Employee financial participation in the New Member States —Hungary
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This report describes the current situation in relation to employee financial participation (EFP) in Hungary.
According to the European Foundation for the Improvement of Living and Working Conditions (Recent trends in employee financial participation in the European Union, 2001), definitions of “participation” abounds. Some authors insist that participation must be a group process, involving groups of employees and their employer. Others stress delegation, ie the process by which the individual employee is given greater freedom to make decisions on his or her own. There are those who stress participation as a process and those who are concerned with participation as a result. For present purposes, we will utilise the definition of participation adopted by the European Foundation: participation is a process which allows employees to exert some influence over their work, over the conditions under which they work and over the results of their work.
There are four basic pillars of employee participation in organisations:
- Direct participation, where employees have an influence on daily work-related issues;
- Indirect or representative participation, where employees have an indirect influence through their employee representatives who deal with work-related and organisation-related issues;
- Financial participation, which gives employees the opportunity to participate in profits and enterprise results;
- Collective bargaining, where parties try to influence labour terms and conditions at company and sectoral level.
In recent years, there has been a growing interest in the subject of employee participation in organisations. This interest is generally explained by some relevant changes (and, consequently, new needs) of a social and economic context that is characterised by factors such as global competition and increased flexibility requirements.
This comparative study intends to investigate the development of employee financial participation in profits and enterprise results, namely in the new EU Member States.
Originally defined in the Pepper I Report (1991), financial participation describes any arrangement under which employees may receive money or other assets with monetary value, linked to the financial performance of their employer. Financial participation involves the payment (or potential payment) of rewards that are over and above basic pay and in which all or most employees in a company are able to participate.
The wide range of financial participation schemes that exist can be classified into the following broad generic categories, which may co-exist and/or be interlinked (e.g. share-based profit sharing, see below) overlap:
- Profit-sharing, ie the distribution to employees of cash sums, according to the profits earned by the company in which they are working. Contrary to traditional bonuses linked to individual performance (such as piece rates), profit-sharing is a collective scheme applied to all or to a large group of employees. In practice, profit-sharing can take various forms. (1) It can provide employees with immediate cash (cash-based profit sharing). Cash-based profit-sharing is easily confused with gain-sharing. Gain-sharing is usually considered as a productivity-improving or cost-reducing activity, not directly related to the company profit levels. (2) It can provide employees with shares of the employer company (share-based profit sharing). (3) Profit-sharing (be it cash or share based) can also take a form of deferred compensation (deferred profit-sharing) under which the allocated profit share is held, most commonly, in trust and is not immediately available to the employee. In the latter case the profit share (a) is invested in enterprise funds or frozen in special accounts for a specific period or (b) if granted as a number of shares in the company, frozen in a fund for a certain period before employees are allowed to sell them.
- Employee share-ownership, ie an employee participation in enterprise results in an indirect way, either by receiving dividends or by the appreciation of employee-owned capital, or a combination of both. While such schemes are not directly related to company profits, they are related to company profitability and so enable participants to gain indirectly from company’s added value. Employee share ownership can be both individual and collective. (1) The broadest variety of models is offered by share ownership plans, where shares are distributed free or sold at the market price (non-discounted) or under preferential conditions. (a) These preferential conditions can be sale at a discount rate (discounted stock purchase plan), sale at a lower price through forms of delayed payment (usually within a capital increase), or by the grant of priority in public offerings to all or a group of employees. (b) In post socialist countries, employee share ownership occurred often in the context of privatisations in the form of shares which are distributed or sold to the workers of the company, or vouchers or coupons that are distributed to all citizens. (2) Collective employee share-ownership may take the form of Employee Share-Ownership Plans (ESOPs). An ESOP usually involves a loan to an employee benefit trust, which acquires company stock and allocates it through periodic contributions to each employee's ESOP account. The loan may be serviced by payments from the company out of company profits, out of dividends paid on the stock held by the ESOP or (in rare instances) from employee salary reductions. (3) Employee stock options unlike those granted to individual employees or small groups (especially in managerial ranks) to reward individual performance (“executive stock options”), are broad based.
Employee share ownership in practice - whether shares are held individually or in some trust - does not necessarily entitle employees as shareholders to have a say in the running of the company. Employees may be issued non-voting stock, or may be issued voting shares, but have very little or no control over the management of the shares held in trust. In the latter case trustees may be appointed by management rather than be elected by the employees.
