Executive incentive compensation in Brazil

Incentive compensation

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

The types and structures of incentive compensation vary depending on the level and type of organisation.

The prevalent types and structures of short-term incentives are commissions, bonuses and profit-sharing payments; long-term incentives are usually structured thorough stock options, stock awards, restricted stocks, phantom stocks and retention bonuses.

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?

Although there are no formal limits on the amount of incentive compensation, Brazilian tax legislation may set out certain limits on the incentive structure that can restrict the incentive amount. Different incentive structures may result in discriminated tax treatments.

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

No. Parties are free to decide on the deferral and vesting of incentive awards, to the extent that there is no detrimental change to employees in previous agreements.

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?

No. There is no legal limitation based on the individuals or groups eligible to receive the compensation.

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

Yes. There are court precedents ruling that continuous payment of discretionary incentive compensation entails mandatory employment rights.

Therefore, this compensation is not rebuttable by the employer, since section 468 of the Labour Code prohibits any type of change that is detrimental to employees (eg, salary reduction, withdrawal of benefits, etc).

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?

Yes. If employees at the same level are granted different incentive compensation or even if one of them received compensation and the other did not, an employee may bring a lawsuit against the employer claiming compensation differences or a statutory discrimination fine (2,765.66 reais) on the grounds of discrimination or equal pay.

Section 461 of the Brazilian Labour Code sets forth the following equal pay requirements with regard to the employee and his or her comparators:

• substantial equal work (job content, not job titles), meaning same production and technique level;
• length of service for the same employer must be less than four years;
• working in the same position must be less than two years; and
• employee and comparator must be working at the same time for the employer at the same workplace (same premises).

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

In Brazil, enforcement of clawback clauses is on the basis of a case-by-case analysis by the courts (eg, companies may require the repayment of a ‘signing bonus’ if an executive resigns before a certain date).

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

Payment of long-term incentives (which are usually structured through stock options, stock awards, restricted stocks, phantom stocks and retention bonuses) can be conditioned on a vesting period. However, the payment cannot be conditioned on continuing employment until the payment date if the performance target (or the vesting period) has already been accomplished. If employment is terminated before the performance is achieved, the employee is entitled to a pro rata payment.