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
of part-time employees and temporary employees on short-term fixed contract;
and schemes are eligible to personnel with a certain minimum length of employment
in the company. Although most of the existing arrangements do not discriminate
between men and women or other categories of beneficiaries, this, however,
does not mean that there exists equal participation.
Most legislation on promoting financial participation
schemes in European States has to do with incentives such as fiscal or other
financial advantages. In the considered period the countries UK and France,
have made further improvements in the variety of incentives for the different
schemes. In Belgium, Denmark, Germany, Spain, Ireland and Austria incentives
are reported only for share-ownership schemes and not for profit-sharing
schemes. The incentives range from tax-free issue of shares or bonds to employees
to tax-free amounts on distributed profits, or by a profitable change of the
taxation basis. Other advantages are the exemption from social insurance contributions.
These incentives are in some countries provided for both employer and employee.
In addition, sometimes they allow employers to deduct costs of the scheme.
In some cases problems arise with social charges
due to a discussion on the question that benefits should be regarded as normal
wages subject to social charges (Belgium) or as other type of remuneration
not subject to these charges.
In general, the incentive-amounts are modest. Other
incentives are the possibility of withdrawals before the end of the withdrawal
period for specific expenses (new housing; insurance and specific capital
savings; retirement funds and in one occasion even cars (France) without any
or minor taxation on these withdrawals. These examples of incentives illustrate
that, at least for the countries with an elaborated system for financial
participation schemes, the policy on incentives and other financial advantages
seems to become a standard issue as part of the macro-economic policy on wages
and consumption.
Active campaigns on promotion of schemes are found
in France, the UK, and Ireland. The other countries refer in this respect
to the responsibility of the employer and representatives. In the UK and France
activities concerning the enhancement of management and labour's awareness
are almost institutionally embedded into different public and private bodies.
These bodies provide for specific information campaigns and consulting practices
directed to both employers and employees. The official appeal to social partners
in Ireland, Germany, Spain and Italy has already been mentioned. In Ireland,
a specific National Programme was launched. Interesting is Austria where representative
parties have developed a learning programme which was included in the training
for works councils and employers.
It must be noted that the macro-economic situation
will have influence on government support and that of the social partners
for any proposals for financial participation. Recent arguments for enhancing
productivity, employment and wage flexibility are stimulating discussions on proposals, as are discussions
on more private savings for future security. However, with the argument of
promoting wage flexibility on labour markets through financial participation
schemes opposition of trade unions is expected.
Historically French financial
participation system has Gaullist right wing origins. De Gaulle’s vision on
the co-operation between capital and labour let him introduce financial participation
after WW II. This means that this system has never been supported by left
wing socialist ideology. This means that financial participation is virtually
never been associated with participative structures. Left and right wing political
consensus on the financial participation system is quite recent. However financial
participation is not an issue of industrial democracy.
Despite the stop and go stages
during the successive changes of left and right wing governments, a more or
less continuous government support to employee financial participation existed
since the end of the fifties. As a result French legislation offers a legal framework and generous tax advantages
to a variety of financial participation forms: voluntary cash-based profit-sharing,
deferred profit-sharing, company savings plans for stock ownership. It is
said that through participation in the enterprises' economic results, these
three forms of financial participation are designed to improve the involvement
of workers in enterprises and at the same time to contribute to collective
savings and the growth of investments.
A belief in the merits of financial
participation schemes as a competitive strategy by improving the efficiency and productivity as well as
the financial structure of French companies has led to new legislative initiatives
in 1993 and 1994. The legislation of July 1994 unifies the three main pillars
of financial participation in France: voluntary profit-sharing (intéressement),
compulsory deferred profit-sharing (participation), and company savings plans
as the vehicle for employee share-ownership (PEE). In addition the law of
1994 encouraged companies to make their employee shareholders participate
in the management of the firms (industrial democracy: participation in decision-making).
According to this law employee representation in company boards is compulsory
for companies which are to be privatised (privatisation law of July 19, 1993)
and optional for firms in the private sector, if employees hold more than
5% of the capital.
Other innovations in the new
participation legislation are particularly inspired by the search for economic
policy measures to combat unemployment and declining economic demand.
The law introduces the concept
of a "time savings account" (compte d’ epargne temps) allowing the
allocation of profit sharing bonuses (intéressement) in the form of paid time
off, for a minimum period of six months. Such schemes should enable employees
to accumulate paid leave, and are therefore expected to enhance work sharing
and employment. However, this has not been used much and is mainly used by
higher staff.
In order to stimulate consumption,
measures are included which provide for the unfreezing of sums, within certain
limits, tied up in company savings schemes and in special profit sharing funds
(normally frozen for a period of five years).
Finally the creation of the
"Superior Council of Participation" (CSP) in 1994 illustrates the
importance of the issue of employee (financial) participation to the French
government. The principal objectives and responsibility of the Council is
to watch over the application of financial participation and participation
in management by French firms, co-ordinate all initiatives leading to their
further extension and produce an annual report for the Prime Minister and
the Parliament summarising all developments in financial participation plans
(voluntary and compulsory profit-sharing and company savings plans) and in
wage bargaining in those companies where voluntary profit-sharing agreements
have been concluded.
Cash-based profit-sharing and
deferred profit-sharing agreements must include arrangements concerning informing
of employees about the application of the schemes, and concerning the investment
and the management of the funds allocated to the employees.
With the exception of savings
plans all financial participation plans must be introduced by firm-level collective
agreements, which can be complemented by operation unit or work unit agreements.
Sector agreements are only applied in a limited number of branches, while
group-level participation agreements are more widespread. France is the only
country where deferred profit-sharing is compulsory for companies of a certain
size.
In the French case CPS is also
well developed in the manufacturing sector while in other European countries
these schemes tend to be developed in the newly services sectors. This s higher
participation rate of the French manufacturing sector follows the origins
of the FP-schemes introduction: a way out to overcome traditionally antagonistic
relationships in manufacturing.
1. Cash-based profit-sharing
(Intéressement des salariés de l'entreprise)
Instituted by the Ordinance
of 1959, this scheme, which is facultative for all companies regardless size,
type of business, or legal constitution, is designed to enable employees to
participate in the economic results of the firm. The scheme must be the outcome
of a collective agreement for three years negotiated between the employer
and employee representatives. It must specify the calculation basis for the
profit-sharing, how it is allocated to employees, and arrangements to keep
workers informed.
Tax and social security statute:
- for the employees: profit-sharing
bonuses are subjected to income tax and the general social security contribution
but free of social charges. The bonus is however deductible from income tax
if it is allocated to a company savings plan (PEE) where it is blocked for
5 years.
- for the employer: profit-sharing
amounts are deductible from corporation tax or income tax and exempt from
all taxes, charges or contributions on wages, in particular social charges.
In order to benefit from tax
concessions the scheme must comply with a number of conditions, some of which
have been reinforced or adapted and for the first time explicitly mentioned
in the new law, such as:
- profit-sharing schemes must
cover all eligible employees (collective character)
- the bonuses must contain
an element of risk and be calculated on the basis of measure for results or
performances of the company.
- the maximum proportion of
total gross payroll which can be allocated as profit-sharing is returned to
20% (after having been reduced to 10% or 15% by law of December 7, 1990)
After a spectacular increase
of the total number of cash-based profit-sharing agreements between 1986-1989
(by more than 300%) it slowed down a bit after 1989. However it is still growing
in numbers. Two reasons account for this slowdown: the worsening economic
climate and the substitution effect of the change in legislation, extending
compulsory deferred profit-sharing to firms with more than 50 employees. Consequently,
a number of firms with between 50-100 employees, switched to the deferred
participation scheme. However, according to the proportion of the number of
agreements small firms continue to play an important role in the development
of voluntary profit-sharing.
In 1997 the total amount of
profit-sharing was FF 12.5 billion (9.5 bill. In 1993) for 3 million employees
covered by the schemes, the average bonus per employee being about FF 5,300
(in 1993: 4,300), or 3.1% of the total wage bill of the enterprises with cash-based
profit-sharing agreements. The positive trend in the last years is also reflected
in the rising number of agreements concluded. Although profit-sharing practice
increases strongly with the size of the firm, the proportion of firms with
less than 100 employees is by far the largest.
2.
Compulsory deferred profit-sharing (participation aux fruits de l'expansion)
This compulsory profit-sharing
scheme, implemented in 1967, is a characteristic feature of French participation
system. All firms with a minimum workforce of over 100, and since 1994 of
over 50, are required to institute a deferred profit-sharing fund (RSP), either
according to a legal formula for profit-sharing, or another well defined formula
provided it guarantees workers an amount no less than the legal RSP. Those
companies which distribute a profit share in excess of the legal formula,
are allowed to make a tax free investment of 50% of that supplement. Smaller
companies can adopt the scheme on a voluntary basis.
The accumulated amounts are
blocked for 5 (or 3) years. The scheme must cover all employees with a minimum
length of employment of 6 months. The individual allocation of the RSP to
the employees is subject to a double maximum: the salary serving as the basis
for the calculation of the profit share of the individual employee must not
exceed four times the maximum salary which is subject to social security contributions,
and the actual amount received can be the maximum of one half of this.
As in the case of cash-based
profit-sharing, the adoption of deferred profit-sharing schemes must result
from an agreement between the employer and the employees' representatives.
Since the legislation of 1994 group level agreements can be negotiated, without
the need to be signed by each firm of the group.
In addition to the same tax
and social security advantages as for cash-based profit-sharing:
- employees benefit from the
total deductibility from income tax of their profit share in case of a retention
period of 5 years and up to a half in case of a three year retention period.
- those employers which distribute
a supplementary profit-sharing sum (RSP) in excess of the legal formula are
allowed to make an extra tax free investment provision of 50% (25% in case
of a three year retention period).
The law of 1994, which has
extended the participation system to all enterprises applying the scheme on
a voluntary basis (less than 50 employees), has also increased the tax incentives
for these companies. Employers are allowed to constitute an extra tax free
provision representing 25% (12,5% in case of a three year retention period)
of the profit-sharing fund (RSP) resulting from the legal formula (besides
the 50% or 25% provision for the supplements distributed above the legal RSP).
Deferred profit-sharing is
of course more widely adopted among French companies than cash based schemes
because of its compulsory character. Until 1990 the number of participation
agreements remained rather stable (about 10,000), but has been increasing
in the past years because of the extension of the 1994-legislation to all
firms with between 50 and 100 employees. In 1997 a total of 15,500 agreements
were in operation, covering more than 17,600 companies and covers almost 4.8
billion employees. In 1997 the total amount of RSP was estimated at FF billion
17.3 representing 3.8% of the wage bill of the firms who actually distributed
profits. The sums allocated to the RSP are generally larger than the profit
sharing bonuses paid as a result of voluntary profit-sharing agreements (intéressement).
3.
Company savings plans (PEE)
A company savings plan is a
system of collective savings, instituted by the 1967 Ordinance, to allow employees
to constitute, with the aid of the employer, a portfolio of securities. It
can be introduced on the initiative of the employer or by an agreement with
the employees.
Company savings plans have
been integrated by the 1986 legislation in the unified framework for financial
participation, serving as a privileged support for employee share-ownership.
Since 1986 company savings plans can receive savings from different sources:
- voluntary savings by the
employee, matched by a contribution by the employer (abondement)
- the sums received from compulsory
profit-sharing during and after the retention period
- and sums received from cash-based
profit-sharing.
Tax and social security statute:
The sums allocated to a company
savings plan, if blocked for a minimum of five years, are exempt from social
security contributions up to a limit of half the yearly social security ceiling
for wages. The employers' contribution to the plan (which is obligatory) is
free from income tax for the employee. It is exempted from corporation or
income tax, taxes on wages and social charges for the employer, within a yearly
limit per employee for a diversified investment and a higher amount for an
investment in shares of the employing company.
The law of 1994 increased these
tax advantages by 50%,
Besides the already substantial
tax benefits, the new participation law has particularly increased the tax
advantages for deferred profit-sharing and company savings plans. The beneficial
tax treatment in these schemes has without any doubt contributed to the spread
of financial participation in France.
From the statistics on Participation
in France considerable growth was found for savings plans or investments plans.
This means that shareholdership increases albeit mainly in an indirect way.
Within the statistics of companies with company savings plans it is estimated
that 15% of these firms (about 1,000) have a more or less broad based share
ownership plan as a PEE plan with mainly shares of the own company. Beyond
that it is estimated that another 1,000 firms have employee share ownership
plans, bringing the total on 2,000 firms from the 26,000 with financial participation
systems (about 7 - 8%).
The growth is obviously related
to labour market problems and greater awareness of financial participation
systems as an employee benefit.
There has not been much change
in the structure of financial participation in France since 1996. However
in the use of cash based profit sharing there has been some changes (which
is traditionally a key element for income policy in France). The Law of Robien
and recently of Aubry (1997) introduced the possibility to use CPS as an incentive
for firms to reduce working time. A typical rule in France is that PS schemes
are legally not a substitute for wages. This raises the possibility to use
CPS as a vehicle for reduction of working time without wage cuts while at
the same time keeping employment on the same level.
At the introduction of this
law this exchange of financial participation for working time reduction was
seen as a defensive means for sustaining and restoring employment. In recent
days the law is directed to incentives for job creation. It has some success
because it has a positive impact on employment. This phenomenon explains also
the recent growth in CPS. As elsewhere in Europe also in France a growth of
share ownership schemes is experienced. However, there are no good statistics
on this phenomenon.
A relationship between financial
participation schemes and pension funding is not discovered in France nor
are there any discussions. There is full discussion coming up to develop more
private funds but these will probably not be firm based. The union influence
on Pensions is too large. However, there are a small number of firms that
developed plans based on plan d’epargne in which longer term life insurance
(with possible payments at retirement age) is regulated (Rhône-Poulenc).