This study intends to investigate and compare the present features of employee financial participation in profits and enterprise results in the new EU Member States. It aims:
- to provide a general overview of the application of employee financial participation schemes in your country (Section 1);
- to collect information on recent changes in the legal regulation of employee financial participation. In particular, this study aims to collect information on legislative interventions on employee financial participation in your country since 2005. In order to do so, you find attached to this questionnaire the National Report prepared for your country in the framework of the PEPPER III Report “Promotion of Employee Participation in Profits and Enterprise Results in the New Member and candidate Countries of European Union” – please note that this document is strictly confidential and was made accessible for internal use only. The PEPPER III Report provides you with information on the legal framework until 2005; please include in your answer any changes that were introduced since then (Section 2. Part A).
- to provide an overview of collective bargaining regulation of employee financial participation and on the connections, if they exist, between legislation and collective bargaining regulation (Section 2. Part B);
- to update and integrate, as far as possible, data included in the PEPPER III Report on the diffusion and characteristics of employee financial participation schemes in your country (Section 3);
- to provide a brief description of specific and significant cases of employee participation in profits and enterprise results in your country (Section 4);
- to describe the position of the social partners on employee financial participation schemes (Section 5).
1. Overview of employee financial participation schemes
Please, provide a general overview of the application of employee financial participation schemes in your country. You should essentially refer to the main cases and to already existing analysis of academic or professional character, if available, or to your own assessment. In particular, please provide:
1. The definition of employee financial participation commonly accepted and used in your country.
The term ‘employee financial participation’ is not used in Hungary, however, employee shares (munkavállalói részvény), ESOP (Munkavállalói Résztulajdonosi Programme, MRP), profit sharing (nyereségrészesedés) and stock options (részvényopció) are commonly used, and understood in line with the above definitions.
2. The main employee financial participation schemes used in your country and the main reasons for their applications (such as promoting productivity increases; enhancing flexibility of remuneration; gaining tax advantages; providing employee with benefits and hence encourage an increased commitment of staff; gaining support for privatisation).
The history of employee shares in Hungary began with the distribution of property notes: state enterprises could give their employees property notes as a piece of enterprise profits. After the commercialisation of the enterprise these notes were converted into employee shares and thus could be used in the buy-out. Minority ownership could be translated into a durable form of ownership only in cases of buy-out companies, usually initiated by the incumbent management.
Employee shares were issued during privatisation amounting to 10-15 % of the company’s equity according to the law. The policy objective was to win the support of the employees for privatisation, but this was a very volatile form of employee ownership, as employees usually sold them right after the privatisation.
ESOP (Employee Share Ownership Programme) is a complex technique, including credit, tax and organisational provisions. It is aimed to help employees to buy the whole or a part of the shares of their companies. The aim of ESOP (according to the preamble of the 1992 law) was the acceleration and furtherance of the privatisation process.
In recent period other forms (Profit Sharing, Stock Options) of financial participation have begun to penetrate in Hungary through the human resource management practice of multinational companies. In principle, as part of the payment system, their introduction is an internal affair of companies, and the State could influence it only through regulations of taxes and social security contribution.
So far the Approved Employee’s Benefit Programme has been the only financial policy instrument which supports company initiatives. The state-recognised programme regulates a broad-based, preferential purchase plan. The fundamental aim is to make employees identify themselves with the long term goals of the company, to retain the key top managers and core workforce at the given firm through supplementing employees’ income.
2. Regulation of employee financial participation
This section concerns both legislative regulation (Part A) and collective bargaining regulation (Part B) of employee financial participation.
Part A. Legal framework
1. Does legislation in your country provide a legal framework to forms of employee financial participation?
No change in the legal framework since PEPPER III.
Formally the most recent amendment of the Law on Personal Income Tax (Act LXI of 2006) did not change the maximum for the annual amount of what can be acquired in a preferential way in ‘Approved Employee’s Benefit Programmes’. What has actually changed, on the one hand, is that gains of all share purchasing and similar transactions should be added up in the given year. On the other hand the calculation of tax base also changed: instead of the nominal value at the time of allocating the share option, now the actual value matters at the time of purchase or collecting share price gains.
