Developments and Prospects
of Profit Sharing and Employee Share Ownership in Europe
Paper for COG Fix Globalization
Conference Oct. 9-11, 2002 and Trans-Atlantic Employee Ownership Conference
Oct. 6-8, 2002
By Erik Poutsma
Nijmegen School of Management
University of Nijmegen
P.O. Box 9108
NL-6500 HK Nijmegen
The Netherlands
Tel. +31 24 3615628
Fax +31 24 3611933
Abstract
The main objective of
this contribution is to provide an account of the development of what has been
called PEPPER in the nineties. PEPPER is an acronym used by the European
Commission that stands for Promotion of
Employee Participation in Profit and Enterprise Results (including equity).
This paper is based on a review of available international research and
publications and interviews with country-experts. It makes an attempt to
present a systematic overview of existing forms of employee financial
participation and the preconditions for its existence. Special attention is
given to the policies of European Member Governments and the views of social partners that support or hinder the
development of financial participation in Europe.
Developments and Prospects of Profit Sharing and Employee Share
Ownership
1. Introduction
There
is a growing interest in the theme of financial participation of employees in
their enterprises within Europe. The PEPPER II report (1996) of the European
Commission, however, concludes that there is more diversity than unity in the use of these employee financial
participation schemes. PEPPER stands for Promotion of Employee Participation in
Profit and Enterprise Results and is the acronym that the European Commission
uses to denote financial participation schemes. There appears also to be a lack
of empirical research on the application of different schemes, their success or
failures, advantages or disadvantages.
Against this background the European Foundation for the Improvement of
Living and Working Conditions initiated a project to develop research on the
application of employee financial participation. In the exploratory stage in
1999 the European Foundation commissioned to prepare a report on the
state-of-the-art knowledge on employee financial participation. The final
report is published jointly by the European Foundation and the European
Commission (see Poutsma, 2001).
This
contribution is based on that report and highlights the developments of
policies on European and national level in particular. It presents an overview
of the development of the views of the social partners.
The
structure of the contribution is as follows: I start with a description of the
variety and complexity of the phenomenon of financial participation. This is
followed by a short description of the use and spread of financial
participation in Europe. Next I present the possible reactions of governments
and social partners followed by an overview of existing policies in the
European Member States. I close the contribution by discussing the views of the
social partners.
2. Financial
participation
One of the arguments for
putting financial participation into practice is to commit employees to the
company and to develop an entrepreneurial attitude and enhance the co-operation
between employees and management. In general, the
motives at company level for putting financial participation into practice fall
into four broad categories:
·
productivity
increase;
·
enhancing
flexibility of remuneration;
·
gaining
tax advantages; and
·
providing
employee benefits and hence an increased commitment from them
Some research also indicate more
negative or defensive reasons for companies adopting these plans, such as:
·
discouraging
unionisation;
·
used
for take-over defence;
·
financing
companies in trouble.
The
motives of the European Commission in promoting the practice of employee
participation in profits and enterprise results is based on expectations of
benefits for both employees and companies. The first PEPPER Report (1991)
listed the following expectations, which were also presented as motives for the
presentation of the Recommendation of the Commission in July 1992 and for
commissioning the PEPPER II Report in 1996:
· achieving a wider distribution of
the wealth generated by the enterprises which the employed persons have helped
to produce;
· encouraging greater involvement of
employees in the progress of their companies;
· developing positive effects on
motivation and productivity of employees;
· enhancing the competitiveness of
enterprises through wage flexibility; and
· sustaining employment.
The two
macro-level-oriented motives of the European Commission — a redistribution of
wealth and sustaining employment — have proved important reasons for
governments to develop policies for financial participation.
2.1
Financial participation schemes
Employee
financial participation plans recently introduced or currently developing in
European countries generally are not new. There are a number of classifications
in the literature that are more or less diffused into broad definitions of
categories. However, there exists not an exclusive set of definitions.
Moreover, schemes can become so complex (a combination plan for instance) that
the employee is not able to figure out if he or she is participating in an ESOP
or receives a thirteenth month’s pay.
The
wide range of schemes can be divided into two main categories, which may or may
not co‑exist and in some cases overlap: sharing in profits, and sharing
in equity. These can be subdivided again into two broad categories which result
into a broad generic classification of four categories (with some overlap in
some situations) into which these plans fall:
·
cash based profit-sharing,
·
deferred profit-sharing,
·
asset accumulation and employee share
savings plans
·
employee share ownership.
Typically for
European policies is that employee financial partiucipation covers employee
share ownership as well as profit sharing. The European Commission defines the
term that way. In some countries these schemes are also interrelated and / or
are covered with the same legislative framework.
2.2 Patterns of
financial participation
The
various forms of financial participation are combined in some countries and
companies. The broad range of financial participation schemes could develop
into a full range of patterns of financial participation schemes that could be
typical for a European country under investigation. It can resolve into a
pattern of measures taken by employers to meet desired objectives. The next
scheme 1 presents a non-exhaustive pattern of financial participation in an
attempt to generalise the subject for Europe. It is clear from this scheme that
it covers quite a number of financial participation models that could be
implemented, especially when we take into account that one scheme can resolve
into another and that combinations are possible. For instance it can be
embedded in retirement plans or investment funds in which not only employee
shares are involved but also other contributions from profit sharing schemes.
In fact some countries have specific tax advantages in resolving certain
employee benefits derived from one scheme to another, for instance, from profit
sharing into asset savings plans.
<Scheme
1 about here>
In other words under the heading of
financial participation you will find quite some possibilities with different
outcomes in terms of arrangements, rights and administration. It makes the
picture rather complex. It is important to note that up till now we do not know
how the different detailed forms of financial participation is distributed and
arranged. From several sources we know that deferred profit sharing is the most
widespread in Europe. Next scheme which is popular is stock options scheme. The
typical ESOP comparable with the USA type is very rare in Europe.
