1.6 One Global Company, 20 Different Plans.ppt Share Bonus Plan (DSBP) ... Leaver treatment for blocked shares under Swiss local / sub plans. ... 1.6 One Global Company, 20 Different

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

All plans had different format and terminology

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

Executive Summary

Pre-assessment

Plan Harmonization

2014

New PlansLong Term Incentive Plan

(LTIP), incl. LTRPP

Annual Incentive Plan

Deferred Share Bonus Plan (DSBP)

Existing Plans

Special Grants

Stock Incentive Plan N. America (SIP)

Long-Term Performance Plan (LTPP)

ROWCHN. America

ESOP (CH)

2015

DeliverablesLong Term Incentive Plan (LTIP)

incl. LTRPP



Special Grants


Equity Plan Select


Sche

dule

s of

the

LTIP

ESOP (CH)


Stan

d-al

one

Plan

alig

ned

to L

TIP

Preparation & Implementation of Sell to Cover processes across 33 countries worldwide

Leverages Share Savings Plans (LSSP)

RSRSU ROWRS CHRS ROWFrench qualifiedOption CHOption ROWOption N. America

CEO Grant

Sele

ctLS

SP*

* Leveraged Share Savings Plan

Key ChallengesSt

ruct

ure

Reduce complexity of the plan landscape

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

Manage local compliance for global plans

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)

Proc

ess 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

Improve alignment with best practice

New plans implemented using current best practice which vary greatly to existing plans: Leavers, ECN regulations, Clawbacks, CoC Clauses etc.

Manage mobility - policy for international transfers

More than 1,500 internationally mobile employees

IA / ILHs* subject to different policies re tax equalization

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

Streamline administration

Key

Aim

s

* International Assignees and International Local Hires

PART 1: PLAN HARMONIZATIONReduce complexity and streamline administration

Overview of Plan HarmonizationKey harmonization steps

Review and harmonize clauses:

• Leaver• External joiner• Change of control• Claw back• Forced Sell to Cover

Draft transfer policy Language review Legal review

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

Key structural amendments

Pre-assessment

Plan Harmonization

2014

New PlansLong Term Incentive Plan

(LTIP), incl. LTRPP



Existing Plans

Special Grants



ROWCHN. America

ESOP (CH)

2015

DeliverablesLong Term Incentive Plan (LTIP)

incl. LTRPP



Special Grants


Equity Plan Select


Sche

dule

s of

the

LTIP

ESOP (CH)


Stan

d-al

one

Plan

alig

ned

to L

TIP

Preparation & Implementation of Sell to Cover processes across 33 countries worldwide

Leverages Share Savings Plans (LSSP)

RSRSU ROWRS CHRS ROWFrench qualifiedOption CHOption ROWOption N. America

CEO Grant

Sele

ctLS

SP*

LTIP is basis of harmonizationWork Life eventsWork Life Event LTIP rules to apply to existing equity awards as of January 1, 2015

External Joiners Award granted at any time in the calendar year prorated for time

Good Leavers

Involuntary termination orTransfer of Business

Time vesting awards: Vesting prorated for time on normal vesting datePerformance-vesting awards: Vesting prorated for time, subject to performance, on normal vesting date

Retirement and early retirement (according to local laws or practice e.g. 55/10 in the US)

Time vesting awards: Full vesting on normal vesting datePerformance-vesting awards: Full vesting, subject to performance, on normal vesting dateProrated for time if retirement within 12 months of grant

Death and disability Immediate full vesting Note: For ECN members, pro-rata if within 12 months of grant

Bad Leavers

Resignation, termination for cause Forfeiture of all unvested awards

LTIP is basis of harmonizationCorporate 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

Time vesting awards: Immediate full vesting Performance-vesting awards: Immediate full vesting subject to performanceProrated for time if within 12 months of grant (except for ECN members)

Clawback Forfeiture of unvested awards, or pay back of vested awards in certain circumstances

Forced Sell to Cover Force the sale of a portion of the award to cover employee payroll withholding taxes and social security

Swiss specific Specific features of ESOP and LSSP CH

Blocking period treatment Harmonization of blocking periodsLeaver treatment for blocked shares under Swiss local / sub plans

LTIP is basis of harmonizationCorporate compliance

Corporate Compliance LTIP rules to apply to existing equity awards as of January 1, 2015

Minder / VegüV rules Awards can be adjusted to the extent necessary to comply with the Minder provisions

ECN Schedule ECN Schedule included for specific rules relating to ECN members

US ComplianceRevision 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 Qualified awards French legal drafting of a Schedule for French qualified awards

Other plan harmonization key steps 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

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

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

Set up new Plan rules e.g. new leaver rules on allocation level, electronic award agreements and acceptance process

Plan Administrator setup

Impact of Harmonization of Plan RulesAchieved without any negative impact on Participant or Company

Impact regarding rules for: Impact for participant Impact for CompanyExternal Joiners No change No change

Good Leavers

Involuntary termination orTransfer of Business

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)

Retirement and early retirement (according to local laws or practice e.g. 55/10 in the US)

Death and disability

Bad Leavers

Resignation, termination for cause No change No change

Impact of Harmonization of Plan RulesAchieved without any negative impact on Participant or Company

Impact regarding rules for: Impact for participant Impact for CompanyChange of Control and variations of share capital at Novartis AG level

New clear rules are in line with best practice, and provide certainty regarding treatment

New clear rules are in line with best practice and ensure compliance with Minder

Clawback Clarity regarding the link between the Code of Conduct and Clawback

Compliance with Code of Conduct required by virtue of plan rules, makes clawback provisions enforceable

Forced sell to cover Removes the likelihood of a large tax bill following tax assessment

Compliance with payroll withholding and reporting requirements

US Compliance Improved individual compliance, in line with recently updated laws

Improved Company compliance in line with recently updated laws

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

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

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:

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

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

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

Sell to Cover for OptionsHow 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 withhold-ings /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

Tax RatesApplicable tax rates per country for tax and hypotax withholdings

The marginal tax rates for the Sell to Cover countries:

Country Marginal taxrate (in %)

Argentina 35.00Austria 50.00Bangladesh 25.00Chile 40.00Colombia 33.00Costa Rica 24.17Ecuador 35.00Egypt 25.00Finland 51.74France (NL) 8.85Germany 48.09


Pakistan 30.00Peru 43.00Philippines 32.00Republic of Korea 42.45Romania 22.00Slovak Republic 25.00South Africa 40.00Spain 52.00Sweden 58.00Turkey 35.76UK 47.00


Guatemala 4.83India 33.99Indonesia 30.00Ireland 52.00Israel 50.00Italy 47.56Kenya 30.00Malaysia 26.00Mexico 30.00Netherlands 52.00Norway 46.80

Thank You

Dennis WeinholdNovartis International AG

[email protected]

Britta SchmittEY

[email protected]

Documents

1.6 One Global Company, 20 Different Plans.ppt Share Bonus Plan (DSBP) ... Leaver treatment for blocked shares under Swiss local / sub plans. ... 1.6 One Global Company, 20 Different