Dan Vasella, CEO of Swiss drug giant Novartis, has long been viewed as one of the industry’s more capable leaders. But Novartis’s less-than-stellar performance in 2007 led to steep pay cut for Vasella.

Vasella’s compensation in 2007 fell by about 20% from the previous year, to 17 million Swiss francs, according to Novartis’s annual report. How come? Novartis failed to meet some of its financial and business targets, Vasella told the Health Blog. The Novartis chief said it was his first pay cut since he took the helm of the drug maker more than a decade ago.

“This is the first year I have missed my objectives — or part of them,” Vasella said. “Normally I always meet or surpass the expectations.” Dr. Vasella said he sets these targets together with the board, which then reviews his performance and decides his compensation.

Novartis’s prescription drug unit had a tough year in the U.S., where it faced tough competition from generics. Novartis also suffered some setbacks with the FDA. The agency delayed a decision on diabetes pill Galvus, an important new drug that Novartis hoped to start selling in the U.S. last year. FDA also leaned on Novartis to withdraw the irritable bowel syndrome drug Zelnorm from the U.S. market due to safety concerns. The company complied.

All of that contributed to a 45% drop in fourth-quarter net profit, the company reported today. Novartis has said it would cut 2,500 jobs, or about 2.5% of its workforce, to save money and reduce bureaucracy.

Vasella wasn’t alone in taking home less pay. Thomas Ebeling, who oversaw the pharmaceutical unit until October, when he was transferred to run the consumer health division, also suffered a big pay cut: his compensation fell by a whopping 65% last year, to 3.7 million Swiss francs. Chief Financial Officer Raymund Breu and head of R&D Mark Fishman also took home fewer francs. Bucking the trend was Andreas Rummelt, head of the generics unit Sandoz, whose pay rose 16% to 5.6 million Swiss francs. Sandoz had a good year, with sales up 20% to $7.2 billion and operating income up 41% to $1.04 billion.

Clarification: Novartis changed the way it calculates executive compensation in its 2007 annual report to include Novartis stock that the company pledges to give executives in the future if they invest their bonuses in Novartis stock today. Novartis didn’t include this stock in the compensation table in its 2006 annual report. If Novartis had, Vasella’s compensation would have been greater in 2006, and would have fallen 33% in 2007 to 17 million Swiss francs ($15.5 million). This post said his the compensation fell by about 20% in 2007 to 17 million Swiss francs. That was based on the total compensation figure Novartis reported for him in the compensation table in its 2006 annual report: 21 million Swiss francs.