Remuneration packages for satisfied and loyal employees

Inside View

Gellért Menczel-Kiss, Partner, Senior tax advisor, LeitnerLeitner

Employment-related costs, increasing fluctuation and workforce difficulties strengthen the need for Human Resources solutions. How to satisfy employees and whether the salary alone is enough to motivate them in the long term is a lengthy debate. Still, it is very likely, when considering the market situation and the available remuneration, that money counts.

Indeed, the remuneration package may prove crucial in helping an employee decide between staying at their current employer or searching for new job opportunities. On the other hand, a significant raise cannot be expected, especially given the recent inflation turbulence, and what is given today as the salary will become the base of the next raise.

Therefore, in addition to the basic salary and potential bonuses, employers must find a good combination of remuneration packages so that the wage remains attractive, but labor costs, including taxes, increase as little as possible. That brings to light fringe benefits and other schemes.

However, after a recent reform of fringe benefits, the Hungarian wage system does not provide much of a playground for creativity, limiting the opportunities, especially considering the above-mentioned attitude that “it is what is put in the purse counts.”

The Szép card, with its beneficial taxation, is a well-known fringe benefit; however, this has a yearly cap, which does not provide a significant volume, especially in mission-critical positions. Nowadays, a bonus scheme, healthcare services or company car as a benefit are not extraordinary either. The scope of tax-exempt benefits is limited to cultural and sports tickets, nursery or kindergarten contributions; however, these cannot be seen as constant wage supplements or motivators.

As tax advisors, from time to time, we receive questions about whether a benefits scheme is available that ensures both the satisfaction and loyalty of employees for a longer period and also decreases costs. This is where the combination of HR and tax planning is necessary. Employee participation programs (MRP in Hungarian) have recently come into consideration. Although some may think this is only for multination giants, it might also be worth considering for smaller enterprises, as such schemes can contribute to the motivation and higher performance of employees by supporting the feeling that they are working not only for the success of the company but also for their own higher remuneration same like owners. MRP is even, in principle, available for joint stock companies, and under special rules, this can be extended to the Hungarian subsidiaries of foreign entities, and participation might be achieved in limited liability companies as well.

MRP is primarily granted to key employees or senior management for loyalty and motivation purposes. Compared to other incentive schemes, this is more favorable than employee share, premium or bonus plans and restricted stock units.

The advantage of the MRP is that membership interest acquired, as well as securities granted through it, are exempted from tax and are not regarded as income of the employee at the time of acquisition, meaning that neither the employer nor the employee is liable to pay tax on them. Further, assuming that the employee’s annual income reaches the social tax’s upper limit, only personal income tax at 15% is due when receiving payments from the MRP or when the securities acquired are sold or redeemed.

With good and timely planning combining tax and legal considerations, MRP could serve as a preferential compensation scheme where the common and individual goals might create unity between the company and the employees, bringing HR and the compensation mindset to a new level. You may rely on the full-scope service packages of LeitnerLeitner, one of Central Europe’s most influential tax, accounting, audit and legal consulting companies.

This article was first published in the Budapest Business Journal print issue of April 19, 2024.

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