Survey of the DARES institute
of the French government reveals that there is agreement in opinion between
management and employee representatives about the reasons and possible impacts
which more or less covers the theoretical expectations of the phenomenon (Fakhfakh,
1997). The survey also noted a productivity gap between non-profit sharing
firms and profit sharing firms of about 5%. Interesting is that this productivity
gap did not exist in companies where employee representatives disagree with
management about the positive impact of profit sharing schemes. An interpretation
would be that a better understanding
between management and employee representatives coincides with higher productivity
and/or profit sharing is really not an incentive for workers in those companies.
The survey also found associations between cash based profit sharing and participative
management tools. CPS is clearly seen as part of a package of commitment tools.
The same survey reveals also
that there exists no relationship between profit sharing and more participative
structures (participating in decision making) in French companies. This might
be interpreted as a typical French result. The traditional more antagonistic
industrial relations in France has not been resolved into a development of
participative structures as might be the case in Germany and the Netherlands.
Generally unions are not in
favour for financial participation systems as compensations systems. In the
seventies unions promoted the idea of self-management but abandoned the idea
in the 80’s almost completely. Share ownership became an issue only in some
defensive cases. In general some greater interest in the phenomenon of share
ownership by trade unions is experienced. Important here is the flow of privatisation.
In fact privatisation seems to be the only way of introduction of substantive
share ownership by employees in France. Also with privatisation the
influence of unions on the phenomenon might be developed. Recently
in case of privatisation and privatised companies with high proportion of
employee share owners the unions try to influence the direction of the negotiations
on bids. Priority is given to more social oriented buyers and the employment
issue is brought in the discussion.
In France employers are inclined
to think of profit sharing as a tool for enhancement of commitment to the
objectives of the firm. This was the most cited argument. Also important is
productivity increase. Of managers in firms with financial participation schemes
42% think that productivity improved. However, only 25% has a tool for assessment
of the effect on performance. Third main argument is to increase flexibility
of wages and to make the attitude to the normal trend of rigid wage increase
more reluctant. Indeed there exists in the French system some real variance
in the total remuneration of 3% with CPS and 4% with DPS.
4.3.2 SPAIN
Like in other European countries Spain has its regulations concerning profit
sharing, share based profit sharing and indirect financial participation via
asset savings for pension funds. Typical for Spain is the regulations and
commitment for the social economy. It is significant that the Spanish government
considers its fiscal support for share-based profit-sharing as one of its
measures favouring small- and medium-sized firms. In fact the development
of firm’s pension plans and the pronounced support for workers’ co-operatives
and labour firms should be looked at in a complementary manner as the main
Spanish plans to improve worker’s financial participation in the firm. The
next report will cover the arrangements and developments of these three forms
of financial participation.
The schemes and their diffusion
1. Profit
Sharing
Although
the current practice and institutionalisation of profit-sharing in Spain is
rather minimal in comparison with other European countries, it should be taken
into account that the 1990s are the inflexion point of that state of affairs.
In terms of regulation a considerable effort has been made in this decade
to change and simplify remuneration structures. In this process, profit-sharing
has moved from being merely one possible wage complement, in an extraordinary
long list, to being one of three main categories of complements to wages that
can be used. As such it has recovered its original variable nature, which
had been long-forgotten through tradition. Such qualitative support has already
seen some fruits through collective bargaining -the instrument of regulation
of profit-sharing favoured by the law-, a trend that could be expected to
continue.
As in other European countries, profit-sharing was present in Spain during
the 19th century. In fact one of the few contemporary books centred
on labour matters was dedicated to it under the title “Profit-sharing. Basis of harmony between capital
and labour[4]”
(Armengol y Cornet 1896). Both the First Republic and the Francoist regime
attempted to promote this form of workers’ participation; in the latter case,
it may have been related to the ideological framework of social-Catholicism
(Mercader Ugina, 1996). However, by the 1960s it had become clear that profit-sharing
bonuses had lost their original variable nature and had become a fixed bonus,
independent of business fluctuations.
Fixed cash-based profit-sharing bonusses
As a regular extra payment whose relation to profits was only to be found
in its name, the presence of fixed “profit-sharing” bonus in firms’ collective
agreements has continued for decades and is still current. It characteristically
takes the form of an extra monthly wage (or some percentage of it[5])
paid annually around March-April[6].
Technically, however, it constitutes an independent complement that is added
to the base wage.
No accurate estimation of the extension of this fairly common practice
is available but there are some grounds to expect its progressive disappearance
through its incorporation in the base wage. Such developments have already
been seen in the 1998 bargaining round, where some collective agreements have
eliminated what was nominally a separate annual component of the base wage,
incorporating it instead to the monthly wage. The coherence of this restructuring
makes it reasonable to expect that it will consolidate and extend in subsequent
bargaining rounds as part of the reorganisation of wage structures intended
by the social actors since 1994. For some years yet, however, the term profit-sharing
will not necessarily mean variable pay in Spain.
Variable
cash-based profit-sharing
The 1994 reform of the labour market (Law 11/1994) has been the main vehicle
of promotion of variable profit-sharing in Spain. The legislator and the social
actors were particularly concerned about adapting the rigid wage structures
to the needs of the enterprise. Thus, among other things, the aforementioned
law tries to promote the use of variable pay, and it specifically mentions
the use of bonuses connected to the results and situation of the enterprise.
This illustrates the intentions of the social actors to develop this type
of remuneration, but no clear guidelines are established on the form profit-sharing
may take. All aspects of introduction of profit-sharing in the firm are left
to the partners involved in bargaining. The only restriction that has been
placed to those involved in the bargaining is that profit-sharing cannot become
“consolidated”, i.e. the additional payment must remain contingent.
The success of this law remains limited: in 1998 cash profit-sharing bonuses
appeared in around 400 firms’ collective agreements and in less than 5 per
cent of sectoral agreements[7]
(Consejo Económico y Social 1999a). However, these figures should be treated
with caution as it is possible they include gain-sharing agreements, also
on the increase in Spain. Although estimates of the extent of profit-sharing
before that date are not available, observation of samples of collective agreements
indicates it has become less rare than it was in 1996 (Costa Reyes 1999).
This is in fact the first year that the Economic and Social Council annual
report reflects on the extension of these bonuses, giving some idea of its
limited importance until this date. In considering the slow expansion of this
form of profit-sharing in Spain it should be taken into account that there
is no specific promotion of cash profit-sharing through tax incentives: to
all effects it is considered part of wages[8].
One of the problems of the silence of the law about the forms of profit-sharing
is that it leaves the door open for abuse. Thus some firms agreements on profit-sharing
are very vague about when and what will be paid[9].
According to Costa Reyes (1999) in most cases the profit-sharing bonus varies
with profits or some other measure of performance but in some it is still
a fixed quantity independently of the degree of achievement of the objectives.
In any case it is common to fix a maximum for the bonus and also to operationalise
it as a proportion of wages.
Scheme 1. Some examples from the service sector of collective agreements
with variable cash-based profit-sharing
Banking sector (article 18):
to calculate the profit-sharing bonus the banking sector collective agreement
favours the consideration of the relationship between returns to shareholders
and wages. Thus, in banking, if ten per cent of dividends were less than
a quarter of the base wage bill, the bonus is a monthly wage; if it were
superior to a quarter and inferior to half the base wages, the bonus is
a monthly wage and a quarter and so on, up to a maximum of 3,57 wages.
CAJAS DE AHORRO[10]
(art. 60): taking as reference half of the
sum of deposits and reserves at 31st of December of the previous
year, the bonus is a monthly wage if results are between 0.5 per cent and
2 per cent of the reference and 1.5 monthly wage if results are above 2
per cent.
INSURANCE SECTOR
(art. 39): Life, illness and death insurance workers receive 0.25 per cent
of net profits; other insurance workers receive 1 per cent. The minimum
is a monthly wage and a half if business revenue is inferior to 2000 million
pesetas or two monthly wages if business revenue is above that figure. The
maximum is 10 monthly wages.
Share-based profit-sharing
The interest of the
Spanish social actors in promoting standard share-based profit-sharing has
been rather limited until the 1990s. The very recent measures promoting it
could in fact be easily attributed to the 1992 Recommendation of the EC. Worker’s
share ownership has obtained since 1996 an advantageous fiscal treatment that
is absent in the case of cash-based profit-sharing.
Shares given by the company, a parent company or other firm of a same group
to the workers for free or at an price inferior to that in the market are
excluded from workers’ income tax assessments if the value of the shares is
not greater than 500,000 pesetas in a year or 1,000,000 in five years, and
if the workers keep the shares for at least three years.
For workers to benefit from this exemption firms must comply with some
conditions imposed by the law (RD 214/1999): first, the offer must be part
of the firm’s general remuneration policy and must contribute to increase
workers’ participation on the firm, i.e. it must be offered to all workers
in the same conditions; and second, the workers must not own already more
than 5 per cent of the firm. It should be noted that the law does not make
necessary the existence of a connection between the profits of the undertaking
and the remuneration in shares.
Also, the income tax law establishes that when the firm and the workers
are in compliance with the terms indicated above, shares given to workers
will not be considered as payments in kind. However, it should be made clear
that such a distinction refers to taxation only. In labour law terms they
are payments in kind and therefore their value cannot amount to more of the
30 per cent of the wage. Payments in kind have an exceptional character and
their establishment its only admissible if there is a law, a collective agreement
or a pact between the parties authorising it; it can never be unilaterally
imposed by the employer.
Regrettably there is no data available on the extension of this practice
either in number of firms or workers.
Attitude of the social partners towards profit sharing
In its concern about the modernisation of remuneration structures through
collective bargaining, the support of government
for cash-based profit-sharing has been merely qualitative but yet noticeable.
Social actors did sign the agreement that was enshrined in the 1994 law and
therefore support the development of profit-sharing as a complement to wage.
However, the actors are cautious. The main employer’s organisations general
guidelines for the 1996 bargaining round did manifest and interest in promoting
the use of variable pay connected to productivity but did not specify a preference
for collective over individual schemes. The equivalent in the union side did
not mention the issue at all.
Cash profit-sharing is a sensitive topic for both unions and employers.
The ideological mistrust that both
individual employers and shop stewards share towards this form of remuneration
is also present in other countries. That, as well as its low extension, seems
to be the main causes of the lack of public debate over profit-sharing. Symbolically,
in recent years profit-sharing seems to have appeared in the press only once:
in 1996 one of the main trade unions, Comisiones Obreras, affirmed that the
proposal of the Labour Counsellor of Catalonia of connecting 30 per cent of
wages to profits was plainly “inadmissible” (El País 1996)[11].
While doing a serious effort at reforming collective bargaining and modernising
the labour regulation stemming from it, nobody seems too interested in promoting
the debate over a secondary but conflictual matter.
A regional employers’ association (FADE) General Secretary stated that,
although he was in favour of profit-sharing, it remained “an unusual topic
for conversation among employers”. He pointed to a clear lack of predisposition
on the part of employers towards such a complex form of participation. In
his opinion it belonged to the less traditional framework of industrial relations
that may be emerging in the last years but it was still something of the future.
It was also recognised that unnecessary problems could arise with unions over
the matter. For all those reasons, he thought the use of profit-sharing was,
for the moment, more likely in firms with problems than in good performers,
excepting maybe the larger firms.
As for the trade unions position, the bottom-line of their perspective
is that the use of profit-sharing as anything but a small add-on on wages
should not be accepted without a greater participation of workers in business
matters.
The limitation of governmental financial support for profit-sharing to
share-based schemes could very easily result from its sensitivity to these
issues. The fact that the schemes do not have to be related to the performance
of the firm should not obviate that there is a great interest in developing
workers’ financial participation. In that sense, it is significant that the
government considers its fiscal support for share-based profit-sharing as
one of its measures favouring small- and medium-sized firms. In fact the development
of firm’s pension plans and the pronounced support for workers’ co-operatives
and labour firms should be looked at in a complementary manner as the main
Spanish plans to improve worker’s financial participation in the firm.
From 1988 (Law 8/1987) the Spanish law has promoted the establishment of
a type of firm-based pension scheme -called “System of Employment” schemes-
which can be considered an indirect form of workers’ financial participation
in Spanish undertakings. Although normally the contributions to the pension
fund are made by the employer, the workers may also contribute to it too.
Although it is not compulsory, the legislation permits that the contributions
of the employer to the fund to be related to the results of the undertaking
and/or to the workers’ contributions (García de Quevedo Ruiz 1999). For the
worker, the contribution of the employer on his/her behalf is considered “payment
in kind” as a deferred wage (Parra Martín-Urda 1999).
There can only be one plan of pensions in a firm; however, through collective
bargaining there may be different schemes for different groups of workers.
Also, firms with less than 250 workers may join with others in order to create
a plan, that will be the same for all of them. Although it contemplates some
exceptions to the rule, in principle there is a limit imposed to the total
annual contributions by or on behalf of a worker. As a consequence of the
government’s and the social actors’ commitment in the 1996 Toledo Pact to
further promote social prevision at firm level, this limit was virtually doubled
at the end of 1997 to a sum of 1,100,000 pesetas.
Taxation regime: The pension funds
themselves are subject to taxation at a 0% rate. For the employer, his/her
contributions to the plan on behalf of the workers can be discounted from
their income for tax purposes. The worker can also discount from their income
the employer’s contribution plus any other made individually with a maximum
set by the smaller of:
-
20 per cent of the net annual income obtained from work and any other economic
activity
-
1,100,000 pesetas
In the case that the worker total contributions are superior to the limit,
since 1997 it is possible to benefit fully from the same fiscal treatment
by discounting the excess within the next five years.
