Recent Developments in Financial Participation

within the European Union

 

(Project No. 0218)

for

 

EUROPEAN FOUNDATION FOR THE IMPROVEMENT OF LIVING AND WORKING CONDITIONS

 

 

 

 

By

Erik Poutsma

Nijmegen Business School

University of Nijmegen

 

March 2000

 

 

 

 

 

 

 

 


 


Preface

There is growing interest in the theme of financial participation of employees in their enterprises within Europe. The latest PEPPER (Participation by Employed Persons in Profits and Enterprise Results) report of the European Commission however concludes that there is more  diversity than unity in the use of these employee 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 a report on the state-of-the-art knowledge on employee financial participation in European Union Countries.

 

The main objective of this report, therefore, is to provide the up to date situation of financial participation in Europe. It is based on a review of available international research and publications and interviews with country-experts. It attempts to present a systematic overview of existing forms of employee financial participation, the reasons for its application, the preconditions for its existence and its impact on the employment relationship. Special attention is given to types of employee share ownership and the relationship with the three other pillars of employee participation, i.e. direct participation, representative participation and participation through collective bargaining.

A first interim report was discussed and commented on by experts on the Joint European Foundation / Nijmegen Business School Conference 9/10 September 1999 in Leiden.

This project was carried out by Dr. Erik Poutsma  of the Nijmegen Business School, University of Nijmegen.


Acknowledgements

 

This project is an endeavour of a number of people. First, Kevin O’Kelly and Hubert Krieger of the European Foundation set the course of the project and were convinced of the necessity and also the possibility of success of this endeavour. I thank them for their expertise and their trust. Second, the project is embedded in the research group PARTNER (Participation & New Employment Relationships) of the Nijmegen Business School, University of Nijmegen. Fred Huijgen and Willem de Nijs are real partners in comments and as critics. Third, parts of this report could not be written without the support of experts. I thank the following for their valuable contributions: Joseph Blasi of Rutgers University, NJ, USA; Andrew Pendleton of Manchester Metropolitan University; Takao Kato, Colgate University, Hamilton, NY, USA; Virginie Pérotin, ILO, Geneva; Francine Van Den Bulcke, Catholic University Brussels; Daryll d’Art, University of Limerick, Ireland; Mark van Beusekom, Participation Solutions, the Netherlands; Mariá González-Menéndez, University of Oviedo, Spain; Thomas Coutrot, Ministry of Labour and Solidarity, Paris, France; Peter Mozet, Ministry of Labour, Germany; Hans Schneider, University of Nuernberg, Germany; Peter Wilke and Stefan Würz, ISA consult, Hannover; and all the participants who attended the workshop in Leiden, on September 9 / 10 1999 and  the Netherlands Participation Institute  for organising this meeting.

Finally, I would like to thank everybody who helped me, knowing that any mistakes and misunderstanding that still remain are mine.


Contents

 

Preface

Acknowledgements

Summary

1.   Introduction

2.   The pillars of participation

3.   Motives and effects

4.   Recent developments in Europe

5.   Research perspectives

Literature

Biographical note

 


Summary

 

There is growing interest in the theme of financial participation of employees in their enterprises within Europe. The latest PEPPER report 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 a report on the up to date situation as regards employee financial participation.

 

The main objective of this report is to provide this up to date situation. It is based on a review of available international research and publications. It attempts to present a systematic overview of existing forms of employee financial participation, the reasons for its application,  the preconditions for its existence, and its impact on the employment relationship. Special attention is given to types of employee share ownership and the relationship with the three other pillars of employee participation, i.e. direct participation, representative participation and participation via collective bargaining.

Overview of forms of financial participation

The report gives an overview of forms of financial participation. It outlines the broad spectrum of financial participation systems and points to the complexity of the process. It also reviews the differences between the concept of PEPPER schemes, covered by the European Commission report and the more broad spectrum of existing schemes.

Recently there has been a shift from statutory to more decentralised arrangements of participation and discussion has focused on participation’s organisational impacts. Arguments have focused more on organisational efficiency than on workplace humanisation or social justice.  It can be said that this shift is mainly caused by four developments:

 

First, experience with real participation in numerous contexts demonstrates that, while participation has many advantages, it is unlikely to transform society or make the workplace into paradise. In other words not full participation but an optimal level is requested and participation should not be considered as a goal on its own.

 

Second, the lengthy European economic recession has required greater attention to productivity than to social justice. This means that participation is put into a context of contributions to be made to a better economic performance.

 

Third, the political pendulum has swung generally towards the dominant coalition of management and owners in their striving to increase share-holder value. Unions have lost power at the company level in most countries. This has resulted in a trend towards a more decentralised form of negotiations.

 

Finally, to a large extent participation has already established and institutionalised workplace humanisation and social justice which means that the need for deliberate action to promote more participation has diminished.

 

More recently, the trend of greater deregulation by governments has turned the focus of responsibility on private business and on the individual. This has influenced the re-distribution of contributions and resources and financial participation became an alternative for channelling this re-distribution.

 

In summary, recent developments suggest that there is more emphasis on:

n    on organisational efficiency than on power sharing;

n    decentralised arrangements than on collective central arrangements;

n    direct participation than on statutory indirect participation;

n    parties contribution than on collective redistribution;

n    remuneration, through additional income and savings, than on fixed wages.

 

Under the heading of financial participation a broad range of schemes can be classified but four broad categories are covered:

·       Cash based profit sharing

·       Deferred profit sharing

·       Employee savings plans

·       Employee share ownership

 

It is important to make a distinction between profit sharing and share ownership. The differences in character between the two may well outweigh the similarities. Whereas one form of financial participation (profit sharing) is essentially employment-related, the other is ownership-related (employee share ownership). These fundamental differences may well have important effects on the relationship with decision-making participation.

 

Profit sharing and share ownership plans can vary in a number of dimensions. For this discussion, the following are the most important:

·       Pure company level agreement or multi-employer plans;

·       Broad based or only eligible for certain categories of personnel;

·       Dependency on performance of the company or less dependent;

·       Negotiated and agreed with employee representatives or not;

·       Degree of worker control.

 

The PEPPER schemes are company level, broad based plans dependent on company performance, while not excluding participation in other companies assets. Given our focus on participation and commitment and following the PEPPER definition there is an argument to exclude such schemes as gainsharing, irregular cash based profit sharing and share options schemes.

 

Concepts, theories and available research results

Despite the lack of empirical research there is a growing body of knowledge and research on the possible impacts of financial participation. However, this research lacks a complete reference to types of financial participation and research on the impact of financial participation on the employment relationship is limited. Besides, in most research the relationship with other pillars is not questioned.

 

This project made an attempt to discover available empirical research by presenting an extensive bibliography based on a search of libraries and internet sites. Next, discussions were held with researchers specialised in this field. Specific focus was on recent research results on the conditions for financial participation and its functions, implementation problems and the risks for parties involved.

 

In general, the motives for putting financial participation into practice appear to fall in four broad categories:

·       productivity increase;

·       enhancing flexibility of remuneration;

·       gain tax advantages;

·       to provide an employee benefit and, hence, increased commitment of employees (labour market argument).

 

More defensive ones are:

·       discouraging unionisation;

·       used for take-over defence;

·       financing companies in trouble.

 

From a macro perspective the most important reasons to promote financial participation are:

·       wider distribution of wealth (assets and other savings);

·       sustaining employment.

 

The research up to now indicates that financial participation schemes are found more often in:

·       larger (publicly owned) companies;

·       more profitable firms;

·       financial sector companies (banking and insurance);

·       firms with higher than average skills;

·       young growing companies.

 

Given these results, it is suggested that large, more profitable companies also tend  to develop more financial participation regulations and other employee benefits. However, this implies the reversal of the cause-effect relationship which implies that there is an expected productivity increase.

 

A considerable body of evidence suggests that the introduction of financial participation is associated with a rise in the level of productivity in the firm. However, the debate on the link between performance and financial participation is not closed. There seems to be an indication that this link is present for the introduction of profit sharing but less in the case of employee share ownership. The research indicates, therefore, that there is no automatic connection between employee ownership and productivity or profitability. Subsequently it is concluded that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance and also very little study of the range of other human resource policies that might produce positive impacts with financial participation.

 

The research also indicates that employee ownership does not automatically improve employee attitudes and behaviour whenever it is implemented. There are indications that perceived participation in decision-making, either by itself or interacting with employee ownership, will have positive effects on employee attitudes. Evidence also appears to suggest that employee share ownership, when combined with participation, does increase productivity. Put another way, employee share ownership and participation (both direct and indirect representative on company level) tend to reinforce each other.

 

Trade union de-recognition has also been put forward as an argument for the introduction of financial participation schemes and this has led trade unions to be sceptical about financial participation. While research shows a positive association between union recognition and other participative structures there is no evidence that employees seek or desire a change in union representation in firms which arranges employee ownership. Moreover, research indicates that when trade unions and employee representatives are involved in the implementation of financial participation plans the further development of employee participation appears to be an important objective.

 

Problems and obstacles

A potential shortcoming of financial participation schemes is that they may not result in higher motivation when the relationship between input and output is weak, thus failing to meet expectations both for employees and for employers. This is especially true for non-management employees, whereas top executives are more directly connected to organizational performance. Financial participation schemes, therefore, tend not to be broad based but directed to higher skilled, core staff.

Another important obstacle might be the costs to companies in the initial design stage, the implementation and the ongoing costs for administration. These are not inconsiderable and there is the additional expense associated with the need to have an annual appraisal of the company’s value by an outside expert. Generally speaking, unless a company is big enough these costs will probably outweigh any tax advantages.

Actual developments since 1995 in selected countries

Drawing on the PEPPER II report, this review attempts to update the developments of financial participation in European countries. A more in-depth description is given of the developments in the most elaborated ‘financial participation’ countries such as France, Germany and the United Kingdom, and three other countries with specific patterns and activities concerning financial participation: Ireland, the Netherlands and Spain[1]. The developments in these countries by and large cover the variety of characteristics, and developments of schemes and also the variety of empirical insights on relevant topics.

 

From this short overview of developments in Europe the following conclusions can be drawn:

·       The full range of financial participation schemes can be found throughout Europe.

·       These systems are more diffused in a limited number of countries. In most European countries financial participation is not an issue in national debates. Any plans in those countries are very local or implemented through foreign companies.

·       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. Therefore, the pattern of financial participation differs between countries.

·       A country’s pattern of financial participation reflects the industrial relations system, the corporate governance system and the prevailing business and corporate culture.

·       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. Financial participation systems are also used for income and employment policies. The corporate governance system provide for a limited scope of employee share ownership due to more concentration of capital and the substance of tightly controlled family firms.

·       Spain has a pattern of minor regulations for share-based profit-sharing. The developments at present 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 enterprise-level pension plans and the support for workers’ co-operatives and labour firms should be looked at as complementary to plans to improve workers’ financial participation in the firm.

·       Germany has a pattern that consists of investment savings plans with the principal aim to increase (employee) ownership of capital savings and other assets for the 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 collectively agreed schemes. Like France, the capital market is not elaborated in Germany. Many firms are tightly controlled or are privately owned, which leaves little scope for the development of full employee share ownership and trade unions appear to initiate any discussions which might take place.

·       The Netherlands’ pattern of financial participation is largely based on a nation wide wage savings plan. This plan allows profitable tax provisions on contributions of both employer and employee to a share based plan. However, most employees opt for the less risky saving in a special account with less profitable tax provisions and trade unions are not demanding collective schemes.

·       The UK has a pattern that consists mainly of deferred share option schemes which have the principal medium term aim of employee incentive. The main actors are employers and government. A well developed and elaborated stock market provides ample opportunity for share based investments. The development is heavily supported by UK Government policy and measures.

·       Ireland has a pattern of financial participation that more or less reflects the UK pattern. The difference is that in Ireland it is just starting. Based on the promotion of a national programme, Programme for Prosperity and Fairness, the trade unions are also committed to the promotion of share based plans.

·       In general, the use, pattern and diffusion of schemes are influenced by government policies on tax advantages and other incentives.

·       Government positions in individual EC countries range from those that are strongly and actively in favour of financial participation, to those that try to have a positive influence on the social partners, to those that leave the matter solely to the individual employers, to those without a defined view on the topic.

·       Throughout Europe there is a growth of financial participation and this is expected to continue.

·       This growth is prompted by the decision of individual employers in larger companies and is mainly in the form of investments savings plans, share option schemes or deferred profit sharing schemes and in a growing number of cases, for future securities (including retirement funding).

·       Throughout Europe there is a growth in share options schemes for staff and executives, especially in the booming financial and high technology sectors.

·       Generally, throughout Europe, smaller privately owned companies are not in favour of financial participation systems.

·       The number of typical ESOP’s in European countries is very low.

·       The incentives and the amounts for financial participation usually fall between 2 to 5% of annual employee earnings and between 2 to 5 % of the wage bill.

·       The development of financial participation is generally dealt with outside the collective bargaining process and is the subject of agreement between employee representatives and employer at company level.

·       In most countries, the attitude of trade unions is changing to a more pragmatic interest.

·       Financial participation systems are mainly used as an additional employee benefit to increase workforce commitment, as an instrument to gain tax advantages and other bonuses. It is used less as an instrument for diminishing wage rigidity or as a broad based performance related pay scheme.

·       Employee share ownership is used less as a defensive mechanism to prevent a take over or as a means of financing companies in trouble.

·       The low diffusion of financial participation in most European countries and in most companies might also reflect another use of reward systems in Europe. European managers do not seem to be convinced of the connection between variable pay and corporate performance.

·       In most countries there is little data and knowledge about the impacts (on employee attitudes, on actual change in employee behaviour or on actual changes in performances of companies) of financial participation systems. Likewise, there is not much knowledge of the relationship of these systems to the other pillars of participation, and is the impact of corporate governance systems on the nature and use of financial participation is not fully understood.

Knowledge gaps in the process of introduction, implementation and support of broad based financial participation

As an input for debate Chapter 5 presents a first overview on existing knowledge gaps and possible research topics. Given the suggested positive impact on a number of desirable objectives which the employers, employees and governments have, the question of implementation and related problems becomes important. There is a need to establish the knowledge gaps, especially when it concerns the combined efforts to improved employee participation.

 

This report identifies topics that has had minor attention in the research literature and suggests a specific focus and research strategy. Discussions on research could focus on the question: at this stage of the development in Europe what is needed most? The theoretical debate and research has not on the whole yet produced decisive results. More empirical evidence is, therefore, needed to identify the relationships and the impact of financial participation. The focus might be the process to discover salient organisational mechanisms that might help explain the actual connections.

 

Much research has been done on the characteristics of companies that use these schemes, compared with companies that have no schemes. Chapter 3 shows some of these findings.

Our knowledge of determinant factors stemming from task structures, social structure, employee relations and work related variables is limited. We also appear not to know much about employees’ opinions about different schemes and the reasons for their decision to participate in a given scheme. Research has also followed the prevailing idea that trade unions take a negative view, while recent experiences with the more positive positions of trade unions is getting more attention. Finally, our knowledge of attitudes and behaviour of employee representatives and their assessment of schemes, is limited.

 

As mentioned above, in the course of determining factors the relationships with external factors have been researched more than the theoretical proposition of the interaction between the pillars of participation and the subsequent HRM instruments. The possible relationship with HRM -strategies should get more attention. Research also needs to move beyond measuring financial participation, non-financial forms of participation and firm performance and presuming that a direct connection can either be established or not. Research could measure a wide variety of elements of the employment relationship, the firm’s culture and competitive strategy. In other words a move in the direction of researching the high performance workplace.

 

In summary, future research on determinant factors should focus more on:

·       employee participation and choices made, for instance through a EU-wide survey of individuals about employee stock ownership, profit sharing and participation;

·       social structure and work related characteristics, for instance the differences between categories of personnel and between broad based plans and executive types of plan; between team-based workplaces and conventional workplaces;

·       Trade unions and employee representatives’ responses and experiences with different types of schemes, in different settings;

·       Other stake holders attitudes and opinions about financial participation.

 

Future research on relationships might include propositions that cover the relationship between different financial participation schemes and:

·       organisational performance (employee involvement and flexibility);

·       industrial relations performance (conflict and levels of absenteeism, recognition of employee influence);

·       levels of intrinsic and extrinsic commitment;

·       the other pillars of participation (direct participation, representative participation and collective bargaining) and its interactive effects on performance (the high performance workplace);

·       other HRM instruments (compensation, appraisal, competence development, recruitment and selection) and its interactive effects on performance.

 

A survey and panel type research approach could cover the determinant factors and relationships that have had minor attention. Policy orientation requests for a focus on discovering of diffusion patterns of different schemes based on the most important determining factors. Next the research should focus on objectives and impacts as it is important is to know employee and trade union representatives views and responsiveness. For the purpose of policy at the EU level, and as an exchange of experiences between countries the case studies might be used as a research strategy.


Introduction

 

1.1 The objective of the research

 

This report describes recent developments in financial participation in the European union. It discusses the backgrounds of the phenomenon, research results and presents an overview of the situation in the European Union. The aim of the report is to present insights that serve as a basis for discussion by social partners, European governments and the European Commission. The information has been based on a literature search, interviews and extracted from secondary sources and information provided by local experts.

 

There is growing interest in the theme of financial participation of employees in their enterprises within Europe. The European Commission has promoted the phenomenon in the 1990s under the heading of PEPPER. The PEPPER II (1996) report conclude that there is more  diversity than unity in the use of these employee financial participation schemes. There appears also to be a lack of empirical research into 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 Foundation commissioned a report on the up to date situation with on employee financial participation.

 

The main objective of this report is to provide that up to date situation. It is based on a review of available international research and publications. It presents a systematic overview of existing forms of employee financial participation, the reasons for their application,  the preconditions for their existence, and impacts on the employment relationship. Special attention is given to types of employee share ownership and the relationship with the three other pillars of employee participation, i.e. direct participation, representative participation and participation through collective bargaining.

 

1.2 Background of the research

In Europe the participation issue has always been an important aspect of organisation and management in companies. Different European governments have traditionally developed legislative arrangements to promote the involvement of employees. Recent shift towards the issue of direct participation has been notified away from the more statutory indirect participation. Generally this shift is explained by global competition and increased flexibility requirements. The significance of direct participation is widely recognised by the social partners, as the EPOC’s study of their views confirms (Regalia, 1995). There was a general consensus on the objectives of direct participation, as well as widespread understanding of what was involved, even though different labels were used and concerns expressed that there were sometimes drawbacks like work intensification, stress and self-exploitation. Employer representatives often emphasised the social, as well as the economic, benefits of direct participation, while their trade union counterparts did not limit their expectations to improving working conditions, but also mentioned improved economic performance.  This suggests, at the very least, a shared industrial relations culture and, in some cases, increasing co-operation between the social partners.

Also on European level the issue of involvement and new forms of work organisation is seen as a major step towards improved quality of production and improved quality of working life as expressed by the European Commission’s Green Paper Partnership for a new organisation of work published in April 1997. The need for direct participation in the organisation of work has become a ‘new conventional wisdom’ (Osterman, 1994: p.173).

 

Widespread conventional wisdom of such a need cannot be discovered for financial participation. Although the European Commission has developed resolutions and studies to promote this type of participation the spread and use in Europe is rather low (PEPPER II, 1996). Recently a growth of management’ interest in increased application of profit sharing and share-options as an involvement instrument has led to an increase of experiments in recent years. Some governments (the UK, France, the Netherlands, Finland and Ireland) have recently developed or improved legislation and tax provisions.

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. Of course, this argument suggests an alignment with direct participation. In some instances this alignment is presented as the partnership company which covers high participation on all levels and all issues, i.e. the high involvement company. However, this alignment-argument is not without dilemma’s. Both pillars of employee participation can have quite different and conflicting objectives and functions. Financial participation might aim at flexible profit related pay on an individual basis, while direct participation might aim at improving the co-operation between workers. Also, the third and fourth pillars of employee participation, i.e. indirect representative participation and collective bargaining might conflict with financial participation since these are mainly focused on collective schemes, solidarity and social justice. On the other hand there are several forms of financial participation that adhere to different objectives that might support synergy with the other pillars of employee participation.

 

The European Foundation for the Improvement of Living and Working Conditions aims with this research to discover topics for research into the phenomenon of financial participation for its research programme.

 

1.3 Structure of the report

Overview of forms of financial participation

The report starts with an overview of forms of financial participation. It discovers the broad spectrum of financial participation systems and points at the complexity of the phenomenon. It also concludes on the differences between the concept of PEPPER schemes, as promoted by the European union and the more broad spectrum of existing schemes. Chapter 2 presents the overview.

Concepts, theories and available research results

The research will focus on concepts and theories that apply to the use of financial participation in conjunction with the other pillars of participation. It will focus on conflicting explanations of the impact of the different pillars of employee participation. More specific it will make references to recent theoretical and empirical insights related to the different functions of (broad based) financial participation: satisfaction, commitment, binding, incentives, savings, participation, performance in relation to different forms of FP (employee shares, options, profit sharing).

Despite the mentioned lack of empirical research there is a growing body of knowledge and research on the possible impacts of financial participation. However the research lacks full references to types of financial participation and research on the impact on the employment relationship is limited. Besides in most research the relationship with other pillars is not questioned. The research will make an attempt to discover available empirical research by presenting an extensive bibliography based on search of libraries and internet sites. Next to this discussions will be held with researchers specialised in this field. Specific focus will be on recent research results on the conditions for financial participation and its functions, implementation problems and risks for parties involved. Chapter 3 presents a summary.

 

Actual developments since 1995 in selected countries

Given the differences in industrial relations systems within Europe, it is to be expected that divergence rather than convergence will be the outcome in the way participation schemes are implemented in different European countries (Hampden-Turner & Trompenaars,1993; Gatley (1996). The way in which organisations and subsequent employment relationships in a country are structured and managed is strongly influenced by national specific social and cultural factors in such a manner that one can even speak of societal patterns of management and organisations. The PEPPER reports on the promotion of financial participation reveal some of these differences.

Drawing on the latest PEPPER II report this report makes an attempt to update the developments of financial participation in European countries. A more in depth descriptions is given of the developments in the most elaborated ‘financial participation’ countries: France, Germany and the United Kingdom, and three other countries with specific patterns and activities concerning financial participation: Ireland, the Netherlands and Spain[2]. The developments in these countries by and large cover the variety of characteristics of schemes and its developments and also the variety of empirical insights on relevant topics.

This part of the research was mainly based on interviews with and supplied resources by national experts. Specific focus will be on the explanations for the developments so far, recent developments and future perspectives and the relationship with the other pillars of employee participation. Chapter 4 presents these recent developments.

 

Knowledge gaps in the process of introduction, implementation and support of broad based financial participation

Chapter 5 gives a first overview on existing knowledge gaps and possible research topics as an input for debate at the workshop. Given the suggested positive impact on a number of desirable objectives of parties concerned (employers, employees and governments) the question of implementation and its problems becomes important. It is expected that knowledge about these problems are dispersed and locally. There is a need to systematise these and discover knowledge gaps especially when it concerns the combined effort of improved employee participation as supported by the different pillars. This part of the research was mainly based on available research on experiences and on discussions with experts at the workshop.

 

In the end the aim of the final report is to highlight important knowledge gaps and hence priorities in research that should be developed for a full understanding of the phenomenon.


2 The pillars of participation

 

2.1 Introduction

We seem to enter the Age of Participation. Governance is an important word in this respect. It refers to the way in which stakeholders in an institution live their power, rights and responsibilities. The authoritarian form of governance has prevailed since people began to organise economic institutions. Participation seems to emerge as an alternative form of governance. Definitions of participation abound. Some authors insist that participation must be a group process, involving groups of employees and their boss; others stress delegation, the process by which the individual employee is given greater free­dom to make decisions on his or her own. Some restrict the term ‘participation’ to formal institutions, such as works councils; other definitions embrace ‘infor­mal participation’, the day-to-day relations between supervisors and subordinates in which subordinates are allowed substantial input into work decisions. Finally, there are those who stress participation as a process and those who are concerned with participation as a result. For the moment we will define participation as a process which allows employees to exert some influence over their work, over the conditions under which they work and over the results of their work.

We distinguish four forms of participation:

·       direct participation (DP), referring to the say people have in dealing with daily work-related issues;

·       indirect or representative participation (RP) where employee representatives are dealing with work and organisation related issues;

·       financial participation (FP) which gives employees the opportunity to participate in profit and enterprise results; and

·       collective bargaining (CB) where parties try to influence labour terms and conditions on company and sector level.

We denote these as the basic pillars of participation in organisations, as basic types of institutions through which participation develops. This notification is not a value statement but classifies the phenomenon of participation.

 

In this chapter we try to discover the participation forms with a special focus on financial participation. We start with a short description why we seem to enter into an era of more participation of employees. Next we present a description of the types of financial participation in its full complexity. After that we present a non-exhaustive overview of major explanations of the phenomenon. We will investigate the basic arguments for putting financial participation into practice and look at dissemination and diffusion patterns.

