In recent years, we have noticed a growing movement of entrepreneurs looking for measures to recognize the importance of executives and key employees to their businesses, and the need to value and reward them.
Such entrepreneurs are usually the founders. They are enthusiasts of the arduous struggle they fought to achieve the success of their companies and hold firm to the idea that this process cannot stop or lose strength due to internal issues or aspects outside their control and will.
The long-term incentive plans for executives and employees have been an ally of entrepreneurs in the search for alignment of interests and care for others. Basically, these are plans that aim to increase remuneration based on profit and individual performance of these executives and employees, in consideration for making them more aligned with the company’s culture and growth expectations and, even more, encouraging them to donate even more to their functions in pursuit of these goals.
Different mechanisms and corporate and contractual instruments can be used to implement these incentive plans, each of which has or can bring different corporate and tax impacts to the company and the beneficiaries.
In the past, the figure of stock options – plans based on the granting of options to acquire shares of companies, according to the duration of work in these organizations and the achievement of certain goals, has been common. However, this mechanism started to be reconsidered for some reasons.
First, there is the risk of questioning by the tax authorities, depending on the form of implementation and its characteristics, so that the achievement of the real objective of the plan – and the guarantee of taking advantage of the tax benefit that the amounts linked to it will not be considered as effective remuneration (therefore the entire tax burden is not levied on effective remuneration) – became, in many cases, costly for companies and uninteresting to beneficiaries. Second, due to the oscillations and uncertainties of the Brazilian capital market, which brought uncertainty towards the future value of the shares object of the stock option plans and the logic of incentive and alignment of interests behind the mechanism.
However, there are several other ways and structures to achieve the goal of entrepreneurs. Our experience shows that each structure has different concerns – which lead to different frameworks for specific situations and desires.
Let me explain: there are cases in which the tax burden for the company in the implementation of a certain incentive plan is not the biggest concern of the entrepreneur; for such, the greatest concern may be the achievement of the maximum economic benefit for the beneficiaries of the plan, but without receiving quotas or shares and effectively becoming partners in the company. In this case, mechanisms such as phantom shares or units can be an alternative.
There are other cases in which the founder wants to guarantee the economic benefit to those whom have reached the goals, but he wants this benefit to only be obtained at a future time of the sale of the company. In order words, expressive payments are only made when there is a liquidity event in the future and the amounts of these payments will be higher depending on the value of the sale of the company – which encourages the beneficiaries to work so that the company increases in value to become interesting in the market and also be bought for a higher value. Here, the technique in drafting the documents of the plan will be fundamental to achieve what is expected by the entrepreneur.
There are also situations in which the founders’ children and grandchildren are already part of the company’s day-to-day management, and thus an additional need arises: in addition to encouraging work for the company’s growth, there is also a concern with the preparation of the next generation for the succession of the patriarch figure in the management of the business. In this case, it is possible to structure specific plans to accommodate the founder’s desire and direct the right people so that the incentive plan is successful over the years – for example, creating specific plans aimed at family managers, with a stipulation of increased remuneration linked to achieving not only the company’s objective performance goals, but also personal training and preparation goals, such as obtaining qualifications in undergraduate and graduate courses, language proficiency certificates, among others.
As you can see, the legislation and contractual arrangements that exist today allow us, lawyers, to be creative in creating plans and structures to meet the exact desires of clients. Sensitivity and experience are needed to find the best and most appropriate solutions for the company, family with attention to the region and community in which they operate. In such difficult times, the sense of collectivity has never been so shaken, but, at the same time, still present in the minds of people who want to make a difference.
Performing this work with our clients and friends is extremely rewarding.
