Participation financière

The history of employee financial participation, in form of employee ownership, profit-sharing and cooperatives has a long history in Hungary. The most important of these forms is the employee ownership, which enjoyed much support in the early years of privatization through the Hungarian Employee Share Ownership Programme (ESOP), which is still prevalent today. Despite the support in the early years, the relative weight of this ownership form decreased rapidly in the last years, so that it is rather insignificant nowadays. Profit-sharing schemes, in the context of incentive plans, have been developed only to a certain extent and did not enjoy any special legal support. An exception from this rule is the ‘Approved Employee Securities Benefit Programme’, introduced in the tax legislation in 2003. Cooperatives, a traditional organization form in Hungary, play today an insignificant role in the Hungarian economy.

Employee ownership has been first introduced in Hungary in 1956, with the “Workers Councils” during the revolution, and has been reinforced during the reforms from 1968. From 1984 on it became full fledged, as employees became partial owners of the companies and “market coordination” replaced the socialist system. Another initiative – from 1982 – was the Enterprise Business Partnership (VGMK). These were “intrapreneurial” organized business with few workers enjoying greater autonomy. The extra income earned so could be retained by the workers. In 1984 the self-government of companies has been institutionalised, allowing state enterprises to be managed by Enterprise Councils or Assemblies elected by the workers. This increased the company’s autonomy and settled the basis for the privatization process started after 1989. The Law on Business Associations from 1988 allowed large State companies to be transformed into limited liability companies and joint-stock companies, thus starting the transition towards a market economy.

Even before the start of the mass privatization programmes in 1990, a decree of the Ministerial Council allowed employee ownership by means of property notes[1]. Companies could issue such property notes free of charge for employees only using the after tax profit, up to a maximum of 10% of the total assets of the company. However, such property notes were issueable only until May 15, 1993. Later they were transferred either into shares or companies were obliged to buy them from their owners.

The growing need for legal control of privatisation resulted in the adoption of a privatisation law and the establishment of the State Property Agency.

The mass privatization programmes started in 1990 and basically two distinct forms of property acquisition by employees developed. The first was the preferential acquisition of properties by employees, which could comprise as much as 10-15% of companies’ subscribed capital.[2] In large state-owned companies approaching insolvency, employees didn’t need to raise cash resources, the preferential acquisition of property was practically free. The situation was quite different in companies with considerable profits, where employees were motivated not so much by dividends but by the return from selling their shares on the secondary market. Most of these shares had been sold afterwards as a matter of fact on the secondary market.

The second form of employee ownership emerged from MRP-Programmes - the Hungarian version of the English acronym ESOP (Employees Shared Ownership Programme). Here, employees could participate in a tender for purchasing the company's property, along with external investors. In the context of MRP, credits were available to employees on preferential terms.

The privatization of the competitive sector ended in 1998, leaving the Hungarian economy with a rather negligible employee ownership share. After their number decreased steadily in the last years of their existence, the overwhelming majority of ESOPs ceased to exist after the loans were repaid.

Cooperatives, especially credit cooperatives, played a very important role in the period between the two world wars. After the communist takeover from 1948 the cooperative sector was artificially inflated, so that by 1986 about one quarter of all employees worked in cooperatives. This changed rapidly with the decline of the regime, and by 2000 only 0.2% of the employed were income earning cooperative members.[4]

Profit-sharing schemes have been used in Hungary also in the socialist state system. Most domestically-owned companies still use this tool nowadays. Multinational- and foreign-owned companies use other incentive methods, mostly those developed inside the mammoth company.[5] About 20% of all Hungarian companies use profit-sharing as an incentive tool.

[1] See also “The PEPPER III Report: Hungary”(2006)

[2] See also Galgóczi & Hovorka: “Employee ownership in Hungary: The role of employers' and workers' organizations” (1996-1997)

[3] Ibid.

[4] See also “The PEPPER III Report: Hungary”(2006)

[5] Ibid.