2.2 Why participation?

 

In general four broad arguments support employee participation: The first is humanistic—that is, that, by contributing to personal growth and job satisfaction, participation will enhance human dignity. The second argument, power-sharing, is that partici­pation will redistribute social power, protect employees’ interests, strengthen unions, and extend the benefits of political democracy to the workplace. The third is that participation will promote organisational efficiency. The fourth argument is to achieve redistribution of the results. This refers to sharing in the sense of reaching a more equitable distribution of income, capital and other assets.

Humanistic

Of the three arguments, the humanistic is most appealing to direct participation in decision making. The argument is that participation helps satisfy employees’ (non-material) needs including those for achievement, and social approval. It contributes to competence development and self-actualisation. For employees, having a voice in how they do their work may be as important as how much they are paid for it. As it is sometimes put, ‘A worker should not have to leave his or her head at the factory gate or office door.’ (Heller et al. 1998, p.8).

Indeed, it is argued, participation is a necessary antecedent to human psycho­logical and social development. Development in social psychology theory showed the emergence of a number of models that connect workers’ satisfaction, participation and achievement. In any case, humanistic demands may become more insis­tent as employees become better educated and their basic needs for survival are better satisfied.

At the same time, however, participation and commitment might also mean more complexity and stress which means danger for the other life spheres. To paraphrase: ‘A worker should not have to keep his or her head full of work when he or she leaves the factory gate or office door’. This suggests an optimum level of participation in working life and a level of self-regulation that covers also other life spheres.

Power-Sharing

Advocates of this approach support participation for ideological and moral reasons, arguing that the traditional autocratic relationships are inherently unjust  and inconsistent with the values of a democratic society (e.g. Vanek 1971 and Moss, 1991). Some do so on political grounds, others out of religious or moral conviction. ‘Industrial democracy’ or ‘workers’ control’ has been a traditional goal of younger left-leaning people.

Trade unionists today differ considerably in their attitudes towards participation. Some see it as a management tool, designed to capture employee loyalty and weaken union influence. Others view it chiefly as a means of limiting and controlling autocratic and technocratic management power and of extending union control to cover issues commonly subject to collective bargaining. There were plentiful democratisation arguments in the late 1960—70s. According to some observers, workers involved in the wave of strikes in Europe in 1968 were protesting not just for higher wages, but also against bad working conditions and arbitrary management. They demanded ‘a say in management, if not the introduction of some form of “workers’ control’ (Streeck l995).

Recently we experience a shift from statutory to more decentralised arrangements of participation. Also more recently the discussion has focused on participation’s organisational impacts (Lammers and Széll 1989b). Arguments have focused more on organisational efficiency than on workplace humanisation or justice.’  According to Heller et al. (1998) this shift towards more modest goals is caused by, first, experience with real participation in numerous contexts demonstrated that, while participation has many advantages, it is unlikely to transform society or make the workplace into paradise. Secondly, the lengthy European economic recession has required greater attention to productivity than to social justice. And, finally and concomitantly, the political pendulum has swung generally to the rights of the shareholder and the dominant coalition of owners with management. Unions have lost power in most countries.

Efficiency

Explanations abound of the positive impacts of participation on organisational efficiency (Miller and Monge 1986; Aoki 1990). Heller et al. summarises these as follows:

1. Participation may result in better decisions. Employees often have infor­mation which senior management lacks. Further, participation permits dif­ferent views to be aired and in this way the danger of groupthink is reduced.

2. People may be more likely to implement decisions they helped make them­selves than decisions imposed on them from above. Not only do they know better what is expected of them, but helping make a decision commits them to it.

3. Motivation is frequently enhanced, psychology has shown, by the setting of goals during the participative decision process and by expecting reward from results that are actually influenced by the participant.

4. Participation may improve communications and co-operation; employees may co-ordinate each other, thus saving management time. Further, by dissemin­ating the experience in employee problem-solving, participation may facil­itate organisational learning. In so doing participation contributes to what Aoki (1990) calls dynamic (as opposed to static) efficiency.

5. Participative subordinates may supervise themselves, again making man­agers’ and supervisors’ lives easier.

6. Joint participation by employees and management to solve problems on a non-adversarial basis may improve employee—management relations generally.

7. On a personal level, employees may learn new skills through participation; leadership potential may be readily identified and developed.

 

Redistribution of assets and results

Power sharing via collective bargaining has already resulted in a certain amount of redistribution of revenues. Back-up by prosperous developments also state intervention has led to quite some re-distribution of revenues and in this way, in some cases, intervened heavily into the design of the employment relationship and the re-distribution of generated income. Of course this development became gradually institutionalised into the welfare state which offered a concerted, more or less participative and responsible, business culture. Recently, however, a deregulation movement by governments stress the point of responsibility of private business and the individual. This influences the re-distribution of contributions and resources. In this discussion financial participation became an alternative for channelling this re-distribution.

 

Specific reasons and conditions

In addition to the general arguments above there are, of course, numerous other more specific reasons why managers adopt participation and why employees are striving for voice. Among them: it might be a management fad. Indeed Ramsay (1977; 1983) argues that interest comes in cycles, with interest being greater when man­agement’s traditional rights are in question.  Various forms of participation are adopted because they are popular at the moment and are pushed by consultants and management publications. Management’s tendency to follow fads might be a problem because it might adopt participation programmes chiefly as a quick, low-cost solution to organisational problems and does so without recognising that these programmes require substantial changes in day-to-day behaviour, heavy investment in training, and often considerable reduction in managerial discretion. Management’s failure to consider these facts helps explain why many participation programmes are short-lived and unsuccessful, also in the case of financial participation.

It is not only management who follow these mimetic institutional pressures. According to the institutional perspective, an organisation's decision about an innovative administrative technology such as financial participation is influenced less by efficiency considerations than by environmental pressures to conform (Di Maggio & Powell, 1983). Organizations will adopt an innovation, even if it is technically inefficient, in order to gain legitimacy, resources, and hence to ensure their survival (Meyer & Rowan, 1977). Thus, by following prevailing practice, an organization may enhance its effectiveness. This might be very well the case for multi-nationals entering foreign countries.  Some of these practices may get institutionalised in regulations and legislation concerning the way organisations should be run, how pay is determined and how staff should be rewarded.

 

Legislation and institutional arrangements

Indeed, an important impact not to be neglected comes from legislative arrangements in countries. The laws in many countries require various forms of participation. Indeed, laws and other legally binding rules provide a major expla­nation for differences in the extent of actual participation across countries (see the PEPPER studies I, 1991; and II, 1996; IDE 1981, and recently the IPSE study 1997). As we discuss later, recent European Commission’ and European Parliament initiatives may spread participation further.

 

Gaps between rhetoric, theory and practice

In practice participation is adopted for a variety of different reasons, including many not discussed above. Given the variety of reasons for which participation has been introduced, it is understandable that the parties have differing expectations as to how it should work and what it should accomplish. Nevertheless the reasons for which participation is introduced often have little to do with how it works in practice. Indeed the reasons for participation’s initial introduction may have little to do with whether it is successful in the end.

2.3 Expected developments

 

Recently we experience a shift from statutory to more decentralised arrangements of participation. Also more recently the discussion has focused on participation’s organisational impacts. Arguments have focused more on organisational efficiency than on workplace humanisation or justice.’  This shift is mainly caused by four developments:

 

First, experience with real participation in numerous contexts demonstrates that, while participation has many advantages, it is unlikely to transform society or make the workplace into paradise. In other words not full participation but an optimal level is requested.

 

Secondly, the lengthy European economic recession has required greater attention to productivity than to social justice.

 

And, third, the political pendulum has swung generally to the right. Unions have lost power on company level in most countries.

 

Finally, most participation has already established and institutionalised workplace humanisation and justice to a large extent.

 

Recently, also a deregulation movement by governments stress the point of responsibility of private business and the individual. This influences the re-distribution of contributions and resources. In this discussion financial participation became an alternative for channelling this re-distribution.

 

In summary, recent developments suggest the following for the issue of participation:

n    more emphasis on organisational efficiency than power sharing

n    more on decentralised arrangement of participation than collective central arrangements

n    more on direct participation than on statutory indirect participation

n    more on parties contribution than on collective redistribution

n    more on remuneration through additional income and savings than on fixed wages

 

Besides, the foregoing includes quite some paradoxes, dilemma’s and hence controversies. Indeed, for every advantage, participation has a disadvantage for the actors and parties involved. Many of these disadvantages are substantial, as are .. the advantages. In short, from an organisational point of view participation may change a) how employees perceive their jobs, b) how they do these jobs, c) how they and their unions relate to their employer and d) how and in what form they get their revenues.

 

2.4 Defining Participation

 

At the beginning of this chapter we defined participation as a process which allows employees to exert some influence over their work, over the conditions under which they work and over the results of their work.

We distinguished four forms of participation: direct participation referring to the say people have in dealing with daily work-related issues; indirect or representative participation where employee representatives are dealing with work and organisation related issues; financial participation which gives employees the opportunity to participate in profit and enterprise results; and collective bargaining where parties try to influence labour terms and conditions on company and sector level. We denote these as the basic pillars of participative governance, as basic types of institutions through which participation develops.

 

In practice there is quite a number of forms within the mentioned pillars and through combining elements of the four pillars. Generally participation schemes are classified using different dimensions of the degree of participation. Heller et al. (1998) distinguishes four dimensions:

·       organisational level: this covers the distinction of direct individual and more strategic representative participation

·       range of issues: this dimension distinguishes importance of the content of participation via minor personnel issues up to major investment decisions

·       degree of control: this dimension distinguishes degrees of influence from consultation up to joint decision making

·       ownership: this dimension refers to ‘economic democracy’ and ‘financial participation’ where employees may own all or part of a firm. Ownership here is distinguished from the degree of control dimension in the sense that ownership implies so called ‘return rights’ whereas degree of control discusses ‘control rights’ (Ben-Ner and Jones, 1995). Return rights relate to claims to income, such as profit sharing and allocation of stock to employees.

 

The next table 1 is adapted from Heller et al. (1998) and presents some illustrative examples. From a participation perspective looking at financial participation the last two dimensions are central in the debate on the promotion of schemes: degree of control and ownership.

 

We could draw up matrices by combining the dimensions and find typical combinations. However in this report we will focus mainly on financial participation and the ownership issue. In the next paragraph we will present different classifications of financial participation and an attempt to discuss the relationships with the other dimensions and typical examples.

 

2.5 Financial Participation

 

One of the most significant business initiatives in the 1980s was experimentation with employee participation in decision-making within the enterprise. At the same time, employers in countries with market economies increased their experimentation with employee financial participation. The concept of sharing profits or other assets with employees is necessarily related to the private enterprise system, so it is not surprising that the countries in which private enterprise is the strongest are generally the countries where finan­cial participation has flourished. The most obvious examples are the United States and the United Kingdom where profit sharing, gain sharing, savings plans, share based plans and employee stock ownership plans (ESOPs) have become relatively widespread on a voluntary basis with some government encourage­ment through the tax laws. In continental Europe, employee financial participa­tion has been more influenced by government policies attempting to encourage asset accumulation, a wider distribution of the ownership of capital, or profit sharing. In part the growing privatisation of state owned companies has contributed to wider employee ownership.

 

Table 1  Participation dimensions and examples

Dimensions

Illustrative examples

Organisational level

 

 Individual

Job enrichment

 Small group

Autonomous work team

 Department

Quality circle

 Plant

German & Dutch works councils

 Company

Worker directors

Range of issues

 

 Wages

Collective bargaining in most countries

 Personnel issues

Collective bargaining in USA; Workscouncils in Germany and Netherlands

 Welfare benefits

French works council regarding medical services

 Production methods

Quality circles, semi-autonomous work groups

 Selecting managers

Yugoslav workers’ councils (in the 80’s)

 Major investment decisions

Supervisory board under German co-determination

Degree of control

 

 Joint consultation

French works councils

 Joint decision

Co-determination in the German iron and steel industry

 Self management

Former Yugoslavia; producers’ co-operatives; semi-autonomous work groups

Ownership

 

 No employee ownership

Typical company in most countries

 Some employee ownership

Employee stock ownership plans (ESOP’s)

 Complete ownership

Producers’ co-operative

Adapted from Heller et al. (1998)

 

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 be 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: profit‑sharing, and employee share-ownership. These can be subdivided again into two broad categories which result into a broad generic classification of for categories   (with some overlap in some situations) into which these plans fall: cash based profit sharing, deferred profit sharing, asset accumulation and employee stock ownership.

 

Profit‑sharing

Profit‑sharing in a strict sense means the sharing of profits between providers of capital and providers of labour, by giving employees, in addition to a fixed wage, a variable part of income directly linked to profits or some other measure of enterprise results. Contrary to traditional bonuses linked to individual performance (e.g. piece rates), profit‑sharing is a collective scheme applied to all, or a large group of employees.

In practice, profit‑sharing can take various forms. At the enterprise level, it can provide employees with immediate or deferred benefits; it can be paid in cash, enterprise shares or other securities; or it can be alloca­ted to specific funds invested for the benefit of employees. At higher levels, profit‑sharing takes the form of economy‑wide or regional wage‑earners' funds.

Cash based profit sharing (CPS)

Although deferred profit sharing and cash based profit sharing have some common features, the differences are more significant than the similarities. The most important difference from the point of view of the employee participant is that the reward from a cash based profit shar­ing plan is paid much closer in time (and in immediate cash) to the performance being rewarded than it is with deferred profit sharing. This ordinarily would be expected to increase the incentive value of the payment, but it also means that the amount received is taxable in the year it is paid to the employee. Cash-based profit sharing is easily mixed up with gain sharing. Gain sharing is usually considered as a productivity improving or cost reducing activity not directly related to company profit levels. Gain sharing also provides for payments to participants much closer in time to the performance that is being rewarded, and is often organised on a unit-wide basis while profit sharing usually is company-wide. Gain sharing is closer to a true incentive plan than cash based profit sharing, and is certainly closer than deferred profit sharing, savings plans, or ESOPs.  Note that  a given employer may have one or more of all of these plans designed to meet particular company objectives.

Deferred profit sharing (DPS)

Deferred profit sharing is a form of deferred compensation under which the allocated profit share is held (most commonly) in trust and is not immedi­ately available to the employee. Usually a deferred scheme allocates a certain percenta­ge of profits to enter­prise funds which are then invested in the name of employees. Investment can be made n the company of the employees but under the heading of DPS also investments in other assets are developed. Or alternatively it is allocated to an employee account with a certain minimum retention period before the amount is made available.

 

Generally, in most countries with any policy on financial participation, a deferred profit sharing plan must be approved by the tax authorities, particularly where tax concessions to employer or employee are involved, so-called approved schemes. In fact, most countries regulate plan features such as eligibility, contribution rates, vesting, investments, distribution, etc.

The use of deferred profit sharing plans in the USA is typically developed to provide retirement benefits. Since most European nations have well developed public retirement plans, there has been less need for private, supplementary pension plans. DPS in Europe is mainly a savings plan for future employee spending. However, recently discussions in Europe on the resources of retirement plans has shift the focus towards more private resources including financial participation schemes in general. Deferred plans might have minimal value as employee motivators. Generally, the employee receives nothing more than a periodic statement of the amounts accumulated in his or her account and perhaps a projection of prospective savings or income. Obviously, the employee is receiving some degree of future financial security, but individual, immediate incentive value is prob­ably minimal. The employer, on the other hand, may deduct from current income amounts paid into the fund or the trust up to specified limits, thereby reducing that employer’s tax liability, depending of course on the existing provisions. Of course, employers may have other reasons for establishing deferred profit sharing plans, for example:

—to attract and retain high quality employees;

—to provide an inducement to employees to identify with the company;

 

Share‑based profit‑sharing consists of giving employees, in relation to profits or some other measure of company performance, a number of shares in the company where they work. These shares are usually frozen in a fund for a certain period before the workers are allowed to sell them. When shares are subject to a minimum retention period the term "deferred share based profit‑sharing" is preferred.

Asset accumulation & employee savings plans (ESP)

Deferred share based profit sharing comes close to asset savings plans and employee share ownership. Asset accumulation & savings plans provide for employees to set aside a por­tion of their pay, and perhaps to receive contributions from their employer, in an account that is in most cases invested in stocks, bonds or other investment choices for a period of time before being made available to the employee. Although usually intended as a long term savings program, plans may allow for withdrawals or loans. These savings plans appear under a variety of names: savings plans, incentive plans, investment plans or other. The most common examples are savings plans in the United States, France, Germany and the Netherlands. These are mainly so-called defined contribution plans which tries to follow tax provisions of governments. Government regulation mainly consists of regulation of the amount of contributions by employees and employers, eligibility criteria to prevent discrimination, and retention periods for tax exemption. Here the aim is to encourage employee saving while entailing little risk for the employee and to provide a relatively low-cost fringe benefit for the employer. Savings plans are designed mainly to encourage employee savings and to attract a committed workforce. There is virtually no direct incentive that might influence immediate performance.

For promotion of savings in some countries governments provide for bonuses when there are defined contributions from employees.

Employee share ownership (ESO)

Employee share‑ownership provides for employee participation in enterprise results in an indirect way, i.e. on the basis of participation in ownership, either by receiving dividends, or the appreciation of employee‑owned capital, or a combination of the two. While such schemes are not directly related to company profits, they are related to company profitabili­ty and so enable participants to gain indirectly from the companies added value.

Employee share‑ownership can be both individual and collective. Shares can be in the company where the employee works or in other firms, or both. This means that the possibility exists of overlap with asset accumulation and other savings plans. To avoid risks in some cases to invest employee contributions in several assets has become practice.

 

Employee share‑ownership can take on many different forms. Typically a portion of company shares is reserved for employees and offered at privi­leged terms; or employees are offered options to buy their company's shares after a certain amount of time, under favourable tax provisions, either through stock bonus plans or stock options plans or immediately. Alter­natively, an employee benefit trust is set up through Employee Share-Ownership Plans (ESOP’s), which acquire company stock that is allocated periodically to each employee's ESOP account.  When a loan is needed to buy the employee stock the term leveraged employee share ownership is used.

Employee share ownership can be build up by a savings plan with contributions (allocation of stock options, part of wages and/or cash savings) from employee and/or employer. These became known as save-as-you-earn schemes (most common in the UK and recently established in Ireland).

Government regulation mainly consists of regulation of the amount of contributions by employees and employers, eligibility criteria to prevent discrimination, and retention periods for tax exemption.  For promotion of savings in some countries governments provide for bonuses when there is defined contributions from employees.

 

Employee stock ownership plans have acquired a specific meaning in the United States where they have grown tremendously over the last twenty years, largely as a result of favourable tax considerations for companies which establish them. The chief difference between ESOPs and other stock ownership plans is that ESOPs make possi­ble a greater share ownership for employees.

 

From the point of view of the employee participant he or she could experience little difference between an employee share plan and a deferred profit sharing plan, at least to the extent that the profit sharing trust invests in stock of the sponsoring employer, since it is possible that In neither case the participant receives any stock (or cash) until distribution at some future time. The participant may receive a periodic statement of amounts accumu­lated in his or her account.

From the employer’s standpoint, the ESOP offers the possibility of additional tax benefits over a deferred profit sharing plan. Employ­ers may also establish ESOP’s in hopes of realising many of the same indirect advantages as those listed above for deferred profit sharing plans including the establishment of an ownership culture.

 

Further variants include producer co-operatives (CO-OP), in which all the firm’s shares (if the provided legal form) are collectively owned by its workforce; and employee buy-outs (EBO), under which the company’s shares are purchased exclusively by its individual workers.

 

The above presented various forms of financial participation are combined in some countries and companies. One of the objectives of the present report is to provide a better understanding of these national differences.

 

2.6 Patterns of financial participation

 

The above broad summary 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 (we draw some possible and most used relationships via dotted lines) and that combinations are possible. In fact some countries has specific tax advantages in resolving certain employee benefits derived from one scheme to another.

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, and 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. In contrast to the ‘theory’ of profit sharing, profit shares are usually ‘pre-residual’ payments. This is because in many firms there are pre-determined formulae for calculating the size of profit share distributions. It is only in a small number of firms — exemplified by small owner-managed firms and professional partnerships — that a decision is taken to share a residual component of the profits after the profits have been calculated. The corollary of this is that profit shares do not have any special or unique status. They are essentially the same as ‘base’ wages and salaries. This concept is recognised in the taxation treatment of profit sharing. Typically, their treatment in relation to corporate taxes is identical to that of wages and salaries (though partial social security exemptions are granted in some cases). In most cases employees do not receive any income tax exemptions on their profit shares. France and the UK are the main exceptions here (though Italy has recently introduced very modest tax benefits to employees receiving profit shares). Cash profit sharing may well be incorporated into employees’ contract of employment. This is usual in mainland European countries where legal regulation of employment is well-developed. In turn the operation of profit sharing is influenced by the principles and requirements of labour codes and labour legislation. In essence, profit sharing forms part of the employment relationship and conceptually takes a similar form to base remuneration.

 

Conceptually, employee share schemes are very different from cash profit sharing. Share schemes are related to the ownership of the firm rather than employment within

it. They have no direct impact on the amount spent on wages within the firm and, unlike profit sharing, are not recorded on the profit and loss account of the firm (though UK accounting practice now requires that discounts in share option schemes are recorded as a cost on the P and L). Instead they impact upon the balance sheet of the firm and affect the value of the firm. In principle it is the owners of the firm who decide to share ownership with employees, though, where there is separation of ownership and control, managers may initiate the share scheme. Although employees may acquire shares on privileged terms by virtue of their employment, in principle share ownership is legally distinct from employment and it is rare for share ownership to be incorporated in employment contracts.

 

These fundamental differences may well have important effects on the relationship with decision-making participation. Whereas one form of financial participation is essentially employment-related, the other is ownership-related.

Range of schemes

The variance of schemes is further based on a number of dimensions that are also important points of discussion in assessments of the scheme:

 

Eligibility; broad based or discretionary

There are schemes that are mainly broad based and have only minor regulations for exclusion, so called broad based schemes. Others have regulations with the result that the scheme is mainly for categories of personnel, mainly core personnel and higher paid staff. Most governments in case of approved schemes have rules to prevent most exclusions and to enhance a eligibility. Of course, this does not mean that in effect there is equal distribution of shares. This is dependent on allocation criteria (see later).

 

Dependency on performance

Schemes can be assessed on its relationship to some kind of measure of performance. It is clear that profit sharing schemes are more directly related to short term performance than share ownership schemes, however in practice the term profit sharing might be quite misleading because it might be quite invariant to direct performance. Other schemes, like certain savings- and capital-investments plans might not at all be related to performance of the company.

 

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 is 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. Important here is the question 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 legislative requirements. We may find such ‘worker directors’ in companies throughout Europe.

 

Company level or sectorall/regional

Rarely, but there are schemes that is not strictly developed on company level but covers more companies in a sector. This means that contributions, distribution and other regulation might not be set by the company where the employee works. The relationship with the employment relationship, work and performance is of course indirect. This may especially be the case with profit sharing plans agreed by collective bargaining and certain general wage earners’ funds and employee savings plans.

Additional technical variance of schemes

Apart from the more political ones the schemes can also vary on a number of technical variables. Some important ones are:

 

Approved and voluntary autonomous schemes

Certain schemes are approved and fit legislative regulations set by governments, but other companies have developed their own system. These might be quite elaborate and sophisticated schemes, but probably also not covered by formal statistics.

 

Retention periods and vesting schedules

Most schemes does not provide in immediate and direct availability of the employee benefit for the individual employee. This means that there is some variance between schemes in retention periods and vesting schedules. Also in this case government approved schemes within a country are subject under certain rules in this respect.

 


 Scheme 1 Possible patterns of Financial Participation

(additional or substitute for wages with or without government regulations)

 
 



Allocation formulas and schemes

Schemes vary according to the way they allocate benefits tot participants. Certain formula’s could include compensation levels and years of service. In other words the distribution of shares may be quite unequal.

 

Contributions

Considerable variation between schemes exists in the resources of contributions and in what ways these contributions are made to the plan (except for profit sharing plans). One extreme is that the company offers the contributions and the other extreme is that employee make contributions as part of their monthly or annual wages. In case of acquiring shares a loan might be needed that have to be paid back (probably by using dividend for that purpose). In most cases some favourable terms for employees are developed. Of course, these are dependent on tax-treatment in a particular country.

