individual, level or grade to which the job is

assigned and external market value of the job (Syngen report, 2010). This is the same

ground that Norvartis group use to establish fixed compensation of the associates.

However, in the case of Syngen compensation strategy, it has a compensation strategy of

COMPENSATION AND BENEFITS 9

deferred share plan that is designed to reward leadership, innovation and performance of

the Executive committee and selected senior manager. The situation is different in the

case of Novartis group as there is no such element in it.

Recommendations

Some of the recommendations that would ensure that these compensation and

benefit is successful include compensation and befit strategy should ensure that the

program cover associates in criteria of their seniority in the company which should be

integrated with the functional unit of Novartis Group. The compensation and benefit

strategy of Novartis Group should ensure that the associates of the company invest in the

company at their own rather than a must, to ensure free entry and exit of the stakeholder.

COMPENSATION AND BENEFITS 10

References

Joseph, J., M., (2009) Strategic Compensation: A Human Resources Management

Approach 5

Lucian, B., and Jesse, F., (2006), Pay without performance: The unfulfilled promise of

executive compensation.

Matthew, G., (2009) Performance incentives. Vanderbilt University, Springer Publisher,

USA.

Michael, G., (2004) Integrating newly merged organizations.ISBN: 1-56720-316-7

Greenwood Publishing Group. USA

Novartis Group Report (2010), compensation and benefit strategies. Retrieved from

http://www.novartis.com/careers/compensation-benefits/index.shtml

Syngen Corporate governance and compensation report, (2010). Retrieved from

http://annualreport2010.syngen.com/en/downloads/PDFs/Syngen_CompRepor

t2010_Eng.pdf

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