Other
important elements to be considered in our discussion (scheme 2) include:
· whether schemes are broad-based or
eligibility is only for certain categories of personnel;
· whether schemes are dependent on the
performance of the company or otherwise;
· whether schemes are additional to
basic wages or part of basic wages;
· whether schemes are negotiated and
agreed with employee representatives or otherwise;
· whether schemes include more or less
worker control rights;
· whether schemes are based at single
company level or multy unit level or developed at multi-company, multi-employer
or sectoral levels or even national or international level.
<Scheme 2 about
here>
Important for financial participation in
the context of industrial relations are whether it is agreed and whether it
allows some participation in decision making.
Agreement plan
In most cases management takes the
initiative to implement a plan. There are schemes that came in existence
through negotiations and in certain European countries approved schemes have
the requirement to be agreed upon with employee representatives or employees
directly.
Voting
rights and worker control
In case
of share ownership, schemes might have developed where the participants have
not full voting rights. Of course, this is guided by country legislation. In
most cases there is no requirement that voting rights should be passed through
on shares that are unallocated (In case of borrowed funds for purchasing the
shares). Unallocated shares are ordinarily voted by the trustees. In case of
publicly held companies and allocated shares the control of employee does not
mean more than a small stockholder might have. Here the important question is
as to what might go on in privately held companies. However, it might be
expected that these firms do not extend voting rights beyond that called for by
law.
Apart
from this in some countries (mainly the USA) there exists the requirement to
nominee employee directors in the board of the company or in the trustee board
in case of a certain percentage of shares (to be) allocated to employees. In
case of negotiated arrangements a representation in such boards may be the
outcome irrespective of legislative requirements. We may find such ‘worker
directors’ in companies throughout Europe.
As a
warning it must be noted that in practice terms are not used in a consistent
way. The generic term "employee share‑ownership" is frequently
used to denote both share‑based profit‑sharing, and employee share‑ownership;
"profit-sharing" is sometimes used to refer to both profit‑sharing
in the strict sense of profit‑related pay, share options schemes or share‑based
profit‑sharing. Also language differences might confuse the discussions
on related subjects.
As a second warning the difference between
profit-sharing and share schemes is highlighted here. Pendleton (1999b)
describes the differences and pointed out that the differences in character
between the two types of financial participation may well outweigh the
similarities.
2.3. Problems
and obstacles
Not surprisingly, financial participation has
disincentives for both publicly traded and closely held companies. For
companies that find the disadvantages outweighing the advantages, there are
other ways to make employees into shareholders, including stock bonus or
purchase plans, profit-sharing plans and stock option plans. Disincentives most
commonly cited from employers’ side are the ‘free rider’ problem (individual
employees can reduce their effort leaving the performance to others while at
the same time get the revenue share on the basis of the effort of these other
employees), re-purchase liability (in case of stock ownership employee shares
tend be re-purchased by the company when the employee leaves the company) and
the dilution of existing stock value of other shareholders (depending on the
issue of new shares). From the side of the employees the main problems
are: the directness of the relationship
with performance, employee risks and restrictions on withdrawals. We elaborate
these three problems shortly.
Relationship with performance
An obvious disadvantage of certain financial participation plans, such as
employee savings plans, is their less direct relationship with company
performance. This is, however, not confined to employee savings plans.
Pendleton (1999a) noticed a tendency in the UK towards stabilising the effect
of the relationship with performance in the case of profit-related pay to
minimise the risks for employees. Of course, this cuts out a central element of
financial participation.
Another argument on this relationship questions the
basic assumption underlying most financial participation schemes. Many
employees do not see a direct relationship between individual and
organisational performance. Only top-management decisions on products,
engineering, pricing and marketing seem to have a direct influence on the
profit of the company. Based on this reasoning, Noe et al (1997) question the performance impact of profit-sharing: ‘Performance motivation is likely to
change very little under profit-sharing. Consistent with expectancy theory,
motivation depends on a strong link between behavior and values consequences
such as pay.’
Employee risks
Another argument raised against financial participation is that it shifts
the risk to the employee, entailing, as it does, a greater likelihood of income
variability. In the case of share ownership, it is not only the income of
employees that is at risk, but their savings also.
Employee share ownership
means a higher degree of risk than other investment options because, to a significant
extent, it is undiversified. This problem might be reduced by implementing
other investments as a portion of the contributions or moving to investments
plans. Nevertheless, employee share ownership is generally not a diversified
investment portfolio and the risk to participants is greatly magnified if they
are relying on company share as their principal benefit. However, the risks may
be very limited if the scheme only provides for an additional benefit to basic
wages.
Another aspect of risk relates
to leveraged employee share ownership, as in the case of employee buy-outs and
ESOPs. Whereas profit-sharing plans represent a variable financial burden,
leveraged employee share ownership requires fixed loan amortisation payments
regardless of the company’s financial performance. In this sense, a leveraged
share ownership is similar to taking on debt. In fact, such loans are treated
as a liability if the company guarantees the loan or commits to future
contributions to service it. For publicly traded companies, this can cause
problems since the stock purchased with a loan is treated as a reduction in
stockholder equity. Thus, if a company is not growing and is unprofitable, the
need to service the loan can threaten its ability to survive.
Another argument against profit-sharing schemes
is that they might result in a situation of higher pressure for performances in
terms of a merit pay system, driving stress up to unhealthy levels.
Restrictions
An obvious disadvantage of deferred profit-sharing plans and employee
savings plans is the sometimes significant restrictions on withdrawals. Most
schemes use certain retention periods before benefits are made available to
employees. These retention periods may be a legislative requirement.
Withdrawals within the retention period might be made impossible or quite
unprofitable. This also has an impact on the problem of expectations and
operating costs, which might lead to lower levels of participation by
employees.
In summary, the
emerging picture of the above is that the range of different schemes can be
tremendous. However, in practice certain schemes are more common than others.
