Compensation review_Hungary_2020

Review of salary increase and bonuses
Colas Hungary

István Sokorai Dr. Margit Révész
Chairman and CEO Hungary HR Director Colas Hungary
Regional Director HUNG, CRO, SLO, ROM

EXECUTIVE SUMMARY Review of salary increase and bonuses Colas Hungary

Our compensation report has three main parts according to the requirements. 1

Economic background in Hungary
- Inflation and CPI – Consumer Price Index
- Economic situation
- Unemployment rate
- Market / Business trend
- Competition Benchmark (Results of the Salary Survey)
- Evolution of minimum wages
- Unions’ positions
- Other comments linked to the topic

Internal background at Colas Hungary
- Headcount
- NCR and turnover

Conclusions and Proposals
- Salary increase
- Bonuses
- Benefits
- Figures
- Timing

To make the analysis in connection with the remuneration was more complex this year than

earlier. We show that our forecast about the labor market trends was sound. The salaries

were rising this year significantly, the unemployment rate has decreased, the competition

for the employees has become stronger. Furthermore, we have an outstanding year when

the workload is also outstanding. Besides these, we can see our prospects for the future, and

according to the Profession.hu (the biggest online jobseekers’ website) the job

advertisement’s number has decreased and the application number has increased in

engineering and manufacturing fields. It signs well what we see in our activity: after 2020 we

expect that our activity and turnover will decrease. So we operate in a really competitive

labor market, we have the highest profit in the last ten years, but we also need to take into

consideration the prospects for the future. That’s why we suggest a complex solution with

a modest increase in salaries and we suggest extra bonus to express our acknowledgment

towards our employees.

Review of salary increase and bonuses Colas HungaryECONOMIC BACKGROUND IN HUNGARY

I. Inflation and CPI – Consumer Price Index

According to the Hungarian National Bank (MNB) inflation review, the inflation rate in
Hungary

in 2019 is 3,3%
the expectation for 2020 is 3,4%.
The inflation chart below features an overview of the Hungarian inflation between 2014 and
2019:

II. Economic situation

In 2019, the volume of gross domestic product in Hungary in the 2nd quarter was 4.9 %
higher than the previous year. The growth is mainly because of market-based services and
the construction industry.

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Construction output in August 2019 was 5,9% higher than in 2018. Production in the
traditional construction industry rose by 14.1%, while in the infrastructure sector it increased
by 3,5%. In the first eight months of the year, construction output grew by 29.6% compared
to the same period last year. Besides different buildings construction, there is a high number
of expressways, railway renewal works and public works in the construction industry.

III. Unemployment rate Review of salary increase and bonuses Colas Hungary

As we predicted last year the Unemployment Rate has been declined further. Now it is running
at 3.4%, this time last year this rate was 3,7% . In the period from June to August 2019,
unemployment fell 0.4 percentage points.

I would like to mention that according to Profession.hu, the average number of applications 3
increased by 5 percent compared to the same period of the previous year. Recently, the
construction industry has seen a strong recovery, with a 23 percent improvement. There is also

Review of salary increase and bonuses Colas Hungarya lot of progress in engineering jobs, with 17 percent more applications this year than in July-
August last year. It is interesting information: as there is a high workload in the construction
industry and the companies need more people to cope with their work, the people are more
active and open to new challenges and they tend to change their job. We suppose it is because
there are more-and-more representatives of the new generation in the labor market. So again
retention is an issue – not only because companies headhunt the employees but the youngsters
are ready to change their workplace. Now maybe there is not as tight competition between the
construction companies as one year earlier but it is because the big infrastructure projects are
in progress and usually every company has fulfilled their needs for staff. There are fewer
engineering and manufacturing position advertisements than a year earlier. But the situation
is different in connection with those positions which aren’t construction industry specified.
That’s why we would like to adjust these positions’ salaries (back-office).

IV. Market / Business trend

Most of our major projects are based in the east part of Hungary (just mentioned the biggest:
M30, M25, M4), which means that it will be more difficult to attract new employees and retain
employees in that area.

