Rômulo Dias and Cielo Executives: 4.5 million Real bonus to remain in the position for two years
The bonuses Brazilian companies pay have nearly doubled this year, and this has enlarged the team of millionaire executives
LUCAS AMORIM
2010 might have been agonizing for execs at Cielo, Brazil's largest card processor. Last July, credit card flag exclusivity with accredited processing companies was banned, and since all machines installed in retail stores started accepting all types of cards, competition skyrocketed. Nonetheless, Cielo made 4.5 billion Reais, 9% more than in 2009, mainly on account of soaring consumption in Brazil. This had a direct impact on the company's executives' compensation: they have never made so much money. The bonuses paid to the organization's top six execs added up to 5.9 million Reais, nearly two times more than in the previous year. But not even this has kept headhunters at bay.
In a mere eight months, eight of Cielo's 24 officers left their jobs, setting a record turnover rate. The bleed had to be stanched. As is the case of most service companies, skilled, trained, and motivated people are critical for Cielo. The circumstances brought about by a heated market place caused the company to change a compensation system that had seemed to be perfect until then.
To find the best way out, Cielo analyzed models used by 30 businesses operating out of the most diverse industries. The changes were set into motion early this year. The first step was increasing the number of professionals eligible for long-term incentive packages. In addition to the 110 people holding key positions who were already eligible for the program, 50 more employees on several hierarchical levels gained the right to a windfall, under a program that blends stocks and options and can be redeemed from 2013.
With the heated market, short-term bonuses have replaced stock option packages in attracting and maintaining top executives
The model also became more aggressive for CEO Rômulo Dias and for the company's five vice-presidents. Until last year, they had been entitled to a package that included their wages, an annual bonus and stock which, when added, was worth about 17 million Reais. This year, a biennial bonus of 4.5 million Reais tied to result targets was added to this already hefty sum. The goal is to retain the officers for at least a couple of years. If everything goes as planned, together, they will get 24.9 million Reais in early 2012. "If a company grows, it is natural for compensation packages keep pace," said Rômulo Dias.
The amount of zeros to the right on Cielo executives' paystub is astonishing, but it is no longer an exception in the Brazilian business environment. In a recent past, you could count on your fingers the number of professionals making a million Reais per year. For a long time, aggressive compensation packages were the brainchild of but a few companies and were traditionally tied to target and result schemes, such as at Ambev. This is now the standard. An exclusive survey conducted by the Hay Group human resources consultancy firm among 296 businesses with operations in Brazil shows the millionaire executive club is growing steadily. In 2011, 1,630 of the 4,000 CEOs, vice-presidents and officers surveyed were paid upwards of 1 million Reais among bonuses, wages and stocks. This is a 33% surge compared to last year, and triple the 2007 mark (see the chart).
There is now an average of five millionaires per company. This change reflects a year of historical growth in Brazil. In 2010, the Brazilian economy grew 7.5%, the highest it has gone in the past 25 years. In the midst of this scenario, annual bonuses nearly doubled - on average, they ballooned 90% for CEOs and 97% for officers and added up to 39% of the total executive compensation in the country. Long-term wages and incentives also forged ahead, but not at the same rate. (The exception was when there was a need to hire senior executives on the market - the companies had to pay 40% more to newcomer CEOs compared to what they paid their predecessors.)
In general, businesses promise to double the bonus if the executives can surpass the targets, something that usually only happens under exceptional conditions. It is worthy of note that in 2010, half of the companies the Hay Group surveyed panned out. "For companies that set proper targets and link the executives' compensation to profit, for example, paying more is not a problem," says Darcio Crespi, a partner at Heidrick & Struggles, a recruitment firm.
Meritocracy
It could be said that 2010 was a year that took meritocracy to its ultimate consequences. If businesses grow more than predicted, all execs get a bigger piece of the cake. Localiza, Brazil's leading car rental company, is an example of this. Last year, its sales went beyond expectations and went soaring: 37% compared to 2009. As a result, the bonuses paid to the company's 4,530 employees also rose from 25 million Reais to 35 million. Naturally, most of this amount was shared by the senior executives.
About 7 million Reais were divided among CEO Eugênio Mattar and his five statutory officers - up 66% over a year earlier. If it reaches its targets for 2011, this group will share an even bigger jackpot early next year: 11 million Reais. To get there, all they have to do is maintain the same performance they had in the first half of the year, when Localiza's income grew 28%. In fact, the company has already set aside the cash to pay next year's bonus. "This amount is adjusted along the course of the year, if we realize the target may be surpassed beyond a limit of 130%," said Mattar.