Moreover institutional and legislative arrangements set limits to the
possibilities. This implies that there are differences between countries.
Moreover there are several political and industrial relations problems and
obstacles involved when implementing these types of schemes. This may have
influenced the development of these schemes in the European context. I will
describe the differences in Europe in the next session.
3. Financial
participation in Europe
Profit-sharing
and employee share ownership schemes are part of reward systems with a greater
emphasis on performance related pay. Discussions and interests, often
conflicting, on this topic within industrial relations systems influence the
existence and diffusion of these schemes. Given the differences in these
systems within Europe, there is a divergence, rather than a convergence, in the
way in which financial participation schemes are implemented in different
European countries. A country’s pattern of financial participation reflects the
industrial relations system, the corporate governance system and the prevailing
management of business regime Lane, 1989).
Industrial
relations systems
There are
quite distinct industrial relations systems in Europe. The centralised
determinacy of labour terms in for instance Finland is contrasted with the
voluntary nature in the UK. The state intervention in labour matters in France
is contrasted with the relative autonomy of social partners agreements in
Germany and the Scandinavian countries. The institutionalised employee
influence via works councils in Germany and the Netherlands is contrasted with
low institutionalised influence levels in Italy and Spain. These differences
influence the discretion of management in the development of financial
participation systems in their companies. These systems allow for certain
operational logics of social partners in the country (Nagelkerke and De Nijs, 1998).
We expect that in countries with a more voluntary industrial relations system
financial participation is more common.
Corporate governance differences
Employee share
ownership schemes are part of corporate governance systems with a greater
emphasis on share participation by employees. Discussions and interests, often
conflicting, on this topic within corporate governance systems influence the
existence and diffusion of these schemes. Again, given the differences in
corporate governance systems within Europe, a divergence is to be expected in
the way in which these schemes are implemented in different European countries.
Weimer & Pape (1999) have developed a typology of corporate governance
systems, which offers an explanation of the different patterns of financial
participation found in European countries. Three models of corporate governance
can be distinguished: 1) Anglo-Saxon with representing countries UK and USA, 2)
German with representing countries Germany, Netherlands and the Scandinavian
countries, and Latin with representative countries France, Italy and Spain.
In the case
of employee share ownership, the difference in extent and nature of the capital
market is important. There is a striking difference between the capital markets
of typical Anglo-Saxon countries, such as the UK and USA, and those of
continental Europe. In the UK and USA, the stock market tends to represent a
larger percentage of the total number of corporations and total corporate
employment than in Europe. The incidence of citizen participation in stock
markets is also higher in the UK and USA, while stock markets in Europe tend to
be dominated by large institutional investors, banks and financial holdings.
Also, there is evidence that a large part of citizen share ownership in the USA
is initiated and developed through employee share ownership (Blasi et al, 1999). In other words, the
incidence of widespread share ownership is also related to the development of
stock markets. Thus, in contrast to the rest of Europe, the UK will have more
employee share ownership than its fellow EU partners.
Influence of government policy
Another
interesting difference between the USA and Europe underpins the importance of
government policy and measures. In Europe, employee share ownership tends to be
concentrated in large publicly listed companies, while ownership in smaller
closely or privately held companies tends to be low. In contrast, smaller
privately held companies in the USA tend to adopt employee share ownership and
small family businesses are a major source of growth (NCEO, 1999). This
development started in 1984 when the US Congress exempted family and other
small business owners of privately held companies from capital gains taxes if
they sold more than 30% of their businesses to employees and invested the
proceeds of the sale in the securities of another US company. This is, without
question, the most important piece of share ownership legislation in the USA
since the ESOP was created (Blasi et al,
1999). Tax provisions makes a great difference in the level of diffusion of
financial participation in European Member States.
Differences in management regime
Besides the
major influences of national industrial relations systems and corporate
governance, there are national specific social and cultural factors that
strongly influence the existence and diffusion of financial participation
schemes. These factors determine how companies in a country are structured and
managed, to such an extent that one could refer to 'societal patterns' of management
and organisations (Lane, 1989). All the research to date bears this out
(Gallie, 1983; Gatley, 1996; Hampden-Turner and Trompenaars, 1993; Hofstede,
1980; Lessem and Neubauer, 1994; Maurice et
al, 1982; Sorge and Warner, 1987; Poutsma et al, 1996). In case of financial participation it is expected
that in countries with more emphasis on performance related pay and on share
value financial participation is more established.
3.1. Incidence of financial
participation in Member States
In general, financial participation
becomes more and more important in companies throughout Europe (see also the
contribution by Pendleton et al. in this volume). In this section we present an
overview of the spread and use and background of financial participation, mainly
based on the 10 Member States EPOC survey done in 1996[1].
Pendleton et al. (2001) present a more extensive overview based on HRM-surveys
in 1992, 1995 and 2000 of the CRANET network. This study develops the emerging focus on comparative European research
into profit sharing and employee share ownership by drawing on data from
fourteen Member States (Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom).
This is the widest geographical scope of any empirical study yet conducted,
with the Mediterranean, Scandinavian, Benelux, and northern European regions of
the EU fully represented in the report.
The figures presented here are
rather global. There is not much research that allow to make differentiation
and distinction between several types of financial participation as described
above. The data presented here gives indication about the differences between
member states.
Also an analysis is executed to find
out which companies use profit sharing schemes on the one hand and employee
share ownership schemes on the other.
The findings of the two surveys
indicate the following:
·
Overall, during the 1990s
financial participation becomes more widespread in European organisations with
more than 200 employees.
·
Just under one-third of
organisations with more than 200 employees have a share ownership scheme. These are distributed fairly evenly between
broadly-based (52 % of cases) and narrowly-based,selective schemes, implemented for management and higher graded staff
only (48 %).
·
Profit-sharing schemes are
more common than share ownership schemes, being found in more than 45 % of
organisations. Profit sharing schemes are more likely to be broadly based than
share ownership schemes. Over 80 % of profit sharing schemes are broadly based.