2.7 Towards a European definition of financial participation

 

As made clear in this chapter several approaches to the phenomenon pinpoint to certain aspects of financial participation and hence will probably result into a range of definitions. Pendleton (1999b) made an argument to ‘unbundle’ the concept of financial participation and to distinguish between profit sharing and employee share ownership at the least. There are other dimensions that are important for our discussion on the variance of both profit sharing  and share ownership schemes. These are:

 

·       Company level schemes or schemes developed on multi-employer or sector level

·       Broad based schemes or only eligible for certain categories of personnel

·       Dependency on performance of the company or less dependent

·       Additional to basic wages or part of basic wages

·       Negotiated and agreed with employee representatives or not

·       Schemes that includes more or less worker control rights

 

In its promotion efforts the European Commission has taken a certain position on these dimensions. The acronym PEPPER has been developed in the course of European Initiatives to promote financial participation. PEPPER stands for Promotion of participation by Employed Persons in Profits and Enterprise Results    (including equity participation). The European commission has issued two PEPPER reports (In 1991 and 1996) which present an overview of policies of member states and diffusion of schemes. In these reports specific PEPPER schemes are described that covers a certain section of the broad spectrum of financial participation schemes as described in the earlier paragraph. Scheme 2 presents an overview.

 

PEPPER schemes have four characteristics:

1.   The schemes are developed internally on company level. This means that PEPPER excludes more or less schemes that are developed outside the company like certain sector capital funds and other capital accumulation plans;

2.   The schemes are broad based, that is there are no limitations in eligibility. This implies that the more diffused and dispersed management oriented schemes are set aside. This adheres to the point of view of participation of employees in general.

3.   The schemes regularly implemented and maintained as an instrument. This means that certain irregular schemes like a stock option scheme that is developed in a certain year but not has had a follow-up, is excluded.

4.   The schemes should include a participation of employees in the profits or enterprise results of their company additional to their basic wages. This means that there should be formula that relates performance to the employee benefit and that it is not part of regular wages.

Important to note is that in the definition of PEPPER schemes nothing is said on agreement with employee representatives and /or control rights of employees. Adherents of the participative approach might emphasise these aspects of financial participation schemes.


 

PEPPER schemes are preferably schemes that allow participation in the assets or revenues of the company of the employee. However, participation in other companies assets is not excluded. In summary the concept of PEPPER is company focused and places emphasis on the relationship with performance.

Given our focus on participation and commitment and following the PEPPER definition there is an argument to exclude gainsharing, irregular cash based profit sharing and share options schemes and executives share (option) schemes.

2.8 Conclusions

 

Recently we experience a shift from statutory to more decentralised arrangements of participation. Also more recently the discussion has focused on participation’s organisational impacts. Arguments have focused more on organisational efficiency than on workplace humanisation or justice.’  This shift is mainly caused by four developments:

 

First, experience with real participation in numerous contexts demonstrates that, while participation has many advantages, it is unlikely to transform society or make the workplace into paradise. In other words not full participation but an optimal level is requested.

Secondly, the lengthy European economic recession has required greater attention to productivity than to social justice.

And, third, the political pendulum has swung generally to the right. Unions have lost power on company level in most countries.

Finally, most participation has already established and institutionalised workplace humanisation and justice to a large extent.

 

Recently, also a deregulation movement by governments stress the point of responsibility of private business and the individual. This influences the re-distribution of contributions and resources. In this discussion financial participation became an alternative for channelling this re-distribution.

In summary, recent developments suggest the following for the issue of participation:

n    more emphasis on organisational efficiency than power sharing

n    more on decentralised arrangement of participation than collective central arrangements

n    more on direct participation than on statutory indirect participation

n    more on parties contribution than on collective redistribution

n    more on remuneration through additional income and savings than on fixed wages

 

Under the heading of financial participation a broad range of schemes can be classified. Four broad categories of financial participation plans are discovered:

·       Cash based profit sharing

·       Deferred profit sharing

·       Employee savings plans

·       Employee share ownership

Important is to make a distinction between profit sharing and share ownership. The differences in character between the two types of financial participation may well outweigh the similarities. These fundamental differences may well have important effects on the relationship with decision-making participation. Whereas one form of financial participation is essentially employment-related, the other is ownership-related.

 

Profit sharing and share ownership plans can vary on a number of dimensions from which the following are the most important for the discussion:

·       Pure company level agreement or multi-employer plans

·       Broad based or only eligible for certain categories of personnel

·       Dependency on performance of the company or less dependent

·       Additional to basic wages or part of basic wages

·       Negotiated and agreed with employee representatives or not

·       Degree of worker control

 

The PEPPER schemes as promoted by the European Union are company level, broad based plans dependent on company performance, while not excluding participation in other companies assets. Given our focus on participation and commitment and following the PEPPER definition there is an argument to exclude gainsharing, irregular cash based profit sharing and share options schemes and not broad based, executives share (option) schemes.

 

 

 

 

 


3 Motives and impact

3.1 Introduction

 

In this chapter research on financial participation schemes, its motives and outcomes is summarised. As far as possible an outline is presented of the direction of executed research and possible issues that has had minor attention. Specific attention is also paid to research on the relationship between financial participation and the other pillars of participation.

 

3.2 Motives

 

In general the motives (on company level) for putting financial participation into practice appear to fall in four broad categories:

·       productivity increase

·       enhancing flexibility of remuneration

·       gain tax advantages

·       to provide an employee benefit and hence increased commitment of employees (labour market argument)

 

Some authors add and discover more specific reasons for adopting these plans, which may be classified as more negative or defensive ones:

·       discouraging unionisation (Kruse, 1996)

·       used for take-over defence

·       financing companies in trouble

·       take-over defence

 

The motives of the European Commission to promote the practice of participation of employees in enterprise results is, of course, based on expectations of benefits for both employees and the company. The first PEPPER report in 1991 reported the following expectations which were also presented as motives and reasons for the presentation of the Recommendation of the Commission in July 1992 and for commissioning the second PEPPER study:

·       achieving a wider distribution of wealth generated by the enterprises which the employed persons have helped to produce,

·       encouragement of greater involvement of employees in the progress of their companies,

·       development of positive effects on motivation and productivity of employees,

·       enhancing the competitiveness of enterprises through wage flexibility,

·       sustain employment.

 

Compared with the main objectives found in literature the European Commission adds two other reasons: ‘the redistribution of wealth’ and ‘sustaining employment’. These more macro level oriented reasons have indeed been important for governments to develop policies for financial participation.

Improvements of performances

By way of a summary of the literature Poole & Jenkins (1990) developed a company level model that guides the reasoning for financial participation and its impact. The logic that derives from this model is that companies implement a financial participation system to enhance intrinsic commitment (direct participation and job satisfaction) as well as extrinsic commitment (instrumental and investment orientation) with in the end the results of improved economic performance as well as organisational performance (increased flexibility) as improved industrial relations (reduced conflict).

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Adapted from: Poole and Jenkins, 1990, p. 22

 

In management surveys most of these objectives are mentioned of course. In some cases this logic can be discovered more or less (see Maaløe, 1998). However, it will not be easy to design a research to discover and to prove the cause and effect relationship in the model. As we will see the reversal of these cause and effect may also be very plausible.

 

Differences between plans

Important to note is that there are obvious different reasons related to different schemes since it is believed that some schemes will meet certain objectives earlier than others. In a Dutch survey a difference was found between profit sharing and share ownership objectives. For profit sharing most managers believed that it enhances ‘productivity’ and ‘profitability’ as well as ‘improvement of motivation’, while for share ownership management stresses ‘involvement with the company’ and far less ‘productivity’ and ‘profitability’ (Poutsma and Van den Tillaart, 1996).

 

Employee ownership plans in the US has attracted attention for its potential both to broaden the distribution of ownership and to improve workplace co-operation and performance. The limited evidence indicates that the primary reasons for adoption of employee ownership plans are to provide an extra employee benefit, improve productivity, and gain tax advantages. This means that these schemes provide for additional benefits and that employees are considered as beneficiaries and not as acting owners.

 

Motivation and productivity as main reasons

In summary, the main reasons are: It is often considered to be a means of improving motivation and productivity. The change from a system of guaranteed wages in which rewards are independent of effort, to a system which provides workers with an income that is more directly linked to enterprise performance, is considered likely to lead to greater commitment, lower absenteeism and labour turnover, greater investments in firm-specific human capital and reduced intra-firm conflict. In contrast to individual merit pay systems, more collective financial participation systems are likely to enhance teamwork and co-operation. Higher commitment in combination with teamwork and co-operation might also facilitate  improvements in the quality of production, in work organisation and the adaptation of the labour force to new technologies. According to the theorists, the incentive effects of financial participation schemes are much greater when they are accompanied by greater worker participation in decision-making. It must be noted that in general participation in this theory means ‘supporting’ the managerial decision making.

 

Wage flexibility

These series of positive effects has influenced official government policies in several European countries, leading to the adoption of specific laws offering tax benefits to firms introducing financial participation, which in turn have contributed to the continuous rise in the number of enterprises adopting some form of financial participation for their employees. Important cases and several research results point to the positive effects on productivity, motivation and satisfaction (cf. Cable & Wilson, 1988; Poole & Jenkins, 1990; Buchko, 1992; OECD, 1995; Blasi, Conte & Kruse 1996; Jones & Kato 1995; Voets & Spear, 1995 and the PEPPER reports). With these results management attitude in Europe seems to be changing, probably also due to finding a European answer to the popularity of financial participation in the USA.

The second, broad, more macro, argument in favour of financial participation concerns wage flexibility. Financial participation schemes and, in particular, profit-sharing bonuses which are paid in cash to employees, should have the effect of making total remuneration more flexible and therefore more responsive to macroeconomic shocks. This wage flexibility is seen as a means of reducing the risk of unemployment in periods of recession and therefore of achieving greater employment stability.

Employment effect

The third, also more macro, argument that has influenced the development (especially also used by governments) comes from the work of Martin Weitzman (1984). In an extension of the wage flexibility argument, he claims that profit-sharing would promote employment by significantly reducing the marginal cost of labour, which would not include the flexible part of remuneration. Monetary policy could then safely be directed towards fighting inflation without the fear of creating unemployment. Although his provocative statements have contributed to emphasising the potential of profit-sharing schemes, several of his basic assumptions have been questioned in theoretical and empirical studies (Uvalic, 1991; Vaughan-Whitehead, 1992). Moreover, Weitzman’ s model requires workers to be excluded from managerial decision-making, because existing employees will obviously object to the reduction in their pay resulting from any expansion of employment. The introduction of profit-sharing without a parallel development of workers’ participation in decision-making is at least in Europe neither feasible nor desirable.

 

Take-over defence

There are cases that makes clear that initially it may have functioned as a potential take-over defence in public companies with mixed success however. Moreover, there have been several publicised cases of such plans adopted in exchange for wage and benefit concessions or otherwise to save failing companies, but much cases represent a tiny portion of the overall growth of ESOP’s. Most employee ownership plans are adopted and maintained in successful companies (Kruse & Blasi, 1995).

Contingencies

Part of the research has focused on the characteristics of firms that implement the plans which may support certain objectives that these companies might have.

They are found more often in larger (for size see Poutsma & Van den Tillaart, 1996; Jones & Pliskin, 1989; OECD, 1995), more profitable firms (Blasi, Conte & Kruse, 1996), financial sector companies (Cheadle, 1989, Poole, 1988) and firms with higher than average skills (Cheadle, 1989; Mol, Meihuizen & Poutsma, 1997).

Given these results it is suggested that large, more profitable companies tends to develop also more financial participation regulations and other employee benefits for its personnel. Note that this implies the reversal of the cause-effect relationship of financial participation enhancing profitability.

 

That financial sector companies are developing financial participation systems more than companies in other sectors is explained by the fact that these companies experience a greater awareness by management as well as by employees how it works and what the benefits might be. This points to an important condition for plan development.

 

‘Higher than average skills’ points at the encouragement to employees to remain with the firm. In this way the stock of knowledge and skills can be built up and maintained at high levels.

Another company-specific predictor often related to in the literature is the age of the firm. It is suggested that profit sharing and employee share ownership schemes vary in different stages of the firm’s life-cycle and that the frequency of use is higher in young growing companies (Poole and Jenkins, 1990).

3.3 Relationships with the other pillars

Human resource policies are contingent upon environmental factors such as global markets, intensive competition and technological change. Those companies who face a dynamic environment, compete on high product quality - and therefore require functional flexibility (Valverde, Kabst, Brewster, Mayne 1997; Friedrich, Kabst, Weber, Rodehuth 1998)- demand for employees with appropriate skills and competencies, employees who are particularly flexible and adaptable and have entrepreneurial attitudes. Hence, it follows that the use of financial participation schemes seems to be substantial for achieving competitive advantages. This has been supported by FitzRoy and Kraft (1987), who stated that the rapid growth of interest in profit sharing schemes and employee share ownership models is related significantly to the dynamic environment such as shifts in technology. In the course of this reasoning it is suggested that different types of participation ‘direct participation’, ‘representative participation’ and ‘financial participation’ tend to reinforce each other in their contribution to competitiveness. Heller (1998) suggests a systems approach to participation in which diverse types of participation are interrelated.

Ownership culture

Recent research focuses on the work structure and culture as determinants of financial participation. In this context it has been noted by several authors that shifts in working organizations towards more co-operation, interaction, and responsibility rather than strongly specialized routine tasks, lead to a higher use of financial participation schemes. Consistent with the relationship between the type of task and financial participation is the following proposition: Profit sharing and employee share ownership are more likely found in companies who concentrate on direct participation and on management by objectives (Wächter and Koch, 1993: 304; Becker, 1993; FitzRoy and Kraft, 1987: 34). Furthermore, patterns of financial participation need to be embedded in the basic values shared within the firm. To improve outcomes, financial participation schemes should be consistent with the firm’s philosophy and culture. Some suggest a new ‘theory O’ that covers the interrelationship of participative structures, subsequent behaviour and enterprise culture (Winther, 1999)

Partnership

In the course of this reasoning the literature suggests an alignment with reasons that in general also has been put forward for direct participation into practice. That is, direct participation is believed to enhance involvement and commitment, to improve quality and productivity, to enhance the competitiveness of enterprises. Indeed, participation is a key ingredient in management strategies utilising ‘high commitment’ or ‘high involvement’ policies (Lawler, 1986). To use popular buzzwords, the purpose of these policies is to ‘empower’ employees and develop ‘high performance’ workplaces. In the course of these strategies there appears evidence that financial participation, when combined with participation does increase productivity. Put another way, financial participation and participation (both direct and indirect representative) tend to reinforce each other (Jones and Pliskin, 1991; Poole and Jenkins, 1990). In some instances this alignment of arguments for the different participation forms is presented as the partnership company which covers high participation on all levels and all issues, i.e. the high involvement company.

However, the alignment-argument is not without critics. Types of participation can have quite different and conflicting objectives and functions. Financial participation might aim at flexible profit related pay on an individual basis, while direct participation might aim at improving the co-operation between workers. Also, indirect representative participation might conflict with financial participation since the former mainly focuses on collective solidarity and social justice in labour terms, while financial participation tends to stress diversity and flexibility in rewards.

Relationship with representative participation and collective bargaining

Discouraging unionisation via financial participation has been put forward as an argument. Of course, this has led trade unions to counteract and to be sceptical about financial participation. However, from the UK Workplace Industrial Relations Survey it became clear that workplaces belonging to firms with share option schemes tend to recognise unions (Pendleton 1997). They also tend to be more participative in other respects, and most literature view share-based financial participation as a strategy to deepen participation in already relatively participative firms rather than as a strategy to weaken union based forms of representation and participation (Poole, 1989). However it must be noted that there also exists the general idea that financial participation does not imply an enhancement of employee involvement in strategic decision making. Also not with share ownership. However, one important distinction here is the actors that are involved in the decision to implement a scheme. When trade unions and employee representatives are involved in this the development of industrial democracy appears to be an important objective.

 

‘Employement 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 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 in any fundamental way the existing forms of representative participation. If profit sharing is incorporated in 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 firm it is more plausible that profit sharing will be incorporated into the existing recipe of pay determination and collective bargaining rather than undermining by itself the prevailing institutions and practices of representative participation.

 

Pay decentralisation

Underlying these questions and considerations are the objectives of those introducing profit sharing. These have been well-rehearsed in the economics and industrial relations literature (see Kruse and Weitzman 1990). However, Pendleton suggests that a weakness of these theoretically-derived reasons for sharing is that they are not usually located in pay determination contexts. By contrast, he suggests that the growing popularity of sharing in some countries since the mid-late 1980s (e.g. France and Italy) has to be understood in the context of pay decentralisation. Pay decentralisation has occurred because of the market challenges facing firms in Europe and the perceived need to tailor remuneration and grading systems (especially the case in France) more closely to the circumstances facing individual firms. 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 firm. 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/workplaces with higher than average levels of either direct or representative participation as these provide both a means for employee expression and some institutional framework for the determination, allocation and administration of remuneration supplements. However, in contrast profit sharing may be viewed as unattractive in firms with unions since it may give unions additional leverage over remuneration and lead to increased access to financial information. And of course there might be ‘machiavellian’ managerialism (d’Art, 1992: 290) underneath that where managers/principal owners use 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’ rather than the ‘employment channel’ of the company. 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 firms. 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 US model, managerial discretion may be high. So, although share schemes impact primarily upon owners, they may be introduced by managers ‘within’ the firm. In principle, here, 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.

 

Corporate governance differences

By contrast, in the European model, where ownership tends to be more concentrated, the decision to introduce employee share schemes seems more likely to be the prerogative of major shareholders (which may explain the lower incidence of share schemes in Europe), and may thus be distinct and separate from other forms of employee participation. In practice, however, the water is muddied because of co-determination rights in some European countries. This gives employee representatives greater direct access to the company board representatives of major shareholders than would be found in the Anglo-American context.

 

Differences within ownership schemes

A further complication in the analysis of employee share schemes is that many take the form of share option schemes i.e. during the period in which employees are members of the scheme they are not actually shareholders. At the end of the period there is no compulsion to use the amount saved to buy shares. In these circumstances it is highly debatable whether there is likely to be any clear relationship or impact upon patterns of decision-making participation. Similar points may be made in relation to deferred schemes, at least during the deferral period. The main point here is that there are differences within the category of employee share schemes which are potentially fundamental (Pendleton, 1999b).

 

3.4 Impacts

 

European research on the impact of profit sharing and employee ownership schemes on organizational performance is relatively limited while in the US several studies have examined this relationship (Poole and Jenkins, 1991: 56). Most of the studies analyse the influence on corporate performance and profitability, others discuss the impact on employee attitudes and behaviour.

Productivity and profitability

A considerable body of evidence suggests that the introduction of profit-sharing is associated with a rise in the level of productivity in the firm (Jones & Kato, 1995; Kumbhakar & Dunbar, 1993; Blasi & Kruse, 1995). In first instance the consistency of the findings on the incentive effect on profitability is remarkable. Profit-sharing is associated with higher productivity levels in every case, regardless of methods, model specification and data used (see PEPPER, 1991: p187-188; OECD, 1995: p160; Wadhwhani & Wall, 1990; Cable & Wilson, 1988; Khumbakar & Dunbar, 1993). The experience to date suggests that these cash-based schemes have had significant larger incentive effects than share-based schemes.

The debate on the association between performance and financial participation is, however, not closed. Pendleton (1997) in research based on data of the UK Workplace Industrial Relations Survey (WIRS) found only weak and mixed support. He goes on to state that by contrast, the findings are both more consistent and stronger in respect of variables referring to employee participation and representation. This was most clearly so in the case of workplaces where there are significant associations between both use of information sharing mechanisms and white collar union recognition agreements and the presence of financial participation. This is also supported by survey data on ESOP’s in OHIO state USA (Logue and Yates, 1999). The importance of this complementary relationship has recently been voiced by Pendleton (1999) in a review of the research on profit sharing and employee ownership as reward systems. He suggests that it is probably unrealistic to expect that any one participation scheme can have a transformational effect on employees or upon the firm in which it is introduced. He goes on by suggesting that they have to be used in conjunction with other human resource instruments and, if well designed, may have mildly positive effects on firm performance.

Kruse & Blasi (1995) reviewed 27 studies of productivity and profitability, separating the studies into those examining U.S. ESOPs alone, co-operatives, and all other forms and combinations. They summarised the results in two statements:

1) There is no automatic connection between employee ownership and productivity or profitability; and

2) While several studies indicate better or unchanged performance under employee ownership, almost no studies find worse performance.

They go on to state that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance and also little study on the range of other human resource policies that might produce positive impacts on employee ownership.

 

Employment and wage flexibility

The effects of profit-sharing on employment through greater wage flexibility are much more debatable. On the one hand, some earlier evidence for Japan suggested that profit-sharing has a significant positive effect on employment (Bradley & Estrin, 1990). The evidence suggests that financial participation has resulted in higher wage flexibility, fewer adjustments in employment, and in higher and more stable employment growth on micro-level. On the other hand, other studies suggest no relationship, or questions the methods and outcomes due to the periods of investigation  (Wadhwhani & Wall, 1990).

 

Employee attitude and behaviour

With the use of participation schemes, especially in case of employee share ownership, companies aim at changing the employee’s attitude and behavior. It is expected that employees who participate in ownership programs consider themselves as entrepreneurs and focus on organizational interests. Hence, it is argued that employees’ commitment to work and to the company will increase by the use of financial participation (Weber, 1992; Klein, 1987; Poole and Jenkins, 1991). Furthermore, if ownership is viewed as financially rewarding it is suggested that this may lead to a higher level of satisfaction (Buchko, 1992; Guski and Schneider, 1977) and may improve the firm’s attractiveness, for employees as well as for future employees. Motivation to remain with the current employer increases.

 

A recent analysis of four countries (Germany, France, the UK and Sweden), based on data of the Cranfield Network on European Human Resource (Cranet-E), suggests that financial participation can not only increase financial performance (increase profits), but also allow for efficient human resource management (decrease absenteeism and staff turnover) (Festing, Groening, Kabst and Weber, 1999). However, the researchers added that compared to profit sharing the argument for employee ownership is not that straightforward.

 

The first PEPPER-report mentions also that PEPPER-schemes could increase the degree of attachment between employees and their companies, encouraging skill formation. Empirical results suggest a positive effect on motivation and satisfaction (Buchko, 1992; Cable & Wilson, 1988; Poole & Jenkins, 1990; Voets & Spear, 1995). Other studies report no change in case of share-ownership (Blasi & Kruse, 1995).

 

Kruse & Blasi (1995) has reviewed 25 studies on employee attitudes, behaviour, and firm performance under various types of employee ownership plans including cross-sectional comparisons between employee-owners and non-owners, longitudinal comparisons before and after employee ownership, or comparisons within groups of employee owners. They came to the following conclusions:

1)      Employee ownership does not magically and automatically improve employee attitudes and behaviour whenever it is implemented; and

2)      While there are a number of findings that employee attitudes and behaviour are either improved or unaffected by employee ownership, it is rare to find worse attitudes or behaviour under employee ownership.

3)      Where there were differences in attitudes or behaviour linked to employee ownership, they were almost always linked to the status of being an employee-owner, and not to the size of one’s ownership stake;

4)      Perceived participation in decisions, either by itself or interacting with employee ownership, was often found to have positive effects on employee attitudes;

5)      Despite the possible benefits from increased employee participation in decisions, there was no automatic connection between employee ownership and either perceived or desired employee participation; and

6)  There is no evidence of decreased need or desire for union representation in employee ownership firms.

Of course, these findings might be slightly US biased because of the substance of US-based research. Nevertheless it expresses the variety of research results that contributes to a understanding of the complex nature of the relationship. Kruse and Blasi proceeded by stating that: ‘Given that positive effects of employee ownership on workplace performance are predicated chiefly upon greater employee motivation and co-operation, it is no surprise that results of firm performance studies are as disparate as those of the attitudinal and behavioural studies’.

 

Attraction, binding, motivation, commitment incentive

In summary, it can be said that both instruments of financial participation, employee share ownership as well as profit sharing, are similar in terms of the goals they pursue. If the compensation system is well designed and attractive by the additional use of financial participation schemes this may influence the decision of future employees to join the company. Employees who already work for the company may be initiated to remain with the company (Weber, 1992: 945). Hence ther exists a motivation and commitment incentive. The potential shortcoming of both schemes may be that they may not result in a higher motivation when the relationship between input and output is weak. The influence of top management decisions on organizational performance is believed to be stronger. Owners tend to control this relationship by minimising opportunistic behaviour of agent-managers. This explains why stock option as well as profit sharing have typically been reserved for executives (Noe, Hoellenbeck, Gerhardt and Wright, 1997: 500).

 


3.5 Disadvantages

 

Not surprisingly, financial participation has also disadvantages for both pub­licly traded and closely held companies although this seems to be resolved by certain measures or changes of the plan. For companies which find that the disadvantages out­weigh the advantages there are other ways to make employees into shareholders, including stock bonus or purchase plans, profit shar­ing plans, and stock option plans. Disadvantages most com­monly cited are the repurchase liability and the dilution of stock value.