As shown in the Cielo case, the higher executive compensation is also the outcome of nearly savage competition for good professionals. Companies fight with other companies, no matter the industry they operate in. Companies fight with the public sector, which in the past few years has increased wages in pursuit of more
qualified people to be part of a largely deplorable bureaucracy (see the report on page 184). Skilled professionals and executives are scarce. Being unable to attract them is awful. Losing them, often after years of investments, may be dramatic. In 2010, the fear of loss turned short-term bonuses into the most commonly used resource to attract and maintain executives. "With the international instability, nobody is quite sure what might happen in two or three years," remarked Leonardo Salgado, a director at Hay Group, which conducted the survey. "That is why execs prefer offers that ensure gains on the short-term."
Because of the pressure, even traditionally conservative businesses - such as Rio de Janeiro's Aliansce shopping center operator - have become more incisive. In 2009, the base wage accounted for 98% of the compensation it paid to its six top executives. In 2010, the year the company went public, the fixed parcel plunged to 68%, thanks to an unprecedented annual bonus of 2.8 million Reais, which doubled this group's annual compensation to 9 million Reais. "We adjusted our policy to remain competitive. Going forward, bonuses are likely to progress more gradually," said Eduardo Prado, Aliansce's investor relations officer.
The increase in short-term bonuses is not a sign businesses are setting other attraction and retention tools aside for good. Quite the contrary: their arsenal is increasing by the day. Moves at São Paulo's Lopes, Brazil's biggest real estate agency, is an example of this. In March, the company doubled the annual bonus its six executive officers might be entitled to. In 2011, they were paid a total of 7 million Reais. Next year, if the targets are reached, the jackpot will shoot up to 14 million Reais. By adding things up, one will realize each officer will get 2.3 million Reais in bonuses alone. But changes are digging in even deeper: from now on, a group of 26 people, among officers and high-performance managers, may exchange part of their bonuses for stock. For each share they purchase, they will be awarded another one as a prize, but they can only withdraw the cash in four-years’ time. "The idea is to show these professionals that they stand to gain much more if the opt for a long-term career at the company," said Robson Paim, Lopes' executive director for human resources.
This year, Localiza created an equally ingenious mechanism - and with even greater potential gains. The model will allow a group of 24 execs to become company partners from 2012. Thus far, the employees were only entitled to an option program, which will be extinguished next year. In both cases, the execs can only enjoy the prize in three years. The difference is that, in the case of the stock, they will not have to pay an initial price for them (as is the case under the stock option plan) - they simply become the owners of the lot. "There is no better way to retain and motivate people than turning them into shareholders de facto," said Eugênio Mattar.
When they get this bonus in early 2012, these folks may invest part of the cash in Localiza stock. To sell the bonds, the executives will have to wait at least three years. But then, for each Real they make Localiza commits to pay 4 more as a prize. If the stock is bullish at that time, these execs' gains may be colossal.
Higher wages and variable packages is an irreversible trend, but increases such as those of 2010 are not likely to repeat any time soon
More sophisticated compensation policies are now also migrating to the hierarchical levels below the first echelon - after all, it makes no sense to make a huge effort to retain the best on the top and shrug off the staff that will hold such positions in the future. "Last year, aggressive variable compensation packages reached company bases. Those who focused only on the top tiers lost a lot of good people along the way," said Fernando Mantovani, a partner at the Robert Half think tank. Turnover was never a major problem at the top of the pyramid at Totvs, Brazil's leading software company. This year, each of its 37 officers stands to get 1.3 million Reais between bonuses and stock. This may not entirely prevent, but dampers competition for them. But pressure from competitors has heightened in the lower echelons. Until 2009, only a group of 50 officers and vice-presidents held company stock options. Last year, the benefit was extended to a group of 20 employees considered "unlosable," among whom analysts and managers. The list of "unlosables" was compiled based on a process that takes individual results, particularly participation in innovative projects and with great future potential into account. Another assessment is expected for October to select 20 more employees. The signal that is being sent to these people is clear: the greater the compensation, the greater the pressure and the challenges," said Totvs CEO Laércio Cosentino.
Ignoring the heated market and the rise in wages, bonuses and long-term incentives is often an inglorious battle. But creating new compensation tools may be equally risky, since for most Brazilian companies, this is still unexplored territory. The Minas Gerais-based MRV construction company, for example, reviewed its stock option plan in early 2009. Back then, after waiting for two years, a group of executives was forced to exercise their call option. The problem is that on account of the crisis, their options had turned into dust. The solution was to
change the rule and stretch the term to exercise the option. MRV's option program is now starting to have a gain, after the third year, and the employees have two more years to make the buy.
