Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
A company must offer an annual profit-share incentive to executives by one of the two following ways:
- distribute at least 30 per cent of the company’s annual net profit to executives in proportion to their respective remuneration; or
- pay each employee 25 per cent of their annual income with a cap of 4.75 minimum monthly wages per year (approximately US$1,880).
No other statutory incentive compensations are required. However, annual or biannual incentives related to executives’ performance and the results of the whole or part of the company are common.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 limits, except for the limit of 10 per cent for capital increases awarded as stock option plans, discussed in question 3.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Yes, this is permissible (eg, in stock option plans). The stocks involved in the plan shall be subscribed and paid within five years of the shareholders’ meeting where the capital was increased and the plan approved.
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 are no limitations. Distinctions and different exclusions are permitted between employees eligible to receive the compensation provided they are based on objective criteria and non-discriminatory reasons (eg, equal remuneration between men and women who perform the same duties).Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
Yes, and once recurrent they become acquired rights and may not be withdrawn. However, compensation at the sole discretion of the company would likely be deemed unlawful because otherwise the company could decide when to pay such compensation, and employment law requires provisions on compensation to describe clearly the events that trigger the incentive and when such events can take place.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?
No, provided disparate treatment exists on the basis of an illegal reason (eg, discriminatory reasons).Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Yes, provided it is proven that the employee failed to fulfil the terms and conditions of the compensation. The company has the burden of proof in this regard.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
In general no, although the subject remains debatable. Recent case law states that if a compensation is accrued under conditions that are met while the employment relationship is in effect, but the employment relationship terminates before payment date, the employee is, in any case, entitled to the proportional payment corresponding to the compensation at the termination date.