Short answer is yes. The finance team has to track each year’s expense as a “tax layer” and amortize it separately. By year 5, ignoring half-year or half-quarter conventions, if have a constant spend, the annual expense will be equal to fully expensing.
The short answer to some of those questions is yes.
But clearly not for the final question: “does that create incentives to try to keep employees longer-term in order to make them more cost-efficient?”
I dont think the math works out in a way such that individual employees are not interchangable. It's based on engineer labor cost as a whole; there is no difference if the 3yr year employee was Jack or Jane.
The net result here seems to be a tax-induced penalty to any (software) organization < 5 years old, as compared to a (software) organization with 5 years of employee history.