Extension: As it can be seen
in the Table 2 below, by 1998 the growth of firm-based pension funds remained
rather limited and was even surpassed by firm-based insurance plans. Still,
the rise in the limit to the contributions (and deductions from income tax)
may have been too recent to have an impact.
Table 4.4. Social provision firm based funds 1998
|
|
Mill. Pesetas |
% |
Workers |
|
Total social
provision private funds |
16,400,000 |
|
7,708,000 |
|
System of
employment pension funds |
1,750,000 |
10.7 |
350,000 |
|
Collective-employment
life-retirement insurance |
3,100,000 |
19.0 |
550,000 |
Source: García de Quevedo
Ruiz 1999
As part of what was agreed at the Toledo Pact, the government is currently
working on a new law regulating pension funds, particularly centred upon the
protection of the workers in case of bankruptcy of the firm. The disagreements
between trade unions and employers’ associations regarding these funds became
visible in the revision of the proposal of law carried out by the Economic
and Social Council (1999b).
The Council recommended that in the case of plans involving several SMEs,
the plan as well as the incorporation to it of a given firm or its abandonment
should be the result of collective bargaining in the firms and above them.
The employers were critical of this point, stating that the plan should be
able to be a unilateral decision of the employer. While the Council recommended
a special promotion of “System of employment” pension plans through tax incentives,
the employers regretted the lack of neutrality with this instrument.
3. The social economy
In Spain, as in other countries, the principles guiding social economy
firms are the finality of service to the members or the environment, self-management,
democratic decision-making processes and the primacy of persons and work over
capital in the distribution of returns. The Spanish Constitution (art. 129.2)
obliges the public powers to promote the social economy and, in compliance
with this fundamental norm, the commitment of Spanish central and autonomous
governments and the social actors to the development of the social economy
has been a constant.
However, as exposed by Barea and Monzón (1992) an outdated social conception
of the social economy as a temporary and circumstantial solution -enshrined
in the law- has made the competitiveness and growth of these firms difficult
by limiting their access to external funding. This criticism has been accepted
by the legislator: a recent law tries to make more compatible the ethical
values of co-operativism with the achievement of long-term economic success.
The government, as it manifested in the 1997 Luxembourg meeting on employment,
believes in the social economy potential to create employment and, as a consequence,
it occupies a relevant place in the annual plans on employment. Similarly,
the motives cited at the beginning of the new general law on co-operatives
states the belief that co-operativism both eases economic integration in the
labour market and is an efficient and competitive form of economic organisation.
In 1998 the resources budgeted to support the social economy (1,756 mill.
pesetas) had increased a 26 per cent in respect to the previous year and the
incorporation of unemployed persons to the social economy had been eased by
allowing them to capitalise their unemployment benefit in one payment. In
1999 the resources budgeted to support the social economy were 2,021 mill.
pesetas (Ministerio de Trabajo, 1998).
In general, workers’ firms (cooperativas de trabajo and sociedades laborales)
had shown a great capacity for job creation. Despite the increase of unemployment
in the period 1990-1995 these firms were able to increase their employment
figures by a 25 per cent -from 178,000 workers at the end of 1990-, and kept
a similar rate of growth in the period 1995-1998. They are present in all
sectors and particularly in services. They are mostly labour intensive and
they frequently absorb workers with insertion difficulties (young, disabled
and mature workers). According to Barea and Monzón (1992) their employment
is more stable and labour productivity and training provisions higher, and
the reinvestment of profits superior to that in traditional firms.
Table 4.5. Social economy employment figures
|
|
1995 |
1998 |
|||
|
|
No
of firms |
Associated
workers |
Workers non associated |
No
of firms |
Total
employment |
|
Labour Cooperatives |
13,101 |
163,952 |
19,303 |
- |
- |
|
Total of co-operatives |
19,096 |
- |
- |
22,155 |
244,711 |
|
Labour firms |
5,413 |
49,574 |
3,421 |
7,079 |
62,567 |
Source: elaborated from
data proportioned by CEPES and the Ministry of Labour
Labour
cooperatives (Cooperativas de Trabajo Asociado)
Operation: the distribution
of profits between the workers depends on the work done individually. Wages
are an early participation on these profits and are not called wages but advanced
results (anticipos societarios). Some 20 per cent of the profits or co-operative
returns and 50 per cent of the extraordinary profits must be incorporated
to a reserve fund that can never
be distributed between the associates; a further 5 per cent will go to a fund
for training and the promotion of the social economy.
The number of hours per year done by workers that are not associates cannot
be superior to the 30 per cent of the hours per year done by the associates.
The associates have a mercantile relationship (not an employment one) with
the co-operative, however, they can apply to themselves the existing incentives
for the establishment of permanent labour contracts.
Legislation: Apart from the
general Law on Co-operatives (Law 27/1999; before Law 3/1987), they are specifically
regulated by each Autonomous Community which introduces certain degree of
variability. According to the General Law labour co-operatives are those whose
object is giving jobs to their associates, through their personal and direct
effort, full-time or part-time, through the common organisation of the production
of goods or services for third parties
The new Law on Co-operatives tries to promote further the development of
the social economy by lifting some of the restrictions on their operations
and assimilating them more to other firms. It also eases the co-operatives’
constitution and self-government. This law is applicable to those co-ops with
activities in more than one Autonomous Community. Some of the more important
changes are:
-
Constitution of the co-op: the minimum number of associates is reduced
from five to three.
-
Operations with third parties: the possible operations with third parties
are widened.
-
Economic regime: obtaining capital funds is made easier allowing access
to new financial instruments as obligations, special participations and other
participatory titles; it is now possible to create reserve funds that can
be distributed between the associates in given circumstances; extraordinary
profits and some profits obtained outside of the co-operative activity, for
instance through participation in other firms, may be considered co-operative
returns.
-
Structural changes: any firm can become a co-op and viceversa. Fusion of
co-operatives with other mercantile firms will be possible.
It is expected that the new regulation will provoke a further expansion
of this type of co-operatives in the same way that the growth of labour firms
originated (see below).
Incentives for workers buy-outs: they receive some financial support from the state. The condition is
that there is no continuity with previous ownership, i.e. the employer cannot
become an associate or shareholder in the newly formed firm.
Tax regime: Labour coops are
“specially protected” by the law (Law 20/1990). They receive exemptions from
the capital transfer tax. Also, they only pay 10 per cent as corporation tax
(35 per cent normally; 20 per cent for other co-operatives) and have a 95
per cent reduction on the tax over economic activities. Further fiscal advantages
come from the fact that they can consider as costs those funds constituted
as a reserve to compensate future losses.
In the period 1994-1998 co-operatives have experienced a growth of 24,9
per cent (4,424 new firms). The geographical distribution of co-operatives
presents a great concentration in three Autonomous Communities: Catalonia
(5,882), Andalucia (4,498) and Valencian Community (2,539), with 58 per cent
of the total between them.
As for the geographical distribution of their employment, a great concentration
of it can be observed in Andalucia (43,431), Catalonia (42,464), Basque Country
(38,704) and Valencian Community (37,654). The employment in these regions
represents 66 per cent of the total. The sectoral distribution of the 244,711 workers is as follows:
Agriculture: 22,697 (9.3%)
Industry: 72,114 (29.5%)
Building sector: 19,969 (8.2%)
Services: 129,931 (53.1%)
According to further division of economic activities, the greater employment
appears in the manufacturing industry (71,221 workers) followed by commerce
and hotels and catering (63,593 workers).
During the period 1994-1998, the building and service sectors shown the greatest
dynamism in employment creation (31% and 33.2% rates of growth).
Labour co-operatives are the most frequent
type of co-operatives, however, no specific aggregate data on their extension
is available. Data on the annual constitution of these co-ops in relation
to the total (as shown in Table 4) may be indicative of its relevance.
Table 4.6 Total
of labour co-operatives and co-operatives constituted annually, period 1989-1998
|
|
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
|
Labour co-operatives |
1,203 |
964 |
937 |
1,448 |
2,286 |
2,560 |
2,392 |
2,140 |
1,890 |
1,426 |
|
Total co-operatives |
1,931 |
1,729 |
1,583 |
2,186 |
3,146 |
3,304 |
3,106 |
2,814 |
2,555 |
2,036 |
|
Associates labour co-operatives |
8,499 |
6,642 |
6,261 |
8,409 |
12,188 |
13,491 |
12,445 |
10,463 |
9,375 |
7,447 |
|
Associates total co-operatives |
20,998 |
19,308 |
18,540 |
22,091 |
35,700 |
25,091 |
20,096 |
21,729 |
31,422 |
23,950 |
Source: Dirección General de Fomento de la Economía Social y del
Fondo Social Europeo
Labour
firms (Sociedades Laborales)
Definition: firms in which
at least 51 per cent of the capital belongs to the workers. None of the associates
may own more than one third of the capital (except for the possible participation
of the Public Administration that can be up to a fifty per cent). The number
of hours per year done by workers that are not associates cannot be superior
to the 15 per cent of the hours per year done by the associates if the firm
has more than 24 workers; if the firm has less than 25 workers that percentage
goes up to 25 per cent. Temporary workers are not considered for this calculation.
Participation in capital can be of two types: labour type, those shares in hands of permanent
workers, and general type as for
the rest. The firms must constitute an Special Reserve Fund to which 10 per
cent of the profits will be incorporated annually. When selling labour type
shares permanent workers that are not associates have preference over associated
workers, general associates and temporary non-associated workers in that order.
Legislation: Labour firms appeared
in Spain in the 1960s although they did not have specific legal regulation
until 1986. The Law 15/1986 on Labour firms was a response to the fact that
workers’ had become owners of firms in crisis without changing its legal form.
Thus, the law initially envisaged labour firms as a solution to crisis, as
a way in which the workers of bankrupt firms could keep their jobs and become
owners of the means of production. However, since 1997 the law considers these
firms as a possible legal form of the economic organisation of workers’ participation
in the firm.
The Law 4/1997 introduced an important novelty: it allowed firms of limited
responsibility to become a labour firm. Thus, now labour firms can be:
-
Sociedad Anónima Laboral (SAL), with a minimum capital of 10,000,000 pesetas
(previously the only existing type), or
-
Sociedad Limitada Laboral (SLL), with a minimum capital of 500,000 pesetas
Fiscal incentives: Those labour firms
that incorporate 25 per cent of profits to the Special Reserve Fund in a given
year may benefit from a 99 per cent tax exemption from capital transfer tax.
Extension in 1998: At the end of
1998 the number of Sociedades Anónimas
Laborales was 8,867and of Sociedades
Limitadas Laborales 2,212 having shown a joint growth of 26.1 per cent
within a year. Such growth was due to the 367.7 per cent growth of the SLL
(1,748 new firms) whereas the SAL decreased in the same period a 5.5% (282
firms less).
The number of workers –associates and non associates – in SALs was 53,993
and in SLLs 8,574.Thus, their employment presented a net increase of 12.2
per cent in respect to 1997.
The geographical distribution of these co-operatives presents a great concentration
in the following regions: Madrid (1,011), Basque Country (822), Andalucia
(797), Catalonia (744), Valencian Community (611) and Castille-La Mancha (608),
with 64.9 per cent of the total between them. As for the geographical distribution
of their employment, a regional concentration can be observed in the Basque
Country (11,147), Catalonia (8,306), Valencian Community (6,655), Andalucia
(6,477), Madrid (5,949) and Castille-La Mancha (4,805). The employment in
these regions represents 69.1 per cent of the total.
According to further division of economic activities, the greater employment
appears in the manufacturing industry (30,173 workers) followed by commerce
and hotels and catering (11,928 workers).
A dynamic analysis for the period 1994-1998 is as follows:
-
a 30 per cent increase in the number of firms (see Table 6 below)
-
a 23,3 per cent increase in employment with some 11,833 new jobs
-
services (5,805 new jobs) followed by industry (2,890 new jobs) and the
building sector (2,814 new jobs) were the sectors with the greatest generation
of employment.
-
the average number of workers in a firm diminished from 9.4 in 1994 to
8.8 in 1998, as a consequence of smaller size and growth of the SLLs.
Table 4.7 Evolution of labour firms and their employment
1993-1998
|
|
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
No of firms
|
5,069 |
5,419 |
5,413 |
5,309 |
5,613 |
7,079 |
|
No of workers |
48,010 |
50,734 |
52,857 |
52,857 |
55,783 |
62,567 |
Source: Base de Datos de la Economía Social, Ministerio de Trabajo
y Asuntos Sociales
4.3.3 GERMANY
German legislation provides
no incentives for profit sharing per se. There is a considerable body of
regulations designed to encourage employee share-holding and asset accumulation.
This encourages mainly redistribution of capital and employees savings by
investments plans. Part of this acts to encourage profit sharing, albeit not
very strongly. These schemes are regulated through a series of Capital Formation
Laws (Vermögungsbildungsgesetz) and the Income Tax Law. Minor changes in these
laws in 1992 - 1994 cover regulations on investments in building/housing (Bausparen)
and the way premiums are paid. Major changes are found in the latest
Capital Formation Law, September 1998.
1. Employee participation in capital savings
Employees have been encouraged
to participate in their and other company's capital primarily within specific
savings schemes (comparable to The Netherlands). The regulations offers incentives
related to individual workers' savings, to employer contributions to these
savings, and in case where the employers' contribution is the only one made.
Concessions are offered to low earners (single people: up to 27,000 DM; married:
up to 54,000 DM annual tax income) and if the participation is committed
in a specific form of investment for a minimum retention period of 6 years.
The Capital Formation Law of 1998 has changed these figures. It increased
the level of earnings to 35,000 DM (single) and 70,000 DM annual taxable income
(married couple). This means higher coverage.
The savings bonus is 10% on
up to DM 936 in contributions paid into a home ownership savings plan or used
to pay off a mortgage on residential property. Alternatively or in addition
there is a 20% savings bonus on up to DM 800 in employee savings contributions
invested in equities. For workers whose main place of residence is in Eastern
Germany, the bonus is 25% for contributions paid in up to 2004.
