Brazil Confidential: Recruiters forecast double-digit growth in pay, despite growing reluctance from multinationals

Financial Times – Brazil Confidential

Executive salaries still surging
Recruiters forecast double-digit growth in pay, despite growing reluctance from multinationals.

SUMMARY

>Brazil Confidential interviewed eight senior recruiters in depth about the top end of the labour market The recruiters said salaries would rise by more than 10% per year as small companies take up the slack

>Second-tier cities such as Recife are seeing salaries almost as high as in São Raulo and Rio de Janeiro. Rising premiums are being paid to lure executives to more remote regions.

> Recruiters already see problems arising from the promotion of inexperienced staff. Companies are developing professional HR departments to retain good employees and weed out bad ones.

April 14-27 2011 – Brazilian executive salaries, already among the highest in the world, are likely to continue to grow quickly this year. Eight senior headhunters surveyed by Brazil Confidential forecast that average executive pay increases would be in double-digits this year, before slowing in 2012.

In fast-growing cities such as Belo Horizonte and Recife, salaries for senior executives are now close to those in Sao Paulo. Across Brazil, companies are deferring new recruitment and over-promoting juniors to avoid executive salaries. Recruiters report longer negotiation periods and some reluctance to pay up, especially from foreign companies, but compensating interest from smaller local companies. One agency, Dasein, says that over the past three years many individuals have seen their salaries double or triple. Dasen’s figures are partly inflated by not comparing individuals at similar stages of their career. Other headhunters say executive salaries have grown less, but still robustly: 15-35% per year recently. To illustrate the continuing demand, Rafael Souto, director of headhunters Produtive, points to a recent report by HSM Management, in which 78% of the 500 executives surveyed said they did not have sufficient leaders in their companies. Little has changed this year. “Growth is a little more modest but the balance of power is still with executives,” says Carlos Ribeiro Dias, chief executive of ASAP, which has seven offices in Brazil. In 2009 and 2010, he saw salary increases average between 15% and 20% and he expects that rate to be maintained this year.

Jorge Maluf, a partner at Korn Ferry (KFY:NYSE) in São Paulo, who specialises in financial recruitment, says, “At the beginning of the year I was expecting a reduction in terms of activity but this is not happening. It’s even accelerating.” He points to the role of start-ups in insurance, investment, private and corporate banking in keeping demand strong.

From 2012, most recruiters surveyed see salary increases slowing to 5-10%. Training programmes are set to add more personnel to the market, while the notorious cost of doing business in Brazil – including social security payments on wages – may slow the arrival of international companies- “No one can keep up with this pace of wage rises,” says Mr Souto.

Indeed, there are some rumbles of discontent. General Motors (GM:NYSE) has complained about salaries outstripping productivity gains in Brazil. In October, the US carmaker’s president for South America, Jaime Ardila, said that, while Brazilian car manufacturer salaries had risen 3-5% above inflation in recent years, productivity gains were a more modest 2-2.5%- In addition, social security costs can represent a full 120% of salaries. According to Adauto Duarte of Brazil’s vehicle manufacturers association Anfavea, salary increases in the sector have played a large role in driving up imports. Bidding wars are now common. A luring company may offer an employee a rise of 20-30% to move and the employer needs to offer 30-35% for the person to stay, says Mr. Ribeiro Dias. Headhunters are becoming more aggressive, with companies cold-calling whole departments, often without names of individuals to speak with – a tactic rarely seen in Brazil until now.

Multinational caution

Adriana Prates of Dasein is an exception and thinks that a slowdown in salaries is already starting. When she speaks to executives and HR at companies, she finds them less inclined to offer substantial increases to lure staff. More executives are prepared to move into more dynamic sectors, in search of experience rather than greater pay: Ms. Prates recently helped a R$45,000 ($28,285, £17,388, €19,570) per month executive transfer from steel to mining with minimal pay increase. Some of Ms. Prates’s clients are mulling sacking senior executives for more junior ones to save money and she expects that trend will gather pace.

Foreign companies are leading growing resistance to pay rises. They are battling the increase in salaries, as well as the appreciation of the Real and high levels of profit distribution to executives through bonuses, says Mr. Maluf. Moreover, many international companies have global policies capping remuneration that make them less flexible and responsive to rapid wage rises.

Recruiters working with multinationals are reporting longer negotiating periods for hires. Multinationals can also bring in staff from other offices in the region, although this is complicated by language factors. And foreign executives may ultimately become part of the same pay cycle: “It’s difficult to tell vour client in New York ‘approve a pay rise for your hire in Sao Paulo or you’ll lose them,’ when the Brazilian is already being paid more than his boss,” says one recruiter.

One of the most sought-after skills has been knowledge of Brazilian legislation, says one recruiter

Many foreign companies are just opening up shop in Brazil- “Everyone is eyeing Brazil right now- Executives have to show that they are doing business in the growing economies of Latin America,” says Mr Crespi. More companies are now considering operating through occasional visits to Brazil, rather than by opening local hires. However, that is less of an option in the oil and gas sector, where multinationals must comply with local production requirements.

Brazilians retort that the cost of living is taking the gloss of these huge pay rises for Brazilian executives. Ms. Prates points out that flats in Belo Horizonte have matched the increases of salaries with good apartments quadrupling in price in recent years.

And if multinationals are more cautious, recruiters report that demand from local companies is strong. Family-owned companies are bringing in respected professionals from the market to improve corporate governance, often to prepare for IPOs. For years, employees have been drawn to work at the safety of larger and particularly multinational companies; today, smaller local companies are putting in place the same professional structures and employees do not need to master English, a prerequisite for most multinationals.