In Hungary, several major investments have been announced over the last few years, which
will create more than 10,000 new jobs. These new workplaces can offer permanent workplace
for employees close to their home. In construction industry the projects are changing places
and our employees work different place of the country from time to time. And it causes an
increasingly serious problem in retention, because employees do not want to work away from
their families and work-life balance is more-and-more important issue in connection with
employment. That’s why it is crucial to offer something outstanding for our employees to be
able retain them and attract new ones.

4 It is worth mentioning the expected labor market effects of one of Hungary's largest
investments, the BMW factory in Debrecen. The data reflects that there are now clear signs of

this. In Hajdú-Bihar County, where Colas has the largest investments, there has been a 17%
increase in advertising numbers in the last quarter.

In the county, the number of job ads posted for skilled workers jumped by 24 percent, for
manufacturing production by 48 percent, and for engineering jobs, by a whopping 65 percent.
Significant progress has also been made in these jobs in the area's wage proposals, as
employers have promised their prospective employees 17 percent higher than last year.

In the table below you can see how many new workplaces (employments) are planned in the
next years:

Area Company New jobs Review of salary increase and bonuses Colas Hungary
Budapest Tesco 800
Central (Dorog) GMD 240
Central (Göd) Samsung
Central (Kecskemét) Mercedes 1500
Central (Salgótarján) Bumchun Precision 2500
East (Debrecen) BMW
East (Debrecen) Continental 200
East (Debrecen) Deufol 1000
East (Gyöngyös) B.Brain Medical
East (Kaba) Conagen 450
East (Miskolc) Lufthansa 120
East (Nyíregyháza) Lego 400
West (Komárom) SK Innovation 250
West (Komárom) Inzi Controls 200
1600
410
120

V. Competition Benchmark (Results of the Salary Survey) 5

In the last years our goal was to belong to the top 25% companies in Hungary in terms of job
satisfaction, popularity that lead to us competitive advantage. Salary and other benefits are
important job satisfaction and popularity point of view. In order to ensure competitive
advantage or at least the competitiveness of our salaries and benefits we participate from
year to year a salary survey (we mentioned it in the previous reviews also). The process: we
had to evaluate our positions (according to the factors below) and then we had to put them
in the appropriate level (1,2..7,9..).

Review of salary increase and bonuses Colas HungaryThe main factors what were took into account in the survey in terms of position’s evaluation:

- qualification
- professional experience,
- contribution to company results,
- complexity of tasks,
- project management tasks,
- people management tasks
- External customer relationships.

The company size (headcount, turnover, performance, workload ...) also were took into
account.

We had to send our data to the external company and then we received a report about the
results. When we have analyzed the information we experienced that we are behind the
best 25% of the companies. We went further and saw whether we are in the average of the
companies from the salary point of view. The most cases we are there but unfortunately,
there are some positions where we are behind the average also. And these positions are
mainly back-office positions. We prepared some calculations about the costs in that case if
we would like to belong to the best 25% of the companies. We present the results at the end
of the review “In Figures” part.

VI. Evolution of minimum wages

The Hungarian government and the trade unions last year signed an agreement about the
minimum wages and they recommended in this agreement for the employers 8% salary
increase in 2020.
As of January 1, 2020, the minimum wage is HUF 161,000 and the guaranteed minimum
6 wage is HUF 210,600 (those who needs any qualification for their job).

According to KSH the gross average salary were 362,200 forints in August 2019. It is Review of salary increase and bonuses Colas Hungary
12,7% higher than a year earlier. This chart shows the average salary evolution since
2015.

And last but not least we would like to show a comparison about net salaries in the

nearby countries:

7

Review of salary increase and bonuses Colas HungaryWe can see that the Hungarian salaries are still fail from the nearby countries’ salaries. And
- as we said it earlier – it is a serious problem for us because more-and-more employees go
to work on abroad.