In addition the Income Tax
Law enables employees who are offered shares by their employers exemption
from tax and social insurance payments up to a certain maximum tax-free amount
on the condition that enterprises contribute to the acquisition of employee
shares up to a certain percentage of the share value and that shares are frozen
for a period of 6 years (Mozet, 1999).
2. Cash-based profit-sharing
While Germany grants no concessions
to cash-based profit-sharing schemes, they are relatively common in the low
number of firms which also have deferred or share-based schemes. The proportion
of employees covered by the two broad types of schemes are roughly comparable.
Profit shares are considered normal wages and the employer also has to pay
the usual social insurance contributions as a percentage of the amount of
profit share.
In Germany there is no statistics
on financial participation. Recent figures on the number of general profit
sharing schemes are not available (in 1990 about 1.3 million employees were
participating in a profit sharing scheme).
In 1996 the value of employee
savings investments was about 17 bln DM (1996) including employer contributions
(up to 50%) and was made in that year by 2.4 million employees. It is estimated
that half of investments made in a given year is directed to housing investments
(Bausparen). It is estimated that in 1996 2 million employees have stock from
about 2,000 companies with a total value of 20 billion. New estimates show
an increase to 2.3 million in 2700 companies with a total value of 25 billion.
The next table presents an overview of estimates of diffusion of schemes in
Germany. From the sources it can be reported that there is a slight increase
in the number of employees covered. More than 75% of employee participants
are found in publicly held companies. Given the new law a further increase
is expected.
Another expected increase comes
from the larger number of enterprises that is going public. Traditionally
the German Stock Exchange Market is not big. Most, even large, companies are
still closely held private companies. Only recently quite a number of new
enterprises entered the Stock Market. This might be an impetus for the phenomenon
since these are mainly high tech, services companies from which we know that
they offer its personnel more often stock options.
Employee's savings are invested
as agreed with workers or the trade unions in collective agreements. The coverage
is more than 90% of employees that are bound by Collective Labour Agreements.
The social partners has the possibility to develop their own type of scheme.
Existing schemes are usually based on agreements in which among others the
following is regulated: the form of participation (either direct or indirect
via capital fund); the amount, profit-based or not; the way the capital is
funded (employer or employee-savings); retention periods and withdrawal rights.
Table 4.8 Financial
participation schemes in Germany
|
|
Enterprises |
Employees |
Capital |
|||
|
Type of participation |
N |
% |
N (*1,000) |
% |
N (*1,000) |
% |
|
Bonds |
500 |
18.5 |
100 |
4.9 |
800 |
3.2 |
|
Silent partnerships |
650 |
24.1 |
200 |
8.8 |
355 |
1.4 |
|
Indirect partnerships |
400 |
14.8 |
80 |
3.5 |
350 |
1.4 |
|
Stock options |
300 |
11.1 |
100 |
3.9 |
1500 |
6.0 |
|
Employee share ownership |
400 |
14.8 |
1,800 |
78.0 |
21,900 |
87.6 |
|
Co-operatives |
300 |
11.1 |
15 |
0.7 |
45 |
0.2 |
|
Share ownership in closely held companies |
150 |
5.6 |
5 |
0.2 |
50 |
0.2 |
|
|
2,700 |
100 |
2,300 |
100 |
25,000 |
100 |
Source:
Estimates from AGP & GiZ
On several occasions in the
1995 annual economic report and recently with the publication of the Law of
1998 the German government has appealed to the social partners to consider
employee share-ownership and other related schemes as part of their wage-agreements.
Also in new initiatives regarding the employee share ownership is stressed
the possible advantages of that wage policy for employment-growth, a more
equitable income and capital distribution. German government tries to convince
the social partners to encourage the schemes.
The encouragement of employee
participation in enterprise capital is based on the German concept of the
Social Market-economy ("Sozialen Marktwirtschaft") in which economic
democracy is considered to diminish conflicts between capital and labour.
Financial participation is embedded in the long lasting tradition of German
re-distribution policy. Despite this the diffusion of the mentioned schemes
in Germany is not as wished. The situation in former East Germany is even
worse. The German government reports the need for new initiatives from the
social partners which helps to create an environment for private employee
investments to enhance employment growth, and to encourage employee participation
in capital also to improve employee involvement in enterprise. The new Capital
Formation Law was presented with following objectives:
· to promote share
ownership of employees
· improvement of investments
potential and performance of companies
· offering a new acting
ground for agreements on additional income in times where the possibilities
for improvements of basic wages is limited
· improvement of the
retirement basis through capital formation and savings of lower income groups.
Trade union position to the
phenomenon of share ownership is sceptical. In the early seventies the German
Trade Union decided to support no other participation form than co-determination.
Trade unions excepted share ownership only in times of difficulty. However,
there are dramatic shifts taken place in the business landscape. There is
a growing stock mindedness not only of employers but also with members of
trade unions. Practical all large publicly held companies, traditionally covered
by co-determination, has implemented stock options or related share based
profit sharing plans for its personnel. Only in some occasions trade unions
were part of these developments. The rising sector of services and IT with
less trade union recognition heavily experiment with stock options and employee
share ownership. The position of trade unions has been shifting towards a
more pragmatic position. German trade union in one of its documents proposed
the promotion of a more equal distribution of capital through the promotion
of asset development for employees. Certain professional and white collar
unions are in favour of entering this bargaining field. However, main position
of the German trade union will be no trade off between wage bargaining and
financial participation.
Recently trade unions negotiated
and agreed a collective agreement in chemical industry in which the possibility
for company based financial participation plans for retirement funding is
explicitly stated. Besides that the agreement includes the right of employees
to receive an annual bonus to be used for the retirement plan. Also in building
industry similar agreements are developed. In the course of EXPO 2000 German
trade unions started research and discussions on the subject as an input for
EXPO conferences on future of work (Einkommen der Zukunft, 1998; Wilke, 1999)).
German management’s position
is to be described as to provide within the calculated costs an alternative
for fixed wages. Next they view it as good for the internal culture and an
instrument for commitment and binding personnel. German employers federations
are not inclined to see the phenomenon as a bargaining issue.
In the German context a few
developments can be discovered.
· Financial participation
in Germany is traditionally linked to (multi-employer) savings plans for employees
following an approved government regulated provision and less to employee
share ownership at company level.
· There is a (slow)
move towards decentralised arrangement of retirement plans and funding these
plans by company level contributions (both employer and employee) for stocks
or profit related plans. Mainly large companies develop these schemes and
it is thought to be an innovation. Up till now Germany has virtually never
experienced any discussion that covers the link between company based share
ownership and retirement plans.
· There is a growing
awareness at both sides that financial participation might be a new employee
benefit to be employed.
· German trade union
tries to be involved and tries to get a foot in this new bargaining field
· The substance of
share ownership in Germany is too small to have an impact on corporate governance
or industrial democracy
4.3.4. NETHERLANDS
In
the eighties discussions on encouraging PEPPER schemes in the Netherlands
became national. It resulted in a detailed proposal on tax-incentives for
profit sharing. From January 1st 1994 a number of financial participation
arrangements were modified, and some fiscal incentives enhanced in order to
stimulate employers to set up financial schemes and employees to participate
in them (Law Vermeend/Vreugendenhil). It also provides an adequate legal structure
for financial participation in general although the main basis is a saving
scheme or personnel fund.
In
the Netherlands, the variety of profit sharing schemes is limited, certainly
in comparison with other countries, such as the United Kingdom and France.
There are two different profit-sharing schemes for which fiscal incentives
are available: cash-based profit sharing and deferred profit sharing. However,
cash based profit sharing appears to be the prevalent for, of course employers
can take other measures in order to calculate the profit sharing benefit,
and instead of payments they can opt for options on stocks.
Saving
scheme
A
central feature to the 1994 Law is the wage-saving scheme. The wage saving
scheme and premium saving scheme are the most important savings systems practised
by companies. Both schemes were established with the aim to moderate the annual
wage growth. Workers are encouraged to save money, and employers to set up
schemes, by means of fiscal incentives. It is possible to make use of both
schemes at the same time. Savings can be converted in shares. However the
relationship of savings and performance and results (profits) is not direct.
To
encourage participation in profit-sharing, the Government has raised in 1994
the tax free benefit and shortened the retention period. Employers who practice
this scheme need to pay a total charge of 20% (instead of 35% before 1994).
In exchange of payments, the employer may offer the worker an option on shares
of the firm.
Stock
options can be part of a saving scheme and are subject to the same tax-incentives
as the wage saving scheme. Subsequent requirement was that the value of the
options is ‘x’ per cent of the value of the respective shares. Any revenues
on the use of these options is allocated to a special savings account with
a retention period of four years. The amount will be tax free to a maximum
(DFL 1708 in 1999) which amount will be determined yearly by the government.
Until 1998 ‘x’ was fixed on 7,5% but as an answer to the commotion that arose
about the big revenues stock option plans provided for topmanagement, the
government changed the tax treatment of stock options. ‘x’ can now vary from
minimal 4% to 50%, depending on the length of the exercise period and the
intrinsic value of the stock option. Roughly stated the costs for an employee
receiving a stock option with an exercise period of 5 years normally have
more than doubled (from 7,5% to 20% of the value of the underlying share.
The
Dutch government combined this tax measure with a tax relieve in case employees
receiving their stock options through their wage saving scheme. The maximum
is doubled, so if an employee agrees upon using the saving scheme for this
purpose an employer can grant stock options for an amount of HFL 3416 (instead
of HFL 1708) in 1999!
Another
change was already introduced in 1996: before than a total charge of 10% had
to be paid by employers when they make use of the wage saving scheme. This
charge is reduced to 0% provided that the saving sum consists of company stocks
belonging to either the employers' company, or a partnership connected with
the employer.
Diffusion
of schemes
The
total number of employees receiving a cash-based profit sharing benefit has
grown, but at the same time the benefit level has dropped significantly. In
1994, this scheme applied to about 11.5% of all employees, against 7.3% in
1993. The total benefit averaged DFL 2426 in 1994, 5.65% of the average earnings
per hour. This was about 55% lower than the average benefit in 1993. The existing
arrangements do not discriminate between men and women or other categories
of beneficiaries. This however, does not mean that there exists equal participation.
As noted above, the extent of participation depends on several aspects of
which wage levels are the most important. For higher paid jobs, the benefit
is about 1% of total average hourly earnings (non-participants included) and
for low paid jobs less than 0.3%. In December 1994 almost 26% of all workers
took part in wage-saving schemes.
A
quantitative research in 1996 on the nature and number of financial employee
participation (Financial employee participation: Time for Policy!, Netherlands
Participation Institute & Nijmegen Business School, 1996) showed the following
results:
Stock(option)plans
are a limited but fast growing phenomenon.
2.000
companies (4%) have a stock(option)plan. About 125.000 employees are involved
in those plans.
Another
1.500 to 2.000 companies intend to introduce such a plan in the next three
years
Profit
sharing is becoming a mature and common element of employee benefits.
15.000
companies have a profit sharing scheme. This is 27% of the companies with
10 or more employees. About 500.000 employees are involved.
Another
2.000 companies intend to introduce such a plan in the next three years.
Stock
option plans are mostly set up for management and staff
The
greater part (three quarter) of the 2.000 plans are stock-option plans
Only
one third of the 2.000 plans are open for all employees
Stock(option)plans
occur most often in medium- and large-sized enterprises
2%
of the companies with 10 to 49 employees have a stock(option)plan
15%
of the companies with 50 to 99 employees have a stock(option)plan
13%
of the companies with 100 or more employees have a stock(option)plan
The
law Vermeend/Vreugdenhil, that offers fiscal facilities for stock(option)plans
and profit sharing, has not enhanced employee ownership. Salary saving schemes
compete with profit sharing. Even after the introduction of the law Vermeend/Vreugdenhil
on January 1, 1994 many companies have introduced employee ownership without
making use of the saving-scheme possibilities
The
message of the report is that it is time that companies and government start
to make policies on financial employee participation. The research shows a
possible growth of financial participation in the Netherlands. Recognising
the fact that in the Anglo-Saxon countries employee ownership is much more
developed, one also might expect a further growth in the Netherlands. Furthermore,
companies are looking for ways to enhance the entrepreneurial competencies
of their employees. And financial participation fits into a differentiation
of employee benefits in which the differences between efforts of the human
resources are recognised.
Companies
appear to be poor informed about the possibilities of financial employee participation.
Knowledge of the fiscal advantages is not common. Many companies seem to choose
for the least risky and most simple plan: a stock-option plan for higher management
and staff (small, controllable group). Companies probably also choose for
stock-options because of fiscal motives. This means that with the current
most practised plans the possibilities of financial participation to stimulate
Human Resources is insufficiently used. These possibilities are: improvement
of motivation, strengthening of involvement, higher productivity.
Finally,
the research shows that financial employee participation is practised mainly
in companies with well developed institutional participation and participative
management. Meaningful is the role of the works council. It is expected that
works councils will put financial participation plans on the agenda.
Recent
developments
The
Dutch debate on financial participation is dominated by criticism of stock
option plans for top management. Obviously these amounts are hard to accept
especially in a country where the economic success is among others the result
of employees moderating their salary demands. However, criticism on the amounts management earn appear
to result in criticism of the amounts and not the unequal distribution of
these options. Somewhere down the road it became mainstream to introduce financial
participation solely for specific groups in the organization. Topmanagement
is of course responsible for this policy but also the trade unions have a
responsibility. Many trade unions opposed (and some still do) the introduction
of broad based financial participation.
