Are profit-sharing incentives getting attractive again?

Are profit-sharing incentives getting attractive again?Information provided by Asinta’s French Partner, Gerep.

General De Gaulle introduced profit sharing in 1959 with the aim of amalgamating the interests of employees and employers, by linking staff interests to the success of the company. Today, sixty years on, this old value-added sharing scheme is still full of promise. The proposed company law known as Pacte devotes one of its key measures to incentives by abolishing the flat-rate NI contribution (“forfait social”) for companies with under 250 staff. Will this be enough to give a new lease of life to such schemes, so familiar but often not understood?

Profit sharing hiding in the wings

The growth of such schemes came to a halt several years ago. The “forfait social” set at 2% when introduced in 2008 and which rose rapidly to 8% and then in 2012 to 20%, has made these bonus schemes much less attractive. In 2015, profit sharing distributed by companies with over 10 staff hardly exceeded €8 billion. Although one in two employees in companies with over 250 staff have access to profit sharing, such schemes are practically absent in companies with fewer than 50 staff. Less than 10% of those staff actually has a scheme.

A flexible way to help staff share in company performance

Profit sharing has everything to make it attractive, especially in small companies. Even though it is optional, it is still an agreement made with staff or their representatives. Calculation of the incentive can be based on the company’s trading results. In this way, it offers staff a form of variable, collective remuneration that is proportional to the company’s good results. Nevertheless, the incentive may also be linked to more targeted performance criteria, not actually appearing in the books of account. For example, in the building trade, some incentive agreements are based on meeting completion deadlines or the upkeep of plant and material. In services or consulting, customer satisfaction may be an important criterion. In this way, an incentive mobilises staff around precise collective objectives on which they clearly have influence. On one condition: the criteria must be capable of objective measurement. By mixing various criteria, an incentive agreement arrives at a customised formula that determines staff bonuses, at least for the next three years.

Cost now makes it attractive for companies with under 250 staff

Abolishing the “forfait social” for companies with fewer than 250 staff means the difference in cost of a profit sharing “bonus” as opposed to salary extras becomes spectacular. A €100 bonus taken in the form of salary would cost the employer at least €180. If paid as profit sharing, the same net amount of €100 would only cost the employer €111 (€111 less CSG and CRDS levies costing 9.7%). These financial gifts still do not ensure a massive take-off for these incentives in companies with fewer than 250 staff.

It is the real nature of such schemes that puts the brake on

Firstly, putting together a profit-sharing agreement presupposes a period of negotiation with staff. Staff can get various people involved: union reps, the ESC (economic and social committee), or the staff themselves who will have to ratify the offer made by the employer. Negotiations are always a good time to take the pulse, as it were, of the company’s staff.

Once discussions have succeeded and the legal deadlines passed, the agreement may be registered. It is up to the employer to ensure the agreement lasts over time: the criteria used should be measured and be the subject of active and clear communication to staff. In reality, entering into a profit-sharing agreement entails a certain degree of transparency on the company’s performance, something that can be off-putting for many a boss when having to publish and explain results and, in effect, become accountable to their staff. Seen from that angle, one can understand why some prefer to stick to traditional bonuses paid to deserving employees individually on a discretionary basis.

Even though profit-sharing incentives satisfy the idea that staff contributes collectively to performance and the notion of negotiated profit sharing, not all trade unions and leaders of opinion are convinced. Some people are suspicious to a maximum. Even though they are attached to the pre-eminence of the employment contract, they are reluctant when it comes to sharing in the risks as well as the profits of the employer and are allergic to employee savings schemes.

Such hesitation found with so many people, shows that a profit-sharing incentive is much more than just a tax-free bonus. It is a device that boosts the feeling of common interest between boss and staff, and breaks down the traditional barriers within the organisation. In short, the first stage towards a change in management culture.

Canada: Asinta Partner Named One of Canada’s Most Admired Companies

Canada: Asinta Partner Named One of Canada’s Most Admired CompaniesAsinta is pleased to announce that its Canadian Partner, Cowan Insurance Group, was recently named one of Canada’s most admired companies by Waterstone Human Capital, Canada’s leading cultural talent management firm.

