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By Emily Pickrell
April 20—In an international environment where controlling executive pay through caps on bonuses and clawbacks has become widely accepted, Mexico's strong protectionist laws for employees means that these limitations do not exist even for senior management, although conditions apply to the awarding of bonuses.
“The sky's the limit,” said Monica Schiaffino, a Mexico City-based partner with Littler, an international human resources law firm, speaking at a global pay panel at the International Bar Association in Mexico City. “There are no limits for bonuses, and clawbacks are not known in Mexico. The laws are extremely protective for employees.”
The Mexican approach contrasts with that of the U.S., the U.K., Switzerland and other countries that have begun to introduce limitations and conditions to bonuses offered to top management, especially if the company's overall performance has been poor.
Switzerland, for example, has introduced laws making a hiring bonus illegal, according to Michele Stutz, an attorney at MME Legal in Zurich.
“You can be criminally liable for a sign-on bonus,” Stutz said. “Severance pay, including golden parachutes, are also forbidden.”
In the U.S., the Dodd–Frank Wall Street Reform and Consumer Protection Act requires shareholder approval of executive compensation and golden parachute packages. It also includes a clawback provision, which allows companies to recoup bonuses paid if the reported results upon which the bonus is paid are found to be false.
Mexico's legislative history of strong labor protections largely precludes such limitations for executive compensation, Schiaffino said. For example, the laws governing dismissing an employee for cause keep the allowable timeframe relatively short, making it difficult to prove that an employee has not performed up to the standard on which a severance or golden parachute would be awarded.
“It is going to take three months or maybe up to six months to make an investigation,” Schiaffino said. “By that time, the short term you have to dismiss an employee for cause has lapsed. You might end up paying severance.”
While paying bonuses based on performance is legal in Mexico, the conditions of the award must be objective and transparent, documented in Spanish and imposed by the actual employer, especially for outsourced workers.
“The key point is implementation,” Schiaffino said. “While you have flexibility on bonuses, if you don't implement them correctly, you will end up paying up. The laws are extremely protective for employees, so the employees will be in a good position.”
The strict condition provisions are intended to protect employees from the not uncommon practice of employers offering employees a bonus as a means to avoid paying profit sharing, then withholding the bonus on the grounds that the employee did not meet the conditions, allowing the employer to avoid paying either profit sharing or bonus.
The concept of clawbacks is foreign to Mexican law, and efforts to recoup already-paid remuneration are likely to be fruitless, Schiaffino said, recommending that companies not pay employees in advance if the conditions have not been demonstrably fulfilled. An alternative way to structure such pay would be as an advance based on certain conditions.
“There are laws that limit the amount an employer can recoup,” Schiaffino said. “If it is not earned, you can probably take something back. Otherwise it is difficult, as it will be considered that the amount is earned, and the laws are very protective of employees.”
To contact the reporter on this story: Emily Pickrell in Mexico City at email@example.com
To contact the editor responsible for this story: Rick Vollmar at firstname.lastname@example.org
For more information on Mexican HR law and regulation, see the Mexico primer.
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