The
attitude of the Dutch trade unions towards financial participation is however
changing. They used to oppose to the idea for different reasons: “Capital
and labour shouldn’t mix”: “They (the employees) must not put two eggs in
one basket”; “Employees need to get control rights because they work and not
because they are owner”; “Will employee-owners stay member of a union?” As
a result of the public debate on stock options for topmanagement unions started
to realise that their normative way of thinking on financial participation
gives the board of directors the freedom to act on financial participation
as they think is right (stock options for a select group). The union ‘De Unie’
started the trend, demanding ‘shares for employees’ in the negotiations on
collective labour agreements with Philips. Soon after that in the banking
sector and several other sector unions addressed this issue.
4.3.5. UNITED KINGDOM
There is a long tradition of
financial participation in the United Kingdom, originating in the nineteenth
century. Since 1978, significant growth has been encouraged in legislation
granting tax concessions to Inland Revenue approved profit sharing and employee
share ownership schemes. The legislation is permissive, in that it is designed
to offer tax incentives which employers and employees can take up on a voluntary
basis.
Briefly, approved profit sharing
schemes were introduced in 1978 followed by Save‑As‑You‑Earn
(SAYE) share option schemes in 1980. The 1984 Finance Act introduced tax relief’s
for discretionary share option schemes and statutory employee share ownership
trusts (ESOTs) were introduced in 1989. The 1987 Finance Act introduced tax
relief for employees covered by a registered Profit‑Related Pay (PRP)
scheme. In addition to the initiating legislation, subsequent Finance Acts
have amended the original rules, further encouraging the development of the
various schemes.
In the 1995 Finance Act significant
changes were made to the eligibility criteria for all five of the United Kingdom
tax-relieved employee financial participation schemes. The changes were intended
to remove the previous restrictions on the inclusion of part‑time employees
from the schemes and to ensure that the tax relief’s give equal treatment
to part‑time employees, most of whom are women. The new rules ensure
that part‑time employees are ‑ for the future ‑ eligible
to participate in those schemes.
There are several types of
statutory profit sharing, share ownership and share option schemes as well
as many non‑statutory schemes.
1. Profit Related Pay (PRP)
PRP schemes link a part of
employees' pay to changes in the profits of the business they work for. The
1987 Finance Act introduced income tax relief for employees covered by a registered
PRP scheme. The 1989 Finance Act made further improvements to the tax relief
available. Following the Finance Act 1991, all PRP is eligible for tax relief
up to the point where it is either 20% of employees' total pay or ,4,000,
whichever is the lower. The tax relief is available to employees of private
sector employers who must register their PRP schemes with the Inland Revenue
before they come into operation. The improvement in 1991 was developed due
to a lack of interest of employers. Since then the number of PRP schemes increased
about ten-fold.
Profit-Related Pay has been
aimed at wage substitution. To overcome understandable reluctance on the part
of employees to make this concession, generous tax benefits were an integral
part of the scheme.
The costs of setting up a registered
scheme are tax deductible. Separate schemes can be set up for any unit producing
separate profit and loss accounts, but must cover 80% of those employed in
any unit covered by PRP. All eligible employees must benefit on similar terms.
At March 1996 there were 12,740 live registered PRP schemes covering 3,569,000
employees.
The evidence to date suggests that firms
have used PRP in three sets of ways. One, is to provide a profit share to
supplement existing levels of remuneration. Most early PRP schemes took this
form, and involved conversions of prior-existing profit sharing schemes. PRP
therefore made little impact on the overall incidence of profit sharing in
the UK in the early years. The second use of PRP has been as a substitute
for an annual pay increase. Net employee pay may be increased at no cost to
the firm. The third, known as ‘salary sacrifice’, substitutes PRP for part
of current pay whilst maintaining net take-home pay at pre-scheme levels.
In effect the firm rather than the employee benefits from the tax concessions.
In practice the benefits tend to be shared, with employees receiving a net
increase in take-home pay and firms a reduction in wage costs. The use of
the various dampening measures mentioned above means that employee pay can
be maintained at stable levels whatever the movements in profits (Pendleton,
1999).
Initially most schemes took the form of
profit bonus schemes but after the improvement in tax concessions ‘salary
sacrifice’ became the most popular. Since the degree of risk and flexibility
in employee salaries in these types of schemes was minimal in practice, PRP
functioned as a blanket tax subsidy for any firm which cared to set up a scheme.
At around the same time as public criticism of executive share option schemes
mounted, PRP schemes came to be seen as an expensive tax ‘dodge’. By the late
1 990s PRP was forecast to lose the Exchequer around a billion pounds each
year in lost tax revenues, and in November 1996 it was announced that PRP
would be phased out from 1998. The size of the PRP payment attracting tax
relief was to be reduced in 1000 pound steps so that by the millennium no
tax relief would be allowable.
2. Employee share schemes
Approved employee share schemes
(those approved by the Inland Revenue) provide significant advantages. They
allow employees to receive shares free or at a reduced price from their employer
without paying income tax on the value of those shares. The costs a company
incurs in setting up approved schemes are also tax deductible.
There are three types of approved
share schemes. The first two provide that all employees of a company with
over five years' service must be allowed to participate by the employer. If
the employer wishes, new employees or employees with fewer years' service
may be able to participate on similar terms. In the Finance Act 1995 a significant
change was made to the rules governing the eligibility. The legislation aims
to ensure that part‑time workers are not excluded from schemes. Previously,
the rules stated that all full‑time employees with five years' service
had to be able to participate in the schemes. The new rules require that all
employees with five years' service must be able to join, regardless of hours
worked. The third scheme allows a company to restrict participation to selected
employees (discretionary share options schemes).
The three types of schemes
are:
a)
Save‑As‑You‑Earn
(SAYE) Share Option Schemes (Finance
Act 1980).
Employees are offered
an option to buy shares, at a fixed price and often at a discount (up to 20%),
in three, five or seven years time. Employees wishing to participate in the
scheme pay fixed monthly contributions for five years to a SAYE savings contract.
Upon maturity of
the SAYE contract, the proceeds may be used to purchase the shares at the
price fixed under the option. Alternatively, the savings, which will have
earned tax‑free bonuses or interest, may simply be paid back in cash,
if the employee so wishes. In the Finance Act 1991, maximum monthly savings
were increased to ,250 (from ,150 a month). The bonus earned on the savings
is income tax free, as is the benefit of the discount and any gain realised
on the option when it is exercised. Proceeds from the sale of shares, however,
could be subject to capital gains tax if the gains in any one year cross the
individual's threshold (currently £6,000).
The main benefit
of the scheme for employees is that they are not required to pay income tax
on the favourable purchase price of the shares. Nor are they required to pay
income tax on any increase which may occur in the value of those shares during
the period from the granting of option to the actual purchase of shares. The
Finance Act 1991 makes it possible for shares to the value of £3,000 obtained
in this way to be transferred directly into a single company Personal Equity
Plan (PEP). A PEP is a way of investing in shares without paying tax on the
dividends or capital gains. Single company PEPs are a type of PEP which invests
only in the ordinary shares of a single UK or EC company. As of April 1999
PEP’s were superceded by Individual Savings Accounts (ISAs)
By 1996 there were
1,500 approved SAYE schemes. The total number of employees with options is
not known, but must be considerable since in the 1996 550,000 employees were
granted options with an initial value of 1.6 billion in that year. The yearly
numbers seem to be stabilising in the last decade. As of Novmber 1998 there
were 1201 live schemes, with 1.25 million participants altogether. Averagre
grant if shares per employee was £ 2,700 (HM Treasury, 1998)
b)
Approved Profit
Sharing Schemes (share-based)
Here, a company sets up a trust
and makes payments to it, typically from profits. Shares are appropriated
to individual employees free of charge, but are held by trustees appointed
by the company. The employees must agree to leave the shares with the trust
for at least two years; and if the shares are left with the trust for a total
of five years, there is no income tax to pay. Employees may take their shares
out of trust after the first two years and sell them ‑ but in this case
there may be income tax to pay. Special rules reduce this tax charge where
shares are taken out of trust because of "compassionate" reasons
(such as retirement, or ceasing to work for the company because of injury,
disability or redundancy).
Shares obtained in this way
can also be transferred directly into a single company PEP. All employees
who meet the statutory requirements must be able to participate in the scheme
on similar terms. The definition of "similar terms" will ultimately
depend on scheme rules, but, in short, employers can vary the level of share
allocation according to the length of service or in proportion to earnings.
The company can set the payments
it makes to trustees against profits, providing the payments are used by the
trustees to buy shares or are necessary to meet the expenses of the scheme.
Since the scheme was started
in the late I970s about 1200 schemes have been approved by the Inland Revenue.
Of these about three-quarters are thought to be still ‘live’. The number of
employees benefiting from share allocations during the 1990s has ranged from
just over 600,000 to nearly 900,000, and the average value of shares distributed
has been between 400 and 500 pounds (Inland Revenue 1997). As of November
1998 there were 859 live schemes with 1 million participants with average
distribution per employee of £680. Not surprisingly this form of profit sharing
is found in firms with issued share capital, and therefore tends to be found
in larger firms. In fact, this type of scheme is especially found in the Finance
sector: one survey conducted in the mid-1980s found that 50 per cent of Finance
sector firms had such a scheme (Poole 1989).
c.
Company Share Option Plans (CSOP) (formerly Discretionary Share Option Schemes.
In addition to the all‑employee
schemes, the Finance Act 1984 introduced tax relief for approved discretionary
share option schemes (also known as executive share option schemes). This
type of scheme allows a company to offer employees selected at its discretion
an option to buy shares in the company at a fixed price. Where an option is
held for more than three years, but less than ten, employees are not liable
for income tax on the gains they realise when the option is exercised. There
must be an interval of three years between the exercise of options to qualify
for tax relief. If employees decide to exercise the option within three years
they are liable to pay income tax on any increase in the value of the shares.
Next capital gains tax is liable on growth in value at time of excercising
the options. These schemes are implemented by companies to recruit and retain
key managers and employees, and provide an effective incentive to working
for the prosperity of the company.
By the end of March 1996, more
than 6,000 discretionary share option schemes had been approved and were still
being used. Income tax relief’s on the grant and exercise of approved executive
share options were withdrawn with effect from July 1995. The numbers of approved
schemes decreased accordingly. As of November 1998 there were 3,769 live schemes
with 300,000 participants with average grant of £5,700 (HM Treasury, 1998).
Non‑statutory
profit‑sharing and share option schemes
In addition to the statutory
schemes described above, there are many profit‑sharing and share option
schemes in existence which are not approved by the Inland Revenue. In the
case of such schemes, any bonuses paid in cash are subject to income tax and
national insurance payments in the same way as ordinary salary payments. In
those cases where employees receive company shares, the value of the shares
is taken into account as salary for income tax and national insurance purposes.
Comparison of the growth rates
of the two main types of share option schemes provide interesting insights
into company priorities in remuneration policy. SAYE schemes are more common
than deferred share based profit sharing schemes but the pattern of development
is not substantially different. By contrast, discretionary schemes have grown
at a much higher rate. Over 6,500 schemes have been introduced since 1984,
an average of over 540 new schemes each year. The average initial value of
discretionary options has been much higher. In most years this figure has
exceeded 24,000 pounds compared with 2-3,000 in SAYE schemes. The participation
rates of eligible employees is much higher in discretionary schemes: over
90 per cent compared with 20 per cent (see Pendleton and Robinson 1999). However,
the proportion of eligible employees is much smaller in discretionary schemes:
9 per cent compared with over 80 per cent in SAYE schemes. The inference that
might be gained from this comparison is that many companies have attached
rather more importance to executive reward packages than developing broad-based
employee share ownership schemes.
The characteristics of firms
with SAYE option schemes are clear. Besides having a share capital, they tend
to be large, multi-site, UK owned firms and to have strong positions in their
product markets (Poole and Whitfield 1994). They also tend to be more participative
than firms without stock option schemes, and have a variety of mechanisms
for employee involvement (Pendleton 1997; also Poole 1988). SAYE schemes tend
to be more evenly distributed between sectors than deferred profit sharing,
though they are especially common in financial services. Less is known about
the distribution of discretionary schemes since research interest has focused
upon all-employee schemes. However, the distribution between size of company
seems to be similar to all-employee share-based schemes (see Baddon, Hunter,
Hyman, Leopold and Ramsay 1989).
3. Employee Share Ownership
Trusts (ESOTs)
ESOTs provide a further means
in which shares can be transferred to employees. There can be statutory or
non‑statutory ("case‑law") ESOPs.
Under the statutory scheme,
companies set up a trust which acquires and distributes shares to employees.
The trust is responsible for buying and selling the shares and for distributing
them to employees, either direct or through an approved profit sharing scheme.
Important changes were introduced in the Finance Act 1994 easing two of the
conditions applying to statutory ESOTs (sometimes known as ESOPs) and are
described below.
Payments by a company to an
ESOT qualify for corporation tax relief provided certain conditions are met.
In addition, the sale of shares to an ESOT may also qualify for capital gains
tax relief, and the costs an employer incurs in setting up an ESOT are deductible
for corporation tax.
Some companies prefer to implement
non‑statutory or "case law" ESOTs. While company contributions
under such schemes may qualify as deductions for corporation tax purposes
‑ if the contributions fulfil certain conditions ‑ they do not
attract all the reliefs which are available to a statutory ESOT. "Case
law" ESOTs are much more numerous than statutory ESOTs. Their rules are
negotiated with the tax inspector, giving employers the flexibility to adapt
schemes to the particular needs of the company and its employees.
A significant development since
1989 has been the growth of the use of ESOTs in medium‑scale privatisation.
It has been estimated that there have been about forty of these.
