It has always been a challenge for employers to retain the talented (executive) management of the company and encourage them for better performance and thus improve the company’s profitability. At the same time, in my opinion, the motivation system works well only, if the business leaders also consider these colleagues as an asset of the company and are willing to “give a slice of their cake”. This is because these executives contribute greatly to the corporation’s success.
“He/she doesn’t look at the firm as his own.” “I paid him/her a high salary for years, yet he/she left us and went to the competition.” We have come across countless times such and similar statements as a consultant. But why would an owner, an entrepreneur expect, whether with an international background or leading a family business, the managers to give their hearts and souls for the company and put their personal life and leisure back, when they do not benefit proportionately from the company’s success? Of course, mapping out the real proprietorship challenge is not a purely legal task. Nonetheless, there are several corporate, commercial, and employment law agreements to motivate management. Not only the owners, but also people who develop the organization by being responsible for HR, coaching, as well as the company’s tax or finance managers should also be aware of those solutions.
The following few examples make the benefit system transparent, thus being predictable and strengthening the employer brand, increasing loyalty within the business and encouraging higher performance of key personnel.
Quota / Share
Whether a legal person operates in the form of a limited liability (Kft.) or as a private company limited by shares (Zrt.), it has the option to grant quota / share conferring special rights to (middle) management or a certain class of staff. Such quotas / shares with different legal rights serve the purpose of recognizing colleagues who play a key role in the profitability. These quotas / shares do not need to provide equal or proportionate rights (for example, in terms of voting rights or dividend entitlements) and may be for a definite period (i.e. duration of legal relationship with the entity). The changes must be reflected in the establishment’s corporate law documentation, and in the case of a private company limited by shares, additional securities management tasks must be considered.
The purpose of the so-called Employee Share Program (MRP), which is regulated by law, is similar, based on which employees may acquire ownership shares in an organized and preferential manner.
With proper planning and documentation, the introduction and closure of these benefit schemes, i.e. the provision and withdrawal of key employee shares, can be achieved in a tax-efficient manner, otherwise unexpected tax liabilities may arise.
However, in the case of long-term planning, the biggest advantage of the program (which also helps to meet the owner’s expectations and goals mentioned above) is that the concerned employees can earn income through dividends and thus its taxation is more favorable compared to salary.
If a company owner wants to reward its managers’ loyalty, but still does not willing to grant ownership (shares/quotas) in the company (not even one with full value), it has the option of developing a simpler, so called low-tax asset management scheme. As part of this scheme, certain jobs, positions, seniority levels may be defined which determine the benefits in accordance with the establishment’s performance yearly, therefore, encouraging the talented colleagues to perform even better.
In that case, a benefit system can be established where preferred employees, such as middle and senior executives do not take ownership in the company’s shares (quotas), consequently, any fear and mistrust of owners about employee ownership plans may be avoided. Furthermore, the sale and purchase of dividends, tasks and questions related to the provision may be excluded as well. However, even in such cases, it is possible to ensure the distribution of more favorable taxed income on the surplus compared to salary with appropriate planning and documentation.
Other favorable options
Whether in an employment or contractual relationship, the owner of a company always can formulate favorable rules in relation to employment, and thus, among others, implement tax-efficient performance incentives at the company such the following ones:
- increased or reduced notice period in proportion to seniority;
- insurance, health insurance, private health care packages
- a higher amount of severance payment, based on the number of years spent at the company;
- “alumni” benefits (either directly or through a fund, insurance company) available after the termination of the employment relationship with the company;
- benefits provided to the employee’s family,
- providing longer unpaid leave (sabbatical leave).
Like the Employee Share Programs (MRPs), the planning and systematization of the above-detailed benefits may have an impact on tax administration, and thus, on the total cost of the benefits. It is therefore worth structuring the benefit plan carefully from a tax perspective, considering the given circumstances.
The loss and replacement of a middle or senior manager imposes a significant financial burden on businesses. That is because not only the time and cost of recruiting the right person should be considered, but also the alternative costs of handing over processes, integrating a new colleague, rebuilding the entity’s reputation, the loss of the company’s know-how, customer base and building long-term loyalty. It is therefore in the fundamental interest of firms to rethink how they can reward the work of their valuable co-workers and support their loyalty through transparent and predictable remuneration systems.