At the same time, according to the interpretation of the officers at the Ministry of Finance, the new amendment is favourable for the share option schemes, as it does not require that the shares should be kept for a certain period. Previously in the ‘Approved Employee’s Benefit Programme’ was a ‘deferred’ scheme, i.e. the employees could not sell their shares in the year of purchase and in the following two years. This is not the case now with the share option schemes, therefore employees may avoid the risk of floating share prices, while this option is also acceptable for the tax authorities collecting taxes on the gain in share prices. These changes will probably help share option schemes penetrate in the near future.
2. Since the 1990s, did the privatisation of state-owned enterprises foster the diffusion of employee financial participation?
No, since 1992 there have not been any legislation on privatization which could promote dissemination of employee financial participation.
Employee ownership, especially the ESOP model, spread quickly in the early phase of privatisation. (However, it was not a decisive form of ownership in its heyday either. In summary it can be said that in 1998, the year of privatisation closing, as little as one per cent of assets of companies other than financial institutions was in management or employee ownership in Hungary.) Partly as a result of unfavourable legal regulations, the overwhelming majority of ESOP organisations ceased to exist after the loans for purchasing had been repaid. After the privatisation the minority employee ownership practically disappeared, and the number of companies in majority employee ownership significantly decreased. (See PEPPER III for details.)
Part B. Collective bargaining regulation
3. Are there collective agreements which cover employee financial participation?
Collective agreements do not deal with employee financial participation in Hungary, neither even in those cases of employee ownership in which trade unions have had an active role in the preparatory phase. One of the justifications of this situation is that employee ownership is regulated by laws other than the Labour Code, while the scope of the vast majority of Hungarian collective agreements is limited to issues enlisted by the Labour Code as a possible deviation from the mandatory rules through collective agreements’ stipulations. (The basic principle of the Labour Code, however, allows any kind of deviation in regulation of the individual employment relationship, unless it is contrary to a definite legal regulation.)
3. Incidence, features and effects of employee financial participation
Please provide any update to information and data included in PEPPER III Report, as for the attached National Report, which may derive from either official data or recent research and studies.
| Sector | Number of financial participation schemes | Of which: Profit-sharing only | Of which: Share-ownership only* | Of which: Mixed | Total number of firms in the sector |
|---|---|---|---|---|---|
| Agriculture, hunting and fishing | 18 | ||||
| Industry, including Energy | 143 | ||||
| Construction | 20 | ||||
| Trade, transport and communication services | 69 | ||||
| Business activities and financial services | 0 | ||||
| Other services | 48 | ||||
| Total | 298 |
Source: Rész-Vétel Foundation, 1995
The share of ESOP firms was the highest in commerce, and was relatively high in manufacturing and construction. On the other hand, in agriculture, tourism and real estate services their share was well below the average. (Source: Rész-Vétel Foundation, 1995) According to a telephone-survey carried out in 2000, the majority of still existing ESOP companies was in manufacturing (55%), and the proportion of commerce and service firms had been increased to 20 and 10%, respectively. (Source: Boda-Neumann, 2002)
No data available on other forms.
| Occupational group | Number of employees partaking in financial participation schemes | Of which: Profit-sharing only | Of which: Share-ownership only | Of which: Mixed | Total number workers in the occupation |
|---|---|---|---|---|---|
| Senior officials and managers | 6,300 | 6,300 | 191,200 | ||
| Professionals | 6,200 | 6,200 | 444,800 | ||
| Technicians and associate professionals | 11,100 | 11,100 | 716,600 | ||
| Skilled workers* | 15,600 | 15,600 | 1,566,200 | ||
| Elementary occupations | 700 | 700 | 285,600 | ||
| Other | 200 | 200 | 41,000 | ||
| Total | 40,100 | 40,100 | 3,246,400 |
* Clerks, service and shop and market sales workers, skill agricultural and fishery workers, craft workers, plant and machine operators and assemblers.
Source: Labour Force Survey of 2004/II. (HSCO)
Similar results were published by Rozgonyi-Jávor (1996) based on their empirical study carried out in 5 companies on the workers’ attitudes concerning employee ownership. The distribution of employee owners across occupational groups was as follows: 28.3% senior officials and managers; 22.3% professionals; 29.6% technicians and associate professionals; 18.3% skilled workers and 1.5% in elementary occupations.