Assessment of the
development of ESOP’s
The merit of ESOPs is that
they provide a low-cost, low-risk method for employees to acquire substantial
portions of equity in their employer. However, few companies have gone down
this route. A variety of reasons can be found for this such as unwillingness
of owners to pass on their companies to their employees and the reluctance
of banks to provide financial assistance to employee-owned enterprises. A
further problem with statutory ESOPs in particular is the perceived inflexibility
of the requirements for Inland Revenue approval (though these were relaxed
somewhat in 1994). Recently hoever there is an increase in numbers. This emanates
from th relaxation of ESOP legislation which allows firms to use a statutory
ESOP (or QUEST) to support SAYE schemes in conjunction with a revision to
accounting regulations which in certain circumstances means that firms can
set internal financial transfers against corporation tax. The firms taking
advantage of this are large public companies. This is viewed as a loophole
and is likely to be closed by the government soon. Currently there are about
300 statutory ESOP’s.
Precise numbers of case-law
ESOPs are difficult to calculate since these schemes do not have a specific
legal identity, and most are subsumed in the figures for approved profit sharing
schemes. Most observers believed there to be between 50 and 100 ESOPs in the
mid-l990s though this number is now likely to be smaller because many ESOPs
have now been sold to ‘conventional’ firms. The situation is complicated further by the establishment of employee
benefits trusts by many large companies to buy shares on the open market to
support existing SAYE and discretionary share option schemes. These are sometimes
referred to as ‘unapproved ESOPs’ as no tax breaks are sought. Whether they
should be viewed as ESOPs at all is open to question as their operation is
primarily focused on meeting insurance and legal requirements rather than
extending industrial or economic democracy per se (see Pendleton, MacDonald,
Robinson and Wilson 1995).
In addition to initiatives
involving the Government, a myriad of independent organisations and private
companies provide information, advice, guidance, consultation, education and
research on financial participation schemes, as well as promotion and publicity.
In the UK, with certain exceptions, the provision of information to, and consultation
with, employees is not determined by legislation but by voluntary agreement
between employers and their employees.
All but one form of financial
participation currently in operation in the UK has been supported by legislation
passed by the Conservative Governments of 1979-1997, and clearly these Governments
were strong supporters of profit sharing and financial participation. Although
the other main political parties in the UK did not share the same sentiments,
they have nevertheless been broadly sympathetic to the financial participation
programme. The Liberal Party has long advocated profit sharing, and the 1978
deferred profit sharing legislation owed much to Liberal pressure on the minority
Labour Government. The Labour Party in the past has displayed agnostic attitudes
towards financial participation -neither strongly for or against it - though those on the left of the party have been suspicious
of company motives for using profit sharing and share ownership schemes. More
recently, the logic of the party’s flirtation with ‘stakeholder capitalism’
has implied more positive support for financial participation. Providing employees
with a share in company profits seems a good way of rewarding this particular
group of ‘stakeholders’, and indeed a key member of the Labour Government
elected in 1997 has argued that ‘ideally all employees should have shares’
(see Pendleton and Robinson in Pendleton and Perotin, 1999). However, three
features of the Labour Party’s recent approach have differed in tone if not
in substance from that of the Conservative Governments. One, they have been
more reluctant to selective financial participation schemes and ‘soft’ incentive
schemes for top executives. Two, they have been critical of the level of tax
relief for Profit Related Pay and for executive share options (and as such
these schemes are not profitable any more). Three, they have suggested that
greater use should be made of collective employee trusts to counteract the
current tendency for employees to sell their shares once they acquire full
ownership of them. It has also been suggested that lower rates of capital
gains tax might be linked to long term ownership of shares, though this is
unlikely to affect most employee shareholders (Pendleton and Robinson in Pendleton
and Perotin 1999).
Employers organisations have
been broadly supportive of profit sharing and share ownership initiatives
by government though on occasions they have been critical of a perceived lack
of flexibility in scheme design. Most managers have also supported the use
of profit sharing and employee share ownership. Mansfield and Poole found
that 70 per cent of managers believed SAYE share option schemes to be a good
idea, and even higher proportions supported the use of cash and deferred profit
sharing (1991). Trade unions, by contrast, have traditionally been suspicious
of financial participation on the grounds that it transfers risk to employees,
undermines collective bargaining and provides little scope for employee involvement
in decision-making. Most unions, however, have no specific policies on profit
sharing and employee share ownership, and their general approach has been
viewed as one of disinterest (Baddon et al 1989: 45-48). Recently the main union confederation - the Trades Union Congress - has taken a more positive view of financial participation, noting that
it “welcomes moves to give employees a means of sharing in company prosperity”
with the provision that schemes are open to all employees and that their design
and introduction are subject to consultation with the workforce and its representatives.
This follows a policy shift in some constituent unions towards a more favourable
view of financial participation. At the 1987 annual meeting of the Trades
Union Congress the unions representing staff in the Post Office and British
Telecom successfully proposed a motion recognising the merits of employee
share schemes as a form of ‘social ownership’ (see Pendleton 1992: 229). On
the whole, white collar unions have been more receptive to the introduction
of financial participation than predominantly manual unions. Some have even
taken the initiative in proposing schemes.
It is noteworthy in this context that the UK Workplace
Industrial Relations Survey data suggests not merely an association between
trade union-based participation and financial participation but also with
other forms of employee involvement and participation, such as quality circles
(see Pendleton 1997: 115). However the evidence overall suggests that there
is little direct relationship between
trade union participation and profit sharing and share ownership. The positive
relationship between trade unionism and employee financial participation stems
from the broad tendency for firms with collective bargaining also to be those
in which other ideas for extending employee involvement are encouraged (Poole,
1989).
Evaluating the use of schemes
in the UK so far, there is little evidence that either the design of the UK
schemes or their operation in practice spread risk to employees to any significant
degree. Participation in share option schemes and deferred profit share schemes
is voluntary and, in the case of SAYE schemes, employees can choose not to
exercise their option should share value fall after the option has been taken
out. On the surface, Profit-Related Pay - which can link a portion of ‘core’ pay to profits - appears to transfer risk to employees but in practice
this tends not to occur. Many schemes are introduced to provide tax-free pay
and to achieve reductions in the rate of growth of labour costs, rather than
to link remuneration levels to variability in profits. To secure employee
consent to changes in their terms and conditions of employment it is often
necessary for the degree of risk to be minimised.
Next, the UK approved schemes
appear to be more flexible in operation than in France, where legislation
provides strict formula on the calculation of the share of profits to be passed
to employees, or Italy, where management-union agreements use a range of performance
indicators to allocate profit shares. This reflects the emphasis in the UK
on the use of financial participation as a management tool, rather than as
a mechanism for income or capital redistribution. Accordingly, within the
statutory frameworks the operation of schemes is reserved to firms themselves.
In most cases, financial participation schemes are not negotiated with trade
unions, and it is not required that the consent of employee representatives
be secured before schemes are introduced.
4.3.6. IRELAND
Prior
to 1982 employee shareholding or cash based profit sharing schemes were apparently
a rarity in Ireland. From the late
1970s individuals who favoured the establishment of wide spread employee shareholding
argued that government intervention in the form of tax
concessions
was essential to promote the growth of these schemes. The 1981 Fine Gael/Labour coalition programme for government included
a proposal to exempt from income tax any shares issued to workers under an
employee shareholding scheme.
The
Finance Acts of 1982, 1984 and 1986.
The
Finance Act of 1982 and subsequent amendments mark the entry of government
into the field of employee financial participation.
Provisions in the Act relating to employee shareholding closely followed
those of the UK Finance Act of 1978. Like
its British counterpart the Irish legislation was designed to encourage the
voluntary and widespread
adoption of share based profit sharing.
Success of this project it was believed might
encourage
a positive alteration in employee behaviour issuing in improved industrial
relations, productivity and co-operation
To that end, government offered tax concessions for companies and their
individual employees. However such concessions would only be granted to companies
establishing approved schemes. These
were share-based profit sharing or employee shareholding schemes which met
certain government requirements.
Conditions
of approval: The company seeking approval
for its profit sharing/employee shareholding scheme must first apply in writing
to the Revenue commissioners enclosing relevant details. Approval will be forthcoming if the scheme
meets the requirements listed below.
The
Trust: The company must establish
a trust which will acquire shares on behalf of participating employees. Trustees must be resident in the state and
will be required to maintain necessary records, e.g. the amount of shares
allocated to individual participants. They
will also be required to pay over dividends or other moneys to participants,
act on their
instructions
and inform them of their taxation liabilities.
Participant
Eligibility: Participation in approved
schemes must be open to all full-time employees and all employees must be
eligible to participate on similar terms.
This definition of eligibility has since been amended by the Finance
Act of 1997. Approved schemes must
now also be open to the inclusion of part time employees. However if the amount of shares
appropriated
to an employee were to vary with the level of remuneration the legislation
did not regard this as incompatible with participation on similar terms.
Participant
Shares: Shares issued to participants in approved employee shareholding schemes
must conform to a variety of requirements.
First, shares must form part of the ordinary share capital of the company
or its parent company. Second, they
must be shares of a class quoted on a recognised stock exchange. Third, they must be fully paid up,
non-redeemable,
and free of any restrictions other than those which attach to all shares of
the same class. In short the shares
must carry the same rights and privileges attaching to shares of a similar
class held by conventional shareholders.
Finally, closed or private unquoted companies were not precluded from
establishing approved schemes, provided the Revenue Commissioners were satisfied
with their method of share valuation.
The Operation of Approved Schemes.
Company
Contributions: First a trust is set
up and trustees appointed. The company
then passes a sum of money, its profit sharing contribution, to the trust. Trustees use this money to purchase shares
in the company on behalf of all eligible employees. A company can shorten this
procedure by passing directly to the trust a block of its own newly issued
shares as its profit sharing contribution.
Share
Distribution: Once trustees have purchased
or received a block of shares from the company, they must be credited to blocked accounts of
individual participants. The criteria
for allocation, equally dividing the block of shares among eligible employees
or varying the amount according to length of service or levels of remuneration,
is in the main a company
decision. Shares are not immediately released or distributed
to employees who must, under the terms of the Act agree to their retention
by the trustees for a minimum period of two years. Beyond the obligatory retention period, employees
can instruct trustees to release, sell on their behalf, or retain their shares.
Employees who instruct trustees to sell or transfer shares to their
name will be liable for income tax. The
extent of this liability will vary inversely with time elapsed from the end
of the retention period. Maximum tax advantage is with participants
who allow trustees to retain their shares for a certain period from the date
they were first acquired by the trust. Beyond
this period, shares held in trust are automatically released or transferred
to individual employees free of any liability for tax though they may be liable for capital gains
tax. Employees now become shareholders in their own company, and enjoy the
rights and privileges of conventional shareholders.
While
the mandatory retention period remains in force the automatic release date
when employee shares will be free of tax has been gradually brought forward. Under the 1982 Finance Act the automatic release
date was 7 years from the time the shares were first acquired by the trustees
on behalf of eligible employees. This
was reduced to 5 years by the 1986 Finance Act and was further reduced to
3 years by the Finance Act of 1997. Apparently
the expectation is that these amendments will increase the attractiveness
of the
schemes for employers
and employees and so promote their widespread adoption.
Tax advantages for companies
and employees:
A
company that establishes an approved profit sharing/employee shareholding
scheme is allowed to deduct the value of its profit sharing contribution,
be it in cash or its equivalent in newly issued shares, from its taxable income. This concession is subject to certain conditions.
Under the provisions of the 1982 Finance
Act, only contributions up to a maximum of 20% of trading profit less deductions
and losses were tax deductible. Furthermore the total shares acquired by trustees
for an individual employee must not exceed £1000 per annum. These concessions underwent generous modification in the Finance
Act of 1984. Company contributions
up to 100% of trading profit less deductions and losses were now tax deductible.
The
limitation on the market value of the shares acquired for an individual employee
followed a more erratic course. As
we have seen under the 1982 Finance Act the maximum share allocation to an
individual employee was limited to £1000. This was increased to £5000 in the Finance Act of 1984.
However
in 1992 when it appeared likely the government would withdraw all tax concession
to these schemes as a saving to the exchequer, lobbying by the Irish Business
and Employers Confederation IBEC and the Irish Congress of Trade Unions ICTU
averted this outcome. Instead the
government reduced the maximum employee share allocation from £5000 to £2000.
With a new government in office the Finance Act of 1995 increased the
employee share allocation from £2000 to £10000.
Some
examples of the larger Irish companies operating Approved Profit Sharing Schemes
would be the Bank of Ireland, Guinness Ireland, Waterford Wedgwood and the
tobacco concern P.J.Carroll. The Revenue
Commissioners estimate that the 292 APSS cover approximately 141,350 participants.
Given the Revenue Commissioners method of calculation it may tend to
overestimate the number of participants involved in these schemes.
Recent
Developments in Financial Participation.
Since
the early 1990s government policy towards State owned companies has altered
in favour of increased commercialisation and privatisation. One aspect of this change in policy was a provision
for employees of state owned companies to obtain shares in the company that
employed them in the event of partial or full privatisation. The 1997 Finance Act contain provisions to
facilitate this outcome though the legislation can also be applied to
privately
owned companies.
Table 4.9 Growth in the number of Approved Schemes 1982-1999
|
Year ended 5th April |
Number of Approved Schemes |
Limitation of the Market
Value of shares for the individual employee |
|
1983 |
0 |
£1,000 |
|
1984 |
2 |
£5,000 |
|
1985 |
6 |
£5,000 |
|
1986 |
7 |
£5,000 |
|
1987 |
13 |
£5,000 |
|
1988 |
18 |
£5,000 |
|
1989 |
18 |
£5,000 |
|
1990 |
23 |
£5,000 |
|
1991 |
23 |
£5,000 |
|
1992 |
11 |
£2,000 |
|
1993 |
9 |
£2,000 |
|
1994 |
4 |
£2,000 |
|
1995 |
8 |
£10,000 |
|
1996 |
27 |
£10,000 |
|
1997 |
37 |
£10,000 |
|
1998 |
32 |
£10,000 |
|
1999 |
54 |
£10,000 |
|
Total |
292 |
|
Source: Figures supplied by the Revenue Commissioners.
