COMMISSION OF THE EUBOPEAN COMMUNITIES 
C0M(91) 259 final 
Brussels, 3 September 1991 
m Proposal for a 
CQUNCIL RECOMMENDATION 
concerning the promotion of employee participation 
in profits and enterprise results 
(including equity participation) 
8Si 
m: 
ft*-' (presented by the Commission) 
2 -
CONTENTS 
I. INTRODUCTION 3 
II. THE CONTEXT 3 
A. Antecedents and preparations 3 
B. Typology of schemes for financial participation by employees 5 
C. Financial participation schemes in economic theory 6 
D. The existing legal and fiscal framework for financial 
participation schemes in the EC 8 
E. Financial participation schemes in practice 10 
F. Evidence on the effects of financial participation schemes 13 
G. Cross-border extension within the EC of financial 
participation schemes 15 
H. Related issues and developments 17 
I. Role of the social partners 17 
J. Role of governments 17 
III. THE ELEMENTS OF THE PROPOSAL 20 
IV. CONCLUSIONS 23 
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EXPLANATORY MEMORANDUM 
I. INTRODUCTION 
1. in the context of the establishment of the Single European Market, 
the European Councils of Hanover, Rhodes and Madrid considered that 
the same importance should be attached to social as to economic 
aspects and that they should therefore both be developed in a 
balanced manner. The European Parliament (in numerous resolutions 
taken on own iniative) and the Economic and Social Committee (in its 
opinion of 22 February 1989) have taken a similar view. 
2. In developing this approach, the Community Charter of the Fundamental 
Social Rights of Workers states, in point 12, inter alia, that 
employers or employers'organizations, on the one hand, and workers' 
organizations, on the other, shall have the right to negotiate and 
conclude collective agreements under the conditions laid down by 
national legislation and practice. In point 17 of the Charter it 
states that information, consultation and participation for workers 
must be developed along appropriate lines, taking account of the 
practices in force in the various Member States. 
3. With this in mind, in its Action Programme relating to the 
implementation of the Charter, the Commission announced its intention 
to present a Community instrument on "equity sharing and financial 
participation by workers". Underlining its earlier declarations in 
favour of employee participation in asset formation and in productive 
capital formation as a device for a greater justice in the 
distribution of wealth and as a means for attaining an adequate level 
of non-inflationary growth, the Commission considered that " the 
requirements of economic competition as well as new management 
approaches have led to the establishment of various mechanisms for 
the financial participation of salaried workers which meet the 
objectives referred to earlier, as well as others whereby the role of 
workers in enterprises is reconciled with their aspirations for a 
better remuneration and with the financial equilibrium of the 
enterprise." 
In accordance with the Charter and as announced in its action 
programme, the Commission therefore proposes a Recommendation aiming 
at facilitating and encouraging the development of such practices of: 
- "profit-sharing" in Its various forms; 
- employee share-ownership. 
The nature of the instrument chosen, a Council Recommendation, is 
motivated on the one hand by the nature of the subject which, as 
shown below, strongly suggests that preference should be given to a 
non-binding instrument. On the other hand, a Council Recommendation 
is a more appropriate choice than a Recommendation by the Commission, 
given the view expressed by i.a. the European Parliament, that the 
status of this instrument should be sufficient to have an impact on 
a 11 parties. 
II. THE CONTEXT 
A. Antecedents and preparations 
4. The 24 June 1976 Tripartite Conference had asked governments and the 
two sides of industry to take appropriate measures to encourage asset 
formation by workers. The work undertaken in the few years 
thereafter, in close collaboration with experts from governments and 
the two sides of industry on the basis of a mandate from the Council 
(Social Affairs), resulted in a Memorandum on Employee participation 
in asset formation" which was adopted by th© Commission in August 
1973. This Memorandum did not contain formal Commission proposals but 
rather two different sets of guidelines. The first set of guidelines 
aimed at reinforcing the social aspect of incentives to individual 
savings, the second set was directed towards the development of 
systems of financial participation by employees. 
The main follow-up to this Memorandum and its 1983 addendum was a 
Resolution adopted by the European Parliament in October 1983 in 
which the EP supported the approach taken in the Memorandum and 
requested the Commission to draw up a Recommendation on the subject. 