·
A number of countries
experienced sharp increases in the proportion of companies using share schemes
especially in the second half of the 1990s, while within others there is not
much change or even a slight decrease.
·
The largest increase in
share schemes incidence during the 1990s is found amongst managers.
·
Both the overall incidence and the
rate of increase in incidence of share schemes are more modest for other
occupational groups.
·
In contrast, there is no increase
in the incidence of profit sharing schemes for managers.
·
In contrast, the rate of growth of
profit sharing schemes is higher for other occupational groups than for
managers
·
The bulk of the increase in profit
sharing takes place in the first half of the decade, compared with the second
half in the case of share ownership schemes.
·
The opening up of capital markets
in many Member States has provided an opportunity to develop employee share
schemes.
·
Legislation and tax concessions
have a powerful impact on the use of broad based financial participation
schemes.
·
In contrast, in case of management
oriented narrow-based schemes country specific support is less important than
company characteristics.
·
The smaller the enterprise the
less likely it is to have any form of financial participation.
·
Organisations with any type of
share scheme are more likely to release information on strategy and finances to
employees than organisations without schemes.
·
Broad based financial
participation schemes tend to be found in companies with a higher qualified
workforce in business services.
·
Amount of training of employees is
related to share schemes. This support the notion that companies try to protect
human capital development through training and share schemes.
·
There is no evidence that forms of
financial participation weakens the representative role of trade unions or
works councils within an enterprise.
The research supports the experience that involvement of both social partners
tends to make schemes less selective and to broaden the eligibility of
financial participation schemes to all employees.
The
next table and graph show the diffusion in the year 2000 in 14 Member States.
The
results concerning share schemes confirm the expected pattern in Europe (see
figure 2). The UK (45 % of organisations), the Netherlands (45 %) and France
(41 %) have the highest incidence of share ownership schemes. Ireland (34 %) and Finland (30 %) are
important followers, whilst Belgium, Sweden, Denmark, Germany, Greece, and
Spain have a lower diffusion of schemes. The lowest incidence is found in
Portugal and Austria.
Analysis
makes also clear that the higher the incidence of share ownership schemes in a
country, the higher tends to be the coverage of these schemes. Thus, 67 % of the
UK’s share ownership schemes are broadly-based, whereas only 26 % of Spain’s
share schemes are broadly-based.
<Table 1 and graph
1 about here>
In case of profit
sharing the pattern changes slightly (see figure 3). In the list of countries
with higher proportion of companies with schemes Germany and Austria are
present among France, the Netherlands and the UK. However, profit sharing
schemes in Austria and Germany appeared to be mainly narrow based schemes (62%
and 75% of all schemes respectively), whereas in France, the UK and the
Netherlands the schemes are mainly broad based (more than 80% of schemes;
Finland: 77 % of schemes are broad based. This reflects the importance of
profitable tax legislation on profit sharing savings in the three latest countries
(and Finland).
Broad based financial participation
appears to be a reaction to the possible benefits provided by government policy
in certain European countries, most notably in the UK and France. Important is
to note that, in France, the implementation of a profit-sharing system is
mandatory for companies with more than 50 employees.
Throughout Europe
there has been a growth in selective share options schemes for professional
staff and executives (Pendleton et al. 2001) supported by the booming capital
market, especially in the Netherlands and Finland.
The
largest increase in incidence during the 1990s is found amongst manager
oriented share schemes. Incidence of these schemes increased from 23 % in 1992
to 29 % in 2000, an increase of over 25 %. Both the overall incidence and the
rate of increase in incidence are more modest for other occupational groups:
the rate of increase ranges from about 6 % in the case of professional staff to
about 10 % for manual staff. For most
groups of staff the increase in incidence takes place between 1995 and 2000.
As expected, France has very
high numbers of schemes throughout the decade, with some growth between 1992
and 1995, and a stabilizing development 1995 onwards. This pattern of growth is
also observed in the UK. Most other European countries experienced increases in
the use of profit sharing for management and professionals in the period
1995-2000. The largest growth for management schemes was found in Spain,
Denmark, Finland and the Netherlands. Also for professionals growth was
experienced in these countries and in addition in Ireland, Austria and Germany.
The development of other occupational categories appear to follow slowly the
pattern of development of schemes for management and professionals.
3.2. Which companies use these schemes?
Based on earlier research, we expected that certain
company characteristics would explain the incidence of financial participation
schemes. We expected that both direct participation and financial participation
are important for those companies facing dynamic environments and that have to
compete on quality and variety. Competitive environments would enhance the use
of these financial schemes because of the commitment effect of these schemes.
Higher commitment is a necessary requirement for functional flexibility needed
in a dynamic environment. Scarcity on labour markets would also tend to enhance
their use by committing employees to the company and its objectives. This would
be true especially for such occupational groups as qualified professionals in
knowledge-intensive service industries. Research has found that these schemes
were implemented for higher qualified professionals and commercial personnel.
In addition, we expected that financial participation schemes are more often
found in young growing companies and less applied to employees with labour
terms bound by collective labour agreements. We expected these schemes to be
less prevalent in companies with substantive degrees of unionisation and to be
rare in independent, family-owned companies. Hence we expected that an
important factor would be management’s attitude towards participation in
general.
Analysis of the EPOC survey data shows that, from
these expectations, the type of occupational group and the incidence of
collective labour agreements do not promote or hinder the existence of
financial participation schemes. The other variables give results in the
expected direction, but there are mixed results for the two schemes of
profit-sharing and employee share ownership.
The analysis of the EPOC survey data ( Poutsma, 2001,
chapter 4) reveals the following
§
Characteristics
of typical companies with profit-sharing schemes are:
growing, domestically owned companies, operating in
the commercial (trade) sector under rather severe competition, with a highly
qualified workforce organised in empowered teams —dynamic workplaces with
participative work structures of the autonomous group work type.