Employee Share Ownership and
the Finance Act 1997.
The
1997 Act introduces the concept of an Employee Share Ownership Trust (ESOT)
to enable share to be acquired, held and allocated to employees. The ESOT can raise a loan or borrow to acquire
shares in the company that established it. This is very similar to the American leveraged Employee Stock Ownership
Plan (ESOP) which can borrow money for the purchase of employer securities
or shares.
Conditions
for ESOT approval: At the time the
Trust is established the company must be an Irish resident company and cannot
be under the control of another company.
Indeed shares in the founding company cannot be acquired by the trustees
at any time after the founding company falls under the control of another
company e.g. a take-over. Share purchased
or received by the ESOT must form part of the ordinary share capital of the
company.
Finally
employees or directors having a material interest, that is 5% of ordinary
share capital, are excluded as beneficiaries of the scheme.
Operation
of an Approved ESOP:
(1)
Employees and their trade union take part with the employer in the establishment
of an ESOT.
(2)
Once established the ESOT can take out a loan, guaranteed by the participating
company, or receive cash contributions from the company which are tax deductible.
However there are three alternative trustee models allowed under the
legislation. The first model provides for
employee control with the majority of
trustees being employee representatives. A second model allow for a balance of power
between the employer and employee, while the third allows for a majority of
management appointees. All models
must
have one professional independent person
approved by the Revenue Commissioners.
(3)
Using the proceeds of a loan the ESOT purchases shares in the company.
(4) The company can
make a tax deductible cash contribution to an associated Approved Profit Sharing
Scheme APSS. (see 1982 Finance Act above)
(5) The APSS passes
this contribution to the ESOT in return for a block of shares in the company.
In this way the ESOTs stock of shares is reduced.
(6)
The contribution from the APSS
allows the ESOT to meet the first instalment due on loan. However the company may need to make cash contributions
directly to the ESOT. An example would
be a shortfall in loan repayments or to enable the ESOT to purchase shares
from departing employees. Under the
1997 Act companies can require all shares held by departing directors or employees
to be sold back to the company.
(7)
The APSS allocates the shares bought from the ESOT into the names
of individual employees.
In
Ireland at present there is only one approved ESOT in operation. This is located
in the formerly state owned but now partially privatised telephone company
Eircom.
Save
as you Earn (SAYE) and the Finance Act 1999.
Under
the Act employees will be given the right to buy a certain number of company
shares at a fixed price at a particular time.
These shares will be bought
using money the employee has saved under the SAYE arrangement. Not only will the price of the shares be fixed
at the time the employee begins saving but the price of the shares may be
discounted by an amount below the market value to a level approved by the
Revenue Commissioners. The scheme
will be established by the employer but must be open to all employees on
similar
terms. SAYE schemes will require approval
from the Revenue Commissioners.
Employer
and Trade Union Responses to Financial Participation.
Government
haste to effect its pre election commitment on financial participation may
explain the absence of consultation with either the employers or trade unions
prior to the passage of the 1982 Act.
Nevertheless in 1984 both parties were invited by government to submit their
views on the measure.
The Employer Response:
As
the Federated Union of Employers (now IBEC) had not developed a policy on
the topic it conducted an attitude survey among its corporate members so as
to reflect their views in its discussions with government. Over half the respondents believed such schemes
could improve company performance and industrial relations and so favoured
the development
of
suitable schemes. A slightly smaller
majority wished the FUE to support the concept. Possible obstacles cited by respondents to the establishment of
the schemes were, union opposition, worker distrust, the difficulty of educating
employees concerning the schemes operation , the obligation to disclose company
financial information, dilution of ownership and unfavourable reaction of
existing shareholders.
Reviewing
the findings of its survey the FUE was certain that the majority of family
owned businesses would not be interested in developing profit sharing schemes.
Profit sharing it believed was only a useful motivator at senior management
level. Finally, the official attitude adopted by the
FUE regarding the schemes was hardly enthusiastic. The organisation regarded an entirely voluntary
development of these schemes within individual companies as acceptable.
It was flatly opposed to any element of compulsion in their
establishment.
Though the schemes were acceptable to the National Executive, it was not prepared
to encourage their adoption by member companies.
This
initial position of the employers organisation IBEC regarding financial participation
has since been modified. As already
noted in 1992 both the employers organisation and the union centre ICTU successfully
lobbied government against the total abolition of tax concessions for approved
profit sharing schemes. Now IBEC encourages its members to consider schemes for the financial involvement of their employees.
In its Budget
submission
for the year 2000, IBEC has strongly
requested government to develop a tax regime that will accommodate the most comprehensive use of financial
employee involvement schemes. However
in one respect the position of the employers organisation remains unaltered.
It is opposed to the mandatory or prescriptive introduction of financial
involvement.
The Trade Union Response:
At
the end of 1984 in response to the Ministers request the ICTU outlined its
position on profit sharing/employee shareholding. Reviewing schemes already established, Congress was critical of
many aspects of their operation. First,
the general absence of employee
consultation,
involvement or participation either at the introductory stage on in the schemes
subsequent administration. Second,
the reluctance of employers to disclose financial information and the small
amount of profit distributed among employees.
Nevertheless Congress declared that 'the overall approach of the Irish
trade union movement to worker shareholding is not a negative one'. However, its expectations of profit sharing/employee
shareholding
were such as to render unsatisfactory any schemes based at the level of the
individual firm. These expectations
were the provision of extra investment capital for growth and job creation,
a redistribution of wealth, increased equity and the introduction of industrial
and economic democracy. Congress proposed
to realise its objectives through a Scandinavian-type workers fund system
or collective profit sharing.
This
position has since been substantially modified. The demand for a worker fund system or collective profit sharing
has been dropped. Likewise the opposition
to the privatisation of state enterprises has given way to neutrality if not
a general acceptance. Indeed in the
event of full or partial privatisation, Congress views the ESOP as a vehicle
through which union members or employees of such companies can participate
in the profits they have helped to create. Congress has also identified the sale of a
subsidiary company or a management buy out as a potential opportunity for
union members to negotiate an ESOP.
Developments
at national level may partly explain
the altered position of employers and trade unions regarding financial participation.
Since 1987 social partnership type agreements or bargained corporatist arrangements
between government employers and trade unions have been the dominant feature
of collective bargaining in Ireland. All parties agree that partnership at national
level should be complimented by partnership at enterprise level. Forms of
financial involvement have been designated as one of the appropriate topics
for discussion at enterprise level. In the National Partnership 2000 programme
agreed in 1997 between government and social partners the financial involvement
was not presented as a specfic heading within the programme. In the latest
renewal of the agreement in February 2000 the possibility of innovations in
financial involvement was stipulated.
Conclusion
A
favourable tax regime appears to be a crucial factor in promoting the growth
of Approved Profit Sharing Schemes(APSS) (see table) In the twelve years between 1982 and 1994 the annual average growth
rate for APSS was approximately 11 schemes per annum. In the years since 1995 the annual average
growth rate has increased to approximately 32 schemes per annum. Given the
support of government, employers and trade unions for the promotion of financial
participation the growth in scheme numbers seems likely to continue. However
focusing attention on the tax advantages of schemes could be productive of
an unintended consequence. Over time one important objective of the schemes
(a positive alteration in a range of employee behaviour) could become increasingly
obscured.
From
this short overview of developments in Europe the following conclusions can
be drawn:
· The full range of
financial participations schemes can be found throughout Europe.
· These systems are
more diffused in a limited number of countries. In most European countries
financial participation is not an issue in national debates. Any plans in
those countries are very locally or implemented through foreign companies.
· Countries differ
from each other not only in the development and diffusion of schemes but also
in the nature of schemes and the emphasis on certain objectives. This means
that the pattern of financial participation differs between countries.
· A country’s pattern
of financial participation reflects the industrial relations system, the corporate
governance system and the prevailing business and corporate culture.
· France has a pattern
that consists of more state regulated (mandatory) broad based deferred profit
sharing with the aim of enhancement of employee savings and wider distribution
of wealth and wage flexibility. Financial participation systems are also used
for income and employment policies. The corporate governance system of France
provide for a limited scope of employee share ownership due to more concentration
of capital and the substance of closely held family firms.
· Spain has a pattern
of minor regulations for share based profit sharing. The developments so far
are not substantial although an increase is expected. It is significant that
the Spanish government considers its fiscal support for share-based profit-sharing
as one of its measures favouring small- and medium-sized firms. In fact the
development of firm’s pension plans and the pronounced support for workers’
co-operatives and labour firms should be looked at in a complementary manner
as the main Spanish plans to improve worker’s financial participation in the
firm.
· Germany has a pattern
that consists of investments savings plans with the principal aim of enlargement
of (employee) ownership of capital savings and other assets for future security
of low earners. The main actors are employers and government. The consensus
based corporate governance system of Germany has led to the operation of collective
agreed schemes. Like France the capital market is not elaborated in Germany.
Many firms are closely held and privately held firms which leaves little scope
for the development of full employee share ownership. Trade unions appear
to start discussions on plans.
· The Netherlands’
pattern of financial participation is largely based on a nation wide introduced
wage savings plan. This plan allow profitable tax provisions on contributions
of both employer and employee to a share based plan. However, most employees
choose for the less risky saving on a special account with less profitable
tax provisions. However, an increase is experienced since changes in 1999.
Few trade unions are demanding collective schemes.
· The UK has a pattern
that consists of mainly deferred share option schemes with the principal aim
of medium term employee incentive. The main actors are employers and government.
An elaborated stock market provide for ample space for share based investments.
The development in the UK is heavily supported by UK governmental policy and
measures.
· Ireland has a pattern
of financial participation that more or less reflects the UK pattern. The
difference is that the development in Ireland is just starting. Based on the
promotion of a national programme of Partnership 2000 also trade unions promote
the development of share based plans.
· In general both
the use and the pattern and diffusion of schemes are influenced by government
policies on tax advantages and other incentives.
· Government positions
in individual EC countries range from those that are strongly and actively
in favour of financial participation, to those that does an appeal to social
partners, to those that leaves the matter to the individual employers, to
those without a defined view on it.
· Throughout Europe
a growth of financial participation is experienced and expected.
· This growth is promoted
by individual employers decisions in larger companies and takes mainly the
form of investments savings plans, share option schemes or deferred profit
sharing schemes, in a growing number of cases for future securities (including
retirement funding).
· Throughout Europe
a growth is experienced in share options schemes for staff and executives,
especially in booming financial and high technology sectors.
· Generally throughout
Europe smaller closely held private companies are not in favour of financial
participation systems.
· The number of typical
ESOP’s in European countries is very low.
· The incentives and
the amounts for financial participation usually fall between 2 to 5% of annual
employee earnings and between 2 to 5 % of the wage bill.
· The developments
of financial participation is generally separated from collective bargaining
and less from agreements talks between employee representatives and employer
on company level.
· A change is experienced
in the position of trade unions from counteractive to more pragmatic interest
in most countries.
· Financial participation
systems are mainly used as an additional employee benefit to commit the workforce,
as an instrument to gain tax advantages and other bonuses, used less as an
instrument for diminishing wage rigidity and used rarely as broad based performance
related pay.
· Employee share ownership
is less used as a defensive mechanism like preventing take over or financing
companies in trouble.
· The low diffusion
of financial participation in most European countries and in most companies
in Europe might reflect also another use of reward systems in Europe. European
managers seem not to be convinced
of the connection between variable pay and corporate performance.
· In most countries
there is not much data and knowledge about the impacts (on employee attitudes,
on actual change in employee behaviour or on actual changes in performances
of companies) of the promoted financial participation system. Neither is there
much knowledge of the relationship of these systems with the other pillars
of participation. And is the impact of corporate governance systems on the
nature and use of financial participation not fully understood.
The aim of this report is to highlight important knowledge gaps and hence
priorities in research that should be developed for a full understanding of
the phenomenon. The aim of this chapter in the interim report is to offer
a framework for discussion. Research objectives and research questions determine
research strategies and methods used. In this chapter we try to make an inventory
of different research strategies used and connect these with the main topics
that were researched and the topics that has had minor attention.
Financial participation seems to emerge as an important event in Europe.
In this context, Governance is an relevant term. It refers to the way in which
stakeholders in an organisation live their power, rights and responsibilities.
The authoritarian form of governance has prevailed since people began to organise
economic institutions. Participation, however, appears to become a powerful
alternative form of governance in Europe. Since financial participation is a new element in this domain, the
question is how this phenomenon will fit in this governance debate.
To some, we now appear to enter the Age of Participation because we seem
to have reached a point in the development of our labour terms where we discuss
and negotiate on substantially new elements. We did agree on the importance
of basic pay and good human relations; we came to an agreement about the protection
and the development of the young, the disabled and the deprived; and we agreed
on the importance of conquering unemployment. And now we talk about profit
sharing and employee share ownership as a new acting ground for changing our
employment relationships. Several governments in Europe promote this change
and do appeal to the social partners to develop this new domain.
In fact, management itself has helped to develop this new domain. In the
course of binding, commitment and development of human resources management
has introduced the use of share options in Europe on a wide scale. Several
trade unions have picked up the development and introduced the topic of financial
participation into their talkings with employers in several European countries.
In general, the discussions at the expert meeting in Leiden, September
9-10, 1999 eventuated, among other things, in the following observations:
·
There is a growing awareness at both sides of industry that employee share
ownership might be a new employee benefit to be applied.
·
A growing number of trade unions develops a pragmatic attitude towards
the phenomenon and tries to be involved.
·
There is an increase in the use of schemes in Europe.