The Commission was not able to meet this request in the years 
thereafter, because of other priorities in its work programme, but 
the issue continued to receive attention in the European Parliament. 
In the announcement in the Action Programme of its intention to 
present a Community instrument on equity sharing and financial 
participation by workers, the Commission outlined an approach which 
is different from the one followed a decade ago and which takes 
account of the latest developments and of the present policies in 
this area within the EC. Rather than trying to cover all aspects of 
general asset-formation policy or of incentives offered to the 
population as a whole or to specific income-groups outside tha 
employment context, the instrument will focus on employee 
participation in the profits and capital growth of their enterprise 
and on employee share-ownership. 
In the process of preparing this Community instrument the Commission 
has funded a research project undertaken at the European University 
Institute of Florence, with the specific aim of obtaining a good 
overview of "the state of the art" concerning financial participation 
by employees in the EC. The results of this project are being 
described in the so-called "PEPPER-Report" (PEPPER standing for 
"Promotion of Employee Participation in Profits and Enterprise 
Results"). The following descriptive chapters (B-F) largely summarize 
the most significant findings of the Report. More details, 
bibliographical references etc. are to be found in the Report itself 
(Supplement 3/91 to Social Europe). 
The two main competitors of the EC on world markets, the USA and 
Japan, both already practize financial participation schemes on a 
more substantial scale than the Community does. 
Some estimates for the USA suggest that over the period 1977-1987 the 
number of profit-sharing plans has risen from 300,000 to 500,000. 
Even in 1978 around 17 million workers were covered by registered 
employee profit-sharing schemes. Following tax concessions 
encouraging a specific form of financial participation, Employee 
Stock Ownership Plans (ESOPs) have known an impressive growth to 
reach in 1990 a figure of some 10,000 ESOPs, covering 10 million 
employees. 
In Japan financial participation by employees is alrar y a long 
tradition, although some characteristics of the schemes may differ 
from what is usual in the West. Among Japanese enterprises profit-
sharing is widely diffused; profit-sharing bonuses are usually paid 
twice a year and are estimated to account for as much as 25% of total 
employee earnings. Another frequent practice is to encourage 
employees to purchase company shares. Some have argued that Japan's 
low unemployment rate and level of inflation can be attributed to 
profit-sharing, but this is almost certainly an oversimplification. 
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B. Typology of schemes for financial participation by employees 
9. There is a wide range of different forms of employee participation in 
enterprise results. These can be grouped under two main categories, 
which may or may not co-exist and may in some cases overlap: profit-
sharing, and employee share-ownership. 
B.1 Profit-sharing 
10. "Profit-sharing" in a strict sense implies the sharing of profits by 
providers of both capital and 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. Profit-
sharing provides employees with a regular bonus paid out of profits 
which would normally be allocated to capital but, 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 take the form of allocation to specific funds 
invested for the benefit of employees. At higher levels, profit-
sharing takes the form of economy-wide or regional wage-earners' 
funds. 
Cash-based profit-sharing links employee bonuses directly to some 
measure of enterprise performance (profits, revenue, value-added, or 
other), most frequently providing an immediate payment. However, it 
can also be a deferred scheme: e.g. if a certain percentage of 
profits is allocated to enterprise funds which are then invested in 
the name of employees. A distinction is also made between gain-
sharing and profit-sharing although both are clearly related; gain-
sharing typically consists of a group incentive pay system that is 
geared to productivity, cost-reduction or other criteria, less 
comprehensive than profitability. 
Share-based profit-sharing consists of giving employees, in relation 
to profits or some other measure of enterprise performance, a portion 
of shares of the enterprise where they work. These are usually frozen 
in a fund for a certain period of time before the workers are allowed 
to dispose of them. When shares are subject to a minimum retention 
period the term "deferred prof It-shar i no" is used. 
B.2 Employee share-ownership 
11. 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 enterprise profits, 
they are related to enterprise profitability and so enable 
participants to gain from the growth of company profits. 
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Employee share-ownership can be both individual and collective. 