The bonus and variable package popularization trend is irreversible. But experts consulted by EXAME are unanimous in saying that years with gains such as those witnessed in 2010 are not likely to repeat soon. In 2011, Brazil will grow much less than 2010's 7.5%. The official forecast is 3.8%. Add to that the financial crisis in Europe and in the United States and to the plunging Brazilian stock exchange and you have a somewhat pink scenario. "The market is more competitive, and corporate profitability is expected to shrink. Bonuses will pitch too," said Antônio Lanzana, a professor of economics at Fundação Dom Cabral. The good news is that despite this possible halt, compensation is unlikely to take a step backwards. "The Brazilian economy is on a new level that cannot be
ignored," said Marco Santana, a partner at the Towers Watson human resources consultancy firm. The millionaire executives club will continue being less and less exclusive, even if the rate at which new members gain access to it slows down a bit.
An Aliansce shopping mall in Belém: the unprecedented 2.8 million Reais bonus introduced its executives to the team of millionaires in 2011
The distance shrank
The gap between what is paid to executives in Southeastern and Northeastern Brazil is closing, and if it continues at this pace, it will have all but vanished in two years
LUCAS AMORIM
A business administration graduate, 39-year-old São Paulo native André Chaves built his entire career in São Paulo. In the past couple of years, he worked on the Faria Lima avenue, the financial heart of the city, serving as an executive director for BTG Pactual, one of the most aggressive and admired investment banks of present-day. In early August, Chaves traded Faria Lima for the Agamenon Magalhães avenue, in Recife. That is where he now serves as an investment officer for Gerador, a bank incorporated in 2009 by Pernambuco native Paulo Dalla Nora. Just to be clear: Chaves left São Paulo for Recife in pursuit of more money. "I make a lot more here than I did at BTG Pactual," he says, although he will not discuss figures. The compensation package that was offered to him includes wages, stock options and a profit sharing program. His mission at Gerador is to get a funding area geared towards regional businesses with sales ranging from 100 million to 300 million Reais per year off the paper. "I never imagined I'd find the most challenging project of my career in Recife," remarked Chaves.
Finding executives with Chaves' profile - and pay - far away from São Paulo and Rio de Janeiro is increasingly common. A Hay Group survey conducted among 296 major companies shows the difference between the wages and bonuses paid to execs in Southeastern Brazil compared to the remaining Brazilian regions is dipping. Last year, the Southeast was the region where officer and CEO compensation grew the least - 10%. The greatest spike was in the Northeast (see the chart). The average difference between executive compensation in the two regions was 22% a year ago. In the most recent hay assessment, it had slumped to 16%.
"If the trend is maintained, in two years' time there will be practically no difference between the wages paid in the main Brazilian regions," said Leonardo Salgado, an officer at the Hay Group. The migration of top executives to the interior of the country is directly connected to the expansion there has been in the economic activity in these regions. To meet the needs of the new consumers of the emerging Brazilian middle class, large corporations are building plants, multiplying their distribution centers and enhancing their offices in places distant from their main offices. "As there are not enough local executives, these corporations have to attract people from the major centers," said Asap recruitment company's Carlos Eduardo Ribeiro Dias. "You can only achieve this by offering top-notch pay."
Non variable force
It is not only about increasing wages. Aggressive bonuses have also become part of the packages offered by businesses spread throughout the interior of the country. This is what has happened at the regional office of American outfit Kraft in Northern and Northeastern Brazil. Last May, the company inaugurated its first plant in Recife with a view to meet the 25% annual growth rate in chocolate, fruit juice and cookie sales. To lead the business, it dispatched a group of six execs from São Paulo, Curitiba, Miami, and Venezuela, who will get the same
wages and benefits as those paid to their colleagues at the Brazilian operation's head office, in São Paulo. The Group's main executive, Rio de Janeiro native Bárbara Miranda, is even entitled to four additional wages per year and to a long-term package that includes stock options. Development and construction company Cyrela has adopted a similar strategy. Last year, it sent to its Salvador unit seven executives who are paid the same wages as their colleagues at the headquarters, with the right to an annual bonus of up to 12 additional wages. "Until recently, it was impossible to find offers such as this one in Salvador," says Bahia native Tomás Freire, an engineering director who returned to his native land after living in São Paulo for 12 years.
Kraft plant in the interior of Pernambuco: to handle the growth in the region, the company assigned six officers to the Northeast
The new compensation level in other states is keeping pace with the economic boom that has been taking place in the interior of the country
The recent professionalization movement that has taken place in the regional businesses has been the second biggest wage increase driver outside of the Rio de Janeiro-São Paulo region. Curitiba electronic device manufacturer Visum, established by three engineers in 1993, is an example of this. Controlled by the GG private equity fund since 2008, Visum had 430 million Reais in sales in 2010 and has been expanding its executive group ever since. In June, it hired finance officer Rafael Gorenstein, who had previously served at Nokia and Alpargatas, with a compensation proposal that may reach a million Reais per year if targets are met. "This is an opportunity to fast track my career," says Gorenstein. And to make things even better, it is a chance to get a jackpot which, in a virtuous cycle, will help spread more business and bring more development to Brazil.
