Long-Term Incentive Plans in Brazil

Incentives can be divided into two main types: those linked to stocks and those that are not.

Incentives that are not linked to stocks include profit sharing and performance and retention bonuses. They usually prioritise individual performance, retain employees for shorter periods, and have a limitation on gains because employees know in advance how much they can receive for achieving pre-defined goals or objectives.

Stock incentives include phantom stocks, restricted stock units and stock options. They are usually only granted to executives and employees in high-level positions. They are aimed at engaging and aligning collective interests and are usually considered long-term incentive plans.

In Brazil, stock options are the most common form of long-term incentive, especially among early stage companies. They are cost-efficient and simple to implement, as well as widely understood by Brazilian employees.

Incentives must be suited to the relevant company’s business model and long-term objectives. An early-stage tech company that plans to grow through multiple investment rounds and achieve an IPO or sale within a five to ten-year period would probably opt for a long-term stock option plan with a “strike price” that an employee needs to pay in order to exercise the option. Such a plan would likely involve no disbursement over the first few year, suiting an entity with low cash reserves.

A more mature company, one whose strike price is potentially out of reach for many employees, would typically switch to an RSU model. When such options are exercised, taxes will need to be withheld; while such taxes make this an expensive option for the company, its better cashflow position is likely to make this less painful.

The general rule in Brazil is that all benefits are of a compensatory nature and therefore part of the tax base for labour charges, social security payments and income tax. There are, however, exceptions: when a stock option plan has  a strike price equal to the fair market value at the time of the option grant and the employee bears the risk of stock devaluation, the plan will be deemed to be of a commercial nature and not taxable as compensation.