Shares can be in the enterprise where the employee works or 
elsewhere. However, the draft Recommendation mainly focuses on 
those employee share-ownership schemes set up with the explicit 
intention of providing employees with an additional source of income 
related to enterprise results. 
Employee share-ownership can take 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 
enterprise's shares after a determined amount of time, under 
favourable tax provisions. Alternatively, an employee benefit trust 
is set up through Employee Share Ownership Plans (ESOPs), which 
acquire company stock that is allocated periodically to each 
employee's ESOP account. Workers' buy-outs of their enterprises are 
a special form of employee share-ownership. 
In the literature, 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 
to share-based profit-sharing. The distinction between individual and 
collective employee share-ownership is also not always clear-cut. 
This draft Recommendation refers primarily to those schemes which 
are : internal (applied within an enterprise); collective (available 
for all, or a major part of employees); continous (applied on a 
regular basis); and providing for employee participation in some 
measure of enterprise performance (whether directly or indirectly). 
C. Financial participation schemes in economic theory 
12. During the 1980s, a lively debate developed among economists on the 
possible effects of financial participation schemes. Those in favour 
argue that there will be three main types of beneficial effects. 
The first is the Incentive effect, which is expected to result in 
higher labour productivity and improved overall enterprise 
performance. Employee income directly linked to enterprise results 
is expected to lead to higher motivation and commitment, greater 
identification of workers with the interests of their firm, lower 
absenteeism and labour turnover, reduced intra-firm conflict and 
labour-management tension, and improvements in work organization. 
Other related possible effects are a contribution towards a greater 
social justice in the distribution of total wealth and an insurance 
against managerial opportunism, by an encouragement of Joint wealth-
maximizing behaviour. More indirectly related are effects and 
objectives such as an improvement of employee understanding of the 
fundamentals of enterprise economics or the encouragement of 
positive attitudes towards more Industrial democracy. 
The second theoretical argument is that profit-sharing provides for 
greater flexibility of labour earnings. By increasing the frequency 
of adjustments in remuneration, profit-sharing is likely to result in 
less variable employment, and can, therefore, reduce the pressure for 
redundancies. 
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In addition to these effects expected at the enterprise level, some 
economists (J. Vanek and M. Weitzman) have proposed that profit-
sharing could have stabilizing macroeconomic effects. A "share 
economy" in which firms give employees a share of profits as a 
substitute for a part of their wages, could have important advantages 
over a "wage economy". Since firms would regard the base wage, and 
not total remuneration, as the relevant marginal cost of labour, 
profit-sharing would lower the marginal cost of employing extra 
labour, and therefore could not only raise employment, but shift the 
entire economy to a state of full employment. Monetary policies 
could then be used to fight inflation, without fear of creating 
unemployment. 
13. A number of interrelated arguments against financial participation 
schemes can also be found in the literature, more particularly : 
a) Weakening of property rights. Scholars belonging to the Property 
Eights School have argued that legislation encouraging any form of 
economic democracy represents a continuing erosion of property 
rights, by using the power of the state to transfer wealth from 
owners of capital to workers, profit-sharing is thus regarded as a 
purely distributive "vealth confiscation scheme" without potential 
incentive effects. They predict a large negative relationship 
between employee participation and performance, due to loss of 
managerial control and the weakining of the authority of capitalists, 
and increased demands for workers' participation in decision-making. 
Moreover, where workers' earnings include a share in profits, the 
reinvestable surplus will be lower and hence growth and future 
employment may be adversely affected. 
b) Inefficiency of group incentives. It has also been argued that group 
incentives are ineffective, since incentives become diluted in a 
group setting where rewards are linked to group effort. Profit-
sharing gives each worker only a small fraction of any additional 
profit due to his own effort; workers will therefore be tempted to 
free-ride, and difficulties in monitoring a single worker's 
contribution will arise. However, more cooperative behaviour 
resulting from financial participation (especially if accompanied by 
decisional participation), could offset these potential negative 
effects. 
c) Risk-bearing. Financial participation schemes may also expose 
workers to an unacceptable degree of risk. Because of the physical 
impossibility of diversifying the use of their labour in different 
sectors and enterprises in the economy (as capitalists can do with 
their capital), by putting "all eggs in one basket", workers will not 
only bear the risk of unemployment, but will also face additional 
income risk, in particular when building up participation in holdings 
(directly or indirectly) of shares or bonds issued by their employer. 
