Scheme 1 Possible patterns of Financial
Participation (additional or
substitute for wages with or without government regulations)
for
EUROPEAN FOUNDATION FOR THE
IMPROVEMENT OF LIVING AND WORKING CONDITIONS
By
Erik Poutsma
Nijmegen Business School
University of Nijmegen
March 2000
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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Table 1 Participation dimensions
and examples
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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 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.
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 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.
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 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.
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.
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.
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.
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.
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.
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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.
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.
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.
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.
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.
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.
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.
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).
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).
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.
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).
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.
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.
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).
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).
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.
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.
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).
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.
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.
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