 

Free rider problem

A series of arguments have been put forward against financial participation. Theoretical criticisms often emphasise the “free-rider’ issue. Group incentive schemes, such as profit-sharing, give individual workers only a small fraction of any additional profit accruing due to their own effort, especially in large organisations; they would therefore tend to encourage shirking or free-riding, which would result in lower productivity. However, according to the findings of other theoretical and empirical studies, these negative aspects would be more than offset by the enhancement of co-operative behaviour and teamwork resulting from financial participation.

Another argument against financial participation that especially profit sharing systems might end in a situation of higher pressures for performances in terms of a merit pay system driving stress levels up to unhealthy levels.

 

Relationship with performance

An obvious disadvantage of certain financial participation plans, for instance employee savings plans, is their less direct relationship with company performance. This is however not only a disadvantage of employee savings plans. Pendleton (1999) noticed in the UK a tendency towards stabilising the effect of the relationship with performance in 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 organizational performance. Only top-management decisions regarding products, engineering, pricing and marketing seem to have a direct influence on the profit of the company. Based on this reasoning Noe, Hoellenbeck, Gerhardt and Wright (1997: 498) 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”. Bell and Hanson (1989), on the other hand, argue that employees do have a high interest in profit sharing as long as they do not have to take a risk themselves.

 

Restrictions

Also 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 has also an impact on the problem of expectations and operating costs. This might be leading to lower levels of participation of employees.

 

Repurchase Liability

Closely held companies might be willing or even obliged to purchase the shares of departing plan participants because of the absence of a public market for their stock. This repurchase liability generally increases over time if the company is successful and the appraised value of the company’s stock rises. If a company does not adequately plan to meet this liability, it may be forced to make a public offering of its stock and in this way eliminate the repurchase obligation. Of course, this solution is not ideal since public offerings are very expensive and also involve a loss of control and independence. In other words it might be necessary to create a (internal) market.

This phenomenon points also to another observation that is virtually not being researched, that is the dynamics of employee share ownership. Spear (1999) in his account of UK Bus experiences suggests that employee ownership might be more flux than permanent, and that it occurs in certain stages of the development of enterprises while in other stages share ownership might not be the best solution or is simply resolved by selling the stock.

 

Employee risks

Another argument which has been raised against financial participation is that it shifts risks to employees, 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.

Employee share ownership entails 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. In other words moving to investments plans. Nevertheless generally employee share ownership is not a diversified investment portfolio, and the risk to participants is greatly magni­fied if they are relying company share as their principal benefit. However, the risks may be very limited if the scheme only provide for an additional benefit to basic wages.

 

Another aspect of risks relates only to leveraged employee share ownership, for instance in case of employee buy out 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 an 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.

 

Dilution of Shareholder Stock

When a company contributes newly issued stock to its employees the current stockholders suffer a dilution in equity per share. Theoretically, this dilution can be com­pensated for if the company increases its productivity and profitability as a result of higher employee motivation and increased work­ing capital, and in the process raises the value of its stock There are some studies that confirms this (Jones & Kato, 1995; Chang, 1990).

 

Reduction in Management Control

In the vast majority of employee share ownership arrangements, there has not been any significant transfer of decision mak­ing authority from management to employees. Depending on the structure of the plan, however, it is possible that management could lose some control as employees (and their representatives) gradually become more substantial shareholders. However, with the exception of distress buyout situations where unions have at times taken an active role in establishing share ownership, it is almost always management that initiates and implements employee share ownership. And managers will prevent loss of control by influencing the design of the scheme and subsequent control and voting rights.

 

Failure to Meet Expectations

If a company’s management estab­lishes share ownership in the belief that the plan alone will lead to higher productivity and profitability, it will undoubtedly be disappointed in the results. The research to date fails to establish a clear link between stock ownership and greater employee motivation and commitment. When ownership has been accompanied by worker participation programs, however, it does appear that employees react in a positive manner and that firm performance improves.

Viewed from the perspective of the employee, employee ownership can create the expectation of a greater role in decision making as a natural result of the ownership stake. Employee frustration and discontent could arise if these expectations are not met, and thus the share ownership potentially could have a negative effect on productivity and profitability. Another potential employee disincentive could occur if the value of the sponsoring com­pany’s stock falls for reasons perceived by employees as unrelated to their own or the company’s performance (Maaløe, 1998).

 

Set-up and Operating Costs

The cost to companies of the initial design, implementation, legal, and perhaps, negotiating costs, and the ongoing costs for administrative personnel and communication programs are not inconsiderable. Also, for closely held firms there is the additional expense associ­ated with the need to have an annual appraisal by an outside expert of the company’s value. Generally speaking, unless a company is mid-sized or larger these costs will probably outweigh any tax advantages. Last argument against these schemes are mentioned by smaller firms in particular (Poutsma & Van den Tillaart, 1996).

 

3.6 Conclusions

 

In general the motives for putting financial participation into practice appear to fall in four broad categories:

·       productivity increase

·       enhancing flexibility of remuneration

·       gain tax advantages

·       to provide an employee benefit and hence increased commitment of employees (labour market argument)

More defensive ones are:

·       discouraging unionisation

·       used for take-over defence

·       financing companies in trouble

From a macro perspective the most important reasons to promote financial participation are:

·       wider distribution of wealth (assets and other savings)

·       sustaining employment.

 

The research up to now indicates that financial participation schemes are found more often in:

·       larger (publicly owned) companies

·       more profitable firms

·       financial sector companies (banking and insurance)

·       firms with higher than average skills

·       young growing companies

 

Given these results it is suggested that large, more profitable companies tends to develop also more financial participation regulations and other employee benefits for its personnel. Note that this implies the reversal of the cause-effect relationship that is put forward by the expected productivity increase.

 

A considerable body of evidence suggests that the introduction of financial participation is associated with a rise in the level of productivity in the firm. However, the debate on the association between performance and financial participation is not closed. This impact  seems to be indicated for the introduction of profit sharing but less in case of employee share ownership. The research indicates that there is no automatic connection between employee ownership and productivity or profitability. Subsequently it is concluded that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance and also little study on the range of other human resource policies that might produce positive impacts with financial participation.

 

Also the research indicates that employee ownership does not magically and automatically improve employee attitudes and behaviour whenever it is implemented. There are indications that perceived participation in decisions, either by itself or interacting with employee ownership, will have positive effects on employee attitudes. There appears evidence that employee share ownership, when combined with participation does increase productivity. Put another way, employee share ownership and participation (both direct and indirect representative on company level) tend to reinforce each other.

 

Discouraging unionisation has been put forward as an argument. Of course, this has led trade unions to counteract and to be sceptical about financial participation. However, there is no evidence of decreased need or desire for union representation in employee ownership firms. Research reveals an association between union recognition and other participative structures. Moreover, research indicates that when trade unions and employee representatives are involved in the implementation of financial participation plans the further development of industrial democracy appears to be an important objective.

 

Looking at the problems the potential shortcoming of schemes may be that they may not result in a higher motivation when the relationship between input and output is weak. It might fail to meet expectations both for employees and for employers. This is especially true for non management employees, whereas top executives are more directly connected to organizational performance. Financial participation schemes therefor tend to be not broad based but directed to higher skilled, core staff.

Another important obstacle might be the costs to companies of the initial design, implementation, and the ongoing costs for administration. These are not inconsiderable. Also, for closely held firms there is the additional expense associ­ated with the need to have an annual appraisal by an outside expert of the company’s value. Generally speaking, unless a company is mid-sized or larger these costs will probably outweigh any tax advantages. Last argument against these schemes are mentioned by smaller firms in particular.

 

 


4 Recent developments in Europe

 

4.1 Introduction

 

Drawing on the latest PEPPER II report this report makes an attempt to update the developments of financial participation in European countries. The update is based on second sources and interviews with country experts. More in depth descriptions is given of the developments in selected countries: France, Spain, Germany, The Netherlands, the United Kingdom and Ireland  [3]. The developments in these countries by and large covers the variety of characteristics of schemes and its developments and also the variety of empirical insights on relevant topics.

 

4.2 European overview

National differences

Profit-sharing and employee share ownership are part of reward systems with a greater emphasis on performance related pay.  Discussions and  (conflicting) interests on this topic within industrial relations systems will influence the existence and diffusion of these schemes. Given the differences in industrial relations systems within Europe, it is to be expected that divergence rather than convergence will be the outcome in the way financial participation schemes are implemented in different European countries. Next, to answer  the question whether countries have produced similar or different responses on the possibility of developing financial participation schemes one has to acknowledge the initial differences of institutions and business regimes. Nagelkerke en de Nijs have recently described the industrial relations in Britain, France and Germany on the basis of ’ideal-typical' characte­ris­tics (Nagelkerke en de Nijs, 1998). Each of these systems has its own specific dominant principle of structuration of participation that according to these authors can be seen as  the expression of distinct logic’s of collective action to be defined respectively as the logic of contract (UK), the logic of opposition (F), and the logic of co-operation (G). 

 

Corporate governance differences

Employee share ownership schemes are part of corporate governance systems with a greater emphasis on participation by employees. Discussions and  (conflicting) interests on this topic within corporate governance systems will influence the existence and diffusion of these schemes. Again, given the differences in corporate governance systems within Europe, it is to be expected that divergence rather than convergence will be the outcome in the way these schemes are implemented in different European countries. Weimer & Pape (1999) developed a typology of corporate governance systems that offers an explanation of the different patterns of financial participation found in European countries.

Weimer and Pape(1999) distinguish four models of corporate governance (see table 4.1) .

 

Table 4.1 Corporate Governance Models

System

Anglo-Saxon

German

Latin

Examples

USA

UK

Canada

Australia

Germany

Netherlands

Switzerland

Sweden

Austria

Denmark

Norway

Finland

France

Italy

Spain

Belgium

Open market oriented systems versus more closed network oriented business systems

Market

Network

Network

Business concept instrumental or more institutional

Instrumental, share holder value

Institutional

Stake holder value

Institutional

Control structure: one tier or more; division on control

One tier (one board of directors with ‘internal’ and ‘external’ members

Two tier (division between execution and control)

Optional (normally one tier)

Influence of stakeholders

Share owners

Industrial banks; employees Diversity

Financial holdings, government, families / Diversity

Importance of stock market

High

Medium/ high

Medium

Active market of take-overs, buyers and sellers

Yes

No

No

Relative concentration of ownership

Low

Medium/high

High

Performance related pay of management

High

Low

Medium

Time-horizon of economic relationships

Short term

Long term

Long term

Source: Weimer and Pape (1999), moderation by Broekhof (1999) and author

 

The criteria for classification involves several factors of which the most important ones are: the role and position of the state, financial systems and institutions, the influence of employees and their representatives, ownership and control-structures and performance related behaviour of management. Table 4.1 summarises the characteristics of the four models (Broekhof, 1999) and includes typical countries. In case of financial participation i.e. employee share ownership the difference in extent and nature of the capital market is important. There is a striking difference in capital market between the Anglo Saxon model countries UK and USA and the continental European countries. In the USA and UK the stock market tend to represent a larger percentage of the total number of corporations and total corporate employment than in continental Europe. The incidence of citizen participation in stock markets is also large in the UK and USA while the stock markets in continental Europe tend to be dominated by large institutional investors, banks and financial holdings. Also there is evidence that large part of citizen share ownership in the US is initiated and developed via employee share ownership (Blasi, Kruse and Sesil, 1999). In other words the incidence of widespread share ownership is also related to the development of stock markets. This means that the UK in Europe does have more employee share ownership than other parts of Europe.

 

Influence of government policy

Another interesting difference between the US 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. On the contrary in the US, smaller companies adopt employee share ownership more among privately-held companies and small family businesses are a major source of growth for share ownership (NCEO, 1999). This development started since 1984 when the US congress exempted family and other small business owners of privately-held businesses from capital gains taxes if they sold more than 30% of their business to the 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 United States since the ESOP was created (Blasi, Kruse and Sesil, 1999).

 

Differnces in management regime

Not only at the level of national industrial relations and corporate governance we touch upon substantial differences. Research carried out by Hofstede (1980), Maurice et al.(1982), Gallie (1983), Sorge & Warner (1987), Hampden-Turner & Trompenaars (1993), Lessem & Neubauer (1994), Gatley (1996) and many others, has shown that the way in which organisations in a country  are structured and managed is strongly influenced by national specific social and cultural factors in such a manner that one can even speak of societal patterns of management and organisations (Lane, 1989). Despite differences encountered in companies within the same country there is nevertheless a specific recognisable societal pattern that emerges between countries. This implies that also the employment relationship in companies is influenced by national specific social and cultural factors. Within this perspective it is to be expected that workers and employers in different countries will have a different attitude towards participation in general and towards financial participation in particular (Poutsma, Benders, Van Hootegem en De Nijs, 1996).

For example, Sparrow and Hiltrp (1994) noted that whereas American managers tend to assume the link between variable pay and corporate performance (given their cultural inclination towards short-term performance measures), European managers (given their cultural rejection of short-termism) need to be convinced of the connection, preferring to proceed in a direction that reflects their ‘may be’ and  ‘in certain organisations’ philosophy (Sparrow and Hiltrop, 1994, p. 517). In his comparative study on variable executive rewards systems Pennings (1993) gives the following  quotation of a Dutch manager  with respect to his view on the  link between  remuneration and performance. “ We don’t believe in it. Even profit-sharing pay-outs are fixed and can be found in the budget. We would not allow the polishing of results to boost a pay-out. Profits are due to a lot of factors, depreciation, setting of replacement value and so forth.... We differ from the US, where historical prices induce people to focus on short-term profits, so that their business becomes very cyclical. People cannot wait five, ten years before they get the results on the basis of which they are paid..... We let the people grow with the business. Their best reward is promotion”  (pp. 271-272).

Financial participation in Europe

Different official government positions in individual EC‑countries must be seen against a back­ground of differing traditions and especially large differences in experience in practise concerning financial participation schemes. The 1996 PEPPER II Report observed that since the first PEPPER report in 1991 there have not been any great changes in the general situation of government policy on financial participation schemes in EC-countries. The situation improves slightly. Our updtae of the situation confirms a slow development  of more diffusion of financial participation. These developments appears to be guided by more support by governments and a more pragmatic attitude of trade unions. However, official government positions in individual EC countries still range from those that are strongly or partly in favour of financial participation, to those without a defined view on it. Also trade unions differ likewise in their attitude towards these schemes.

France and the UK have a long tradition in encouragement of financial participation (see tables 4.2 and 4.3). In other countries, such as Belgium, Denmark, Germany, Greece, Spain, Italy, Luxembourg, Sweden and Austria, financial participation has been discussed in the eighties but official government support for the whole range of financial participation schemes has been limited or lacking. During the nineties there has been officially strong appeals to the social partners to promote these schemes in the course of their negotiations in Germany, Spain, Italy and Ireland. Very recently Germany improved the possible revenues for employees and employers substantially.

 

Attitude of social partners

Opposi­tion from social partners are found more in countries which has minor developments of financial participation: Belgium, Germany, Spain and Italy. However, there appears to be a move towards a more pragmatic approach of trade unions, and in some cases white collar unions take the lead in a more pro-active policy. These development could be observed in Ireland, Germany and the Netherlands (see the country reports hereafter). In Ireland the most recent National Partnership Agreement (February 200) stipulate the possibilities of innovation in pay determination and pay-practices including profit sharing and employee share ownership. Also, most recently in Sweden’s Trade Union Congress (LO) discusses a motion to the convention asking for an investigation into a Swedish model for employee ownership that has been promoted by the Metal Workers. The European Trade Union Confederation developed recommendations and goudelines for financial participation schemes in September 1999 (ETUC, 1999) and supports the idea under the requirements of democratisation in the workplace, as a complementary element of employee participation in decision making.

 

 

 


 


Table 4.2: Financial participation in European countries

Country

General  situation

Legal provisions

Dissemination

Change in the nineties

Belgium

Not favourable, but recently more attention and plans

Since 1983 legislation for share-ownership;

Tax advantages limited; 1997 start of some regulation

Profit sharing mainly by multinational enterprises; and in the financial services sector

Selective application of ESO in specific companies

:

Plans for PS; Plans for Regulation of Share options in

1999; No other data

Denmark

No attention

Legislation for ESO and SPS since 1958; Minor tax-provisions for these systems

Small numbers of ESO; mostly savings plans;

EPOC % establishments 1996: 10%  PS; 6% employee share ownership

d.n.a

Germany

Recently more favourable for stock related plans; appeal to social

partners

Some regulations and advantages on DPS en ESO;

 

not for PS

Approx. 2700 companies have for 2.3 million employees 25 billion DM capital in ESO type of schemes;

More emphasis on investments savings plans; Total capital in savings plans outnumbers that of ESO type company plans.

EPOC % establishments 1996: 13% PS; 4% employee share ownership

Growth in stock related company plans

Greece

No attention

Some regulations on CPS (1994) & ESO (1987); However, important tax-advantages

d.n.a.

d.n.a

Spain

Some attention; appeal to social

partners

Only general regulation in employee statute; specific regulations for EBO; limited advantages, except for EBO

Tax provisions for Share based profit sharing in 1996

Collective labour agreements with CPS; covers more than 2 million employees; advantages not available

EPOC % establishments in 1996: 8% PS; 10 % employee share ownership

Increase in stock related plans

France

Very Favourable

Since 1959 for CPS; since 1967 for DPS, SO en ESO; important improvements in 1994; substantial advantages; specific work time/ employment related policy on CPS

Large numbers also due to mandatory profit sharing arrangements; Minor substance of ESO; investment savings plans growth

EPOC % establishments in 1996: 57% PS; 7 % employee share ownership

Strong growth in CPS and in stock related savings plans

Ireland

Attention with a National Programme on Partnership

Only for ESO, SPS & SO; large  improve-ment in advantages in 1995 and in 1997

Estimate 290 share based PS covering > 140,000 employees

EPOC % establishments in 1996: 8% PS; 4 % employee share ownership

Experienced growth

d.n.a.: data not available; see for the abbreviations the text

EPOC: percentage of establishments in 1996 that has a profit sharing scheme (PS) or an employee share ownership scheme; derived from Poutsma & Huijgen (1999)


 

Table 4.3: Financial participation in European countries (continued)

Country

General situation

Legal provisions

Dissemination (1995; unless other mentioned)

Change

1991-1997

Italy

Recently any attention; appeal to social

partners(1993)

Some regulation in employee social statute; no advantages

PS:In negotiated agreements profit related schemes increased

SO: only in specific companies, also due to privatisation; small numbers

EPOC % establishments in 1996: 4% PS; 3% employee share ownership

Growth of PS

Slight growth of SO

Luxembourg

Some attention; propositions for ESO from social partners

No legislation; no advantages

CPS especially in financial sector;

Slight growth

Netherlands

Favourable but less attention

In 1994 legislation for CPS, BPS & SO

CPS: More than 27% of companies; more emphasis on savings plans

EPOC % establishments in 1996: 13% PS; 3% employee share ownership

Growth of PS; experienced growth of SO

Austria

Favourable, but sceptical about ESO

Legislation since 1974; revised in 1994

ESO/SO/ESOP only small numbers; other data n.a.

expected growth of ESO; further d.n.a.

Portugal

Minor attention

Since 1989; privatisation law for ESO; PS based on law of 1969; Advantages with PS only for companies; With ESO: advantages both for company and employees

PS: d.n.a

ESO: only specific companies; 12,4% of all shareholders are employee-shareholder

EPOC % establishments in 1996: 6% PS; 3% employee share ownership

Growth due to  privatisation

Finland

Favourable and discussed with social partners

DPS in 1990; No advantages for CPS or ESO

DPS: small number of companies.

CPS/ESO: d.n.a.

Growth DPS: after introduction of regulation in 1990; since then slowing down

Sweden

No attention

Only for DPS; Advantages both for employer and employee

Mainly oriented towards employee savings plans

EPOC % establishments in 1996: 20% PS; 2% employee share ownership

d.n.a.

United Kingdom

Very favourable

Since 1978 regular improvements of legislation especially for  SO-schemes. Substantial advantages for all parties.

Skipping advantages for CPS and Executives schemes

Large numbers of SO; ESOP’s only a very small number

EPOC % establishments in 1996: 40% PS; 23% employee share ownership

Strong growth, except for CPS and

DSO for executives due to change in legislation

d.n.a.: data not available; see for the abbreviations the text

EPOC: percentage of establishments in 1996 that has a profit sharing scheme (PS) or an employee share ownership scheme; derived from Poutsma & Huijgen (1999)

 


In the Member States Ireland, Netherlands and Finland there appears a development towards more elaborate government support towards financial participation. However, it might be stated that (with exception of Ireland) the implementation of regulations in those countries appears to be subject to political manoeuvres and economic downturns that counteract financial participation developments. The publicly criticised “exhibitionist enrichment of top management” (quoted from the Dutch Prime Minister Kok) by executing their stock options has led to an unfavourable climate in the Netherlands. The economic problems of Finland has pushed the subject to the background.

 

While there is substantial development in schemes and employees involved in countries with a longer tradition on financial participation, UK, France and for savings plans: Germany, other States with only modest governmental policy and legislative arrangements experience little or no growth or even a decline (Denmark and Sweden). In other countries where policy appears to make a start an increase is experienced or expected (Ireland, The Netherlands, Finland and Italy). Concerning both the legislation and the diffusion of schemes there appears to develop a growing disparity between the acknowledged countries and the countries that have only modest policy and minor arrangements.

 

In considering the development of financial participation in EU-countries so far, we can conclude that France and the UK has reached the level of an integrated legislation and policy with a high level of distribution of these schemes. Except France and the UK the legislation in the EC countries is mainly favouring only a limited number of schemes. Less favoured in those countries is cash-based profit sharing and most favoured is share-ownership. The scheme that initially promotes the development strongly appears to be a nationally supported deferred profit-sharing scheme; the most pronounced development of integra­tion of schemes on company level stems from a nationally promoted company savings scheme. The beneficial tax treatment in these schemes has without any doubt contributed to the spread of financial participa­tion in the Member States.

Eligibility

Most Member States have no restrictive regulation that might hamper the introduction of these schemes. However, there are certain legislative requirements set in Member States that mainly relates to the possibilities to be eligible to tax relief. These requirements consist of a minimum percentage of personnel covered by the scheme, eligibility criteria, retention periods and statutory and trustee requirements, etc. These requirements might reduce the flexibility in introducing these schemes. However, in several cases the choices and options were enhanced. In other cases the possible administrative burden and/or set-up costs by the employer to meet the legislative require­ments are deductible as operational costs.

It should be noted that 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 contract; and 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 beneficiaries, this, however, does not mean that there exists equal participation.

Incentives and financial advantages

Most legislation on promoting financial participation schemes in European States has to do with incentives such as fiscal or other financial advantages. In the considered period the countries UK and France, have made further improvements in the variety of incentives for the different schemes. In Belgium, Denmark, Germany, Spain, Ireland and Austria incentives are reported only for share-owner­ship schemes and not for profit-sharing schemes. The incentives 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. These incentives are in some countries provided for both employer and employee. In addition, sometimes they allow employers to deduct costs of the scheme.

 

In some cases problems arise with social charges due to a discussion on the question that benefits should be regarded as normal wages subject to social charges (Belgium) or as other type of remuneration not subject to these charges.

 

In general, the incentive-amounts are modest. Other incentives are the possibility of withdrawals before the end of the withdrawal period for specific expenses (new housing; insurance and specific capital savings; retirement funds and in one occasion even cars (France) without any or minor taxation on these withdrawals. These examples of incentives illustrate that, at least for the countries with an elabor­ated system for financial participation schemes, the policy on incentives and other financial advantages seems to become a standard issue as part of the macro-economic policy on wages and consumption.

 

Active campaigns on promotion of schemes are found in France, the UK, and Ireland. The other countries refer in this respect to the responsibility of the employer and representatives. In the UK and France activities concerning the enhancement of management and labour's awareness are almost institutionally embedded into different public and private bodies. These bodies provide for specific information campaigns and consulting practices directed to both employers and employees. The official appeal to social partners in Ireland, Germany, Spain and Italy has already been mentioned. In Ireland, a specific National Programme was launched. Interesting is Austria where representative parties have developed a learning programme which was included in the training for works councils and employers.

It must be noted that the macro-economic situation will have influence on government support and that of the social partners for any proposals for 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, with the argument of promoting wage flexibility on labour markets through financial participation schemes opposition of trade unions is expected.

 


4.3 Developments in France, Spain, Germany, The Netherlands, UK and Ireland

 

4.3.1 FRANCE

Historically French financial participation system has Gaullist right wing origins. De Gaulle’s vision on the co-operation between capital and labour let him introduce financial participation after WW II. This means that this system has never been supported by left wing socialist ideology. This means that financial participation is virtually never been associated with participative structures. Left and right wing political consensus on the financial participation system is quite recent. However financial participation is not an issue of industrial democracy.