§
Characteristics
of typical companies with no profit-sharing schemes are:
independent company, operating under low competitive
pressure with a highly unionised workforce, but without employee representation
at establishment level and no group consultation — rather traditional,
non-dynamic workplaces.
§
Characteristics
of typical companies with share ownership schemes are:
domestically owned larger companies, with more than
200 employees, in the trade sector, with a medium level of technical innovation
and with employee representation among a highly qualified workforce and a
relatively high level of empowerment for the individual worker.
§
Characteristics
of typical companies with no share ownership schemes are:
totally independent companies, often family-owned,
located in Sweden, employing less than 200 people and not practising individual
delegation or group consultation.
Narrow-based
profit sharing
Broad-based
profit sharing
Narrow-based
share ownership
Broad-based
share ownership
In summary, research reveals that broad based financial participation
schemes of profit-sharing and employee share ownership are found in typical
companies in a typical situation: in more dynamic workplaces which have
participative work structures. Employee share ownership is found in a minority
of businesses and is predominant in large firms listed on the stock exchange
markets. These companies embed employee financial participation in human
capital strategies. They tend also to have a higher qualified workforce.
The importance of the country effect
suggests that other conditional and operational variables influence the
existence of schemes. Among these influences would be national traditions in
working arrangements; government policies and legislation, industrial relations
systems, corporate governance structures, the labour market situation, the
attitudes and behaviour of actors involved and the prevailing organisational
culture. The next session will focus on government policies and the influence of
the industrial relation systems.
4 Policy developments in the EU
The European Commission has promoted financial
participation in the nineties. Recently the Commission published a
Communication following the announcement of a Communication and an action plan
on financial participation in the Commission’s Social Policy Agenda of June
2000. This Communication builds upon a number of previous initiatives at EU
level:
· In 1991 the Commission published the PEPPER I report on the ‘Promotion
of participation
by employed persons in profits and enterprise
results’1, which summarised the situation
concerning financial participation in Europe at
the time.
· On the basis of this report, the Council adopted a Recommendation2 in 1992, which invited
the Member States to acknowledge the benefits
of a wider use of financial participation,
taking into account the responsibilities of the
social partners, in accordance with national
law and/or practice.
· The PEPPER II report3 on the application of the Council Recommendation underlined the
fact that financial participation schemes are
associated with a number of important
benefits, especially in terms of higher
productivity levels, employment and workers’
involvement. It further stressed that the
development of financial participation was strongly
influenced by government action, in particular
through the availability of tax incentives.
However, it also concluded that the general
approach of Member States’ policies to Pepper
schemes had not greatly changed and that there
was little exchange of information.
· In its Resolution on the Pepper II report, the European Parliament made
a number of calls
for action on the Commission, the Member States
and the social partners, aiming at a wider
diffusion of financial participation schemes.
During the nineties the European Commission´s
policy on financial participation has developed into a framework that is
related to other initiatives in the EU. We summarise these shortly:
§
The
different benefits of employee financial participation make it an integral
element in achieving the Lisbon objectives. Financial participation is an
excellent example of a policy which can simultaneously address economic,
employment and social objectives in a mutually reinforcing way. When introduced
in the right way, financial participation can render enterprises more
profitable and competitive, improve the motivation, commitment and job
satisfaction of workers, enhance the quality of work and last but not least
contribute to a more equitable distribution of income and wealth.
§
Promoting
employee financial participation thus also shows that investing in the quality
of work and industrial relations is not only and not primarily a cost factor
but also a productive factor contributing to higher productivity, social cohesion
and higher social standards, as it was outlined in the Commission’s
communication of June 2001 on “Investing in quality”9.
§
Financial
participation is thus also closely linked to the European Employment Strategy
and the Employment Guidelines. It reinforces the objectives of the adaptability
pillar, rendering both enterprises and the workforce more adaptable to economic
change. Moreover, by providing a possible source of financing for start-up
firms and by fostering an entrepreneurial spirit among employees it also makes
an important contribution in relation to the entrepreneurship pillar.
§
By
contributing to a closer alignment of employees’ interests with those of other
shareholders, and by ensuring that employees take a more active and long-term
interest in the development of their enterprise, financial participation also
supports the emergence of more transparent and effective corporate governance.
§
The
recent discussion on corporate social responsibility shows very clearly the
importance for enterprises to take into consideration the interests of their
various stakeholders. This is not only important in its own right and for
making sure that enterprise policies are socially and environmentally
responsible. It is also associated with very tangible benefits for enterprises
themselves and is therefore in their own best interest. The Commission’s Green
Paper on corporate social responsibility12 underlines these benefits for both companies
and society when companies acknowledge their social responsibilities and take
on board social and environmental concerns.
The situation in
the member states
Drawing on the latest
PEPPER II report (1996), as well as secondary sources and interviews with
country experts in 1999/2000, an updated overview of policy developments for
financial participation in European countries is presented here. Next, we did
more in depth studies of selected countries (see for a more detailed report of
these: Poutsma, 2001, chapter 5). The countries selected for in-depth coverage
are France, Germany, Ireland, the Netherlands, Spain, Finland and the UK.
4.1. Financial participation promotion in
the EU
Although the
full range of financial participation schemes can be found throughout Europe,
countries differ from each other not only in the development and diffusion of
schemes, but also in the nature of schemes and the emphasis on certain
objectives. This means that the pattern of financial participation differs
between countries. France and the UK, for example, have a long tradition of
encouraging financial participation. Legislation and tax provisions were
developed in the nineties in the Netherlands and Finland. On the other hand,
Belgium, Denmark, Germany, Greece, Spain, Italy, Luxembourg, Sweden and Austria
have all discussed financial participation in the 1980s, but official
government support for it has been limited or lacking. During the 1990s, there
have been official strong appeals to the social partners in Germany, Spain,
Italy and Ireland to promote these schemes in the course of their negotiations.
