Incentive compensation

Typical structures

What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?

The organisations themselves are free to regulate the type of incentive, whether it is denominated as incentive, bonus, etc. Likewise, they also enjoy the freedom to establish the structure of these incentives: they can choose to give greater or lesser importance to the contribution, productivity or results of the worker or their work team, as well as taking into account the financial results of the division or department in which the worker is employed, obtained by the company at national level, or even obtained at a regional or global level, according to the size of the organisation.

Restrictions

Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?

There are no legal limits on the amount or structure of incentive compensation. From the fiscal point of view, the ‘wage tax’ is applied progressively and although the percentages have not changed, the amounts on which it is applied are updated every year.

Until September 2020, the current exempt amount was 840,000 Costa Rican colóns monthly; on the excess of that amount and up to 1,233,000 Costa Rican colóns monthly, the tax is 10 per cent; and over the excess of that amount up to 2,163,000 Costa Rican colóns monthly, the tax is 15 per cent; over the excess of that amount and up to 4,325,000 Costa Rican colóns monthly, the tax is 20 per cent; and over the excess of that amount, 25 per cent of tax will be paid. The previously described income tax brackets will be in force from 1 October 2019 until 31 December 2020. Subsequently, these tax brackets will be modified again by the Ministry of Estate.

As indicated, the tax is calculated on the ‘gross salary’. Salary includes the sum in cash obtained by the ordinary working day, the extraordinary day and the work done on a holiday or a weekly rest day, plus the amount received for incentives or bonuses. Likewise, there must be included the value of the benefits received in kind, which according to the law are considered salary.

Once the income tax or salary tax has been calculated, the ‘family credits’ (article 34 of the Law on Income Tax) can be deducted from the amount to be paid. Only one of the spouses may benefit from these. The following monthly amounts are:

  • for each child: 1,570 Costa Rican colóns; and
  • for the spouse: 2,360 Costa Rican colóns.
Deferral

Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?

The law does not establish a limit to the rules that organisations can set about granting incentives and the way in which these incentives can be deferred over time.

In this sense, an organisation may arrange for the incentive to be delivered on a monthly, quarterly, semi-annual or annual basis. The most common incentives in the market are those that have an annual periodicity.

Also, it is common in the market that once the requirements for obtaining the incentive have been met, payment is usually not made immediately but at a later point in time, which can even exceed one month.

Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?

There is no limitation on the company granting certain incentives or compensation only to a category of workers, provided there is an objective reason for that differentiation. It is also possible that a part of the compensation has a deferred payment term, even after the termination of the employment contract, or that it is deposited in a savings fund or for any other purpose agreed by both parties.

Recurrent discretionary incentives

Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?

Discretionary incentives only become obligatory rights – referred to as ‘acquired rights’ by the courts – when they have been offered to the workers without conditions. If the incentives offered are conditioned to eventual modification or elimination based on objective and reasonable criteria, which must be supported by different proof (economic, financial, productive, market, etc), the right to receive the incentives cannot be demanded as a contractual obligation and the worker’s claim can be refuted.

Effect on other employees

Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?

The compensation of an executive may be conditioned or indexed to the compensation of another executive or employee, provided that this condition is expressly indicated and accepted on the date on which he or she is hired and exceeds the legal minimum wage. In these cases, it is usual that compensation may have, as reference, market studies in similar positions and in companies of the same sector. In others, the reference is the amount received by staff of the same company, at the same level or in higher positions.

Mandatory payment

Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?

The benefit received may be subject to repayment for any circumstance that demonstrates an ‘undue’ or ‘unjustified’ payment. These circumstances may originate in the review of compliance with the requirements established to obtain the benefit.

When the reason for making an error does not in turn constitute a reason for immediate termination of the employment contract and for the return of the money received, the legal rules provide for ‘excess’ payments that can be followed.

The Labour Code provides that ‘the debts’ that the worker contracts with the organisation for ‘payments made in excess’ may be reimbursed by the employer, during the term of the contract, ‘in a minimum of four periods of payment and will not accrue interest’, and that in the event that the debt subsists at the end of the contract, at that time ‘the final settlement may be made as appropriate’. The liquidation in these cases will imply that of the wages owed to the worker at the end of the contract, and the outstanding balance owed can be deducted (article 173 of the Labour Code).

The decision to deduct the sums paid in excess from the salary is a unilateral one by the employer, who must inform the worker of the amount paid in excess, the reason for this, the number of payment periods in which the compensation will be applied and the period in which it will happen.

By agreement of the parties, fewer payment periods may be established or even the application of non-proportional amounts in each of them, provided that it is demonstrated that it is for the convenience of the worker.

When the reason for the mistake incurred is in itself a reason for immediate termination of the employment contract, for having incurred the executive in a serious fault that justifies his dismissal, the collection of the existing debt will force the organisation to resort to the judicial office, through an ordinary civil claim for reparation of the damage caused.

Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?

Two topics have been subject to judicial discussion in reference to what is indicated here.

First, in some cases, the incentives include additional requirements for the final payment of the benefit, even though the productivity or profit goals or objectives have been met. For example, a minimum length of time spent by the worker in the employment is required once those goals or objectives have been met. It is a form of staff retention. The judgments of first and second instance courts, not of the Supreme Court of Justice, have been inclined to consider that once the computation period of productivity or profit goals or objectives has ended, the right to benefit is acquired, even though the person may leave the job later.

Second, workers who terminate their employment contract before the end of the period for calculating productivity or profit goals or objectives have claimed proportional payment of the benefit, despite the fact that requirements established by the organisation are measured for a longer time, usually annually. Some judgments of the Second Chamber of the Court have admitted the right to a payment proportional to the time worked within the computation period, provided that the worker can demonstrate partial compliance with the requirements, which obviously will not always be possible, especially because the partial fulfilment of a goal does not mean that at the end of the period the beneficiary will be entitled to the benefit given that the ultimate requirement will not have been met.

Law stated date

Correct on

Give the date on which the information above is accurate.

10 August 2020.