UPDATE 2-Novartis scraps $78 mln pay for outgoing chairman Vasella
* Vasella would have got 72 mln Sfr under non-compete deal
* Deal sparked row ahead of Swiss pay referendum on March 3
* Vasella to chair his last AGM at drugmaker on Friday
* Vasella says understands many find pay "unreasonably high"
ZURICH, Feb 19 (Reuters) - Novartis scrapped plans to pay its outgoing chairman Daniel Vasella 72 million Swiss francs ($78 million) to stop him working for rivals, bowing to mounting anger in Switzerland over executive compensation.
The move is a victory for the drugmaker's Swiss shareholders, such as Geneva-based Ethos Fund, which campaigned against paying Vasella 12 million francs for each of the next six years to prevent him from working for competitors.
The move comes three days before the group's annual shareholder meeting and ahead of a Swiss referendum next month on whether to set stricter controls on executive pay.
The abrupt turnaround after the terms of Vasella's "golden handcuffs" deal were made public last Friday sets a precedent that will reverberate through the Swiss business community.
"Not everything that's legal is legitimate or right, and Vasella and Novartis have bowed to the public pressure, which is a positive signal," said Peter V. Kunz, professor for business law at Berne University.
The package for Vasella, one of Switzerland's top earners alongside Credit Suisse CEO Brady Dougan, ultimately unravelled because even pro-business advocates were critical.
"This was Vasella's home turf, so to speak, and when they condemned him, there really was no alternative but to forgo the payment," Kunz said.
Novartis vice chairman Ulrich Lehner said in a statement on Tuesday that the drugmaker continued to believe in the value of a non-compete agreement struck with Vasella, but the decision to cancel it addressed concerns of shareholders and others.
The row comes at a decisive phase in the run-up to a March 3 referendum that, if successful, would give shareholders a binding vote on compensation and ban "golden handshakes" for new hires and "golden parachutes" for departing managers.
Roughly 65 percent of Swiss voters favoured the initiative mid-January. New poll results are due shortly.
"I have understood that many people in Switzerland find the amount of the compensation linked to the non-compete agreement unreasonably high, despite the fact I had announced my intention to make the net amount available for philanthropic activities," Vasella said.
Vasella's attempt to appease critics may not be enough to reverse demands for pay curbs. Even Philipp Mueller, leader of Switzerland's Free Democrats (FDP) and a major opponent of the initiative, told Swiss radio that news of Vasella's pay had already wrought too much damage with public opinion.
In his 17 years at the helm, Vasella has been the architect of Novartis from its creation via a merger of Sandoz and Ciba Geigy through a series of later deals that have made it a diversified healthcare giant.
But his pay has long made him a lightning rod for criticism of executive pay. Vasella earned 13.1 million francs in 2012, down slightly from 13.5 million francs the prior year.
REBUKE FROM ABBOT
Vasella's departing pay package attracted a raft of criticism not only from the public, but notably from top-ranking Swiss politicians and some parts of the business community.
By scrapping the deal, Novartis may pre-empt some of the grilling it would otherwise have faced at its shareholder meeting on Friday, the last one that Vasella will chair.
Shareholder activists, such as Ethos Fund and Actares, had urged investors to vote against the pay scheme and pledged to reject an absolution - a quirk of Swiss securities law - of Novartis' board for their performance last year in retaliation for agreeing to it.
Vasella's pay deal even provoked a rebuke from Martin Werlen, the business-friendly Benedictine abbot of Einsiedeln in Switzerland who has secured backing for his abbey's costly renovations from a number of high-profile Swiss business figures, including Vasella.
Switzerland has not seen such an intense backlash on the issue of executive pay since 2002, when former ABN CEOs Percy Barnevik and Goeran Lindahl returned around 137 million francs in payments after a dire period for the company.