Despite the stop and go stages during the successive changes of left and right wing governments, a more or less continuous government support to employee financial participation existed since the end of the fifties. As a result  French legislation offers a legal framework and generous tax advantages to a variety of financial participation forms: voluntary cash-based profit-sharing, deferred profit-sharing, company savings plans for stock ownership. It is said that through participation in the enterprises' economic results, these three forms of financial participation are designed to improve the involvement of workers in enterprises and at the same time to contribute to collective savings and the growth of investments. 

 

A belief in the merits of financial participation schemes as a competitive  strategy by improving the efficiency and productivity as well as the financial structure of French companies has led to new legislative initiatives in 1993 and 1994. The legislation of July 1994 unifies the three main pillars of financial participation in France: voluntary profit-sharing (intéressement), compulsory deferred profit-sharing (participa­tion), and company savings plans as the vehicle for employee share-ownership (PEE). In addition the law of 1994 encouraged compa­nies to make their employee shareholders participate in the management of the firms (industrial democ­racy: participation in decision-making). According to this law employee representation in company boards is compulsory for companies which are to be privatised (privatisation law of July 19, 1993) and optional for firms in the private sector, if employees hold more than 5% of the capital.

Other innovations in the new participation legislation are particularly inspired by the search for economic policy measures to combat unemployment and declining economic demand.

 

The law introduces the concept of a "time savings account" (compte d’ epargne temps) allowing the allocation of profit sharing bonuses (intéressement) in the form of paid time off, for a minimum period of six months. Such schemes should enable employees to accumulate paid leave, and are therefore expected to enhance work sharing and employ­ment. However, this has not been used much and is mainly used by higher staff.

In order to stimulate consumption, measures are included which provide for the unfreezing of sums, within certain limits, tied up in company savings schemes and in special profit sharing funds (normally frozen for a period of five years).

 

Finally the creation of the "Superior Council of Participation" (CSP) in 1994 illustrates the importance of the issue of employee (financial) participation to the French government. The principal objectives and responsibility of the Council is to watch over the application of financial participa­tion and participation in management by French firms, co-ordinate all initiatives leading to their further extension and produce an annual report for the Prime Minister and the Parlia­ment summarising all developments in financial participation plans (voluntary and compulsory profit-sharing and company savings plans) and in wage bargaining in those companies where voluntary profit-sharing agree­ments have been concluded.

Cash-based profit-sharing and deferred profit-sharing agreements must include arrangements concerning informing of employees about the application of the schemes, and concerning the investment and the manage­ment of the funds allocated to the employees.

 

With the exception of savings plans all financial participation plans must be introduced by firm-level collective agreements, which can be complemented by operation unit or work unit agreements. Sector agreements are only applied in a limited number of branches, while group-level participation agreements are more widespread. France is the only country where deferred profit-sharing is compulsory for compa­nies of a certain size.

 

In the French case CPS is also well developed in the manufacturing sector while in other European countries these schemes tend to be developed in the newly services sectors. This s higher participation rate of the French manufacturing sector follows the origins of the FP-schemes introduction: a way out to overcome traditionally antagonistic relationships in manufacturing.

The schemes and their diffusion

1. Cash-based profit-sharing (Intéressement des salariés de l'entreprise)

Instituted by the Ordinance of 1959, this scheme, which is facultative for all companies regardless size, type of business, or legal constitution, is designed to enable employees to participate in the economic results of the firm. The scheme must be the outcome of a collective agreement for three years negotiated between the employer and employee representatives. It must specify the calculation basis for the profit-sharing, how it is allocated to employees, and arrange­ments to keep workers informed.

 

Tax and social security statute:

- for the employees: profit-sharing bonuses are subjected to income tax and the general social security contribution but free of social charges. The bonus is however deductible from income tax if it is allocated to a company savings plan (PEE) where it is blocked for 5 years.

- for the employer: profit-sharing amounts are deductible from corporation tax or income tax and exempt from all taxes, charges or contributions on wages, in particular social charges.

 

In order to benefit from tax concessions the scheme must comply with a number of conditions, some of which have been reinforced or adapted and for the first time explicitly mentioned in the new law, such as:

- profit-sharing schemes must cover all eligible employees (collective character)

- the bonuses must contain an element of risk and be calculated on the basis of measure for results or performances of the company.

- the maximum proportion of total gross payroll which can be allocated as profit-sharing is returned to 20% (after having been reduced to 10% or 15% by law of December 7, 1990)

 

After a spectacular increase of the total number of cash-based profit-sharing agreements between 1986-1989 (by more than 300%) it slowed down a bit after 1989. However it is still growing in numbers. Two reasons account for this slowdown: the worsening economic climate and the substitution effect of the change in legislation, extending compulsory deferred profit-sharing to firms with more than 50 employees. Consequently, a number of firms with between 50-100 employees, switched to the deferred participation scheme. However, according to the proportion of the number of agreements small firms continue to play an important role in the development of voluntary profit-sharing.

 

In 1997 the total amount of profit-sharing was FF 12.5 billion (9.5 bill. In 1993) for 3 million employees covered by the schemes, the average bonus per employee being about FF 5,300 (in 1993: 4,300), or 3.1% of the total wage bill of the enterprises with cash-based profit-sharing agreements. The positive trend in the last years is also reflected in the rising number of agreements concluded. Although profit-sharing practice increases strongly with the size of the firm, the proportion of firms with less than 100 employees is by far the largest.

 

2. Compulsory deferred profit-sharing (participation aux fruits de l'expansion)

This compulsory profit-sharing scheme, implemented in 1967, is a characteristic feature of French participation system. All firms with a minimum workforce of over 100, and since 1994 of over 50, are required to institute a deferred profit-sharing fund (RSP), either according to a legal formula for profit-sharing, or another well defined formula provided it guarantees workers an amount no less than the legal RSP. Those companies which distribute a profit share in excess of the legal formula, are allowed to make a tax free investment of 50% of that supple­ment. Smaller companies can adopt the scheme on a voluntary basis.

 

The accumulated amounts are blocked for 5 (or 3) years. The scheme must cover all employees with a minimum length of employment of 6 months. The individual allocation of the RSP to the employees is subject to a double maximum: the salary serving as the basis for the calculation of the profit share of the individual employee must not exceed four times the maximum salary which is subject to social security contributions, and the actual amount received can be the maximum of one half of this.

As in the case of cash-based profit-sharing, the adoption of deferred profit-sharing schemes must result from an agreement between the employer and the employees' representatives. Since the legislation of 1994 group level agree­ments can be negotiated, without the need to be signed by each firm of the group.

 

In addition to the same tax and social security advantages as for cash-based profit-sharing:

- employees benefit from the total deductibility from income tax of their profit share in case of a retention period of 5 years and up to a half in case of a three year retention period.

- those employers which distribute a supplementary profit-sharing sum (RSP) in excess of the legal formula are allowed to make an extra tax free investment provision of 50% (25% in case of a three year retention period).

 

The law of 1994, which has extended the participation system to all enterprises applying the scheme on a voluntary basis (less than 50 employees), has also increased the tax incentives for these com­panies. Employers are allowed to constitute an extra tax free provision representing 25% (12,5% in case of a three year retention period) of the profit-sharing fund (RSP) resulting from the legal formula (besides the 50% or 25% provision for the supplements distributed above the legal RSP).

 

Deferred profit-sharing is of course more widely adopted among French companies than cash based schemes because of its compulsory character. Until 1990 the number of participation agreements remained rather stable (about 10,000), but has been increasing in the past years because of the extension of the 1994-legislation to all firms with between 50 and 100 employees. In 1997 a total of 15,500 agreements were in operation, covering more than 17,600 companies and covers almost 4.8 billion employees. In 1997 the total amount of RSP was estimated at FF billion 17.3 representing 3.8% of the wage bill of the firms who actually distributed profits. The sums allocated to the RSP are generally larger than the profit sharing bonuses paid as a result of voluntary profit-sharing agreements (intéressement).

 

3. Company savings plans (PEE)

A company savings plan is a system of collective savings, instituted by the 1967 Ordinance, to allow employees to constitute, with the aid of the employer, a portfolio of securities. It can be introduced on the initiative of the employer or by an agreement with the employees.

 

Company savings plans have been integrated by the 1986 legislation in the unified framework for financial participation, serving as a privileged support for employee share-ownership. Since 1986 company savings plans can receive savings from different sources:

- voluntary savings by the employee, matched by a contribution by the employer (abonde­ment)

- the sums received from compulsory profit-sharing during and after the retention period

- and sums received from cash-based profit-sharing.

 

Tax and social security statute:

The sums allocated to a company savings plan, if blocked for a minimum of five years, are exempt from social security contributions up to a limit of half the yearly social security ceiling for wages. The employers' contribution to the plan (which is obligatory) is free from income tax for the employee. It is exempted from corporation or income tax, taxes on wages and social charges for the employer, within a yearly limit per employee for a diversified investment and a higher amount for an investment in shares of the employing company.

The law of 1994 increased these tax advantages by 50%,

 

Besides the already substantial tax benefits, the new participation law has particularly increased the tax advantages for deferred profit-sharing and company savings plans. The beneficial tax treatment in these schemes has without any doubt contributed to the spread of financial participa­tion in France.

From the statistics on Participation in France considerable growth was found for savings plans or investments plans. This means that shareholdership increases albeit mainly in an indirect way. Within the statistics of companies with company savings plans it is estimated that 15% of these firms (about 1,000) have a more or less broad based share ownership plan as a PEE plan with mainly shares of the own company. Beyond that it is estimated that another 1,000 firms have employee share ownership plans, bringing the total on 2,000 firms from the 26,000 with financial participation systems (about 7 -  8%).

The growth is obviously related to labour market problems and greater awareness of financial participation systems as an employee benefit.

 

Recent developments and perspectives

There has not been much change in the structure of financial participation in France since 1996. However in the use of cash based profit sharing there has been some changes (which is traditionally a key element for income policy in France). The Law of Robien and recently of Aubry (1997) introduced the possibility to use CPS as an incentive for firms to reduce working time. A typical rule in France is that PS schemes are legally not a substitute for wages. This raises the possibility to use CPS as a vehicle for reduction of working time without wage cuts while at the same time keeping employment on the same level.

At the introduction of this law this exchange of financial participation for working time reduction was seen as a defensive means for sustaining and restoring employment. In recent days the law is directed to incentives for job creation. It has some success because it has a positive impact on employment. This phenomenon explains also the recent growth in CPS. As elsewhere in Europe also in France a growth of share ownership schemes is experienced. However, there are no good statistics on this phenomenon.

 

A relationship between financial participation schemes and pension funding is not discovered in France nor are there any discussions. There is full discussion coming up to develop more private funds but these will probably not be firm based. The union influence on Pensions is too large. However, there are a small number of firms that developed plans based on plan d’epargne in which longer term life insurance (with possible payments at retirement age) is regulated (Rhône-Poulenc).

 

Survey of the DARES institute of the French government reveals that there is agreement in opinion between management and employee representatives about the reasons and possible impacts which more or less covers the theoretical expectations of the phenomenon (Fakhfakh, 1997). The survey also noted a productivity gap between non-profit sharing firms and profit sharing firms of about 5%. Interesting is that this productivity gap did not exist in companies where employee representatives disagree with management about the positive impact of profit sharing schemes. An interpretation would be  that a better understanding between management and employee representatives coincides with higher productivity and/or profit sharing is really not an incentive for workers in those companies. The survey also found associations between cash based profit sharing and participative management tools. CPS is clearly seen as part of a package of commitment tools.

 

The same survey reveals also that there exists no relationship between profit sharing and more participative structures (participating in decision making) in French companies. This might be interpreted as a typical French result. The traditional more antagonistic industrial relations in France has not been resolved into a development of participative structures as might be the case in Germany and the Netherlands.

 

Generally unions are not in favour for financial participation systems as compensations systems. In the seventies unions promoted the idea of self-management but abandoned the idea in the 80’s almost completely. Share ownership became an issue only in some defensive cases. In general some greater interest in the phenomenon of share ownership by trade unions is experienced. Important here is the flow of privatisation. In fact privatisation seems to be the only way of introduction of substantive share ownership by employees in France. Also with privatisation the  influence of unions on the phenomenon might be developed. Recently in case of privatisation and privatised companies with high proportion of employee share owners the unions try to influence the direction of the negotiations on bids. Priority is given to more social oriented buyers and the employment issue is brought in the discussion.

 

In France employers are inclined to think of profit sharing as a tool for enhancement of commitment to the objectives of the firm. This was the most cited argument. Also important is productivity increase. Of managers in firms with financial participation schemes 42% think that productivity improved. However, only 25% has a tool for assessment of the effect on performance. Third main argument is to increase flexibility of wages and to make the attitude to the normal trend of rigid wage increase more reluctant. Indeed there exists in the French system some real variance in the total remuneration of 3% with CPS and 4% with DPS.

 

4.3.2 SPAIN

 

Like in other European countries Spain has its regulations concerning profit sharing, share based profit sharing and indirect financial participation via asset savings for pension funds. Typical for Spain is the regulations and commitment for the social economy. 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 firm’s pension plans and the pronounced support for workers’ co-operatives and labour firms should be looked at in a complementary manner as the main Spanish plans to improve worker’s financial participation in the firm. The next report will cover the arrangements and developments of these three forms of financial participation.

 

 

The schemes and their diffusion

 

1. Profit Sharing

Although the current practice and institutionalisation of profit-sharing in Spain is rather minimal in comparison with other European countries, it should be taken into account that the 1990s are the inflexion point of that state of affairs. In terms of regulation a considerable effort has been made in this decade to change and simplify remuneration structures. In this process, profit-sharing has moved from being merely one possible wage complement, in an extraordinary long list, to being one of three main categories of complements to wages that can be used. As such it has recovered its original variable nature, which had been long-forgotten through tradition. Such qualitative support has already seen some fruits through collective bargaining -the instrument of regulation of profit-sharing favoured by the law-, a trend that could be expected to continue.

 

As in other European countries, profit-sharing was present in Spain during the 19th century. In fact one of the few contemporary books centred on labour matters was dedicated to it under the title “Profit-sharing. Basis of harmony between capital and labour[4]” (Armengol y Cornet 1896). Both the First Republic and the Francoist regime attempted to promote this form of workers’ participation; in the latter case, it may have been related to the ideological framework of social-Catholicism (Mercader Ugina, 1996). However, by the 1960s it had become clear that profit-sharing bonuses had lost their original variable nature and had become a fixed bonus, independent of business fluctuations.

 

Fixed cash-based profit-sharing bonusses

As a regular extra payment whose relation to profits was only to be found in its name, the presence of fixed “profit-sharing” bonus in firms’ collective agreements has continued for decades and is still current. It characteristically takes the form of an extra monthly wage (or some percentage of it[5]) paid annually around March-April[6]. Technically, however, it constitutes an independent complement that is added to the base wage.

 

No accurate estimation of the extension of this fairly common practice is available but there are some grounds to expect its progressive disappearance through its incorporation in the base wage. Such developments have already been seen in the 1998 bargaining round, where some collective agreements have eliminated what was nominally a separate annual component of the base wage, incorporating it instead to the monthly wage. The coherence of this restructuring makes it reasonable to expect that it will consolidate and extend in subsequent bargaining rounds as part of the reorganisation of wage structures intended by the social actors since 1994. For some years yet, however, the term profit-sharing will not necessarily mean variable pay in Spain.

 

Variable cash-based profit-sharing

The 1994 reform of the labour market (Law 11/1994) has been the main vehicle of promotion of variable profit-sharing in Spain. The legislator and the social actors were particularly concerned about adapting the rigid wage structures to the needs of the enterprise. Thus, among other things, the aforementioned law tries to promote the use of variable pay, and it specifically mentions the use of bonuses connected to the results and situation of the enterprise. This illustrates the intentions of the social actors to develop this type of remuneration, but no clear guidelines are established on the form profit-sharing may take. All aspects of introduction of profit-sharing in the firm are left to the partners involved in bargaining. The only restriction that has been placed to those involved in the bargaining is that profit-sharing cannot become “consolidated”, i.e. the additional payment must remain contingent.

 

The success of this law remains limited: in 1998 cash profit-sharing bonuses appeared in around 400 firms’ collective agreements and in less than 5 per cent of sectoral agreements[7] (Consejo Económico y Social 1999a). However, these figures should be treated with caution as it is possible they include gain-sharing agreements, also on the increase in Spain. Although estimates of the extent of profit-sharing before that date are not available, observation of samples of collective agreements indicates it has become less rare than it was in 1996 (Costa Reyes 1999). This is in fact the first year that the Economic and Social Council annual report reflects on the extension of these bonuses, giving some idea of its limited importance until this date. In considering the slow expansion of this form of profit-sharing in Spain it should be taken into account that there is no specific promotion of cash profit-sharing through tax incentives: to all effects it is considered part of wages[8].

 

One of the problems of the silence of the law about the forms of profit-sharing is that it leaves the door open for abuse. Thus some firms agreements on profit-sharing are very vague about when and what will be paid[9]. According to Costa Reyes (1999) in most cases the profit-sharing bonus varies with profits or some other measure of performance but in some it is still a fixed quantity independently of the degree of achievement of the objectives. In any case it is common to fix a maximum for the bonus and also to operationalise it as a proportion of wages.

 


Scheme 1. Some examples from the service sector of collective agreements with  variable cash-based profit-sharing

 

Banking sector (article 18): to calculate the profit-sharing bonus the banking sector collective agreement favours the consideration of the relationship between returns to shareholders and wages. Thus, in banking, if ten per cent of dividends were less than a quarter of the base wage bill, the bonus is a monthly wage; if it were superior to a quarter and inferior to half the base wages, the bonus is a monthly wage and a quarter and so on, up to a maximum of 3,57 wages.

 

CAJAS DE AHORRO[10] (art. 60): taking as reference half of the sum of deposits and reserves at 31st of December of the previous year, the bonus is a monthly wage if results are between 0.5 per cent and 2 per cent of the reference and 1.5 monthly wage if results are above 2 per cent.

 

INSURANCE SECTOR (art. 39): Life, illness and death insurance workers receive 0.25 per cent of net profits; other insurance workers receive 1 per cent. The minimum is a monthly wage and a half if business revenue is inferior to 2000 million pesetas or two monthly wages if business revenue is above that figure. The maximum is 10 monthly wages.

 

Share-based profit-sharing

The interest of the Spanish social actors in promoting standard share-based profit-sharing has been rather limited until the 1990s. The very recent measures promoting it could in fact be easily attributed to the 1992 Recommendation of the EC. Worker’s share ownership has obtained since 1996 an advantageous fiscal treatment that is absent in the case of cash-based profit-sharing.

 

Shares given by the company, a parent company or other firm of a same group to the workers for free or at an price inferior to that in the market are excluded from workers’ income tax assessments if the value of the shares is not greater than 500,000 pesetas in a year or 1,000,000 in five years, and if the workers keep the shares for at least three years.

 

For workers to benefit from this exemption firms must comply with some conditions imposed by the law (RD 214/1999): first, the offer must be part of the firm’s general remuneration policy and must contribute to increase workers’ participation on the firm, i.e. it must be offered to all workers in the same conditions; and second, the workers must not own already more than 5 per cent of the firm. It should be noted that the law does not make necessary the existence of a connection between the profits of the undertaking and the remuneration in shares.

 

Also, the income tax law establishes that when the firm and the workers are in compliance with the terms indicated above, shares given to workers will not be considered as payments in kind. However, it should be made clear that such a distinction refers to taxation only. In labour law terms they are payments in kind and therefore their value cannot amount to more of the 30 per cent of the wage. Payments in kind have an exceptional character and their establishment its only admissible if there is a law, a collective agreement or a pact between the parties authorising it; it can never be unilaterally imposed by the employer.

 

Regrettably there is no data available on the extension of this practice either in number of firms or workers.

 

Attitude of the social partners towards profit sharing

In its concern about the modernisation of remuneration structures through collective bargaining, the support of  government for cash-based profit-sharing has been merely qualitative but yet noticeable. Social actors did sign the agreement that was enshrined in the 1994 law and therefore support the development of profit-sharing as a complement to wage. However, the actors are cautious. The main employer’s organisations general guidelines for the 1996 bargaining round did manifest and interest in promoting the use of variable pay connected to productivity but did not specify a preference for collective over individual schemes. The equivalent in the union side did not mention the issue at all.

 

Cash profit-sharing is a sensitive topic for both unions and employers. The ideological mistrust  that both individual employers and shop stewards share towards this form of remuneration is also present in other countries. That, as well as its low extension, seems to be the main causes of the lack of public debate over profit-sharing. Symbolically, in recent years profit-sharing seems to have appeared in the press only once: in 1996 one of the main trade unions, Comisiones Obreras, affirmed that the proposal of the Labour Counsellor of Catalonia of connecting 30 per cent of wages to profits was plainly “inadmissible” (El País 1996)[11]. While doing a serious effort at reforming collective bargaining and modernising the labour regulation stemming from it, nobody seems too interested in promoting the debate over a secondary but conflictual matter.

 

A regional employers’ association (FADE) General Secretary stated that, although he was in favour of profit-sharing, it remained “an unusual topic for conversation among employers”. He pointed to a clear lack of predisposition on the part of employers towards such a complex form of participation. In his opinion it belonged to the less traditional framework of industrial relations that may be emerging in the last years but it was still something of the future. It was also recognised that unnecessary problems could arise with unions over the matter. For all those reasons, he thought the use of profit-sharing was, for the moment, more likely in firms with problems than in good performers, excepting maybe the larger firms.

 

As for the trade unions position, the bottom-line of their perspective is that the use of profit-sharing as anything but a small add-on on wages should not be accepted without a greater participation of workers in business matters.

 

The limitation of governmental financial support for profit-sharing to share-based schemes could very easily result from its sensitivity to these issues. The fact that the schemes do not have to be related to the performance of the firm should not obviate that there is a great interest in developing workers’ financial participation. In that sense, it is significant that the 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 firm’s pension plans and the pronounced support for workers’ co-operatives and labour firms should be looked at in a complementary manner as the main Spanish plans to improve worker’s financial participation in the firm.

2. Indirect forms of financial participation: Pension Funds

 

From 1988 (Law 8/1987) the Spanish law has promoted the establishment of a type of firm-based pension scheme -called “System of Employment” schemes- which can be considered an indirect form of workers’ financial participation in Spanish undertakings. Although normally the contributions to the pension fund are made by the employer, the workers may also contribute to it too. Although it is not compulsory, the legislation permits that the contributions of the employer to the fund to be related to the results of the undertaking and/or to the workers’ contributions (García de Quevedo Ruiz 1999). For the worker, the contribution of the employer on his/her behalf is considered “payment in kind” as a deferred wage (Parra Martín-Urda 1999).    

 

There can only be one plan of pensions in a firm; however, through collective bargaining there may be different schemes for different groups of workers. Also, firms with less than 250 workers may join with others in order to create a plan, that will be the same for all of them. Although it contemplates some exceptions to the rule, in principle there is a limit imposed to the total annual contributions by or on behalf of a worker. As a consequence of the government’s and the social actors’ commitment in the 1996 Toledo Pact to further promote social prevision at firm level, this limit was virtually doubled at the end of 1997 to a sum of 1,100,000 pesetas.

 

Taxation regime: The pension funds themselves are subject to taxation at a 0% rate. For the employer, his/her contributions to the plan on behalf of the workers can be discounted from their income for tax purposes. The worker can also discount from their income the employer’s contribution plus any other made individually with a maximum set by the smaller of:

-          20 per cent of the net annual income obtained from work and any other economic activity

-          1,100,000 pesetas

In the case that the worker total contributions are superior to the limit, since 1997 it is possible to benefit fully from the same fiscal treatment by discounting the excess within the next five years.

 

Extension: As it can be seen in the Table 2 below, by 1998 the growth of firm-based pension funds remained rather limited and was even surpassed by firm-based insurance plans. Still, the rise in the limit to the contributions (and deductions from income tax) may have been too recent to have an impact.

 

Table 4.4. Social provision firm based funds 1998

 

Mill. Pesetas

%

Workers

Total social provision private funds

16,400,000

 

7,708,000

System of employment pension funds

1,750,000

10.7

350,000

Collective-employment life-retirement insurance

3,100,000

19.0

550,000

Source: García de Quevedo Ruiz 1999

 

Views of Social Actors

As part of what was agreed at the Toledo Pact, the government is currently working on a new law regulating pension funds, particularly centred upon the protection of the workers in case of bankruptcy of the firm. The disagreements between trade unions and employers’ associations regarding these funds became visible in the revision of the proposal of law carried out by the Economic and Social Council (1999b).

 

The Council recommended that in the case of plans involving several SMEs, the plan as well as the incorporation to it of a given firm or its abandonment should be the result of collective bargaining in the firms and above them. The employers were critical of this point, stating that the plan should be able to be a unilateral decision of the employer. While the Council recommended a special promotion of “System of employment” pension plans through tax incentives, the employers regretted the lack of neutrality with this instrument.

