Attention all investors who like to delve into the numbers of public companies: the "black box" of management compensation in Brazil has revealed a lot of interesting information. The change is due to Instruction 480 of the Brazilian Securities and Exchange Commission (CVM), which made it mandatory for companies to provide a detailed account of their compensation systems, as well as Instruction 481, which requires disclosing such information to investors no later than 30 days before the annual shareholders' meeting. CAPITAL ABERTO performed a qualitative analysis based on the contents of 15 compensation proposals published by companies of all sizes and industries as of April 20 (Iochpe Maxion, Paraná Banco, BR Malls, Minerva, Inpar, Net, Iguatemi, JBS, Weg, OGX, Lojas Renner, SLC Agrícola, Marcopolo, Vale and Marisa). It revealed that despite the countless errors committed by these companies, a lot of new information on top management pay can already be gleaned from these documents.

At Marcopolo, the disclosed maximum, average and minimum salaries revealed an executive committee much better paid than all of senior management

At Marcopolo, one of the world leaders in solutions for mass transit, the disclosure of maximum, average and minimum amounts paid to the management bodies revealed an executive committee much better paid than senior management. Whereas the highest amount paid to a senior manager in 2009 was R$ 821 K (plus variable compensation of R$ 942 K), the highest amount on the committee, whose job is to advise the board of directors, was R$ 2.42 million (an amount that could double when the variable portion is added in). In turn, the company's directors received a maximum of R$ 247 K, without variable compensation.

An interesting detail is that the executive committee's million-real income applies only to three of its five members, the so-called effective members: Paulo Pedro Bellini and Valter Antônio Gomes Pinto, both representing the controlling group, and José Antônio Fernandes Martins, a shareholder with a relevant interest in Marcopolo. The other two are company officers. "These are dividends in disguise for directors who are also controllers", said a market professional who asked to remain anonymous. Marcopolo did not give a statement, claiming to be in a quiet period.

The information published by Lojas Renner also stood out. In 2009, the highest-paid officer earned R$ 15.6 million, accounting for 64% of the total remuneration given to all 15 of the company's top managers during the period. According to Renner, the amount was inflated by a special stock option plan approved in March 2009. At that time, a new contract was discussed aiming to keep José Galló as CEO of the company for another five years. The options are subject to a six-year vesting period, with early exercise of 20% per year starting on the second anniversary of the date they were granted, provided specific targets have been met. While the agreement is in effect, new options cannot be granted to Galló.

At Lojas Marisa, also a retail chain, a striking fact is that the company does not have a profit sharing program in place for its employees – a common incentive, especially in the retail industry. Approached by CAPITAL ABERTO, Marisa's Human Resources officer, Marília Parada, explained that a profit sharing program is currently in the final stages of negotiation with the appropriate trade union. However, the company has a bonus program for 150 of its executives.

At Weg, a company specializing in manufacturing and selling electrical motors, transformers, generators, and paints, there is a 98% difference between the highest compensation paid to a director in 2009 (R$ 651 K) and the lowest (R$ 12 K, an average of R$ 1,000 per month). The figures contemplate the amounts paid to all directors in the group's companies, which include the Weg S.A. listed company and private subsidiaries. "The difference between the amounts is adequate, for some of our subsidiaries' directors receive only symbolic pay for their services on the board, given that they are already paid for other attributions performed within the Weg Group", informed the company's press relations office.

OGX's stock option plan for officers and some directors displeased the RiskMetrics agency, which specializes in proxy advisory. The plan establishes a vesting period – the amount of time that an executive must hold on to the options before exercise – of one year. At each anniversary of the options agreements (which range from 4 to 7 years in total), 14%-20% of the total shares can be acquired. Patrícia Kanashiro, an analyst for Latin American and Iberian markets with the consultancy, considers the period too short, since according to RiskMetrics policy, stock options should target the long term. "We believe that vesting periods should last at least three years", she says. The company told CAPITAL ABERTO that its strategy of annual vestings "aims to attract, stimulate and motivate employees, compensating them in such a manner that reflects the value created during the development of our operations".

"When companies don't have to disclose information, they sit on their hands. Now, investors will have a clear view of whatever is being done differently from the rest of the market", says Adriane de Almeida, general coordinator of the knowledge center at the Brazilian Institute of Corporate Governance (IBGC). "This should make companies think out their compensation policies more carefully."

At Weg, there is a 98% difference between the highest and lowest salaries paid to directors in 2009

NO BOYCOTT — RiskMetrics favors the disclosure of maximum, average and minimum amounts paid to directors and officers. Its recommendation was for clients to vote against any compensation proposal that applied the preliminary injunction won by the Brazilian Institute of Finance Executives of Rio de Janeiro (Ibef-Rio). The appeal, judged by Firly Nascimento Filho of the 5th Federal District Court of Rio de Janeiro, allowed Ibef-Rio members to keep their salary expenditures confidential. "Disclosing individual pay is an international practice and there's no reason for Brazilian companies to resort to the injunction", argues Adriana Doniak, a corporate governance analyst with RiskMetrics.