VII. Unions’ positions

Planning salary increase and other benefits, we need to take into consideration
representative trade unions’ requirements. The strongest trade union is Colas Északkő trade
union, which has the following requests:

- minimum 3 months bonus for each employee.
- 12% salary increase for all employees and of course keep the 10% flexible salary.

Their reasons:

 Quarry industry is facing a significant shortage of labor force, which makes it difficult
to retain employees who have worked for the company for many years, and the
seeking and hiring of the young, well-trained technician team.

 The number of employees at Északkő in 2019 was almost similar to the previous year;
however, the order stock was consistently high. Thus, employees’ productivity
increased, but they get tired of meeting the increased requirements. New
employees can only be hired at higher wages, so they received significant salaries;
however, the wages of former colleagues were not raised to such an extent. They do
not feel valued, so there is constant, wage differential between colleagues.

 Within the business area of the company, other smaller and larger companies and
enterprises in the construction industry started to close the cap of the wages to a
significant extent to prevent labor migration.

 First of all, in the case of youngsters, because of the unified European labor market

8 every company no longer has to compete with only Hungarian wages, but rather with
wage levels in countries with higher economic performance. Young people are
already targeting these job markets in their career building visions.

VIII. Other comments linked to the topic Review of salary increase and bonuses Colas Hungary

Employer’s contribution will be decreased again by 2%. According to the news it will happen
in the beginning of July. It means that some of our increase will be compensated for longer
period.

INTERNAL BACKGROUND AT COLAS HUNGARY

I. HEADCOUNT

Because of the increase of workload and work on hand the headcount has risen in this year
by the end of October we had 173 new employees and 130 leavers, as this time last year we
had 205 new employees and 102 leavers. One of the reasons for leaving is higher salary
offer. The number of employees at 30th of October 1 103. Unfortunately, our retention ability
is worse than last year. 130 leavers mean big losses in this period and we need to improve in
this issue. If we see the diagrams below we can see that we have some challenges with white-
collar-workers retention (remember! earlier I presented that our salaries behind the market
in white-collar-worker’s position).

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II. Net Consolidated Result and Turnover

The consolidated turnover and the NCR was the following in 2019 and the previous year:

Consolidated Turnover NCR

kEUR 2018 actual 2019 B2 2018 actual 2019 B2
Hungary TOTAL 324 746 335 479 19 620 22 286

We would like to show our last ten years results:

Review of salary increase and bonuses Colas Hungary Consolidated turover and NCR

2010-2019

400 000 € 30 000 €

350 000 € 20 000 €
300 000 € 10 000 €
250 000 € -€
200 000 € -10 000 €
150 000 € -20 000 €
100 000 € -30 000 €

50 000 €

-€ -40 000 €
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Consolidated turnover 206 27 170 33 150 84 160 07 293 89 241 13 138 66 237 33 324 74 335 47
NCR -33 851 -7 487 - 975 € 328 € 15 572 8 394 8 461 14 091 19 620 22 286

So this year is our best year for a long time. That’s why we would like to reward our
employees with extra bonus. As we said earlier: bonus is not only given for a job well done
but also to keep employees motivated and focused. Bonus is linked to results and
profitability. This gives us flexibility. This year is outstanding from both turnover and profit
point of view. Of course, the employees are aware of this as they have to perform harder
than ever. For this, it is vital to retain and motivate our employees. If we give a higher
bonus in the better years it shows them that we acknowledge their efforts.
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And one last thing in connection with the turnover and NCR. When we plan salary increase
we need to keep an eye on the near future prospects – as salaries mean fix costs. That’s why
we took into account our next years’ expectations from turnover and profit point of view
when we have prepared our suggestion:

Consolidated turnover Net Consolidated Result

400 000 25 000 Review of salary increase and bonuses Colas Hungary
350 000 20 000
300 000 15 000
250 000 10 000
200 000 5 000
150 000 -
100 000

50 000
-

2019. 2020. 2021. 2022.