 

3. The social economy

 

In Spain, as in other countries, the principles guiding social economy firms are the finality of service to the members or the environment, self-management, democratic decision-making processes and the primacy of persons and work over capital in the distribution of returns. The Spanish Constitution (art. 129.2) obliges the public powers to promote the social economy and, in compliance with this fundamental norm, the commitment of Spanish central and autonomous governments and the social actors to the development of the social economy has been a constant.

 

However, as exposed by Barea and Monzón (1992) an outdated social conception of the social economy as a temporary and circumstantial solution -enshrined in the law- has made the competitiveness and growth of these firms difficult by limiting their access to external funding. This criticism has been accepted by the legislator: a recent law tries to make more compatible the ethical values of co-operativism with the achievement of long-term economic success. The government, as it manifested in the 1997 Luxembourg meeting on employment, believes in the social economy potential to create employment and, as a consequence, it occupies a relevant place in the annual plans on employment. Similarly, the motives cited at the beginning of the new general law on co-operatives states the belief that co-operativism both eases economic integration in the labour market and is an efficient and competitive form of economic organisation.

 

In 1998 the resources budgeted to support the social economy (1,756 mill. pesetas) had increased a 26 per cent in respect to the previous year and the incorporation of unemployed persons to the social economy had been eased by allowing them to capitalise their unemployment benefit in one payment. In 1999 the resources budgeted to support the social economy were 2,021 mill. pesetas (Ministerio de Trabajo, 1998).

 

In general, workers’ firms (cooperativas de trabajo and sociedades laborales) had shown a great capacity for job creation. Despite the increase of unemployment in the period 1990-1995 these firms were able to increase their employment figures by a 25 per cent -from 178,000 workers at the end of 1990-, and kept a similar rate of growth in the period 1995-1998. They are present in all sectors and particularly in services. They are mostly labour intensive and they frequently absorb workers with insertion difficulties (young, disabled and mature workers). According to Barea and Monzón (1992) their employment is more stable and labour productivity and training provisions higher, and the reinvestment of profits superior to that in traditional firms.

 

Table 4.5. Social economy employment figures

 

1995

1998

 

No of firms

 

Associated workers

Workers non associated

No of firms

Total employment

Labour Cooperatives

13,101

 

163,952

19,303

-

-

Total of co-operatives

19,096

-

-

22,155

244,711

Labour firms

5,413

 

49,574

3,421

7,079

62,567

Source: elaborated from data proportioned by CEPES and the Ministry of Labour

 

Labour cooperatives (Cooperativas de Trabajo Asociado)

Operation: the distribution of profits between the workers depends on the work done individually. Wages are an early participation on these profits and are not called wages but advanced results (anticipos societarios). Some 20 per cent of the profits or co-operative returns and 50 per cent of the extraordinary profits must be incorporated to a reserve fund that can never be distributed between the associates; a further 5 per cent will go to a fund for training and the promotion of the social economy. The number of hours per year done by workers that are not associates cannot be superior to the 30 per cent of the hours per year done by the associates. The associates have a mercantile relationship (not an employment one) with the co-operative, however, they can apply to themselves the existing incentives for the establishment of permanent labour contracts.

 

Legislation: Apart from the general Law on Co-operatives (Law 27/1999; before Law 3/1987), they are specifically regulated by each Autonomous Community which introduces certain degree of variability. According to the General Law labour co-operatives are those whose object is giving jobs to their associates, through their personal and direct effort, full-time or part-time, through the common organisation of the production of goods or services for third parties

 

The new Law on Co-operatives tries to promote further the development of the social economy by lifting some of the restrictions on their operations and assimilating them more to other firms. It also eases the co-operatives’ constitution and self-government. This law is applicable to those co-ops with activities in more than one Autonomous Community. Some of the more important changes are:

-          Constitution of the co-op: the minimum number of associates is reduced from five to three.

-          Operations with third parties: the possible operations with third parties are widened.

-          Economic regime: obtaining capital funds is made easier allowing access to new financial instruments as obligations, special participations and other participatory titles; it is now possible to create reserve funds that can be distributed between the associates in given circumstances; extraordinary profits and some profits obtained outside of the co-operative activity, for instance through participation in other firms, may be considered co-operative returns.

-          Structural changes: any firm can become a co-op and viceversa. Fusion of co-operatives with other mercantile firms will be possible.

 

It is expected that the new regulation will provoke a further expansion of this type of co-operatives in the same way that the growth of labour firms originated (see below).

 

Incentives for workers buy-outs: they receive some financial support from the state. The condition is that there is no continuity with previous ownership, i.e. the employer cannot become an associate or shareholder in the newly formed firm.

 

Tax regime: Labour coops are “specially protected” by the law (Law 20/1990). They receive exemptions from the capital transfer tax. Also, they only pay 10 per cent as corporation tax (35 per cent normally; 20 per cent for other co-operatives) and have a 95 per cent reduction on the tax over economic activities. Further fiscal advantages come from the fact that they can consider as costs those funds constituted as a reserve to compensate future losses. 

 

In the period 1994-1998 co-operatives have experienced a growth of 24,9 per cent (4,424 new firms). The geographical distribution of co-operatives presents a great concentration in three Autonomous Communities: Catalonia (5,882), Andalucia (4,498) and Valencian Community (2,539), with 58 per cent of the total between them.

As for the geographical distribution of their employment, a great concentration of it can be observed in Andalucia (43,431), Catalonia (42,464), Basque Country (38,704) and Valencian Community (37,654). The employment in these regions represents 66 per cent of the total.  The sectoral distribution of the 244,711 workers is as follows:

Agriculture:                 22,697 (9.3%)

Industry:                      72,114 (29.5%)

Building sector:          19,969 (8.2%)

Services:                    129,931 (53.1%)

 

According to further division of economic activities, the greater employment appears in the manufacturing industry (71,221 workers) followed by commerce and  hotels and catering (63,593 workers). During the period 1994-1998, the building and service sectors shown the greatest dynamism in employment creation (31% and 33.2% rates of growth).

 

Labour co-operatives are the most frequent type of co-operatives, however, no specific aggregate data on their extension is available. Data on the annual constitution of these co-ops in relation to the total (as shown in Table 4) may be indicative of its relevance.

 

Table 4.6  Total of labour co-operatives and co-operatives constituted annually, period 1989-1998

 

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Labour

co-operatives

1,203

964

937

1,448

2,286

2,560

2,392

2,140

1,890

1,426

Total

co-operatives

1,931

1,729

1,583

2,186

3,146

3,304

3,106

2,814

2,555

2,036

Associates labour

co-operatives

8,499

6,642

6,261

8,409

12,188

13,491

12,445

10,463

9,375

7,447

Associates total

co-operatives

20,998

19,308

18,540

22,091

35,700

25,091

20,096

21,729

31,422

23,950

Source: Dirección General de Fomento de la Economía Social y del Fondo Social Europeo

 

Labour firms (Sociedades Laborales)

Definition: firms in which at least 51 per cent of the capital belongs to the workers. None of the associates may own more than one third of the capital (except for the possible participation of the Public Administration that can be up to a fifty per cent). The number of hours per year done by workers that are not associates cannot be superior to the 15 per cent of the hours per year done by the associates if the firm has more than 24 workers; if the firm has less than 25 workers that percentage goes up to 25 per cent. Temporary workers are not considered for this calculation. Participation in capital can be of two types: labour type, those shares in hands of permanent workers, and general type as for the rest. The firms must constitute an Special Reserve Fund to which 10 per cent of the profits will be incorporated annually. When selling labour type shares permanent workers that are not associates have preference over associated workers, general associates and temporary non-associated workers in that order.

 

Legislation: Labour firms appeared in Spain in the 1960s although they did not have specific legal regulation until 1986. The Law 15/1986 on Labour firms was a response to the fact that workers’ had become owners of firms in crisis without changing its legal form. Thus, the law initially envisaged labour firms as a solution to crisis, as a way in which the workers of bankrupt firms could keep their jobs and become owners of the means of production. However, since 1997 the law considers these firms as a possible legal form of the economic organisation of workers’ participation in the firm.

 

The Law 4/1997 introduced an important novelty: it allowed firms of limited responsibility to become a labour firm. Thus, now labour firms can be:

-          Sociedad Anónima Laboral (SAL), with a minimum capital of 10,000,000 pesetas (previously the only existing type), or

-          Sociedad Limitada Laboral (SLL), with a minimum capital of 500,000 pesetas

 

Fiscal incentives: Those labour firms that incorporate 25 per cent of profits to the Special Reserve Fund in a given year may benefit from a 99 per cent tax exemption from capital transfer tax.

 

Extension in 1998: At the end of 1998 the number of Sociedades Anónimas Laborales was 8,867and of Sociedades Limitadas Laborales 2,212 having shown a joint growth of 26.1 per cent within a year. Such growth was due to the 367.7 per cent growth of the SLL (1,748 new firms) whereas the SAL decreased in the same period a 5.5% (282 firms less).

The number of workers –associates and non associates – in SALs was 53,993 and in SLLs 8,574.Thus, their employment presented a net increase of 12.2 per cent in respect to 1997.

 

The geographical distribution of these co-operatives presents a great concentration in the following regions: Madrid (1,011), Basque Country (822), Andalucia (797), Catalonia (744), Valencian Community (611) and Castille-La Mancha (608), with 64.9 per cent of the total between them. As for the geographical distribution of their employment, a regional concentration can be observed in the Basque Country (11,147), Catalonia (8,306), Valencian Community (6,655), Andalucia (6,477), Madrid (5,949) and Castille-La Mancha (4,805). The employment in these regions represents 69.1 per cent of the total.

According to further division of economic activities, the greater employment appears in the manufacturing industry (30,173 workers) followed by commerce and hotels and catering (11,928 workers).

 

A dynamic analysis for the period 1994-1998 is as follows:

-          a 30 per cent increase in the number of firms (see Table 6 below)

-          a 23,3 per cent increase in employment with some 11,833 new jobs

-          services (5,805 new jobs) followed by industry (2,890 new jobs) and the building sector (2,814 new jobs) were the sectors with the greatest generation of employment.

-          the average number of workers in a firm diminished from 9.4 in 1994 to 8.8 in 1998, as a consequence of smaller size and growth of the SLLs.

 

Table 4.7 Evolution of labour firms and their employment 1993-1998

 

1993

1994

1995

1996

1997

1998

No of firms

5,069

5,419

5,413

5,309

5,613

7,079

No of workers

48,010

50,734

52,857

52,857

55,783

62,567

Source: Base de Datos de la Economía Social, Ministerio de Trabajo y Asuntos Sociales

 

 

4.3.3 GERMANY

 

German legislation provides no incentives for profit sharing per se. There is a considera­ble body of regulations designed to encourage employee share-holding and asset accumulation. This encourages mainly redistribution of capital and employees savings by investments plans. Part of this acts to encourage profit sharing, albeit not very strongly. These schemes are regulated through a series of Capital Formation Laws (Vermögungsbildungsgesetz) and the Income Tax Law. Minor changes in these laws in 1992 - 1994 cover regulations on investments in building/housing (Bausparen)  and the way premiums are paid. Major changes are found in the latest Capital Formation Law, September 1998.

 

1.  Employee participation in capital savings

Employees have been encouraged to participate in their and other company's capital primarily within specific savings schemes (comparable to The Netherlands). The regulations offers incentives related to individual workers' savings, to employer contributions to these savings, and in case where the employers' contribution is the only one made. Concessions are offered to low earners (single people: up to 27,000 DM; married: up to 54,000 DM annual tax income) and if the participa­ti­on is committed in a specific form of investment for a minimum retention period of 6 years. The Capital Formation Law of 1998 has changed these figures. It increased the level of earnings to 35,000 DM (single) and 70,000 DM annual taxable income (married couple). This means higher coverage.

 

The savings bonus is 10% on up to DM 936 in contributions paid into a home ownership savings plan or used to pay off a mortgage on residential property. Alternatively or in addition there is a 20% savings bonus on up to DM 800 in employee savings contributions invested in equities. For workers whose main place of residence is in Eastern Germany, the bonus is 25% for contributions paid in up to 2004.

 

In addition the Income Tax Law enables employees who are offered shares by their employers exemption from tax and social insurance payments up to a certain maximum tax-free amount on the condition that enterprises contribute to the acquisition of employee shares up to a certain percentage of the share value and that shares are frozen for a period of 6 years (Mozet, 1999).

 

2. Cash-based profit-sharing

While Germany grants no concessions to cash-based profit-sharing schemes, they are relatively common in the low number of firms which also have deferred or share-based schemes. The proportion of employees covered by the two broad types of schemes are roughly comparable. Profit shares are considered normal wages and the employer also has to pay the usual social insurance contributions as a percentage of the amount of profit share.

Diffusion of schemes

In Germany there is no statistics on financial participation. Recent figures on the number of general profit sharing schemes are not available (in 1990 about 1.3 million employees were participating in a profit sharing scheme).

In 1996 the value of employee savings investments was about 17 bln DM (1996) including employer contributions (up to 50%) and was made in that year by 2.4 million employees. It is estimated that half of investments made in a given year is directed to housing investments (Bausparen). It is estimated that in 1996 2 million employees have stock from about 2,000 companies with a total value of 20 billion. New estimates show an increase to 2.3 million in 2700 companies with a total value of 25 billion. The next table presents an overview of estimates of diffusion of schemes in Germany. From the sources it can be reported that there is a slight increase in the number of employees covered. More than 75% of employee participants are found in publicly held companies. Given the new law a further increase is expected.

 

Another expected increase comes from the larger number of enterprises that is going public. Traditionally the German Stock Exchange Market is not big. Most, even large, companies are still closely held private companies. Only recently quite a number of new enterprises entered the Stock Market. This might be an impetus for the phenomenon since these are mainly high tech, services companies from which we know that they offer its personnel more often stock options.

 

Employee's savings are invested as agreed with workers or the trade unions in collective agreements. The coverage is more than 90% of employees that are bound by Collective Labour Agreements. The social partners has the possibility to develop their own type of scheme. Existing schemes are usually based on agreements in which among others the following is regulated: the form of participation (either direct or indirect via capital fund); the amount, profit-based or not; the way the capital is funded (employer or employee-savings); retention periods and withdrawal rights.

 


Table 4.8  Financial participation schemes in Germany

 

Enterprises

Employees

Capital

Type of participation

N

%

N (*1,000)

%

N

(*1,000)

%

Bonds

500

18.5

100

4.9

800

3.2

Silent partnerships

650

24.1

200

8.8

355

1.4

Indirect partnerships

400

14.8

80

3.5

350

1.4

Stock options

300

11.1

100

3.9

1500

6.0

Employee share ownership

400

14.8

1,800

78.0

21,900

87.6

Co-operatives

300

11.1

15

0.7

45

0.2

Share ownership in closely held companies

150

5.6

5

0.2

50

0.2

 

2,700

100

2,300

100

25,000

100

Source: Estimates from AGP & GiZ

 

On several occasions in the 1995 annual economic report and recently with the publication of the Law of 1998 the German government has appealed to the social partners to consider employee share-ownership and other related schemes as part of their wage-agreements. Also in new initiatives regarding the employee share ownership is stressed the possible advantages of that wage policy for employment-growth, a more equitable income and capital distribution. German government tries to convince the social partners to encourage the schemes.

Recent developments and perspectives

The encouragement of employee participation in enterprise capital is based on the German concept of the Social Market-economy ("Sozialen Marktwirtschaft") in which economic democracy is considered to diminish conflicts between capital and labour. Financial participation is embedded in the long lasting tradition of German re-distribution policy. Despite this the diffusion of the mentioned schemes in Germany is not as wished. The situation in former East Germany is even worse. The German government reports the need for new initiatives from the social partners which helps to create an environment for private employee investments to enhance employment growth, and to encourage employee participation in capital also to improve employee involvement in enterprise. The new Capital Formation Law was presented with following objectives:

·       to promote share ownership of employees

·       improvement of investments potential and performance of companies

·       offering a new acting ground for agreements on additional income in times where the possibilities for improvements of basic wages is limited

·       improvement of the retirement basis through capital formation and savings of lower income groups.

Trade union position to the phenomenon of share ownership is sceptical. In the early seventies the German Trade Union decided to support no other participation form than co-determination. Trade unions excepted share ownership only in times of difficulty. However, there are dramatic shifts taken place in the business landscape. There is a growing stock mindedness not only of employers but also with members of trade unions. Practical all large publicly held companies, traditionally covered by co-determination, has implemented stock options or related share based profit sharing plans for its personnel. Only in some occasions trade unions were part of these developments. The rising sector of services and IT with less trade union recognition heavily experiment with stock options and employee share ownership. The position of trade unions has been shifting towards a more pragmatic position. German trade union in one of its documents proposed the promotion of a more equal distribution of capital through the promotion of asset development for employees. Certain professional and white collar unions are in favour of entering this bargaining field. However, main position of the German trade union will be no trade off between wage bargaining and financial participation.

 

Recently trade unions negotiated and agreed a collective agreement in chemical industry in which the possibility for company based financial participation plans for retirement funding is explicitly stated. Besides that the agreement includes the right of employees to receive an annual bonus to be used for the retirement plan. Also in building industry similar agreements are developed. In the course of EXPO 2000 German trade unions started research and discussions on the subject as an input for EXPO conferences on future of work (Einkommen der Zukunft, 1998; Wilke, 1999)).

 

German management’s position is to be described as to provide within the calculated costs an alternative for fixed wages. Next they view it as good for the internal culture and an instrument for commitment and binding personnel. German employers federations are not inclined to see the phenomenon as a bargaining issue.

 

In the German context a few developments can be discovered.

·       Financial participation in Germany is traditionally linked to (multi-employer) savings plans for employees following an approved government regulated provision and less to employee share ownership at company level.

·       There is a (slow) move towards decentralised arrangement of retirement plans and funding these plans by company level contributions (both employer and employee) for stocks or profit related plans. Mainly large companies develop these schemes and it is thought to be an innovation. Up till now Germany has virtually never experienced any discussion that covers the link between company based share ownership and retirement plans.

·       There is a growing awareness at both sides that financial participation might be a new employee benefit to be employed.

·       German trade union tries to be involved and tries to get a foot in this new bargaining field

·       The substance of share ownership in Germany is too small to have an impact on corporate governance or industrial democracy

 

4.3.4.  NETHERLANDS

 

In the eighties discussions on encouraging PEPPER schemes in the Netherlands became national. It resulted in a detailed proposal on tax-incentives for profit sharing. From January 1st 1994 a number of financial participation arrangements were modified, and some fiscal incentives enhanced in order to stimulate employers to set up financial schemes and employees to participate in them (Law Vermeend/Vreugendenhil). It also provides an adequate legal structure for financial participation in general although the main basis is a saving scheme or personnel fund.

 

In the Netherlands, the variety of profit sharing schemes is limited, certainly in comparison with other countries, such as the United Kingdom and France. There are two different profit-sharing schemes for which fiscal incentives are available: cash-based profit sharing and deferred profit sharing. However, cash based profit sharing appears to be the prevalent for, of course employers can take other measures in order to calculate the profit sharing benefit, and instead of payments they can opt for options on stocks.

 

Saving scheme

A central feature to the 1994 Law is the wage-saving scheme. The wage saving scheme and premium saving scheme are the most important savings systems practised by companies. Both schemes were established with the aim to moderate the annual wage growth. Workers are encouraged to save money, and employers to set up schemes, by means of fiscal incentives. It is possible to make use of both schemes at the same time. Savings can be converted in shares. However the relationship of savings and performance and results (profits) is not direct.

 

To encourage participati­on in profit-sharing, the Government has raised in 1994 the tax free benefit and shortened the retention period. Employers who practice this scheme need to pay a total charge of 20% (instead of 35% before 1994). In exchange of payments, the employer may offer the worker an option on shares of the firm.

 

Stock options can be part of a saving scheme and are subject to the same tax-incentives as the wage saving scheme. Subsequent requirement was that the value of the options is ‘x’ per cent of the value of the respective shares. Any revenues on the use of these options is allocated to a special savings account with a retention period of four years. The amount will be tax free to a maximum (DFL 1708 in 1999) which amount will be determined yearly by the government. Until 1998 ‘x’ was fixed on 7,5% but as an answer to the commotion that arose about the big revenues stock option plans provided for topmanagement, the government changed the tax treatment of stock options. ‘x’ can now vary from minimal 4% to 50%, depending on the length of the exercise period and the intrinsic value of the stock option. Roughly stated the costs for an employee receiving a stock option with an exercise period of 5 years normally have more than doubled (from 7,5% to 20% of the value of the underlying share.

The Dutch government combined this tax measure with a tax relieve in case employees receiving their stock options through their wage saving scheme. The maximum is doubled, so if an employee agrees upon using the saving scheme for this purpose an employer can grant stock options for an amount of HFL 3416 (instead of HFL 1708) in 1999!

 

Another change was already introduced in 1996: before than a total charge of 10% had to be paid by employers when they make use of the wage saving scheme. This charge is reduced to 0% provided that the saving sum consists of company stocks belonging to either the employers' company, or a partnership connected with the employer.

 

Diffusion of schemes

The total number of employees receiving a cash-based profit sharing benefit has grown, but at the same time the benefit level has dropped significantly. In 1994, this scheme applied to about 11.5% of all employees, against 7.3% in 1993. The total benefit averaged DFL 2426 in 1994, 5.65% of the average earnings per hour. This was about 55% lower than the average benefit in 1993. The existing arrangements do not discriminate between men and women or other categories of beneficiaries. This however, does not mean that there exists equal participation. As noted above, the extent of participati­on depends on several aspects of which wage levels are the most important. For higher paid jobs, the benefit is about 1% of total average hourly earnings (non-participants included) and for low paid jobs less than 0.3%. In December 1994 almost 26% of all workers took part in wage-saving schemes.

 

A quantitative research in 1996 on the nature and number of financial employee participation (Financial employee participation: Time for Policy!, Netherlands Participation Institute & Nijmegen Business School, 1996) showed the following results:

 

Stock(option)plans are a limited but fast growing phenomenon.

2.000 companies (4%) have a stock(option)plan. About 125.000 employees are involved in those plans.

Another 1.500 to 2.000 companies intend to introduce such a plan in the next three years

 

Profit sharing is becoming a mature and common element of employee benefits.

15.000 companies have a profit sharing scheme. This is 27% of the companies with 10 or more employees. About 500.000 employees are involved.

Another 2.000 companies intend to introduce such a plan in the next three years.

 

Stock option plans are mostly set up for management and staff

The greater part (three quarter) of the 2.000 plans are stock-option plans

Only one third of the 2.000 plans are open for all employees

 

Stock(option)plans occur most often in medium- and large-sized enterprises

2% of the companies with 10 to 49 employees have a stock(option)plan

15% of the companies with 50 to 99 employees have a stock(option)plan

13% of the companies with 100 or more employees have a stock(option)plan

 

The law Vermeend/Vreugdenhil, that offers fiscal facilities for stock(option)plans and profit sharing, has not enhanced employee ownership. Salary saving schemes compete with profit sharing. Even after the introduction of the law Vermeend/Vreugdenhil on January 1, 1994 many companies have introduced employee ownership without making use of the saving-scheme possibilities

 

The message of the report is that it is time that companies and government start to make policies on financial employee participation. The research shows a possible growth of financial participation in the Netherlands. Recognising the fact that in the Anglo-Saxon countries employee ownership is much more developed, one also might expect a further growth in the Netherlands. Furthermore, companies are looking for ways to enhance the entrepreneurial competencies of their employees. And financial partici­pation fits into a differentiation of employee benefits in which the differences between efforts of the human resources are recognised.

 

Companies appear to be poor informed about the possibilities of financial employee participation. Knowledge of the fiscal advantages is not common. Many companies seem to choose for the least risky and most simple plan: a stock-option plan for higher management and staff (small, controllable group). Companies probably also choose for stock-options because of fiscal motives. This means that with the current most practised plans the possibilities of financial participation to stimulate Human Resources is insufficiently used. These possibilities are: improvement of motivation, strengthening of involvement, higher productivity.

 

Finally, the research shows that financial employee participation is practised mainly in companies with well developed institutional participation and participative management. Meaningful is the role of the works council. It is expected that works councils will put financial participation plans on the agenda.

 

Recent developments

The Dutch debate on financial participation is dominated by criticism of stock option plans for top management. Obviously these amounts are hard to accept especially in a country where the economic success is among others the result of employees moderating their salary demands. However,  criticism on the amounts management earn appear to result in criticism of the amounts and not the unequal distribution of these options. Somewhere down the road it became mainstream to introduce financial participation solely for specific groups in the organization. Topmanagement is of course responsible for this policy but also the trade unions have a responsibility. Many trade unions opposed (and some still do) the introduction of broad based financial participation.