Recently, Germany and Ireland improved the possible revenues for employees and
employers substantially, while in Belgium legislation on financial
participation schemes was introduced in 2000.
Eligibility
Most Member
States have no restrictive regulation that might hamper the introduction of
financial participation schemes. However, there are certain legislative
requirements set in Member States that relate to eligibility for tax relief,
including such requirements as a minimum percentage of personnel covered by the
scheme, eligibility criteria, retention periods and statutory and trustee
requirements. These requirements could reduce the flexibility in introducing
schemes. However, in several cases, the choices and options have been enhanced,
while in others the possible administrative burden and/or set-up costs for the
employer to meet the legislative requirements are deductible as operational
costs.
In most
countries, both in legislation and in practice, eligibility criteria prevent
the participation of part-time employees and temporary employees on short-term
fixed contracts; schemes are eligible to personnel with a certain minimum
length of employment in the company. Although most of the existing arrangements
do not discriminate between men and women or other categories of beneficiary,
this does not mean that equal participation exists. Participation is generally
related to income and position. However, in countries with elaborate
arrangements, France and the UK, measures were taken to prevent discrimination
of part-time and temporary employees.
Incentives and financial advantages
Most
legislation on promoting financial participation schemes in European Member
States concerns incentives, such as fiscal or other financial advantages. The
UK and France have made further improvements to the variety of incentives
already existing for different schemes. Finland and the Netherlands introduced
promotional legislation in the nineties. In Belgium, Denmark, Germany, Spain,
Ireland and Austria, incentives are reported only for share ownership schemes
and not for profit-sharing schemes. Generally, the incentives are modest and
range from tax-free issue of shares or bonds to employees to tax-free amounts
on distributed profits, or by a profitable change of the taxation basis. Other
advantages are the exemption from social insurance contributions. In some
countries, incentives are provided for both employees and employers, and, for
the latter, the costs of schemes are sometimes deductible. Other incentives are
the possibility of withdrawals, without any or only minor taxation, before the
end of the withdrawal period for specific expenses (such as new housing;
insurance and specific capital savings; and retirement funds).
In some
countries, problems arise with social charges due to the question of whether
benefits should be regarded as normal wages subject to social charges (as they
are in Belgium) or as other types of remuneration not subject to these charges.
The in-depth studies
of a number of countries makes clear that there are quite distinct patterns of
financial participation systems in Europe. The developments in these countries
by and large cover the variety of characteristics of schemes and its
development and also the variety of empirical insights on relevant topics.
France has a
pattern that consists of more state regulated (mandatory) broad based deferred
profit-sharing with the aim of enhancement of employee savings and wider
distribution of wealth and wage flexibility. It is mandatory that the system is
agreed with the employees and their representatives. The financial
participation system has evolved into a system where employee savings plans
with share investment (in and outside the company) become more and more
important. Financial participation systems are also used by the government for
income and employment policies. The corporate governance system of France
provide for a limited scope of employee share ownership, due to a greater
concentration of capital and the substance of ‘closely held’ family firms.
Spain has a
pattern of minor regulations for share based profit-sharing. The developments
so far are not substantial although an increase is expected. It is significant
that the Spanish government considers its fiscal support for share-based profit-sharing
as one of its measures favouring small- and medium-sized firms. In fact the
development of pension plans of firms and the pronounced support for workers’
co-operatives and labour firms should be looked at as complementary to the main
Spanish plans to improve worker’s financial participation. Financial
participation is no topic in industrial relations context. It is typical for
Spain that trade unions support the development of co-operatives.
Germany has a
pattern that consists of investments savings plans with the principal aim of
enlargement of (employee) ownership of capital savings and other assets for
future security of low earners. The main actors are employers and government.
The consensus-based corporate governance system of Germany has led to the
operation of collective agreed schemes. Like France the capital market is not
elaborated in Germany. Many firms are privately held which leaves little scope
for the development of full employee share ownership. Trade unions appear to
start discussions on plans.
The Netherlands’ pattern of financial participation
is largely based on the introduction of a nation wide wage savings plan. This
plan allows profitable tax provisions on contributions of both employer and
employee derived from wages, profit shares or options or share value to a
special account with a retention period. However, most employees choose for the
less risky wage saving on a special account with less profitable tax
provisions. However, an increase in share saving is expected since changes in
1999. Few trade unions are demanding collective schemes.
Finland has a pattern based
on a profit sharing system where profit shares are put in personnel funds
managed by employee representatives. The fund manages the savings on behalf of
the employees and invest these. Revenue from the fund are allocated to an
account with a retention period. There is no profitable tax policy for options
and shares.
The UK has a pattern that mainly consists
of voluntary deferred share option schemes with the principal aim of medium
term employee incentives heavily supported by a favourable tax regime. The main
actors are employers and government. There is no need to seek consent from
employees for the plan. An elaborated stock market provides for ample space for
share based investments. The development in the UK is heavily supported by UK
governmental policies and measures.
Ireland has a
pattern of financial participation that more or less reflects the UK pattern.
The difference is that the development in Ireland is more or less just
starting. Based on the promotion of a national programme, Partnership 2000 and the Programme
for Prosperity and Fairness, trade unions are also promoting the
development of share based plans.
Apparently with these developments
there is an interest in these schemes from both social partners. However, it
does not yet appear in front of the social dialogue and at agreements talks.
Trade unions tend to change their positions to a more pragmatic attitude
towards schemes. They try to get hold of this new domain of additional benefits
for employees. In the next session we describe these developments.
4.2. Financial participation and industrial
relations in Europe
There are a number of
issues that are relevant when taking the perspective of financial participation
in the context of industrial relations systems in Europe. These are:
§
the
differences between profit sharing and employee ownership and the related
possibility that it becomes a negotiable issue in collective bargaining
§
the
possibilities of decentralisation of pay-determination which may boost
financial participation schemes
§
the
possibilities of involvement of employee shareholders and trade unions
§
the
positions taken by the social partners.