No data available on other forms.
| Size | Number of financial participation schemes | Of which: Profit-sharing only | Of which: Share-ownership only | Of which: Mixed | Total number of enterprises in the size class |
|---|---|---|---|---|---|
| Less than 50 | 24 % | ||||
| 51 – 100 | 15 % | ||||
| 101 – 300 | 29 % | ||||
| 301 - 500 | 12 % | ||||
| 501-1000 | 12 % | ||||
| More than 1000 | 5 % | ||||
| Unknown | 3 % | ||||
| Total | 100 % |
Source: Rész-Vétel Foundation, 1995
No data available on other forms.
The ESOP companies were mainly small and medium sized enterprises in 1999 too, more than half of them employed 100 to 500. The share of big firms (employing more than 1000) had been halved between 1995 and 1999. (Source: Telephone survey of 116 companies in 2000, see Boda-Neumann, 2002)
No data available on other forms.
1. In addition to the abovementioned variables (sector, occupational group and size), please indicate if, drawing on existing research, any relations between employee financial schemes and the following set of factors seem to exist:
- Structural: ownership (domestic, foreign).
- Market and economic situation: a) degree of competition (high, low); b) degree of innovation (high, low).
- Company strategies and performance: a) economic performance (growth; stability, decline); b) employment trends (growth, stability, decline); c) management’s attitude towards employee participation (promotional, neutral, adversarial); c) management’s attitude towards industrial relations regulation (promotional, neutral, adversarial);
- Industrial relations: a) presence of a collective agreement (yes, no); union membership (high, low).
See: PEPPER III
2. On grounds of existing studies or accounts, what are the typical features of profit sharing schemes in your country, especially in terms of:
a) source of introduction (unilaterally by the company management, through collective agreement);
b) groups of workers involved (top executives, managers, middle-managers, blue-collar workers, white-collar workers);
c) incidence on annual pay for the workers involved; and
d) types (cash-based, deferred)?
See: PEPPER III
3. On grounds of existing studies or accounts, what are the typical features of employee share-ownership schemes in your country, especially in terms of:
a) source of introduction (unilaterally by the company management, through collective agreement);
b) groups of workers involved (top executives, managers, middle-managers, blue-collar workers, white-collar workers);
c) types (individual, collective); and
d) capacity to effectively exercise shareholders rights?
See: PEPPER III
4. Are there any analysis on the main impacts of the introduction of financial participation schemes on aspects such as productivity and profitability of enterprises; employment and wage flexibility; employees’ attitudes and behaviour?
See: PEPPER III
4. Specific cases
Please, provide a brief description of at least four of the most significant cases of employee participation in profits and enterprise results in your country. Please try to cover both profit-sharing and employee share-ownership schemes and include at least a case where collective bargaining played a significant role.
Herend Chinaware Manufactory (Herendi Porcelánmanufaktúra Herendi Porcelánmanufaktúra)
The company produces hand-painted chinaware, and exports to the luxury market segments of 56 countries. This company is not only a part of the national heritage due to its history, but it also presented the first and most famous case of employee ownership in the country. The Workers’ Council movement, organised at the company in the ‘transition’ period, was a committed protagonist of employee ownership. Currently the employees own 75% of equity, while the state has 25% plus one share. The 1,100 employees became shareholders in 1993, they have owned half of the shares individually and 25% collectively through the ESOP trust. The by-law of ESOP sets a ceiling of 1.5% for the shares of each employee including the managers. The CEO regularly consults with the trade union, shareholders’ representatives, the Supervisory Board, and the works council.
AEGON Hungary General Insurance Company (AEGON Magyarország Általános Biztosító AEGON Magyarország Általános Biztosító)
The company is one of the biggest insurance firms and pension funds in Hungary, owned by the Dutch Aegon since the privatisation of the predecessor state owned enterprise. For several years the company has run an employee share option programme. All the 900 employees are eligible to subscribe shares, and later on, in a predetermined time they are eligible to collect the gains in share prices. In turn, insurance agents, working as self-employed are not eligible to partake. As a rule the amount of share options depends on the position of the employees. The scheme in practice was a sort of premium which enjoyed preferential personal income tax treatment, as the gain has been implied of a flat rate 20% taxation. So far actual share purchase has not been an option, but the ongoing modification in the scheme will make it possible. The company trade union is fairly content with the development of the scheme.