Among the analyzed companies, Vale, Net, OGX, Iguatemi and Minerva hid behind the injunction. However, the latter two don't clearly state in their proposals that they are applying the judge's ruling. According to RiskMetrics's calculations, out of the 186 analyzed compensation proposals, 54% received a recommendation to vote "yes" vote and 46% to vote "no". The main reasons for "no" were the injunction and lack of information.

INEXPERIENCE OR SLOPPINESS? — the debut of Instructions 480 and 481 was also marked by a festival of mistakes, some of them pathetic. In the disclosure form released by wheel and chassis manufacturer Iochpe-Maxion, the minimum amounts paid to the statutory management are higher than average, both in 2009 and 2010. At mall administrator BR Malls, the officers' average compensation is the same as the minimum (see table on page 16). At Paraná Banco, the audit committee's average pay is higher than both the minimum and maximum. However this financial institution said that it will re-submit the numbers to the CVM.

"Such basic information should not present mistakes. Lack of time is no excuse", says Renato Chaves, former equity director at Previ and corporate governance scholar.
"Companies should have put more effort into preparing their disclosure documents. Correct information disclosure is not just compliance with the law, but also a shareholder right", stresses Kanashiro. For 2011, RiskMetrics intends to look not only at the numbers, but also prepare a qualitative analysis of company disclosures.

Generic, vague responses were also found. In the item that should have described the method for calculating and adjusting salaries, agricultural commodities producer SLC Agrícola simply responded that "the company relies on best market practices". In the field that should have disclosed the main performance indicators used for determining compensations, SLC presented only individual evaluation criteria such as focusing on results, innovation, sense of urgency, team building, and leadership.

For Marcelo Ferrari, a director at Mercer, generic principles are of no interest to investors. "Investors want to know whether manager compensation is tied to the company's EVA, Ebitda or any other indicator they can monitor", he says. Dwight Clancy, an analyst with Glass Lewis (another proxy advisory), adds: "Information about quantitative metrics is the only thing that enables investors to evaluate whether a company is paying suitable bonuses to its executives." According to Frederico Logemann, SLC's IR coordinator, the company has been addressing the need for greater detail in Reference Form item 13 in internal discussions. "With the CVM's help, the quality of that data tends to gradually improve", he says.

Some veterans of the exchange, such as Net, also provided insufficient responses. In the item on justifications for salary composition, the company merely stated that it follows "standard market practices, performing periodical surveys and trying to keep the executives in line with the company's strategy, also seeking to encourage high performance and retain talent". Net also failed to provide such mandatory information as item 13.2 of the form, which requires a detailed account of the components of compensations paid to the management bodies and audit committee in the current and past three fiscal years.

Marisa presented contradictory information in the same management proposal. It claimed not to have a performance-based compensation policy in place, then further on in the document, estimated a bonus of R$ 2.66 million for executive officers in 2010. When contacted by CAPITAL ABERTO, Marisa admitted that the document was flawed and said it will be re-submitted to the CVM. For the past three years, the company has adopted a bonus program based on individual targets and financial performance, such as Ebitda.

Felipe Rebelli, a consultant with Towers Watson – a company specializing in executive recruitment and compensation – advises companies to pursue a better way of disclosing their compensation policies, and to do so in a comprehensive, transparent and accessible manner. "Regardless of what the CVM demands, investors will favor companies that do a good job of reporting information. The path toward transparency cannot be reversed", he says.

Different companies, same MD&As While preparing their Reference Forms, the negligence of some companies bordered on the absurd: there were even some cases of copying and pasting. In item 10 - Management Discussion and Analysis (MD&A), the JBS multinational packing plant , Iguatemi shopping mall chain, Inpar real estate syndicator, Hypermarcas, and the Sofisa bank presented practically identical texts on their respective companies' financial and equity status: "Management believes that the company is in a sufficiently good financial and equity position to implement its business plan and fulfill its short and medium term obligations", they all answered. "This flies in the face of the CVM's intended goal, which is to increase transparency", says Dóris Pompeu, a partner-director with Global RI. The newly reformed management comments section, inspired by the American model known as Management Discussion and Analysis (MD&A), aims to convey management's views on their companies' operations. "Therefore, the underlying idea is to avoid cookie-cutter answers", says Antonio Piccirillo, a lawyer with Proskauer. "This should be a place for opinions, explaining the company's results in an easy-to-understand format that anyone can understand." In the MD&A section, the CVM recommends that managers comment on the main tendencies, uncertainties, commitments or events that could have a relevant effect on the company's financial or equity situation. "We're not talking about projections here; we're talking about companies saying what they expect from future operations", adds Fabio Yamada, a lawyer with Proskauer. José Luiz Homem de Mello, a partner at the law firm Pinheiro Neto Advogados, notes that the MD&A is a time-consuming document because its preparation is not merely based on facts. "With all the rush to prepare for annual shareholders' meetings, companies put disclosure quality on the back burner". The CVM promises to make a more qualitative analysis of the materials after companies have turned in their reference forms by June 30th. (L.T.)