Employment and ownership channel
Following Pendleton’s
observation (1999b) to differentiate between profit-sharing and employee share
ownership, the relationship of either scheme with participation in
decision-making and collective bargaining might be quite different. Given that
cash profit-sharing occurs within the ‘employment channel’ and is similar in
form to base remuneration, it may be subject to the same institutions and
processes as those for determining normal pay and conditions of employment. If
this is the case, there is no a priori
reason to expect that profit-sharing should change the existing forms of
representative participation in any fundamental way. If profit-sharing is
incorporated into employment contracts and if contracts are negotiated with or
influenced by unions, then it may be anticipated that unions will engage in
consultation or negotiation over profit-sharing. Indeed, where unions are well
established in a company, it is more likely that profit-sharing will be
incorporated into the existing recipe of pay determination and collective
bargaining, rather than undermining the prevailing institutions and practices
of representative participation. These developments were observed in Italy,
France and Germany.
Pay decentralisation
Underlying these questions and considerations
are the objectives of those introducing profit-sharing. These have been well
covered in the economics and industrial relations literature (Kruse and
Weitzman, 1990). However, Pendleton (1999b) suggests that a weakness of these
theoretically derived reasons for profit-sharing is that they are not usually
located in pay determination contexts. In contrast, he suggests that the
growing popularity of profit-sharing in some countries since the mid- to late
1980s (as in France and Italy) has to be understood in the context of pay
decentralisation.
Pay decentralisation has occurred because of
the market challenges facing companies in Europe and the perceived need to
tailor remuneration and grading systems (especially the case in France) more
closely to the circumstances facing individual companies. It is possible to
interpret the use of profit-sharing in these circumstances as a form of
‘efficiency wages’, to boost pay to the remuneration levels offered by
industry-wide agreements or as a compensation for stepping outside of them,
whilst not adding to long-term or quasi-fixed claims against the company.
Profit-sharing itself is not designed to weaken existing forms of
decision-making participation, though the decentralisation which gave rise to
it may. However, profit-sharing will become subject to the prevailing form of
participation at company or plant level. Profit-sharing may be more prevalent
in companies or workplaces with higher-than-average levels of either direct or
representative participation since these provide both a means for employee
expression and some institutional framework for the determination, allocation
and administration of remuneration supplements. The EPOC analysis supports
this.
In contrast, broad based profit-sharing may be
viewed as unattractive in companies with unions since it may give unions
additional leverage over remuneration and lead to increased access to financial
information. However this is not supported by research (see Pendleton et al. in
this volume). Furthermore, ‘Machiavellian’ managerialism (d’Art, 1992) may be
responsible for managers and principal owners using these schemes as a means to
develop autonomy in pay determination, excluding the influence of trade unions.
Involvement of employee shareholders
Turning to employee share
schemes, these differ from profit-sharing in that they occur in the ‘ownership
channel’ of the company rather than in the ‘employment channel’. The extent to
which employee participation in decisions is connected to employee share
ownership is likely to be substantially influenced by prevailing models of
corporate governance and the capital structures of companies. As yet, this is
an unexplored area of financial participation. Theoretically, there are a
number of possibilities (Pendleton, 1999b). Where ownership is widely
dispersed, as in the traditional USA model, managerial discretion may be high.
So, although share schemes impact primarily upon owners, they may be introduced
by managers ‘within’ the company. Here, in principle, the barriers to close
relationships between other forms of participation and financial participation
may not be high. Indeed, managers and workers may conspire together to realise
value for employees (and managers) at the expense of other shareholders. In
practice, the compliance of shareholders to employee share schemes appears to
be secured by limitations on the amount of stock passed to employees and the
discouragement of active involvement by employee shareholders in corporate
governance matters and other forms of direct or representative participation
linked to ownership of the shares.
The possibility of trade
union involvement in the ´ownership´ channel has been advanced as a
traditional argument of owners to be
against any share ownership of employees. However, there are cases where trade
unions are heavily involved in employee share ownership matters. In most cases
this is the result of privatisation of former state owned companies where in
the negotiations employee share ownership is developed. Typical examples are
Aercom in Ireland, UK Bus in the UK and the Steel industry in Spain. However,
there are no indications that there is any systematic move that trade unions
are inclined to syndicate individual employee shareholders.
Attitude of the social partners in Europe
In table 2 I
have summarised the position of the actors in industrial relations in several
European countries.
In general, national employer
associations and federations are not active promoters of financial
participation. They are in favour because financial participation may result in
more flexibility in the pay system, but employer organisation consider the
implementation of these schemes as the sole discretion of the company owners or
managers. It is kept apart from any collective bargaining. The consequence of this position is
that especially in large companies individual solutions of financial
participation is taken unless there are governmental regulations to get the
scheme approved (in France, UK, Ireland, Netherlands and Finland). On the other
hand, three observations may influence the position of employer organisations:
·
The
increase in the use of share option schemes in companies may have the effect
that employers will demand some support from collective bodies and may lead to
the request to governing bodies for certain conditions and requirements;
·
Transnational
companies experience major barriers in the implementation of their plans across
borders. A recent survey among human resource managers in the top 500 European
multinational companies revealed that there were legal, fiscal and industrial
relations barriers to the implementation of their plans (Van Den Bulcke, 1999).
On the other hand, the survey also found that there was a lack of information
on the employers' side about the situation and climate in other countries and
there was a need for exchange of practices and policies for the implementation
of group-level plans among European companies.
·
There
are explicit negotiations going on between the social partners in certain
sectors in some countries to include elements of financial participation in
their collective labour agreements.