This additional risk may however be compensated by higher employment 
security which profit-sharing is expected to provide, the exposure to 
risk may be limited if workers are excluded from full entrepreneurial 
profits and losses and in some cases forms of insurance may help to 
reduce the risks (but also potential returns). 
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In the whole, the theoretical debate on financial participation 
schemes has by itself not yet produced overwhelming support for the 
arguments in favour of or against financial participation schemes. A 
closer examination of the practice of such schemes will give more 
clues (see sections 20 to 30). 
D. The existing legal and fiscal framework for financial participation 
schemes In the EC 
D.1 General features 
14. The legal and fiscal status of financial participation schemes in EC 
countries is very heterogeneous. The French experience, based on 
legislation which since 1967 has made deferred profit-sharing 
(employee participation in company growth) compulsory in enterprises 
of a certain size, clearly contrasts with the voluntary nature of 
financial participation schemes in all other EC countries. However, 
there is also substantial variety in the legal and fiscal framework 
between countries in which schemes are voluntarily implemented by 
enterprises, especially regarding conditions for qualifying for tax 
benefits and the incentives effectively offered. 
For the moment two EC countries have comprehensive legislation, 
consisting of specific laws for the various types of financial 
participation schemes : France, since 1959; and the UK. since 1978. 
In most other countries, financial participation measures of a more 
limited scope have been adopted. 
Thus in BeIgiurn. Denmark. Germany. Greece. Ireland, the Netherlands 
and Portugal. favourable fiscal provisions have been granted to some 
financial participation schemes. 
Nevertheless, measures adopted so far have regulated a limited number 
of specific forms of schemes, and most frequently when they offer tax 
incentives these are modest. Moreover, these provisions have usually 
been adopted as part of more general legislation, e.g. in Germany and 
the Nether lands on savings schemes, and in BeIgiurn on company laws. 
In Italy. Luxembourg and Spain, there are no specific legal 
provisions on financial participation and consequently no particular 
tax incentives are offered at present, although provisions contained 
in more general laws do envisage the possibility of introducing 
financial participation schemes, and in some of these countries the 
legal framework is not unfavourable (particularly In Spain). 
D.2 Specific forms encouraged 
15. At present, the prevalent types of financial participation encouraged 
by government policies through tax benefits are various forms of 
employee share-ownership and, to a lesser extent, deferred profit-
sharing, whereas cash-based profit-sharing is for the moment actively 
supported In only a few EC countries. 
16. Government measures encouraging various types of employee share-
ownership are found in all countries where there is official support 
forsome form of financial participation. In some countries, it has 
been the only or principal form of financial participation offered 
preferential treatment. Thus in Belgium, tax incentives have for the 
moment been granted exclusively to various forms of employee share-
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ownership; in Germany, the introduction of new fiscal provisions in 
1984 was aimed primarily at encouraging individual workers' 
contributions to enterprise capital; while in Ireland, of the two 
laws adopted so far, one is specifically destined to a specific form 
of employee share-ownership (stock options). 
Official encouragement of employee share-ownership has been far from 
lacking in other countries. In Denmark, offers of enterprise shares 
to employees at preferential terms have been encouraged since 1958. 
In France, favourable tax provisions have been granted to a variety 
of employee share-ownership schemes, including stock options (since 
1970), offers of shares at preferential terms (since 1973), free 
distribution of shares to employees (since 1980), employee investment 
funds (since 1983), and employee buy-outs (since 1984). In Greece, 
legal obstacles for the free distribution of a company's shares to 
its employees were removed in 1987, and thereafter employee share-
ownership (including share options) has been encouraged through 
favourable legal provisions. In Portugal. employee share-ownership 
has been promoted within the 1990 privatization measures. In the UK. 
fiscal measures have encouraged a number of specific employee share-
ownership schemes, including "BOGOFs" (buy one, get one free, 
Introduced in 1978), all-employee stock options (the so-called SAYE-
"Save as you earn" scheme, promoted since 1980), discretionary share 
options (since 1987), and ESOPs (since 1989). 
