Paper for COG Fix Globalization
Conference Oct. 9-11, 2002 and Trans-Atlantic Employee Ownership Conference
Oct. 6-8, 2002
By Erik Poutsma
Nijmegen School of Management
University of Nijmegen
P.O. Box 9108
NL-6500 HK Nijmegen
The Netherlands
Tel. +31 24 3615628
Fax +31 24 3611933
The main objective of
this contribution is to provide an account of the development of what has been
called PEPPER in the nineties. PEPPER is an acronym used by the European
Commission that stands for Promotion of
Employee Participation in Profit and Enterprise Results (including equity).
This paper is based on a review of available international research and
publications and interviews with country-experts. It makes an attempt to
present a systematic overview of existing forms of employee financial
participation and the preconditions for its existence. Special attention is
given to the policies of European Member Governments and the views of social partners that support or hinder the
development of financial participation in Europe.
1. Introduction
There
is a growing interest in the theme of financial participation of employees in
their enterprises within Europe. The PEPPER II report (1996) of the European
Commission, however, concludes that there is more diversity than unity in the use of these employee financial
participation schemes. PEPPER stands for Promotion of Employee Participation in
Profit and Enterprise Results and is the acronym that the European Commission
uses to denote financial participation schemes. There appears also to be a lack
of empirical research on the application of different schemes, their success or
failures, advantages or disadvantages.
Against this background the European Foundation for the Improvement of
Living and Working Conditions initiated a project to develop research on the
application of employee financial participation. In the exploratory stage in
1999 the European Foundation commissioned to prepare a report on the
state-of-the-art knowledge on employee financial participation. The final
report is published jointly by the European Foundation and the European
Commission (see Poutsma, 2001).
This
contribution is based on that report and highlights the developments of
policies on European and national level in particular. It presents an overview
of the development of the views of the social partners.
The
structure of the contribution is as follows: I start with a description of the
variety and complexity of the phenomenon of financial participation. This is
followed by a short description of the use and spread of financial
participation in Europe. Next I present the possible reactions of governments
and social partners followed by an overview of existing policies in the
European Member States. I close the contribution by discussing the views of the
social partners.
2. Financial
participation
One of the arguments for
putting financial participation into practice is to commit employees to the
company and to develop an entrepreneurial attitude and enhance the co-operation
between employees and management. In general, the
motives at company level for putting financial participation into practice fall
into four broad categories:
·
productivity
increase;
·
enhancing
flexibility of remuneration;
·
gaining
tax advantages; and
·
providing
employee benefits and hence an increased commitment from them
Some research also indicate more
negative or defensive reasons for companies adopting these plans, such as:
·
discouraging
unionisation;
·
used
for take-over defence;
·
financing
companies in trouble.
The
motives of the European Commission in promoting the practice of employee
participation in profits and enterprise results is based on expectations of
benefits for both employees and companies. The first PEPPER Report (1991)
listed the following expectations, which were also presented as motives for the
presentation of the Recommendation of the Commission in July 1992 and for
commissioning the PEPPER II Report in 1996:
· achieving a wider distribution of
the wealth generated by the enterprises which the employed persons have helped
to produce;
· encouraging greater involvement of
employees in the progress of their companies;
· developing positive effects on
motivation and productivity of employees;
· enhancing the competitiveness of
enterprises through wage flexibility; and
· sustaining employment.
The two
macro-level-oriented motives of the European Commission — a redistribution of
wealth and sustaining employment — have proved important reasons for
governments to develop policies for financial participation.
2.1
Financial participation schemes
Employee
financial participation plans recently introduced or currently developing in
European countries generally are not new. There are a number of classifications
in the literature that are more or less diffused into broad definitions of
categories. However, there exists not an exclusive set of definitions.
Moreover, schemes can become so complex (a combination plan for instance) that
the employee is not able to figure out if he or she is participating in an ESOP
or receives a thirteenth month’s pay.
The
wide range of schemes can be divided into two main categories, which may or may
not co‑exist and in some cases overlap: sharing in profits, and sharing
in equity. These can be subdivided again into two broad categories which result
into a broad generic classification of four categories (with some overlap in
some situations) into which these plans fall:
·
cash based profit-sharing,
·
deferred profit-sharing,
·
asset accumulation and employee share
savings plans
·
employee share ownership.
Typically for
European policies is that employee financial partiucipation covers employee
share ownership as well as profit sharing. The European Commission defines the
term that way. In some countries these schemes are also interrelated and / or
are covered with the same legislative framework.
2.2 Patterns of
financial participation
The
various forms of financial participation are combined in some countries and
companies. The broad range of financial participation schemes could develop
into a full range of patterns of financial participation schemes that could be
typical for a European country under investigation. It can resolve into a
pattern of measures taken by employers to meet desired objectives. The next
scheme 1 presents a non-exhaustive pattern of financial participation in an
attempt to generalise the subject for Europe. It is clear from this scheme that
it covers quite a number of financial participation models that could be
implemented, especially when we take into account that one scheme can resolve
into another and that combinations are possible. For instance it can be
embedded in retirement plans or investment funds in which not only employee
shares are involved but also other contributions from profit sharing schemes.
In fact some countries have specific tax advantages in resolving certain
employee benefits derived from one scheme to another, for instance, from profit
sharing into asset savings plans.
<Scheme
1 about here>
In other words under the heading of
financial participation you will find quite some possibilities with different
outcomes in terms of arrangements, rights and administration. It makes the
picture rather complex. It is important to note that up till now we do not know
how the different detailed forms of financial participation is distributed and
arranged. From several sources we know that deferred profit sharing is the most
widespread in Europe. Next scheme which is popular is stock options scheme. The
typical ESOP comparable with the USA type is very rare in Europe.
Other
important elements to be considered in our discussion (scheme 2) include:
· whether schemes are broad-based or
eligibility is only for certain categories of personnel;
· whether schemes are dependent on the
performance of the company or otherwise;
· whether schemes are additional to
basic wages or part of basic wages;
· whether schemes are negotiated and
agreed with employee representatives or otherwise;
· whether schemes include more or less
worker control rights;
· whether schemes are based at single
company level or multy unit level or developed at multi-company, multi-employer
or sectoral levels or even national or international level.
<Scheme 2 about
here>
Important for financial participation in
the context of industrial relations are whether it is agreed and whether it
allows some participation in decision making.
Agreement plan
In most cases management takes the
initiative to implement a plan. There are schemes that came in existence
through negotiations and in certain European countries approved schemes have
the requirement to be agreed upon with employee representatives or employees
directly.
In case
of share ownership, schemes might have developed where the participants have
not full voting rights. Of course, this is guided by country legislation. In
most cases there is no requirement that voting rights should be passed through
on shares that are unallocated (In case of borrowed funds for purchasing the
shares). Unallocated shares are ordinarily voted by the trustees. In case of
publicly held companies and allocated shares the control of employee does not
mean more than a small stockholder might have. Here the important question is
as to what might go on in privately held companies. However, it might be
expected that these firms do not extend voting rights beyond that called for by
law.