The attitude of the Dutch trade unions towards financial participation is however changing. They used to oppose to the idea for different reasons: “Capital and labour shouldn’t mix”: “They (the employees) must not put two eggs in one basket”; “Employees need to get control rights because they work and not because they are owner”; “Will employee-owners stay member of a union?” As a result of the public debate on stock options for topmanagement unions started to realise that their normative way of thinking on financial participation gives the board of directors the freedom to act on financial participation as they think is right (stock options for a select group). The union ‘De Unie’ started the trend, demanding ‘shares for employees’ in the negotiations on collective labour agreements with Philips. Soon after that in the banking sector and several other sector unions addressed this issue.


4.3.5. UNITED KINGDOM

 

There is a long tradition of financial participation in the United Kingdom, originating in the nineteenth century. Since 1978, significant growth has been encouraged in legislation granting tax concessions to Inland Revenue approved profit sharing and employee share ownership schemes. The legislation is permissive, in that it is designed to offer tax incentives which employers and employees can take up on a voluntary basis.

 

Briefly, approved profit sharing schemes were introduced in 1978 followed by Save‑As‑You‑Earn (SAYE) share option schemes in 1980. The 1984 Finance Act introduced tax relief’s for discretionary share option schemes and statutory employee share ownership trusts (ESOTs) were introduced in 1989. The 1987 Finance Act introduced tax relief for employees covered by a registered Profit‑Related Pay (PRP) scheme. In addition to the initiating legislation, subsequent Finance Acts have amended the original rules, further encouraging the development of the various schemes.

 

In the 1995 Finance Act significant changes were made to the eligibility criteria for all five of the United Kingdom tax-relieved employee financial participation schemes. The changes were intended to remove the previous restrictions on the inclusion of part‑time employees from the schemes and to ensure that the tax relief’s give equal treatment to part‑time employees, most of whom are women. The new rules ensure that part‑time employees are ‑ for the future ‑ eligible to participate in those schemes.

 

There are several types of statutory profit sharing, share ownership and share option schemes as well as many non‑statutory schemes.

 

1. Profit Related Pay (PRP)

PRP schemes link a part of employees' pay to changes in the profits of the business they work for. The 1987 Finance Act introduced income tax relief for employees covered by a registered PRP scheme. The 1989 Finance Act made further improvements to the tax relief available. Following the Finance Act 1991, all PRP is eligible for tax relief up to the point where it is either 20% of employees' total pay or ,4,000, whichever is the lower. The tax relief is available to employees of private sector employers who must register their PRP schemes with the Inland Revenue before they come into operation. The improvement in 1991 was developed due to a lack of interest of employers. Since then the number of PRP schemes increased about ten-fold.

Profit-Related Pay has been aimed at wage substitution. To overcome understandable reluctance on the part of employees to make this concession, generous tax benefits were an integral part of the scheme.

 

The costs of setting up a registered scheme are tax deductible. Separate schemes can be set up for any unit producing separate profit and loss accounts, but must cover 80% of those employed in any unit covered by PRP. All eligible employees must benefit on similar terms. At March 1996 there were 12,740 live registered PRP schemes covering 3,569,000 employees.

 

The evidence to date suggests that firms have used PRP in three sets of ways. One, is to provide a profit share to supplement existing levels of remuneration. Most early PRP schemes took this form, and involved conversions of prior-existing profit sharing schemes. PRP therefore made little impact on the overall incidence of profit sharing in the UK in the early years. The second use of PRP has been as a substitute for an annual pay increase. Net employee pay may be increased at no cost to the firm. The third, known as ‘salary sacrifice’, substitutes PRP for part of current pay whilst maintaining net take-home pay at pre-scheme levels. In effect the firm rather than the employee benefits from the tax concessions. In practice the benefits tend to be shared, with employees receiving a net increase in take-home pay and firms a reduction in wage costs. The use of the various dampening measures mentioned above means that employee pay can be maintained at stable levels whatever the movements in profits (Pendleton, 1999).

 

Initially most schemes took the form of profit bonus schemes but after the improvement in tax concessions ‘salary sacrifice’ became the most popular. Since the degree of risk and flexibility in employee salaries in these types of schemes was minimal in practice, PRP functioned as a blanket tax subsidy for any firm which cared to set up a scheme. At around the same time as public criticism of executive share option schemes mounted, PRP schemes came to be seen as an expensive tax ‘dodge’. By the late 1 990s PRP was forecast to lose the Exchequer around a billion pounds each year in lost tax revenues, and in November 1996 it was announced that PRP would be phased out from 1998. The size of the PRP payment attracting tax relief was to be reduced in 1000 pound steps so that by the millennium no tax relief would be allowable.

 

2. Employee share schemes

Approved employee share schemes (those approved by the Inland Revenue) provide significant advantages. They allow employees to receive shares free or at a reduced price from their employer without paying income tax on the value of those shares. The costs a company incurs in setting up approved schemes are also tax deductible.

There are three types of approved share schemes. The first two provide that all employees of a company with over five years' service must be allowed to participate by the employer. If the employer wishes, new employees or employees with fewer years' service may be able to participate on similar terms. In the Finance Act 1995 a significant change was made to the rules governing the eligibility. The legislation aims to ensure that part‑time workers are not excluded from schemes. Previously, the rules stated that all full‑time employees with five years' service had to be able to participate in the schemes. The new rules require that all employees with five years' service must be able to join, regardless of hours worked. The third scheme allows a company to restrict participation to selected employees (discretionary share options schemes).

 

The three types of schemes are:

 

a)      Save‑As‑You‑Earn (SAYE) Share Option Schemes (Finance Act 1980).

Employees are offered an option to buy shares, at a fixed price and often at a discount (up to 20%), in three, five or seven years time. Employees wishing to participate in the scheme pay fixed monthly contributions for five years to a SAYE savings contract.

Upon maturity of the SAYE contract, the proceeds may be used to purchase the shares at the price fixed under the option. Alternatively, the savings, which will have earned tax‑free bonuses or interest, may simply be paid back in cash, if the employee so wishes. In the Finance Act 1991, maximum monthly savings were increased to ,250 (from ,150 a month). The bonus earned on the savings is income tax free, as is the benefit of the discount and any gain realised on the option when it is exercised. Proceeds from the sale of shares, however, could be subject to capital gains tax if the gains in any one year cross the individual's threshold (currently £6,000).

 

The main benefit of the scheme for employees is that they are not required to pay income tax on the favourable purchase price of the shares. Nor are they required to pay income tax on any increase which may occur in the value of those shares during the period from the granting of option to the actual purchase of shares. The Finance Act 1991 makes it possible for shares to the value of £3,000 obtained in this way to be transferred directly into a single company Personal Equity Plan (PEP). A PEP is a way of investing in shares without paying tax on the dividends or capital gains. Single company PEPs are a type of PEP which invests only in the ordinary shares of a single UK or EC company. As of April 1999 PEP’s were superceded by Individual Savings Accounts (ISAs)

 

By 1996 there were 1,500 approved SAYE schemes. The total number of employees with options is not known, but must be considerable since in the 1996 550,000 employees were granted options with an initial value of 1.6 billion in that year. The yearly numbers seem to be stabilising in the last decade. As of Novmber 1998 there were 1201 live schemes, with 1.25 million participants altogether. Averagre grant if shares per employee was £ 2,700 (HM Treasury, 1998)

 

b)     Approved Profit Sharing Schemes (share-based)

Here, a company sets up a trust and makes payments to it, typically from profits. Shares are appropriated to individual employees free of charge, but are held by trustees appointed by the company. The employees must agree to leave the shares with the trust for at least two years; and if the shares are left with the trust for a total of five years, there is no income tax to pay. Employees may take their shares out of trust after the first two years and sell them ‑ but in this case there may be income tax to pay. Special rules reduce this tax charge where shares are taken out of trust because of "compassionate" reasons (such as retirement, or ceasing to work for the company because of injury, disability or redundancy).

 

Shares obtained in this way can also be transferred directly into a single company PEP. All employees who meet the statutory requirements must be able to participate in the scheme on similar terms. The definition of "similar terms" will ultimately depend on scheme rules, but, in short, employers can vary the level of share allocation according to the length of service or in proportion to earnings.

 

The company can set the payments it makes to trustees against profits, providing the payments are used by the trustees to buy shares or are necessary to meet the expenses of the scheme.

 

Since the scheme was started in the late I970s about 1200 schemes have been approved by the Inland Revenue. Of these about three-quarters are thought to be still ‘live’. The number of employees benefiting from share allocations during the 1990s has ranged from just over 600,000 to nearly 900,000, and the average value of shares distributed has been between 400 and 500 pounds (Inland Revenue 1997). As of November 1998 there were 859 live schemes with 1 million participants with average distribution per employee of £680. Not surprisingly this form of profit sharing is found in firms with issued share capital, and therefore tends to be found in larger firms. In fact, this type of scheme is especially found in the Finance sector: one survey conducted in the mid-1980s found that 50 per cent of Finance sector firms had such a scheme (Poole 1989).

 

c. Company Share Option Plans (CSOP) (formerly Discretionary Share Option Schemes.

In addition to the all‑employee schemes, the Finance Act 1984 introduced tax relief for approved discretionary share option schemes (also known as executive share option schemes). This type of scheme allows a company to offer employees selected at its discretion an option to buy shares in the company at a fixed price. Where an option is held for more than three years, but less than ten, employees are not liable for income tax on the gains they realise when the option is exercised. There must be an interval of three years between the exercise of options to qualify for tax relief. If employees decide to exercise the option within three years they are liable to pay income tax on any increase in the value of the shares. Next capital gains tax is liable on growth in value at time of excercising the options. These schemes are implemented by companies to recruit and retain key managers and employees, and provide an effective incentive to working for the prosperity of the company.

 

By the end of March 1996, more than 6,000 discretionary share option schemes had been approved and were still being used. Income tax relief’s on the grant and exercise of approved executive share options were withdrawn with effect from July 1995. The numbers of approved schemes decreased accordingly. As of November 1998 there were 3,769 live schemes with 300,000 participants with average grant of £5,700 (HM Treasury, 1998).

 

Non‑statutory profit‑sharing and share option schemes

In addition to the statutory schemes described above, there are many profit‑sharing and share option schemes in existence which are not approved by the Inland Revenue. In the case of such schemes, any bonuses paid in cash are subject to income tax and national insurance payments in the same way as ordinary salary payments. In those cases where employees receive company shares, the value of the shares is taken into account as salary for income tax and national insurance purposes.

 

 

Assessment of the development of share option schemes

Comparison of the growth rates of the two main types of share option schemes provide interesting insights into company priorities in remuneration policy. SAYE schemes are more common than deferred share based profit sharing schemes but the pattern of development is not substantially different. By contrast, discretionary schemes have grown at a much higher rate. Over 6,500 schemes have been introduced since 1984, an average of over 540 new schemes each year. The average initial value of discretionary options has been much higher. In most years this figure has exceeded 24,000 pounds compared with 2-3,000 in SAYE schemes. The participation rates of eligible employees is much higher in discretionary schemes: over 90 per cent compared with 20 per cent (see Pendleton and Robinson 1999). However, the proportion of eligible employees is much smaller in discretionary schemes: 9 per cent compared with over 80 per cent in SAYE schemes. The inference that might be gained from this comparison is that many companies have attached rather more importance to executive reward packages than developing broad-based employee share ownership schemes.

 

The characteristics of firms with SAYE option schemes are clear. Besides having a share capital, they tend to be large, multi-site, UK owned firms and to have strong positions in their product markets (Poole and Whitfield 1994). They also tend to be more participative than firms without stock option schemes, and have a variety of mechanisms for employee involvement (Pendleton 1997; also Poole 1988). SAYE schemes tend to be more evenly distributed between sectors than deferred profit sharing, though they are especially common in financial services. Less is known about the distribution of discretionary schemes since research interest has focused upon all-employee schemes. However, the distribution between size of company seems to be similar to all-employee share-based schemes (see Baddon, Hunter, Hyman, Leopold and Ramsay 1989).

 

3. Employee Share Ownership Trusts (ESOTs)

ESOTs provide a further means in which shares can be transferred to employees. There can be statutory or non‑statutory ("case‑law") ESOPs.

Under the statutory scheme, companies set up a trust which acquires and distributes shares to employees. The trust is responsible for buying and selling the shares and for distributing them to employees, either direct or through an approved profit sharing scheme. Important changes were introduced in the Finance Act 1994 easing two of the conditions applying to statutory ESOTs (sometimes known as ESOPs) and are described below.

 

Payments by a company to an ESOT qualify for corporation tax relief provided certain conditions are met. In addition, the sale of shares to an ESOT may also qualify for capital gains tax relief, and the costs an employer incurs in setting up an ESOT are deductible for corporation tax.

 

"Case Law" Employee Share Ownership Trusts

Some companies prefer to implement non‑statutory or "case law" ESOTs. While company contributions under such schemes may qualify as deductions for corporation tax purposes ‑ if the contributions fulfil certain conditions ‑ they do not attract all the reliefs which are available to a statutory ESOT. "Case law" ESOTs are much more numerous than statutory ESOTs. Their rules are negotiated with the tax inspector, giving employers the flexibility to adapt schemes to the particular needs of the company and its employees.

A significant development since 1989 has been the growth of the use of ESOTs in medium‑scale privatisation. It has been estimated that there have been about forty of these.

 

Assessment of the development of ESOP’s

The merit of ESOPs is that they provide a low-cost, low-risk method for employees to acquire substantial portions of equity in their employer. However, few companies have gone down this route. A variety of reasons can be found for this such as unwillingness of owners to pass on their companies to their employees and the reluctance of banks to provide financial assistance to employee-owned enterprises. A further problem with statutory ESOPs in particular is the perceived inflexibility of the requirements for Inland Revenue approval (though these were relaxed somewhat in 1994). Recently hoever there is an increase in numbers. This emanates from th relaxation of ESOP legislation which allows firms to use a statutory ESOP (or QUEST) to support SAYE schemes in conjunction with a revision to accounting regulations which in certain circumstances means that firms can set internal financial transfers against corporation tax. The firms taking advantage of this are large public companies. This is viewed as a loophole and is likely to be closed by the government soon. Currently there are about 300 statutory ESOP’s.

Precise numbers of case-law ESOPs are difficult to calculate since these schemes do not have a specific legal identity, and most are subsumed in the figures for approved profit sharing schemes. Most observers believed there to be between 50 and 100 ESOPs in the mid-l990s though this number is now likely to be smaller because many ESOPs have now been sold to ‘conventional’ firms. The situation is complicated further by the establishment of employee benefits trusts by many large companies to buy shares on the open market to support existing SAYE and discretionary share option schemes. These are sometimes referred to as ‘unapproved ESOPs’ as no tax breaks are sought. Whether they should be viewed as ESOPs at all is open to question as their operation is primarily focused on meeting insurance and legal requirements rather than extending industrial or economic democracy per se (see Pendleton, MacDonald, Robinson and Wilson 1995).

 

In addition to initiatives involving the Government, a myriad of independent organisations and private companies provide information, advice, guidance, consultation, education and research on financial participation schemes, as well as promotion and publicity. In the UK, with certain exceptions, the provision of information to, and consultation with, employees is not determined by legislation but by voluntary agreement between employers and their employees.

 

Recent developments and perspectives

All but one form of financial participation currently in operation in the UK has been supported by legislation passed by the Conservative Governments of 1979-1997, and clearly these Governments were strong supporters of profit sharing and financial participation. Although the other main political parties in the UK did not share the same sentiments, they have nevertheless been broadly sympathetic to the financial participation programme. The Liberal Party has long advocated profit sharing, and the 1978 deferred profit sharing legislation owed much to Liberal pressure on the minority Labour Government. The Labour Party in the past has displayed agnostic attitudes towards financial participation -neither strongly for or against it - though those on the left of the party have been suspicious of company motives for using profit sharing and share ownership schemes. More recently, the logic of the party’s flirtation with ‘stakeholder capitalism’ has implied more positive support for financial participation. Providing employees with a share in company profits seems a good way of rewarding this particular group of ‘stakeholders’, and indeed a key member of the Labour Government elected in 1997 has argued that ‘ideally all employees should have shares’ (see Pendleton and Robinson in Pendleton and Perotin, 1999). However, three features of the Labour Party’s recent approach have differed in tone if not in substance from that of the Conservative Governments. One, they have been more reluctant to selective financial participation schemes and ‘soft’ incentive schemes for top executives. Two, they have been critical of the level of tax relief for Profit­ Related Pay and for executive share options (and as such these schemes are not profitable any more). Three, they have suggested that greater use should be made of collective employee trusts to counteract the current tendency for employees to sell their shares once they acquire full ownership of them. It has also been suggested that lower rates of capital gains tax might be linked to long term ownership of shares, though this is unlikely to affect most employee shareholders (Pendleton and Robinson in Pendleton and Perotin 1999).

Employers organisations have been broadly supportive of profit sharing and share ownership initiatives by government though on occasions they have been critical of a perceived lack of flexibility in scheme design. Most managers have also supported the use of profit sharing and employee share ownership. Mansfield and Poole found that 70 per cent of managers believed SAYE share option schemes to be a good idea, and even higher proportions supported the use of cash and deferred profit sharing (1991). Trade unions, by contrast, have traditionally been suspicious of financial participation on the grounds that it transfers risk to employees, undermines collective bargaining and provides little scope for employee involvement in decision-making. Most unions, however, have no specific policies on profit sharing and employee share ownership, and their general approach has been viewed as one of disinterest (Baddon et al 1989: 45-48). Recently the main union confederation - the Trades Union Congress - has taken a more positive view of financial participation, noting that it “welcomes moves to give employees a means of sharing in company prosperity” with the provision that schemes are open to all employees and that their design and introduction are subject to consultation with the workforce and its representatives. This follows a policy shift in some constituent unions towards a more favourable view of financial participation. At the 1987 annual meeting of the Trades Union Congress the unions representing staff in the Post Office and British Telecom successfully proposed a motion recognising the merits of employee share schemes as a form of ‘social ownership’ (see Pendleton 1992: 229). On the whole, white collar unions have been more receptive to the introduction of financial participation than predominantly manual unions. Some have even taken the initiative in proposing schemes.

 

It is noteworthy in this context that the UK Workplace Industrial Relations Survey data suggests not merely an association between trade union-based participation and financial participation but also with other forms of employee involvement and participation, such as quality circles (see Pendleton 1997: 115). However the evidence overall suggests that there is little direct relationship between trade union participation and profit sharing and share ownership. The positive relationship between trade unionism and employee financial participation stems from the broad tendency for firms with collective bargaining also to be those in which other ideas for extending employee involvement are encouraged (Poole, 1989).

 

Evaluating the use of schemes in the UK so far, there is little evidence that either the design of the UK schemes or their operation in practice spread risk to employees to any significant degree. Participation in share option schemes and deferred profit share schemes is voluntary and, in the case of SAYE schemes, employees can choose not to exercise their option should share value fall after the option has been taken out. On the surface, Profit-Related Pay - which can link a portion of ‘core’ pay to profits - appears to transfer risk to employees but in practice this tends not to occur. Many schemes are introduced to provide tax-free pay and to achieve reductions in the rate of growth of labour costs, rather than to link remuneration levels to variability in profits. To secure employee consent to changes in their terms and conditions of employment it is often necessary for the degree of risk to be minimised.

 

Next, the UK approved schemes appear to be more flexible in operation than in France, where legislation provides strict formula on the calculation of the share of profits to be passed to employees, or Italy, where management-union agreements use a range of performance indicators to allocate profit shares. This reflects the emphasis in the UK on the use of financial participation as a management tool, rather than as a mechanism for income or capital redistribution. Accordingly, within the statutory frameworks the operation of schemes is reserved to firms themselves. In most cases, financial participation schemes are not negotiated with trade unions, and it is not required that the consent of employee representatives be secured before schemes are introduced.

 

4.3.6. IRELAND

 

Prior to 1982 employee shareholding or cash based profit sharing schemes were apparently a rarity in Ireland.   From the late 1970s individuals who favoured the establishment of wide spread employee shareholding argued that government intervention in the form of tax

concessions was essential to promote the growth of these schemes.  The 1981 Fine Gael/Labour coalition programme for government included a proposal to exempt from income tax any shares issued to workers under an employee shareholding scheme.

 

The Finance Acts of 1982, 1984 and 1986.

The Finance Act of 1982 and subsequent amendments mark the entry of government into the field of employee financial participation.  Provisions in the Act relating to employee shareholding closely followed those of the UK Finance Act of 1978.  Like its British counterpart the Irish legislation was designed to encourage the voluntary  and widespread  adoption of share based profit sharing.  Success of this project it was believed might

encourage a positive alteration in employee behaviour issuing in improved industrial relations, productivity and co-operation  To that end, government offered tax concessions for companies and their individual employees. However such concessions would only be granted to companies establishing approved schemes.  These were share-based profit sharing or employee shareholding schemes which met certain government requirements.

 

Conditions of approval:  The company seeking approval for its profit sharing/employee shareholding scheme must first apply in writing to the Revenue commissioners enclosing relevant details.  Approval will be forthcoming if the scheme meets the requirements listed below.

 

The Trust:  The company must establish a trust which will acquire shares on behalf of participating employees.  Trustees must be resident in the state and will be required to maintain necessary records, e.g. the amount of shares allocated to individual participants.  They will also be required to pay over dividends or other moneys to participants,  act on their

instructions and inform them of their taxation liabilities.

 

Participant Eligibility:  Participation in approved schemes must be open to all full-time employees and all employees must be eligible to participate on similar terms.  This definition of eligibility has since been amended by the Finance Act of 1997.  Approved schemes must now also be open to the inclusion of part time employees.  However if the amount of shares

appropriated to an employee were to vary with the level of remuneration the legislation did not regard this as incompatible with participation on similar terms.

 

Participant Shares: Shares issued to participants in approved employee shareholding schemes must conform to a variety of requirements.  First, shares must form part of the ordinary share capital of the company or its parent company.  Second, they must be shares of a class quoted on a recognised stock exchange.  Third, they must be fully paid up,

non-redeemable, and free of any restrictions other than those which attach to all shares of the same class.  In short the shares must carry the same rights and privileges attaching to shares of a similar class held by conventional shareholders.  Finally, closed or private unquoted companies were not precluded from establishing approved schemes, provided the Revenue Commissioners were satisfied with their method of share valuation.

 

The Operation of Approved Schemes.

Company Contributions:  First a trust is set up and trustees appointed.  The company then passes a sum of money, its profit sharing contribution, to the trust.  Trustees use this money to purchase shares in the company on behalf of all eligible employees.  A company can  shorten this procedure by passing directly to the trust a block of its own newly issued shares as its profit sharing contribution.    

 

Share Distribution:  Once trustees have purchased or received a block of shares from the company,  they must be credited to blocked accounts of individual participants.  The criteria for allocation, equally dividing the block of shares among eligible employees or varying the amount according to length of service or levels of remuneration, is in the main a company

decision.  Shares are not immediately released or distributed to employees who must, under the terms of the Act agree to their retention by the trustees for a minimum period of two years.  Beyond the obligatory retention period, employees can instruct trustees to release, sell on their behalf, or retain their shares.  Employees who instruct trustees to sell or transfer shares to their name will be liable for income tax.  The extent of this liability will vary inversely with time elapsed from the end of the retention period.  Maximum tax advantage is with participants who allow trustees to retain their shares for a certain period from the date they were first acquired by the trust.  Beyond this period, shares held in trust are automatically released or transferred to individual employees free of any liability for tax  though they may be liable for capital gains tax. Employees now become shareholders in their own company, and enjoy the rights and privileges of conventional shareholders.

 

While the mandatory retention period remains in force the automatic release date when employee shares will be free of tax has been gradually brought forward.  Under the 1982 Finance Act the automatic release date was 7 years from the time the shares were first acquired by the trustees on behalf of eligible employees.  This was reduced to 5 years by the 1986 Finance Act and was further reduced to 3 years by the Finance Act of 1997.  Apparently the expectation is that these amendments will increase the attractiveness of the

schemes for employers and employees and so promote their widespread adoption.

 

Tax advantages for companies and employees: 

A company that establishes an approved profit sharing/employee shareholding scheme is allowed to deduct the value of its profit sharing contribution, be it in cash or its equivalent in newly issued shares, from its taxable income.  This concession is subject to certain conditions.  Under the provisions of the 1982  Finance Act, only contributions up to a maximum of 20% of trading profit less deductions and losses were tax deductible. Furthermore the total shares acquired by trustees for an individual employee must not exceed £1000 per annum.  These concessions underwent generous modification in the Finance Act of 1984.  Company contributions up to 100% of trading profit less deductions and losses were now tax deductible. 

The limitation on the market value of the shares acquired for an individual employee followed a more erratic course.  As we have seen under the 1982 Finance Act the maximum share allocation to an individual employee was limited to £1000.  This was increased to £5000 in the Finance Act of 1984.