In general
trade unions are not in favour because of the following arguments:
·
It is less amenable to collective bargaining
·
It can substitute basic pay
·
It means higher dependency on the company and its
performance
·
It shifts risks to employees
·
It alienates the position of employees and may threaten
unionisation
·
It increase unequal distribution between categories of
personnel but also between companies and between the private and public sector.
However,
there now appears to be a move towards a more pragmatic approach by trade
unions and, in some cases, white collar unions have taken the lead with more
proactive policies. These developments have occurred in many European countries
and more pronounced in Ireland, Germany and the Netherlands. In Ireland, the
most recent National Partnership Agreement of February 2000 stipulates the
possibilities of innovation in pay determination and pay practices, including
profit-sharing and employee share ownership. Sweden’s Trade Union Congress (LO)
recently discussed a motion to the convention asking for an investigation into
a Swedish model for employee ownership that has been promoted by the Metal
Workers Union.
The European
Trade Union Confederation developed recommendations and guidelines for
financial participation schemes in September 1999 (ETUC, 1999) and supports the
idea as a complementary element of employee participation in decision-making
under the requirements of democratisation in the workplace.
5.
Conclusions and outlook to further developments
In
considering the development of financial participation in EU countries so far,
we can conclude that France and the UK have reached a level of integrated
legislation and policy, with a high level of distribution of these schemes. In
all other EU countries, the legislation mainly favours only a limited number of
schemes, with employee share ownership being most favoured and cash-based
profit-sharing being least favoured. The initial scheme that promoted the
development of financial participation appears to be a nationally supported
deferred profit-sharing scheme. The most pronounced development of integration
of schemes at company level stems from a nationally promoted company savings
scheme. The beneficial tax treatment of these two schemes has undoubtedly
contributed to the spread of financial participation in Member States.
Countries with only a modest government policy and legislative arrangements
have little or no growth of financial participation or even a decline.
The change in
attitude of trade unions from unfavourable to pragmatic positive in most
countries will probably lead to more discussions on the ins and outs of these
schemes and the requirements to be set for these schemes. The trend towards
more flexibility in employee benefits is irreversible and trade unions have
been active to enter this domain and try to get these additionals under
agreements. This may result in new strategies concerning the development of collective
agreements and new services to members, barely needed because of the decrease
in unionisation in a number of member states.
The macro-economic
situation will have an influence on the support of both government and the
social partners for any proposals on financial participation. Recent arguments
for enhancing productivity, employment and wage flexibility are stimulating
discussions on proposals, as are discussions on more private savings for future
security. However, it is expected that the argument of promoting wage
flexibility on labour markets through financial participation schemes will meet
with opposition from trade unions. Another point that is discussed in some
countries is the relationship between remuneration in the public sector and the
private sector when financial participation is widely introduced in the private
sector. In addition the unfavourable economic climate and the recent
developments in capital markets will probably put at least the employee share
ownership type of schemes on the side track of industrial relations issues.
In its Communication
the EU Commision has developed a number of guidelines that may help member
states governments as well as social partners in their discussions on financial
participation plans. The following principles or guidelines were formulated:
Voluntary participation
Financial participation schemes should be
voluntary for both enterprises and employees.
Extending the benefits of financial
participation to all employees
Access to financial participation schemes
should in principle be open to all employees. While
a certain differentiation may be justified in
order to meet the different needs and interests of
employees, financial participation schemes
should aim at being as comprehensive as possible
and treating employees on similar terms.
Clarity and transparency
Financial participation schemes should be set
up and managed in a clear and transparent way.
In this relation it is particularly important
that employees or their representatives are informed and consulted about the
details of financial participation schemes which are to be introduced.[2] Especially share-ownership schemes
will almost inevitably involve a certain complexity. In this case, it is
important to allow for adequate training for employees to enable them to assess
the nature and details of the scheme in question.
Predefined formula
Rules on financial participation in companies
should be based on a predefined formula clearly
linked to enterprise results. This is a major
element in ensuring the transparency of such
schemes.
Regularity
Financial participation schemes should be
applied on a regular basis and should not be a oneoff exercise. This is
particularly important if such schemes are aimed at enhancing and rewarding the
long-term commitment and loyalty of staff.
Avoiding unreasonable risk for employees
Compared to other ‘investors’ employees tend to
be more exposed to adverse economic developments affecting their enterprise.
For them, it is not only their investment that is at stake, but potentially
also their income and their job itself. Given the potential risks for employees
involved, due consideration should in any case be given in the introduction and
running of financial participation schemes to the avoidance of any unreasonable
risks.
Distinction between wages and salaries and
income from financial participation schemes
A clear distinction has to be made between
income from financial participation on the one hand and wages and salaries on
the other. In some specific cases (for example for top executives or in the
case of start-up firms) income from financial participation, and in particular
stock options, may constitute an important part of the overall remuneration. In
general, however, financial participation cannot be a substitute for pay and
fulfils different, complementary roles.
Compatibility with worker mobility
Financial participation schemes should be
developed in a way that is compatible with worker
mobility both internationally and between
enterprises. Policies towards financial participation
in particular should avoid creating barriers to
the international mobility of workers.
In order to organise a more structured exchange
of information the Commission will
prepare a benchmarking of national policies and
practices. In this respect, a feasibility
study will be carried out in 2002, which will
explore practical and conceptual issues. The
actual benchmarking exercise will be carried
out in 2003. The results will be presented and
disseminated in 2004.
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Scheme 1 Types of financial
participation
CPS
Cash based profit sharing DPS Deferred profit sharing PIF Personnel investment fund SPS Share based profit sharing ESP Employee savings plan ASP Asset savings plan ESO Employee share ownership CVB Convertible bonds SAR Stock appreciation rights SBP Stock bonus plan SOP Stock options plan ESOP Employee share ownership plan EBO Employee Buy Out CO-OP Co-operative Cash
based profit sharing Profit sharing Deferred profit sharing Financial participation Asset accumulation Equity sharing Employee share ownership
Scheme 2
Dimensions of variance of schemes