Graphisoft SE Graphisoft SE
The firm was started-up as a genuine Hungarian small business in the early eighties and specialised for developing software tools for architects. Since then it has grown to be an international company with extensive sales network and it also has a real estate development branch. The shares are traded at the Budapest Stock Exchange and the company was converted into an SE in 2005. The principal owner, the founder of the firm, owns 25% of the shares. To motivate board members, managers and employees the company introduced stock options in 1996. It is a broad based programme, as 65-70 % of the 250 employees are given share options. The implementation of the programme is based on an annual ‘worldwide share option programme’, while the management makes the actual decisions on the individual amounts of the stock options. Most of the stock options are carried out as a ‘cashless’ stock exchange transaction, as the majority of employees do not wish to keep the stocks. The company has not registered for the ‘Approved Employee’s Benefit Programme’ as it found the annual tax-free limit too low and the administrative red tape too high. There is no trade union at the firm.
Auchan Magyarország (Auchan Hungary Auchan Hungary)
The company is a subsidiary of Auchan, an international shopping mall chain, operating 8 supermarkets in Hungary. The company employs 4,500 in Hungary, of which 3,455 owned shares of Valauchan or Valauchan International at the end of 2003. Valauchan International is an asset-management company owning Auchan shares and investing at the stock exchange; its shares are given free of charge or can be purchased by employees with open-ended contract in each country wherever Auchan operates. Purchasing is voluntary and possible up to 25 % of the employee’s annual wage, and sometimes the company provide a matching share for each one bought by the employee. The main objective is to motivate and keep the employees, that is why in Hungary newly hired employees are given 50 shares free of charge, but such shares will be withdrawn if the employee leaves the firm within two years. In case of purchasing, the share prices are deducted from a special bonus, or the employees can pay for them in instalments. As far as free shares are concerned, this is a ‘deferred’ scheme, as the shares cannot be sold for five years. The scheme is organised at the level of supermarkets, independent from the employee representation channels at the company.
5. Position of the social partners
At the national level, trade unions participated in the elaboration of the various forms of employee ownership. Between 1991 and 1995 the main venue of social partners’ involvement was the Privatisation Committee, a standing body along with the Interest Reconciliation Council (Érdekegyeztető Tanács, ÉT).
Local unions, however, were often surprisingly passive and limited their action to declare their interest in employee buy-out but did not play any role in organising the procedure, and obediently did what the managers told them to do. In other cases, however, local trade unions actively lobbied for preferential shares as well as for ESOP buy-out. Workers’ Councils (a grass-root trade union movement established during the political transition period) was especially influential in this respect.
In addition to influencing privatisation decisions, unions usually had at least one of their leaders as member of the ESOP trust-organising committee. While the trade union formally did not participate in organising and running the ESOP at any of the companies, due to personal overlaps ESOP and employee representation were tightly interconnected at most workplaces. The management often tried to separate ESOP from employees’ interest representation (“This time let us represent workers as owners rather than as employees!”) but it never succeeded to perfectly achieve this objective.
It is worth noting that neither national nor company trade unions have legal entitlement to regulate employee ownership or have a say in the operation of the ESOP trusts. None the less, there are rare examples for active roles of social partners, for instance, the hospitality industry sectoral collective agreement includes recommendations for supporting employee ownership in the course of privatisation.
6. Commentary by the NC
Please, provide your own assessment on the issues covered by this questionnaire.
Out of the financial participation forms, it is employee owership that spread in Hungary, linked to the process of privatization, between 1989 and 1995. Today the weight of ownership form is insignificant, which is related to no small degree to the conditions in market economy which are unfavourable to Hungarian-owned SME’s. No mention has been made of state support for financial participation during professional debates on the health-care or pension reform, while other models or measures of mature market economies have become corenerstones of the government’s reforms. Similarly to the period of privatization, today the introduction of the “usual” support schemes of financial participation and the insitutionalisation of tax allowances can only be attained as a result of the activity of lobby groups. Therefore the most promising practices in this domain are those established by multinational companies together with subsidiaries of other companies. The domestic adaptation of such an incentive form has led to the introduction of the only state-supported model, Approved Employee’s Benefit Programme (Elismert Részvényjuttatási Program), in 2003.
References:
Boda, Dorottya and Neumann, László, (2002): A munkavállalói tulajdon visszaszorulása Magyarországon [The roll back of employee property in Hungary], Közgazdasági Szemle, 2: pp. 143-157;
Rozgonyi, Tamás and Jávor, István (1996): A Munkavállalói Résztulajdonosi Program (MRP) törvény alkalmazásának szociológiai és szervezeti hatásai [Sociological and organizational effects of application of the ESOP law], Munkaügyi Szemle, 7-8: pp. 69;