Long‑term incentive plans – why are they worth implementing?

Attracting and retaining highly skilled employees continues to be a challenge for companies in the domestic business sector. This dilemma is common among less experienced or even entry‑level colleagues, as well as mid‑level managers and senior leaders in key positions.

In addition to traditional salary‑based benefits, long‑term incentive plans are playing an increasingly important role. These programs directly link employees’ interests to the company’s performance, offering potentially significant rewards compared to base salary when certain parameters are met. Depending on the structure applied, the incentive may take the form of shares, equity, or even cash. In our experience, an increasing number of employees are aware that such programs are widely used in many countries—particularly in the United States and the United Kingdom. The flow of information is driven less by formal professional materials and more by social media as well as insights shared by specialists working on foreign markets, sometimes under remote‑work contracts from home.

These structures are gradually becoming an expectation—or at least a strong differentiator—when candidates evaluate potential employers. The good news is that a well‑designed long‑term incentive plan not only supports loyalty and engagement, but can also provide favorable tax treatment.

Below, we review the most common long‑term incentive schemes, their structure, benefits, and the corporate environments where they can be successfully applied.

MRP – Employee Share Ownership Program (Munkavállalói Résztulajdonosi Program)
The MRP is perhaps the most significant long‑term incentive structure in Hungary. An MRP organization is a separate legal entity established by the employing corporate group, through which participants may receive shares or cash payments. The conditions for the incentives are set out in a remuneration policy that ties income to objective, measurable targets—typically business performance.

Key advantages include the possibility of acquiring employer group shares tax‑free, as well as favorable taxation of cash payments. The program is particularly suitable for incentivizing mid‑ and senior‑level management and supports the development of an ownership mindset among employees. However, the operation of an MRP is administratively more complex, requires separate bookkeeping, and is subject to specific legal conditions—for example, regarding the “convertibility” of shares.

From a tax perspective, no tax liability arises when the MRP organization transfers shares to participants; tax is only due when the shares are sold. Cash payments are subject solely to 15% personal income tax (i.e., no social security charges), provided that the individual has reached the social contribution tax cap—an assumption that is realistic for executives.

Employee Share Program
This program is based on issuing a special statutory share type. The company may offer employees shares free of charge or at a discount, enabling participation in dividends. This creates direct ownership interest, strengthening employees’ long‑term commitment to the company.

The value of the shares and the company’s performance directly influence employees’ financial position. In our experience, this structure is typically chosen by companies looking for a long‑established, thoroughly regulated framework defined by law.

From a tax perspective, employee acquisition of these shares is tax‑exempt if the company issues them through a capital increase executed from its own equity. This allows tax deferral. If the shares are redeemed, converted, or repurchased, any amount received above the acquisition cost is treated as employment income. However, dividends paid on such shares are taxed more favorably than employment income, meaning the program as a whole offers both tax deferral and tax advantage. This can be especially beneficial, as dividend entitlement may arise before the taxation of acquisition, improving the employee’s financial position compared to non‑deferred programs.

“Classic” Stock‑Based and Phantom Share Plans
These programs often appear within multinational companies that adapt the parent company’s global incentive systems. The value of the benefit is tied to the shares of a group company—typically the parent company—although payouts are not necessarily in shares. For example, phantom shares are always settled in cash. That said, there is nothing preventing domestic companies from implementing similar structures.

These plans often include a vesting period that supports retention, as payouts usually require continued employment at the end of the vesting term.

Their advantage lies in flexibility; however, their tax treatment is generally less favorable than MRPs or employee share programs. Over the long term, they may still present tax advantages, as dividends on shares are taxed more favorably than employment income.

Employee Holding Structures
Holding structures can be especially effective for family‑owned businesses. They are used when owners wish to gradually involve management in ownership while maintaining decision‑making control. Unlike employee shares, acquiring an ownership stake free of charge or at a discount is taxable, so no tax deferral is available; however, dividends received later may still enjoy favorable tax treatment.

Impact of the EU Pay Transparency Directive
One of the biggest upcoming challenges for employers may be the EU Pay Transparency Directive, which will fundamentally change how pay bands and compensation systems are established and communicated.

The Directive considers any benefit received due to employment as part of remuneration. This may include long‑term incentive plans—whether share‑based, cash‑based, or phantom stock. Companies therefore need to prepare in advance for how they disclose these benefits, how they affect pay ranges, and at what value they should be reported.

There are still many open questions. For example:

• When and at what value should tax‑exempt MRP shares be considered?
• Which year should a deferred plan be attributed to?
• Are dividends paid on employee shares included within the Directive’s scope?

Given such uncertainties, it is advisable to also consider pay transparency compliance when seeking professional support for incentive plan design.

Conclusion
Equity‑based incentive programs not only offer tax benefits but also significantly contribute to retaining and motivating key employees. Choosing the right structure depends on the company’s objectives, size, ownership composition, and the profile of the target employee group. When well‑selected, these programs strengthen performance orientation, improve company results, and foster long‑term ownership thinking among employees. As organizations aim to build future‑proof compensation strategies, these structures are increasingly shifting from “nice to have” toward “must have.” Even if we are not fully there yet, acting early can give companies a competitive edge on the labor market.