As you can see we count on a decrease both in turnover and NCR also. This is the reason why
we will recommend a really modest salary increase (less than it would be reasonable
according to the labor market circumstances). But we need to keep the best employees
and motivate them – so when we have such a stunning year than this year we need to give
extra rewards for them.

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Review of salary increase and bonuses Colas HungaryCONCLUSIONS AND PROPOSALS

I. Salary increase

Based on the analysis of external and internal circumstances and weigh up the pros and cons
(the outstanding year and the tough situation in the labor market besides our prospects for
the future) we suggest:

1. General increase:
 List 1 Top Managers: 5 % increase of salary.
 List 2 Staff (white collar workers and supervisors): 5 % increase of salary.
 List 3 Workers: 5 % increase of salary.

2. Adjustment in the next positions: administrator assistant, financial administrator,
technical administrator, tender administrator, accountant. It means around 65
employees.

3. Exceptional salary increase: max. 5 employees every employee group per subsidiary.
So all together max. 25 white collar workers and 25 blue collar workers. The individual
increase cannot be more than 30%. Reason: given that more people have left the
company and it is difficult to replace people as internal promotions, as this usually
involves a pay rise, which is not possible only once a year.

Although the Északkő’s union proposes a 12% increase, the government's proposal is 8%, but
we suggest only 5% increase (the inflation will be 3,4% next year!), this can be explained by
the fact that we are anticipating a decline in the construction industry for the upcoming
years, as you can see from the forecasts of turnover and NCR, showed before.

One note for the adjustments (point 2): The reason for this suggestion is that they are far
below the average labor market salary shown in the salary survey. These jobs are not specific
to the construction industry, so we are competing with the entire job market in their case. If
the size of the company goes down in the future, these back-office jobs also will be needed.
12 And it would be a bad message to improve the back-office’ salaries at a higher rate when the
company falls back, and not maintain the core business’ salaries at the same rate.

II. Bonuses Review of salary increase and bonuses Colas Hungary

As we said: bonus is not only given for a job well done but also to keep employees motivated
and focused. Bonus is linked to results and profitability. This year is outstanding from both
turnover and profit point of view as you can see earlier. Of course, the employees are aware
of this as they have to perform harder than ever. For this, it is vital to retain and motivate
our employees. If we give a higher bonus in the better years it shows them that we
acknowledge their efforts.

Recommendation:

 List 1 Top Managers: we have planned 3,5 months of salary and we suggest + 1 month
so in sum: 4,5 months of salary, and as earlier where the final result (profit) is better
than B2 receive 10% of the extra profit as bonus (extra).

 List 2 Staff (white collar workers and supervisors): we have planned 3 months of
salary and we suggest + 1 month so in sum: 4 months of salary

 List 3 Workers: we have planned 3 months of salary and we suggest + 1 month so in
sum: 4 months of salary.

III. Benefits

We just would like to keep the current benefits:
 Cafeteria: 37 500 HUF / month
 Flexible salary: 5% for managers and 10 % for the rest of the employees.

These will cost less due to the reduction in the employer’s contribution. The savings: appr.
10 MHUF.

 We also would like to keep Medicover, but the cost will increase due to a change in
taxation. The extra costs will be around 40 MHUF.

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Review of salary increase and bonuses Colas HungaryIV. In figures

 The costs of the increase (5% + adjustments) is 379 MHUF.
 The costs of (1 month) extra bonus: 597 MHUF.

When you weigh up these costs and before you would make a decision, we would like to
show you some comparison:
If we would give 8% salary increase (as the government recommends) the costs of the
increase would be 604 MHUF / year.
If we would give 12% salary increase (as the union asks) the costs of the increase would be
987 MHUF / year.
If we would like to belong the best 25% of the companies and for it we would increase every
employees’ salary for this level (according to the salary survey) the costs of the increase
would be 1 085 MHUF / year.
So you can see that our request for the salary increase and the extra bonus is the best
solution from both costs and motivation point of view.

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