Home / National Industrial Relations / Countries / Hungary / Financial Participation

Financial Participation

Employee participation, in the form of employee ownership, profit-sharing and cooperatives, has a long history in Hungary. The most important form is employee ownership, which enjoyed much support in the early years of privatization through the Hungarian Employee Share Ownership Programme. Despite the support in the early years, the relative weight of this ownership form decreased rapidly in recent years and is now quite insignificant.

In 1984 company self-government was institutionalised, allowing state enterprises to be managed by enterprise councils or assemblies elected by the workers. This measure laid the basis for the privatization process started after 1989.

The possibility of employees taking up shares in the companies they work for has existed in Hungary since 1988, when the law on business associations was first introduced; the current version of the law continues to contain these provisions. According to it, up to 10% of a private-sector company’s equity may be held by its workforce. This type of investment has however proved to have little long-term effect, with employees receiving shares from the companies they work for selling them as quickly as possible.1

The mass privatization programmes started in 1990 and basically two distinct forms of property acquisition by parts of the workforce 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 on the brink of insolvency, employees didn’t need to raise cash, as the preferential acquisition of property was practically free. The situation was quite different in commercial companies, where employees were motivated not so much by dividends but by the return from selling their shares on the secondary market. This is what happened to most of these shares.

The commonest form of employee ownership emerged from MRP schemes - the Hungarian version of the English ESOP (Employee Share Ownership Programme). Generally speaking, the Hungarian employee financial participation schemes are related to the American “Trust Model”, though there is one major difference between the two systems. Whereas the Hungarian schemes serve solely as an instrument for privatizing companies and cease to exist once all shares have been paid up and transferred to the employees, the US schemes remain in existence for administering the employee shares.3

In Hungary, 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.

In the period of the ‘spontaneous privatization’, part of the company management became owners. Almost all ESOP buy-outs were de facto management buy-outs (MBOs).4 However in 2003 “fairness rules” were introduced, restricting the number of shares management was allowed to hold. The number of MRP schemes sank drastically on account of the difficult economic and legal situation. After credits had been repaid, a lot of the schemes were terminated due to a lack of funding. Employee owners preferred receiving their wages in money and not in shares. Any shares received were sold as soon as possible.

New legislation came into effect at the beginning of 2003 allowing companies to introduce state-recognised employee share ownership schemes, and providing companies with tax incentives to do so. To gain recognition, a company has to file an application with the Ministry of Finance, which then communicates its decision to the local tax authority concerned. Applicants are generally multinational companies operating in Hungary and wanting to introduce corporate schemes into all national subsidiaries.5

There is at present no overall initiative on the part of the Hungarian government to promote employee share ownership. Although all political parties are expressing their support for the subject, no concrete political decisions have been taken.6

Cooperatives, especially credit cooperatives, played a very important role in the period between the two world wars. After the 1948 communist takeover the cooperative sector was artificially inflated, with about one quarter of all employees working in cooperatives by 1986. This changed rapidly with the decline of the regime, and by 2000 only 0.2% of all employed were income earning cooperative members.7

Profit-sharing schemes were already in use in Hungary in the socialist state system. In the old Hungarian socialist system, profit-sharing was a flexible wage component, topping up basic salaries. Many domestic companies carry on offering such schemes.

Certain foreign companies offer incentive schemes modelled more on short-term “American schemes”. These are very much profit-oriented and are mainly used as management incentives. However, such schemes are the source of major disparities within companies, in contrast to the “European incentive schemes” often practised by domestic companies, where there are fewer differences and disparities between different groups of the workforce and which target more long-term interests8 .

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.