Why is Individual Compensation a Secret in Brazil?

by Kevin McDonald

This article was published in Spanish by América Economía (January 27, 2011) and in Portuguese by Investimentos e Notícias (January 31, 2011).

All over the world, owners of companies want to know how much their CEOs and directors make, especially since corporate scandals and failures over the past two years have involved high fees to insiders. In the US and many other countries, the details of compensation are readily available. Not so in Brazil. Why not?

Many Brazilian companies reply: "It is a matter of security. We would endanger our people if we publicized how much we pay them."

Really? Brazilian firms on the Bovespa already disclose the total they pay to top officers and board members as a group, and they indicate the number of people in each group. From this information, anyone can calculate the average pay. Someone in top management earning below the average is thus exposed to a "security risk" unnecessarily. If a company were to present the amounts paid to individuals, it would reduce the security risk incurred by that person. Doesn't the company care about him? If so, why not report the individual data and make his life safer? Because the "security" rationale does not make sense.

So why hide individual pay? Is it to prevent a competitor from taking advantage of the information? No, most CEOs already know how much their peers make!

Perhaps no one wants to be the first to disclose more than is required by law. Now it's too late for that excuse: Usiminas, the steelmaker from Minas Gerais, reports compensation of executives and directors as individuals. Usiminas may be the only important company on the Bovespa to do this. Investors have noticed the company's transparency. They show their appreciation by paying a premium for Usiminas shares relative to the firm's net income.

Could it be that the big companies pay their executives a lot and do not want to defend the high figures? Consider Vale, the giant iron and steel producer. In 2009, Vale paid its top officers on average R$ 6.2 million. This was five times the average at Usiminas and twice the average at CSN, another big steelmaker. What is more, from 2004 to 2009, Vale's executive remuneration rose nearly twice as fast as the company's net income and stock price grew. One might think that Vale's executive pay is a sensitive subject. The high average compensation in 2009 has already been disclosed, however, and it needed no defending. Thus it is unlikely that Vale has anything to lose by providing more detail, namely the payment to executives as individuals.

Maybe some directors are afraid to justify high fees paid to non-executive directors - i.e., themselves? Take Banco Bradesco as an example. In 2009, the bank paid each non-executive director an average of R$ 2.7 million. That amount is 6.7 times what Santander (Brasil) paid, 33 times what Itaú Unibanco paid, and 71 times what Banco do Brasil paid. The fees are in addition to the capital gains and dividends that Bradesco's non-executive directors earned from their nearly 12 million shares of Bradesco's common stock. This information was reported on p. 459 of the Formulário de Referência and was accompanied by no justification. Nor did it lead to rebellion by minority shareholders. On this basis, the directors should not be worried that the next level of detail - individual disclosure - would shock anyone.

Perhaps a company is concerned about disclosing an unorthodox compensation scheme? OGX comes to mind. In 2009, the controlling shareholder of this oil and gas producer provided supplementary compensation that was not included as an expense in the company's income statements. For executives, the supplement was 13 times the remuneration provided by the company, and for directors it was nearly 10 times what the company paid. The supplements were useful and they were small compared with support government provided by the government to OGX's colossal rival, Petrobras. The supplements from OGX's controlling shareholder were disclosed in Note 15 to the financial statements on 30 June 2010. So the unusual payment method is already known and seems not to have bothered anyone. By comparison, the reporting of individual pay is a non-event.

Maybe a company has reported different compensation numbers that need to be reconciled? In 2009, Gerdau reported approximately R$ 15 million less to the CVM than to the SEC. The difference reflects accrual accounting (CVM) versus cash accounting (SEC) and may not be important. On the other hand, even the lower, accrual-based number (R$ 48 million) has not been reconciled with the monthly compensation budget of R$ 28,300 per person (executives and directors) that was authorized by the company's owners at the annual general meeting on April 30. Still, these facts are discernible from the minutes of that meeting (in particular, Resolução Nº 164/2009-AGO) plus Gerdau's CVM and SEC filings. They are not hidden, and they would not be any more visible through disclosure of individual compensation.

The bottom line is that there is no good reason to keep individual compensation in Brazil a secret from the people who own the company. By contrast, a compelling reason to disclose individual pay in Brazil exists: investors will appreciate the additional transparency, they will feel safer about the firm's management, and accordingly they will pay a higher price for the company's shares.

Now that 2010 has ended and Brazilian companies are preparing annual reports, they should disclose individual compensation. Rather than wait to be forced by law, they should take the initiative and join the rest of the world in creating more open and responsible corporate governance. It's for their own good.


Kevin McDonald
25 years of experience in investment banking, consulting, private equity, and international business
Michael Lehner
In the high technology field for 30 years, as an operating manager, consultant, venture capitalist, and investment banker
Copyright © 2010 McDonald-Lehner. All Rights Reserved.