Another driver heating the market is that the option of luring back Brazilians from abroad is running out. Many Brazilians who want to come back have already done so. This is only partly compensated by the arrival of more Americans and Europeans, especially from crisis-hit Portugal. The number of work visas increased 19% in the first quarter of this year compared to the same period in 2010. The visa process can be protracted.

Demand by sector

The sectors struggling to fill positions include consumer and retail industries. Construction continues to be a main driver with infrastructure improvements and housing bringing up manager salaries for some positions close to investment banker levels. Logistics and supply chain managers are in demand as companies struggle to find their way round Brazil’s labyrinthine transportation system. Mining salaries – particularly for engineers -have gone through the roof too. Chief operating officers can earn as much as R$55,000-60,000 per month.

In agroindustry, there has been a drive to increase productivity and yield with companies looking for fewer, but higher-quality, executives, says Jeffrey Abrahams, founder of Abrahams Executive Search in São Paulo. Agro companies are reluctant to hire managers from outside the industry, concluding that foreign managers had exacerbated the financial problems of many sugar producers in 2008-2009. That puts further pressure on salaries inside: following annual increases of 30-35% over the past two years, they are likely to rise 25% this year, Mr. Abrahams estimates.

Even finding willing candidates has become much tougher, says Mr. Abrahams. Before, he could comfortably find up to seven candidates per vacancy; now finding three is a challenge. Contracts, which were previously signed within 45 days, can now take up to four months to complete.

Mr. Abrahams notes that one of the most sought-after skills last year was knowledge of Brazilian legislation. Onerous laws on imports, for example of fertilisers, means companies need to be able to negotiate with the ministries of agriculture and health, as well as the environment agency Ibama, and red tape at a state level. Mr. Abrahams’ clients have tripled their number of employees with regulatory experience in the last three years, he estimates.

Industry has been a surprisingly strong area too. Mr. Ribeiro Dias saw a 72% increase in demand for executives in industry last year. Others report that industry managers in business-to-business areas are in great demand. However, the oil and gas sector has seen less activity, in part because of the bureaucracy at Petrobras (PETR4:SAO) and the long process of developing the pre-salt fields.

Regional catch-up

In Recife, one of the country’s most heated markets, there has been a doubling of some salaries in the last two years, says Eline Nascimento of Ágilis: mid-level managers have seen their salary rise from around R$6,000 to R$12,000. The biggest growth in remuneration in Pernambuco is in areas such as civil engineering and shipbuilding, but demand is high in services too.

Ms. Prates notes that getting executives to re-settle in Recife is hard because of high crime rates and poor schools and says she often sees demands for 40% more salary to move to the region. A private equity head adds that one of the hardest things to do is move people from Sao Paulo to smaller cities, where infrastructure is weak, and that this has impeded the growth of his company in these areas as it is difficult to find professional managers to run companies in the regions.

The boom is closing the gap in salaries between São Paulo and the rest. Before, executive jobs in the regions, particularly the northeast, were paid at a 20-30% discount to São Paulo. Today senior executives are paid almost the same wherever they are in the country. Indeed, many companies looking for talent in the northeast use staff from São Paulo and Rio de Janeiro instead. Mr. Ribeiro Dias plans on opening a recruitment office in Salvador soon and sets the northeast as the market with the most potential.

Belo Horizonte has seen a similar phenomenon and salaries for executives are almost the same as in São Paulo today, says Ms. Prates, although technical specialists and junior managers earn around 15% less. Other headhunters point out that you can find executives in Sao Paulo from these areas prepared to move.

Rodrigo Campello of FIT Consulting agrees that salary gaps between São Paulo and Minas Gerais have closed. Cities such as Porto Alegre, capital of the southern state of Rio Grande do Sul, are also seeing salaries converge at least for executives, reports Mr. Souto, adding that a 10-15% gap persists in technical positions.

More companies are recruiting students directly from universities, and developing better trainee programmes.

Moving executives to Pará, the northern state which is a major iron ore producer, or Mato Grosso, the centre-west’s largest soya producer, can earn twice the salary they did in São Paulo, as compensation for the loss in quality of life.

Focusing on retention

High demand is creating high turnover. New entrant companies regularly attract staff by offering a promotion. A chief financial officer can be lured with a chief executive position or a regional head becomes a national head, says Mr. Maluf. Yet whether such executives are sufficiently experienced for their new positions is not always clear. Many newcomers privately admit they feel uncomfortable with the level of seniority they have achieved in a very short timeframe.

That is putting retention centre stage. Companies are investing in professional human resources. More professional HR areas also spot people who are not performing and at today’s exorbitant salaries, increasingly companies are willing to sack them and find a replacement.

Almost all large Brazilian companies today have implemented professional career planning for employees, either internally or outsourced. They are reinforcing training packages, paying for courses. Remuneration strategies with equity or options that tie executives in with long-term performance are widely used, recruiters report.

At the same time, more companies are recruiting students directly from universities, and developing better trainee programmes. Some companies are even working with institutes to improve the quality and relevance of the content of the courses, says Mr. Campello. Human resource teams at banks are looking at branding programmes to get closer to the universities, adds Mr. Maluf.

ACTION POINTS

> Executive salary inflation remains strong. One factor keeping the market tight is that Brazilian companies have less scope to lure hack ex-pats, with many of those who want to return already having done so.

> Multinationals constrained by global policies and competitiveness concerns, are leading the resistance to pay increases. Automaker GM has complained that productivity is not keeping pace with salaries.

> Companies are looking to work more closely with universities on recruitment. Meanwhile the development of corporate HR divisions opens up business opportunities. Recruitment case studies.

More companies are considering operating through occasional visits to Brazil, rather than hiring locally

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