Cowan’s submission highlighted a culture characterized by excellence, commitment and innovation; the outcome of continuous, disciplined execution of robust employee engagement strategies directly aligned to corporate business goals and objectives supported by a corporate social responsibility program, a constant focus on employee development and an integrated recruitment and retention framework.

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Hungary: Benefits Tax: Tax advantages eliminated for many benefits

Hungary: Benefits Tax: Tax advantages eliminated for many benefitsEffective date: January 1, 2019

Hungary has eliminated almost all tax advantages for many fringe benefits beginning January 1, 2019. This is a significant development as employee benefits in Hungary have historically been structured as cafeteria-style programs specifically because of their tax favorability. The change will make previously tax-favored benefits, such as pension contributions, health insurance, housing allowance, student loan repayment and cultural vouchers fully taxable as ordinary salary with respect to personal income and payroll taxes. In addition, social insurance contributions will increase slightly.

 

Background

Beginning January 1, reduced tax rates will only be available for a limited number of benefits. Tax law has provided an incentive for employers to offer a number of in kind benefits and allowances that were either completely tax exempt or subject to reduced employer-paid taxes.

In the past, non-wage fringe benefits were subject to a 15% personal income tax and a 14% social health service contribution on 1.18 times the value of the benefit, making the total tax rate 34.22%. From 2019, the social health service contribution will be subsumed under a 19.5% social contribution on 1.18 times the value of the benefit, making the new total tax rate 40.17%. It is expected that the social contribution rate will decrease to 17.5% after July 1, 2019.

Key changes

Favorable taxation is eliminated for the following non-wage benefits:

  • Employer contributions to a voluntary mutual pension fund (group pension fund).
  • Employer contributions to group health insurance.
  • Housing allowances or subsidies up to HUF 5,000,000 in a five-year period.
  • Housing allowances for mobile employees.
  • Student loan repayment up to 20 percent of the minimum wage per month.
  • Risk insurance premiums up to 30 percent of the annual minimum wage.
  • Vouchers or tickets for cultural events up to HUF 50,000.
  • Tickets for sporting events.
  • Voluntary mutual insurance.
  • Local transportation passes.
  • Education allowances.
  • Erzsébet vouchers and cards (gift, meal, school, clothing, culture, sports).
  • The Széchenyi (SZÉP) recreation card cash account benefit up to HUF 100,000.

Favorable taxation will continue for the following non-wage benefits, which will be subject to a combined employer tax rate of 34.5% (15% personal income tax and 19.5% social tax on the actual value of the benefit):

  • SZÉP card benefits of three types will continue to be subject to lower taxation paid by the employer at the rate of 15% as income tax and 19.5 percent as social tax on the value of the benefit. The tax-favored SZÉP card benefits will be:

Accommodation subaccount up to HUF 225,000 per year.

Catering subaccount up to HUF 150,000 per year.

Leisure subaccount up to HUF 75,000 per year.

Favorable taxation will continue for the following non-wage benefits, which will be subject to a combined employer tax rate of 40.17 percent (15 percent personal income tax and 19.5 social tax on 1.18 times the value of the benefit):

  • Payments for targeted services provided by voluntary insurance funds.
  • Private use of a company phone.
  • Official or business trip related meal and other taxable services.
  • Gifts of small value once a year (up the 10% of the minimum wage).
  • Business and representation gifts.
  • Non-wage benefits exceeding the unique and / or the aggregated limits (e.g., SZÉP card amounts above the indicated limits).

The complete tax exemption for childcare services provided or subsidized by an employer will not change.

Next steps

That this change will dramatically affect the employee benefits landscape in Hungary is evidenced by a recent World Bank tribunal judgement awarding French meal voucher provider Edenred EUR 23 million for the effective elimination of their market in Hungary.

Employers in Hungary will need to reevaluate their employee benefits strategy if it is built around previously tax-favored benefits in kind and allowances under a flexible cafeteria structure. Many cafeteria plans give employees the ability to allocate money to voluntary mutual pension funds and other benefits, which will no longer be taxed differently from ordinary income. This may lead employers to reconfigure or even eliminate flexible benefits arrangements that were predicated on tax efficiency. Insurance premiums for policy periods beginning in 2018 will be subject to the previous tax rules on premiums paid through 31 December 2019.

If you have further questions about this change please contact Asinta and we put you in touch with Asinta’s Hungarian Partner MAI-CEE.