·
However, the substance of share ownership in Europe is generally small,
which means that there are relatively isolated experiments going on.
·
There is a growing need for sharing information and a growing need for
models and exchange of experiences on best practices and on solutions for
apparent problems that show up when practising these schemes.
·
Moreover, following the research and discussions more insight should be
acquired concerning the working relationships with other participation practices:
representative participation, direct participation and collective bargaining.
Since the phenomenon of financial participation is not diffused much in
Europe there is only minor attention for research into the subject or is concentrated
in a limited number of countries (UK mainly). Studying a new phenomenon generally
starts with theoretical and descriptive work gradually moving towards more
testing research and research directed towards assessments and action oriented
research. Because of the relative recent attention most European research
has followed the path of description, the contingencies and research on the
main theoretical impacts. Most of these studies are done in the UK. Only recently
the IPSE study of the performance effects of profit sharing combined studies
on UK, France and the German and Italian case. In the USA impact studies started
earlier than in Europe and is more or less beyond the point of impact studies
on performance and seems to move to ownership culture, conditions for performance
and other impacts.
A typical European research interest is the relationship with industrial
relations. Also typical for Europe and more developed than research on share-ownership
and profit sharing is the research
done on co-operatives.
During the last two decades, employers in Europe increased their experimentation
with employee financial participation. The most obvious examples are the United
Kingdom and France where profit sharing, gain sharing, savings plans, share
based plans and employee stock ownership have become relatively widespread
on a voluntary basis with some government encouragement through the tax laws.
In Europe, employee financial participation has been influenced by government
policies attempting to encourage asset accumulation, a wider distribution
of the ownership of capital, or profit sharing.
The degree of research is of course
also dependent on the availability of data. In Europe, only France and the
UK appear to have elaborated polls and statistics on financial participation.
However, a full investigation of available surveys and databanks is not done
yet. This second sources research could be a valuable option. Scheme 5.1 presents
an attempt to assess the research attention, its focus and the topics that
has had more or minor attention.
As has been said research typically follows societal attention which means
that research is done mainly in countries where there is deliberate policy
and active actors dealing with the matter. This means an overemphasis of experiences
and research results from USA, UK and to a lesser extent France, Germany and
most recently Italy.
Scheme 5.1 Research attention
|
More attention in research |
Minor attention in research |
|
Focus |
|
|
Experiences in USA, UK, France,
Germany and Italy |
Other European states |
|
Industrial relations differences |
Corporate governance differences |
|
Financial participation |
Differentiation between schemes |
|
Existence of schemes |
Diffusion patterns |
|
Structural factors |
Business Cultural factors |
|
Impacts of profit sharing and ESOP’s |
Impacts of other financial participation
plans |
|
Content and impacts |
Process and implementation problems |
|
Advantages |
Disadvantages and solutions |
|
Objectives in companies with financial
participation |
Reasons for not putting financial
participation into practice |
|
Large public quoted companies |
Small closely held family businesses |
|
|
|
|
Determinant
factors |
|
|
Determinants of the use of financial
participation schemes by companies (company characteristics) |
Determinants of employee participation
and choices made (employee variables) |
|
Structural on company level |
Social structure and work related
characteristics |
|
Employee’s attitude and some indicators of behaviour |
Employee opinions and determinants
of their choices |
|
Trade unions (negative) attitudes
and its determinant factors |
Employee representatives opinions
and determinants of their choices |
|
Management objectives |
Other stake holders attitudes and
opinions |
|
|
|
|
Relationships |
|
|
Relationship with economic and financial
performance |
Relationship with organisational
performance and with industrial relations performance |
|
Relationship with job satisfaction |
Relationship with extrinsic commitment
and other intrinsic commitments |
|
Relationship with external factors
determining impacts |
Relationship with the other pillars
of participation; interactive effects |
|
Relationship with general HRM strategies |
Interaction with other HRM instruments |
|
|
|
|
Research
strategies |
|
|
Cross sectional; state of the art |
Longitudinal; dynamics of financial
participation |
|
Surveys |
Case-studies Action oriented research |
|
Partial relationships |
Integrated model testing |
The focus of most of the research is on existing schemes and minor research
is done on diffusion patterns (population ecologist viewpoint). Any international
comparative participation research has generally a focus on the importance
of industrial relations differences while in case of financial participation
corporate governance differences and differences in capital markets may be
more important.
First research is more dealing with hard structural factors and only recently
the focus shifts a bit to cultural factors (Theory O; Sense of ownership;
Winter, 1999).
More or less related to the foregoing attention in research for process
and implementation problems has had minor attention than the content of the
scheme and its impacts. Also there seems to be an overemphasis on research
of the advantages and the objectives of companies, while our understanding
of disadvantages and how companies are dealing with these is not very well
developed.
At last most research focused on a specific schemes (which can be quite
country-specific). Less research compares different schemes or looked into
combined schemes. Also the difference in participation between categories
of employees is less researched.
Summarising the prevailing focus there appears to be a need to focus more
on
· corporate governance
differences,
· business culture
factors,
· companies attitude’s
towards the phenomenon, diffusion patterns
· succession problems
of small business owners and family businesses
· process and implementation
problems and solutions to existing problems,
· differentiation
between plans and their impacts.
Much research is done on the characteristics of companies that use these
schemes compared with companies that have no scheme. Chapter 3 shows some
of these contingencies. Employee variables on a lower than company level has
had minor attention.
Our knowledge of determinant factors stemming from task structures, social
structure and employee relations, and work related variables is limited. Also
we appear not to know much about employee’s opinions about different schemes
and the determinants of their decision to participate in a given scheme.
Also research has followed the prevailing idea that trade union counteract,
while only recently experiences with more initiating positions of trade unions
get more attention. Next, our knowledge of attitudes and behaviour of employee
representatives and their assessment of schemes in their company is limited.
The following dimensions seem to be most important for the research of
practices:
·
Broad based or only eligible for certain categories of personnel. This
refers to the participation coverage of the scheme.
·
Dependency on the effort made by employees and the reflection of this in
the performance of the company. This refers to the impact of direct participation
as a likely spin-off or as an adjacent organisational mechanism of share ownership.
·
Negotiated and agreed with employee representatives, or not. This refers
to the influence of trade unions, collective bargaining and other representative
institutions.
In summary, future
research on determinant factors should focus more on:
· employee participation
and choices made, for instance through a EU-wide survey of individuals about
employee stock ownership, profit sharing and participation
· social structure
and work related characteristics, for instance the differences between categories
of personnel and the differences between broad based plans and executives
types of plan; the differences between team-based workplaces and conventional
workplaces
· Trade unions and
employee representatives’ responses and experiences with different types of
schemes in different settings
· Other stake holders
attitudes and opinions about financial participation
Looking at the relationships that appear in research most research seems
to have chased the proof of the impact on improved financial and economic
performance. Blasi, Kruse and Sesil (1999) question this preoccupation. They
state that it is unfair to raise the simplistic question of better performance
while to proof it implies an elaborate and complex research design that probably
never will be realised. They go on by stating that research has showed that
employee ownership companies have at the minimum the same financial performance
as non-employee ownership companies. Research should not focus on the simple
question of better performance.
Blasi et al. also suggest to distinguish between push and pull employee
ownership, where push refers to employee ownership starting the business and
developing the intended objectives, and where pull refers to employee ownership
that is pulled along with the company’s performance but does not create it.
This valuable difference has of course an impact on research design and the
focus of research.
Less research is done on the relationship between financial participation
and organisational performance and industrial and employee relations. In case
these latest relationships are covered than the focus is mainly on job satisfaction;
about other variables we know less. In general there is not much research
done on employee choices and how financial participation has an influence
on their behaviour.
As mentioned above in the course of determining factors the relationships
with external factors are more researched than the theoretical proposition
of the interaction between the pillars of participation and the subsequent
HRM instruments. The limited research suggests that this may entail the key
factors for reaching the stated expectations. The possible relationship with
HRM -strategies should get more attention. Further research needs to move
beyond measuring financial participation, non-financial forms of participation
and firm performance and presuming that a direct connection can either be
established or not established. The research may move in a direction of measuring
a wide variety of elements of the employer-employee relationship, the firm’s
culture and competitive strategy; a move in the direction of research of the
high performance workplace (Huselid and Becker, 1998).
In summary, future research on relationships should include propositions
that covers the relationship between:
· different financial
participation schemes and organisational performance (employee involvement
and flexibility)
· different financial
participation schemes and industrial relations performance (conflict and levels
of absenteeism, recognition of employee influence)
· different financial
participation schemes and levels of intrinsic and extrinsic commitment
· different financial
participation schemes and the other pillars of participation (direct participation,
representative participation and collective bargaining) and its interactive
effects on performance (the high performance workplace)
· different financial
participation schemes and other HRM instruments (compensation, appraisal,
competence development, recruitment and selection) and its interactive effects
on performance.
Of course, It will be more complex to develop research which could cover
the dynamics of financial participation. But it should be noted that most
research does not come far in testing integrated models while these are needed
most in order to reach a fuller understanding. Testing partial associations
and correlations leaves us with quite a number of black boxes. Testing relationships
is of course dependent on the availability of reliable and valid data. And
of course what is located on the right side of scheme 5.1 may cover topics
for which it is less easy to acquire these data. And this explains probably
for a great deal why the focus is on the left side.
As mentioned research focus and strategies are dependent on the substance
and development of a phenomena. Discussions on research could focus on the
question what in this stage of the development in Europe is needed most. As
you might conclude from this short overview of research and experiences, the
theoretical debate and research has not yet on the whole produced decisive
results. More empirical evidence is therefore needed to identify the relationships
and the impact of financial participation. The focus might be the process,
to discover salient organisational mechanisms that might help explain the
actual connection. The next point of view might be of help.
Introduction and sustaining financial participation schemes and developing
and enhancing its positive and desired objectives is a matter of social construction
in which the interests, perceptions and interpretations of those who define
the scheme play a significant role. When the social dimension of these schemes
is made the focus of study, it becomes obvious that the process of financial
participation and its effects is socially controlled and subject to social
influences. From this point of view the process of financial participation
is not simply a matter of procedures and measuring facts, but also of discussing,
interpreting, negotiating and perhaps even awakening a demand for financial
participation. It is clear from the summary of research that research has
been partial and have not yet revealed these processes. Most probably there
is a need for different approaches to develop more insight.
Empirical research strategies on financial participation can roughly be
divided into:
· surveys to test
expected determinants of financial participation schemes and expected relationships
for a large group;
· longitudinal panel
research for the relationships with several performance indicators
· casestudies to deepen
our understanding of the important relationships of financial participation
with other selected topics, for instance the other pillars of participation
and how it in the end affects the desired results; and what problems might
intervene the desired results;
· more action oriented
research to deepen our understanding of best practices and benchmarking.
Surveys has had the most attention.
The survey and panel approach could cover the the above determinant factors
and relationships that had minor attention. Policy orientation requests for
a focus on discovering of diffusion patterns of different schemes based on
the most important determining factors. Next survey and panel research should
focus on objectives and impacts. Important is to know employee and trade union
representatives views and responsiveness.
The casestudies research strategy and action oriented approach could cover
the following. The objective is to get insight in:
·
the interests of actors involved,
·
the relationships with other participative mechanisms,
·
the process of implementation,
·
the problems that were met and the hurdles to be taken,
·
the organisational mechanisms and human resource practices that helped
to reach objectives and
·
the impacts that schemes eventually have.
·
the ways in which processes are embedded in prevailing business regimes.
For policy purposes on EU level the main casestudy research
strategy may be exchange of experiences between countries.
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Biographical Note
Erik Poutsma (1951;
Ph. D, MA Sociology) is associate professor at Nijmegen Business School, University
of Nijmegen and was senior researcher at Economic Institute for Small and
Medium sized business and Delft University of Technology. His PhD research
was on human resource management in small innovative companies. His research
interests are participation, teammanagement and entrepreneurship. He published
several books and articles on these subjects; he conducted several research
projects for the European Commission and affiliated institutions, among others:
The PEPPER II report on financial participation of employees in their enterprises.
He teaches Organisation Theory, Teammanagement and Innovation Management.
[1] The more in depth analysis of the developments in these countries was based on reports from Daryll d’Art (University of Limerick, Ireland), Mark van Beusekom (Participation Solutions, the Netherlands) and Mariá González-Menéndez (University of Oviedo, Spain).
[2] The more in depth analysis of the developments in these countries was based on reports from Daryll d’Art (University of Limerick, Ireland), Mark van Beusekom (Participation Solutions, the Netherlands) and Mariá González-Menéndez (University of Oviedo, Spain).
[3] The reports on Ireland, The Netherlands and Spain are provided by Daryll d’Art (University of Limerick, Ireland), Mark van Beusekom (Participation Solutions, the Netherlands) and Mariá González-Menéndez (University of Oviedo, Spain).
[4] Armengol y Cornet, P. (1896), La Participación en Beneficios. Base de armonía entre capital y trabajo, Madrid: Imprenta del Asilo de Huérfanos del Sagrado Corazón de Jesús.
[5] Examples of sectoral agreements: Shoe-making and repairing (BOE 16/6/99): 9 per cent of wage; Metal Graphics and manufacturing of metal containers (BOE 29/9/98) and Textiles (BOE 3/9/98): 10 per cent of wage
[6] See for instance the agreements of Tabacalera (BOE 19/2/98) and the newspaper El Comercio (BOPA 21/8/97)
[7] Ej. Bingos (BOE 20/1/98)
[8] Not even the statistics of the Labour ministry do differentiate between base wage and complements of this nature.
[9] See for example Grupo Empresa Mediterráneo (BOE 31/3/98), Gijón Fabril (BOPA 3/3/98)
[10] Banks with a social objective similar to the British Building Societies.
[11] El País 18 de Agosto de 1996.