However in 1992 when it appeared likely the government would withdraw all tax concession to these schemes as a saving to the exchequer, lobbying by the Irish Business and Employers Confederation IBEC and the Irish Congress of Trade Unions ICTU averted this outcome.  Instead the government reduced the maximum employee share allocation from £5000 to £2000.  With a new government in office the Finance Act of 1995 increased the employee share allocation from £2000 to £10000.      

Some examples of the larger Irish companies operating Approved Profit Sharing Schemes would be the Bank of Ireland, Guinness Ireland, Waterford Wedgwood and the tobacco concern P.J.Carroll.  The Revenue Commissioners estimate that the 292 APSS cover approximately 141,350 participants.  Given the Revenue Commissioners method of calculation it may tend to overestimate the number of participants involved in these schemes.

 

Recent Developments in Financial Participation.

Since the early 1990s government policy towards State owned companies has altered in favour of increased commercialisation and privatisation.  One aspect of this change in policy was a provision for employees of state owned companies to obtain shares in the company that employed them in the event of partial or full privatisation.  The 1997 Finance Act contain provisions to facilitate this outcome though the legislation can also be applied to

privately owned companies.

 


Table 4.9 Growth in the number of Approved Schemes 1982-1999

Year ended 5th April    

 

Number of Approved Schemes

Limitation of the Market Value of shares for the individual employee

1983

0

£1,000

1984

2

£5,000

1985

6

£5,000

1986

7

£5,000

1987

13

£5,000

1988

18

£5,000

1989

18

£5,000

1990

23

£5,000

1991

23

£5,000

1992

11

£2,000

1993

9

£2,000

1994

4

£2,000

1995

8

£10,000

1996

27

£10,000

1997

37

£10,000

1998

32

£10,000

1999

54

£10,000

Total

292

 

Source: Figures supplied by the Revenue Commissioners.

 

Employee Share Ownership and the Finance Act 1997.

The 1997 Act introduces the concept of an Employee Share Ownership Trust (ESOT) to enable share to be acquired, held and allocated to employees.  The ESOT can raise a loan or borrow to acquire shares in the company that established it.  This is very similar to the American leveraged Employee Stock Ownership Plan (ESOP) which can borrow money for the purchase of employer securities or shares. 

 

Conditions for ESOT approval:  At the time the Trust is established the company must be an Irish resident company and cannot be under the control of another company.  Indeed shares in the founding company cannot be acquired by the trustees at any time after the founding company falls under the control of another company e.g. a take-over.  Share purchased or received by the ESOT must form part of the ordinary share capital of the company.

Finally employees or directors having a material interest, that is 5% of ordinary share capital, are excluded as beneficiaries of the scheme.

 

Operation of an Approved ESOP:    

(1) Employees and their trade union take part with the employer in the establishment of an ESOT.

(2) Once established the ESOT can take out a loan, guaranteed by the participating company, or receive cash contributions from the company which are tax deductible.  However there are three alternative trustee models allowed under the legislation. The first model provides for  employee control with the majority of  trustees being  employee representatives.  A second model allow for a balance of power between the employer and employee, while the third allows for a majority of management appointees.  All models

must have one professional independent  person approved by the Revenue Commissioners.

(3) Using the proceeds of a loan the ESOT purchases shares in the company.

(4) The company can make a tax deductible cash contribution to an associated Approved Profit Sharing Scheme APSS. (see 1982 Finance Act above)

(5) The APSS passes this contribution to the ESOT in return for a block of shares in the company.  In this way the ESOTs stock of shares is reduced.

(6)       The contribution from the APSS allows the ESOT to meet the first instalment due on loan.  However the company may need to make cash contributions directly to the ESOT.  An example would be a shortfall in loan repayments or to enable the ESOT to purchase shares from departing employees.  Under the 1997 Act companies can require all shares held by departing directors or employees to be sold back to the company.

(7)        The APSS allocates the shares bought from the ESOT into the names of individual employees.

 

In Ireland at present there is only one approved ESOT in operation. This is located in the formerly state owned but now partially privatised telephone company Eircom.

 

Save as you Earn (SAYE) and the Finance Act 1999.

Under the Act employees will be given the right to buy a certain number of company shares at a fixed price at a particular time.  These shares will  be bought using money the employee has saved under the SAYE arrangement.  Not only will the price of the shares be fixed at the time the employee begins saving but the price of the shares may be discounted by an amount below the market value to a level approved by the Revenue Commissioners.  The scheme will be established by the employer but must be open to all employees on

similar terms.  SAYE schemes will require approval from the Revenue Commissioners.

 

Employer and Trade Union Responses to Financial Participation.

Government haste to effect its pre election commitment on financial participation may explain the absence of consultation with either the employers or trade unions prior to the passage of the 1982  Act. Nevertheless in 1984 both parties were invited by government to submit their views on the measure.

 

The Employer Response:  

As the Federated Union of Employers (now IBEC) had not developed a policy on the topic it conducted an attitude survey among its corporate members so as to reflect their views in its discussions with government.  Over half the respondents believed such schemes could improve company performance and industrial relations and so favoured the development

of suitable schemes.  A slightly smaller majority wished the FUE to support the concept.  Possible obstacles cited by respondents to the establishment of the schemes were, union opposition, worker distrust, the difficulty of educating employees concerning the schemes operation , the obligation to disclose company financial information, dilution of ownership and unfavourable reaction of existing  shareholders. 

Reviewing the findings of its survey the FUE was certain that the majority of family owned businesses would not be interested in developing profit sharing schemes.   Profit sharing it believed was only a useful motivator at senior management level.  Finally, the official attitude adopted by the FUE regarding the schemes was hardly enthusiastic.  The organisation regarded an entirely voluntary development of these schemes within individual companies as acceptable.   It was flatly opposed to any element of compulsion in their

establishment. Though the schemes were acceptable to the National Executive, it was not prepared to encourage their adoption by member companies.

 

This initial position of the employers organisation IBEC regarding financial participation has since been modified.  As already noted in 1992 both the employers organisation and the union centre ICTU successfully lobbied government against the total abolition of tax concessions for approved profit sharing schemes.  Now IBEC encourages its members to consider schemes for the  financial involvement of their employees.   In its Budget

submission for the year 2000,  IBEC has strongly requested government to develop a tax regime that will  accommodate the most comprehensive use of financial employee involvement schemes.  However in one respect the position of the employers organisation remains unaltered.  It is opposed to the mandatory or prescriptive introduction of financial involvement. 

 

The Trade Union Response: 

At the end of 1984 in response to the Ministers request the ICTU outlined its position on profit sharing/employee shareholding.   Reviewing schemes already established, Congress was critical of many aspects of their operation.  First, the general absence of employee

consultation, involvement or participation either at the introductory stage on in the schemes subsequent administration.  Second, the reluctance of employers to disclose financial information and the small amount of profit distributed among employees.  Nevertheless Congress declared that 'the overall approach of the Irish trade union movement to worker shareholding is not a negative one'.  However, its expectations of profit sharing/employee

shareholding were such as to render unsatisfactory any schemes based at the level of the individual firm.  These expectations were the provision of extra investment capital for growth and job creation, a redistribution of wealth, increased equity and the introduction of industrial and economic democracy.  Congress proposed to realise its objectives through a Scandinavian-type workers fund system or collective profit sharing.

 

This position has since been substantially modified.  The demand for a worker fund system or collective profit sharing has been dropped.  Likewise the opposition to the privatisation of state enterprises has given way to neutrality if not a general acceptance.  Indeed in the event of full or partial privatisation, Congress views the ESOP as a vehicle through which union members or employees of such companies can participate in the profits they have helped to create.  Congress has also identified the sale of a subsidiary company or a management buy out as a potential opportunity for union members to negotiate an ESOP.

 

Developments at  national level may partly explain the altered position of employers and trade unions regarding financial participation. Since 1987 social partnership type agreements or bargained corporatist arrangements between government employers and trade unions have been the dominant feature of collective bargaining in Ireland.  All parties agree that partnership at national level should be complimented by partnership at enterprise level. Forms of financial involvement have been designated as one of the appropriate topics for discussion at enterprise level. In the National Partnership 2000 programme agreed in 1997 between government and social partners the financial involvement was not presented as a specfic heading within the programme. In the latest renewal of the agreement in February 2000 the possibility of innovations in financial involvement was stipulated.

 

Conclusion

A favourable tax regime appears to be a crucial factor in promoting the growth of Approved Profit Sharing Schemes(APSS) (see table)  In the twelve years between 1982 and 1994 the annual average growth rate for APSS was approximately 11 schemes per annum.  In the years since 1995 the annual average growth rate has increased to approximately 32 schemes per annum. Given the support of government, employers and trade unions for the promotion of financial participation the growth in scheme numbers seems likely to continue. However focusing attention on the tax advantages of schemes could be productive of an unintended consequence. Over time one important objective of the schemes (a positive alteration in a range of employee behaviour) could become increasingly obscured.

 

4.4 Conclusions

 

From this short overview of developments in Europe the following conclusions can be drawn:

·       The full range of financial participations schemes can be found throughout Europe.

·       These systems are more diffused in a limited number of countries. In most European countries financial participation is not an issue in national debates. Any plans in those countries are very locally or implemented through foreign companies.

·       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.

·       A country’s pattern of financial participation reflects the industrial relations system, the corporate governance system and the prevailing business and corporate culture.

·       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. Financial participation systems are also used for income and employment policies. The corporate governance system of France provide for a limited scope of employee share ownership due to more 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 firm’s pension plans and the pronounced support for workers’ co-operatives and labour firms should be looked at in a complementary manner as the main Spanish plans to improve worker’s financial participation in the firm.

·       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 closely held and privately held firms 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 a nation wide introduced wage savings plan. This plan allow profitable tax provisions on contributions of both employer and employee to a share based plan. However, most employees choose for the less risky saving on a special account with less profitable tax provisions. However, an increase is experienced since changes in 1999. Few trade unions are demanding collective schemes.

·       The UK has a pattern that consists of mainly deferred share option schemes with the principal aim of medium term employee incentive. The main actors are employers and government. An elaborated stock market provide for ample space for share based investments. The development in the UK is heavily supported by UK governmental policy 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 just starting. Based on the promotion of a national programme of Partnership 2000 also trade unions promote the development of share based plans.

·       In general both the use and the pattern and diffusion of schemes are influenced by government policies on tax advantages and other incentives.

·       Government positions in individual EC countries range from those that are strongly and actively in favour of financial participation, to those that does an appeal to social partners, to those that leaves the matter to the individual employers, to those without a defined view on it.

·       Throughout Europe a growth of financial participation is experienced and expected.

·       This growth is promoted by individual employers decisions in larger companies and takes mainly the form of investments savings plans, share option schemes or deferred profit sharing schemes, in a growing number of cases for future securities (including retirement funding).

·       Throughout Europe a growth is experienced in share options schemes for staff and executives, especially in booming financial and high technology sectors.

·       Generally throughout Europe smaller closely held private companies are not in favour of financial participation systems.

·       The number of typical ESOP’s in European countries is very low.

·       The incentives and the amounts for financial participation usually fall between 2 to 5% of annual employee earnings and between 2 to 5 % of the wage bill.

·       The developments of financial participation is generally separated from collective bargaining and less from agreements talks between employee representatives and employer on company level.

·       A change is experienced in the position of trade unions from counteractive to more pragmatic interest in most countries.

·       Financial participation systems are mainly used as an additional employee benefit to commit the workforce, as an instrument to gain tax advantages and other bonuses, used less as an instrument for diminishing wage rigidity and used rarely as broad based performance related pay.

·       Employee share ownership is less used as a defensive mechanism like preventing take over or financing companies in trouble.

·       The low diffusion of financial participation in most European countries and in most companies in Europe might reflect also another use of reward systems in Europe. European managers seem not  to be convinced of the connection between variable pay and corporate performance.

·       In most countries there is not much data and knowledge about the impacts (on employee attitudes, on actual change in employee behaviour or on actual changes in performances of companies) of the promoted financial participation system. Neither is there much knowledge of the relationship of these systems with the other pillars of participation. And is the impact of corporate governance systems on the nature and use of financial participation not fully understood.

 


5 Research perspectives

 

5.1 Introduction

 

The aim of this report is to highlight important knowledge gaps and hence priorities in research that should be developed for a full understanding of the phenomenon. The aim of this chapter in the interim report is to offer a framework for discussion. Research objectives and research questions determine research strategies and methods used. In this chapter we try to make an inventory of different research strategies used and connect these with the main topics that were researched and the topics that has had minor attention.

5.2 Attention

Financial participation seems to emerge as an important event in Europe. In this context, Governance is an relevant term. It refers to the way in which stakeholders in an organisation live their power, rights and responsibilities. The authoritarian form of governance has prevailed since people began to organise economic institutions. Participation, however, appears to become a powerful alternative form of governance in Europe.  Since financial participation is a new element in this domain, the question is how this phenomenon will fit in this governance debate.

 

To some, we now appear to enter the Age of Participation because we seem to have reached a point in the development of our labour terms where we discuss and negotiate on substantially new elements. We did agree on the importance of basic pay and good human relations; we came to an agreement about the protection and the development of the young, the disabled and the deprived; and we agreed on the importance of conquering unemployment. And now we talk about profit sharing and employee share ownership as a new acting ground for changing our employment relationships. Several governments in Europe promote this change and do appeal to the social partners to develop this new domain.

 

In fact, management itself has helped to develop this new domain. In the course of binding, commitment and development of human resources management has introduced the use of share options in Europe on a wide scale. Several trade unions have picked up the development and introduced the topic of financial participation into their talkings with employers in several European countries.

In general, the discussions at the expert meeting in Leiden, September 9-10, 1999 eventuated, among other things, in the following observations:

 

·         There is a growing awareness at both sides of industry that employee share ownership might be a new employee benefit to be applied.

·         A growing number of trade unions develops a pragmatic attitude towards the phenomenon and tries to be involved.

·         There is an increase in the use of schemes in Europe.

·         However, the substance of share ownership in Europe is generally small, which means that there are relatively isolated experiments going on.

·         There is a growing need for sharing information and a growing need for models and exchange of experiences on best practices and on solutions for apparent problems that show up when practising these schemes.

·         Moreover, following the research and discussions more insight should be acquired concerning the working relationships with other participation practices: representative participation, direct participation and collective bargaining.

 

Since the phenomenon of financial participation is not diffused much in Europe there is only minor attention for research into the subject or is concentrated in a limited number of countries (UK mainly). Studying a new phenomenon generally starts with theoretical and descriptive work gradually moving towards more testing research and research directed towards assessments and action oriented research. Because of the relative recent attention most European research has followed the path of description, the contingencies and research on the main theoretical impacts. Most of these studies are done in the UK. Only recently the IPSE study of the performance effects of profit sharing combined studies on UK, France and the German and Italian case. In the USA impact studies started earlier than in Europe and is more or less beyond the point of impact studies on performance and seems to move to ownership culture, conditions for performance and other impacts.

A typical European research interest is the relationship with industrial relations. Also typical for Europe and more developed than research on share-ownership and profit sharing  is the research done on co-operatives.

 

During the last two decades, employers in Europe increased their experimentation with employee financial participation. The most obvious examples are the United Kingdom and France where profit sharing, gain sharing, savings plans, share based plans and employee stock ownership have become relatively widespread on a voluntary basis with some government encouragement through the tax laws. In Europe, employee financial participation has been influenced by government policies attempting to encourage asset accumulation, a wider distribution of the ownership of capital, or profit sharing.

 

The degree of research is of course also dependent on the availability of data. In Europe, only France and the UK appear to have elaborated polls and statistics on financial participation. However, a full investigation of available surveys and databanks is not done yet. This second sources research could be a valuable option. Scheme 5.1 presents an attempt to assess the research attention, its focus and the topics that has had more or minor attention.

5.3 Focus of research

 

As has been said research typically follows societal attention which means that research is done mainly in countries where there is deliberate policy and active actors dealing with the matter. This means an overemphasis of experiences and research results from USA, UK and to a lesser extent France, Germany and most recently Italy.
Scheme 5.1 Research attention

More attention in research

Minor attention in research

Focus

 

Experiences in USA, UK, France, Germany and Italy

Other European states

Industrial relations differences

Corporate governance differences

 

Financial participation

 

Differentiation between schemes

Existence of schemes

 

Diffusion patterns

Structural factors

 

Business Cultural factors

Impacts of profit sharing and ESOP’s

 

Impacts of other financial participation plans

Content and impacts

 

Process and implementation problems

Advantages

 

Disadvantages and solutions

Objectives in companies with financial participation

Reasons for not putting financial participation into practice

Large public quoted companies

Small closely held family businesses

 

 

Determinant factors

 

Determinants of the use of financial participation schemes by companies

(company characteristics)

Determinants of employee participation and choices made

(employee variables)

Structural on company level

Social structure and work related characteristics

Employee’s attitude

and some indicators of behaviour

Employee opinions and determinants of their choices

Trade unions (negative) attitudes and its determinant factors

Employee representatives opinions and determinants of their choices

Management objectives

 

Other stake holders attitudes and opinions

 

 

Relationships

 

Relationship with economic and financial performance

Relationship with organisational performance and with industrial relations performance

Relationship with job satisfaction

Relationship with extrinsic commitment and other intrinsic commitments

Relationship with external factors determining impacts

Relationship with the other pillars of participation; interactive effects

Relationship with general HRM strategies

Interaction with other HRM instruments

 

 

Research strategies

 

Cross sectional; state of the art

Longitudinal; dynamics of financial participation

Surveys

Case-studies

Action oriented research

Partial relationships

 

Integrated model testing


 

The focus of most of the research is on existing schemes and minor research is done on diffusion patterns (population ecologist viewpoint). Any international comparative participation research has generally a focus on the importance of industrial relations differences while in case of financial participation corporate governance differences and differences in capital markets may be more important.

First research is more dealing with hard structural factors and only recently the focus shifts a bit to cultural factors (Theory O; Sense of ownership; Winter, 1999).

More or less related to the foregoing attention in research for process and implementation problems has had minor attention than the content of the scheme and its impacts. Also there seems to be an overemphasis on research of the advantages and the objectives of companies, while our understanding of disadvantages and how companies are dealing with these is not very well developed.

At last most research focused on a specific schemes (which can be quite country-specific). Less research compares different schemes or looked into combined schemes. Also the difference in participation between categories of employees is less researched.

 

Summarising the prevailing focus there appears to be a need to focus more on

·       corporate governance differences,

·       business culture factors,

·       companies attitude’s towards the phenomenon, diffusion patterns

·       succession problems of small business owners and family businesses

·       process and implementation problems and solutions to existing problems,

·       differentiation between plans and their impacts.

 

5.4 Determinant factors

 

Much research is done on the characteristics of companies that use these schemes compared with companies that have no scheme. Chapter 3 shows some of these contingencies. Employee variables on a lower than company level has had minor attention.

 

Our knowledge of determinant factors stemming from task structures, social structure and employee relations, and work related variables is limited. Also we appear not to know much about employee’s opinions about different schemes and the determinants of their decision to participate in a given scheme.

 

Also research has followed the prevailing idea that trade union counteract, while only recently experiences with more initiating positions of trade unions get more attention. Next, our knowledge of attitudes and behaviour of employee representatives and their assessment of schemes in their company is limited.

 

The following dimensions seem to be most important for the research of practices:

·         Broad based or only eligible for certain categories of personnel. This refers to the participation coverage of the scheme.

·         Dependency on the effort made by employees and the reflection of this in the performance of the company. This refers to the impact of direct participation as a likely spin-off or as an adjacent organisational mechanism of share ownership.

·         Negotiated and agreed with employee representatives, or not. This refers to the influence of trade unions, collective bargaining and other representative institutions.

 

In summary, future research on determinant factors should focus more on:

·       employee participation and choices made, for instance through a EU-wide survey of individuals about employee stock ownership, profit sharing and participation

·       social structure and work related characteristics, for instance the differences between categories of personnel and the differences between broad based plans and executives types of plan; the differences between team-based workplaces and conventional workplaces

·       Trade unions and employee representatives’ responses and experiences with different types of schemes in different settings

·       Other stake holders attitudes and opinions about financial participation

 

5.5 Relationships

Looking at the relationships that appear in research most research seems to have chased the proof of the impact on improved financial and economic performance. Blasi, Kruse and Sesil (1999) question this preoccupation. They state that it is unfair to raise the simplistic question of better performance while to proof it implies an elaborate and complex research design that probably never will be realised. They go on by stating that research has showed that employee ownership companies have at the minimum the same financial performance as non-employee ownership companies. Research should not focus on the simple question of better performance.

Blasi et al. also suggest to distinguish between push and pull employee ownership, where push refers to employee ownership starting the business and developing the intended objectives, and where pull refers to employee ownership that is pulled along with the company’s performance but does not create it. This valuable difference has of course an impact on research design and the focus of research.

 

Less research is done on the relationship between financial participation and organisational performance and industrial and employee relations. In case these latest relationships are covered than the focus is mainly on job satisfaction; about other variables we know less. In general there is not much research done on employee choices and how financial participation has an influence on their behaviour.

 

As mentioned above in the course of determining factors the relationships with external factors are more researched than the theoretical proposition of the interaction between the pillars of participation and the subsequent HRM instruments. The limited research suggests that this may entail the key factors for reaching the stated expectations. The possible relationship with HRM -strategies should get more attention. Further research needs to move beyond measuring financial participation, non-financial forms of participation and firm performance and presuming that a direct connection can either be established or not established. The research may move in a direction of measuring a wide variety of elements of the employer-employee relationship, the firm’s culture and competitive strategy; a move in the direction of research of the high performance workplace (Huselid and Becker, 1998).

 

In summary, future research on relationships should include propositions that covers the relationship between:

·       different financial participation schemes and organisational performance (employee involvement and flexibility)

·       different financial participation schemes and industrial relations performance (conflict and levels of absenteeism, recognition of employee influence)

·       different financial participation schemes and levels of intrinsic and extrinsic commitment

·       different financial participation schemes and the other pillars of participation (direct participation, representative participation and collective bargaining) and its interactive effects on performance (the high performance workplace)

·       different financial participation schemes and other HRM instruments (compensation, appraisal, competence development, recruitment and selection) and its interactive effects on performance.

5.6 Research strategies and perspectives

 

Of course, It will be more complex to develop research which could cover the dynamics of financial participation. But it should be noted that most research does not come far in testing integrated models while these are needed most in order to reach a fuller understanding. Testing partial associations and correlations leaves us with quite a number of black boxes. Testing relationships is of course dependent on the availability of reliable and valid data. And of course what is located on the right side of scheme 5.1 may cover topics for which it is less easy to acquire these data. And this explains probably for a great deal why the focus is on the left side.

 

As mentioned research focus and strategies are dependent on the substance and development of a phenomena. Discussions on research could focus on the question what in this stage of the development in Europe is needed most. As you might conclude from this short overview of research and experiences, the theoretical debate and research has not yet on the whole produced decisive results. More empirical evidence is therefore needed to identify the relationships and the impact of financial participation. The focus might be the process, to discover salient organisational mechanisms that might help explain the actual connection. The next point of view might be of help.

 

Introduction and sustaining financial participation schemes and developing and enhancing its positive and desired objectives is a matter of social construction in which the interests, perceptions and interpretations of those who define the scheme play a significant role. When the social dimension of these schemes is made the focus of study, it becomes obvious that the process of financial participation and its effects is socially controlled and subject to social influences. From this point of view the process of financial participation is not simply a matter of procedures and measuring facts, but also of discussing, interpreting, negotiating and perhaps even awakening a demand for financial participation. It is clear from the summary of research that research has been partial and have not yet revealed these processes. Most probably there is a need for different approaches to develop more insight.

 

Empirical research strategies on financial participation can roughly be divided into:

·       surveys to test expected determinants of financial participation schemes and expected relationships for a large group;

·       longitudinal panel research for the relationships with several performance indicators

·       casestudies to deepen our understanding of the important relationships of financial participation with other selected topics, for instance the other pillars of participation and how it in the end affects the desired results; and what problems might intervene the desired results;

·       more action oriented research to deepen our understanding of best practices and benchmarking.

Surveys has had the most attention.

 

The survey and panel approach could cover the the above determinant factors and relationships that had minor attention. Policy orientation requests for a focus on discovering of diffusion patterns of different schemes based on the most important determining factors. Next survey and panel research should focus on objectives and impacts. Important is to know employee and trade union representatives views and responsiveness.

 

The casestudies research strategy and action oriented approach could cover the following. The objective is to get insight in:

·         the interests of actors involved,

·         the relationships with other participative mechanisms,

·         the process of implementation,

·         the problems that were met and the hurdles to be taken,

·         the organisational mechanisms and human resource practices that helped to reach objectives and

·         the impacts that schemes eventually have.

·         the ways in which processes are embedded in prevailing business regimes.

For policy purposes on EU level the main casestudy research strategy may be exchange of experiences between countries.

 

 

 


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