17. Deferred profit-sharing, most frequently consisting of the allocation 
of enterprise shares (or other securities) to employees which are 
frozen for a certain period of time, or directing profits to 
investment funds for the benefit of employees, has been encouraged in 
several countries (Denmark. France. Germany. Ireland, the Nether lands 
and the UK). In Denmark, employee share and bond schemes offered 
within a profit-sharing arrangement have been given preferential tax 
treatment since 1958. In France, a 1967 law introduced employee 
participation in company growth. This was obligatory for ail 
enterprises with over 100 employees (in 1990 extended to all 
enterprises with more than 50 workers) .Under the scheme a part of 
profits is allocated to a special enterprise fund which is then 
invested for the benefit of all employees; both enterprises and 
employees are exempted from tax and social security charges. In 
Germany, specific investment funds, sometimes combining enterprise 
resources with employees' savings (which, up to a certain amount, are 
tax free), have been encouraged since the early 1960s. It is only 
since 1984, however,that investment in specifically productive 
capital has been actively promoted through legislative measures. 
Share-based profit-sharing has been encouraged through tax exemption 
or deduction both in the UK (since 1978) and in Ireland (since 1982), 
on condition that shares are held in a trust for a determined period 
of time. In the Nether lands, minor fiscal advantages have been 
granted to profit-sharing since the 1960s,on condition that the 
bonuses are frozen on special accounts for a determined amount of 
time. 
18. Finally, cash-based profit-sharing has been actively encouraged 
through specific laws in only two EC countries : in France (since 
1959) and in the UK (since 1987). In Greece and Portugal. although 
no specific laws have promoted this type of financial participation, 
provisions contained in more general laws provide fiscal benefits for 
both firms and employees. In other countries, there is no supportive 
legislation for this type of profit-sharing, particularly in Belgium. 
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Germany and the Netherlands, where enterprises introducing such 
schemes incur high taxes and social security contributions. 
19. In short, the large majority of schemes currently encouraged through 
governments policies are those which allow workers to acquire their 
enterprise's shares, whether automatically (as in the case of share-
based profit-sharing or distribution of company shares), or by 
stimulating voluntary employee share-ownership (through workers' 
acquisition of enterprise shares). This seems to be reflection of 
common and interrelated objectives pursued by individual governments 
and enterprises. Because of obligatory retention and other resale 
restrictions on shares, the majority of schemes presently encouraged 
are of a savings-oriented nature, whether through the allocation of a 
part of profits to specific enterprise funds or trusts, or even more 
so through workers' voluntary contributions of capital. 
E. Financial participation schemes in practice 
E.1 General features 
20. There is a great variety from one country to another in the types of 
financial participation schemes encountered in practice. These 
include cash bonuses, share-based and other forms of deferred profit-
sharing, and a number of particular employee share-ownership schemes, 
I such as free distribution of shares to employees or share offers at 
| preferential terms, stock options for all employees or only for 
executives, employee share-ownership plans or trusts (ESOPs and 
ESOTs), and employee buy-outs. The most diversified forms are found 
in the UK and France. 
In those countries where some form of financial participation has 
been encouraged by the government, the prevalent types applied by 
enterprises are indeed the ones promoted through official government 
measures. The preferential tax treatment granted particularly to 
employee share-ownership and/or deferred profit-sharing, does seem 
to have led to their prevalent adoption in practice (in BeIgIurn. 
| France. Germany. Ireland, the UK). 
> 
! In Be I g I urn. employee share-ownership - the only type currently 
i encouraged by law - is the principal form of financial participation 
j applied by enterprises, as the unfavourable and uncertain fiscal 
| climate for other forms has resulted in limited practices of profit-
I sharing. In France, although cash-based profit-sharing has been 
institutionalized for more than three decades, the number of 
! agreements on cash-based profit-sharing in 1986 was only 20 X of 
I those concluded on "participation" (obligatory); moreover, the 1986 
| French legislation explicitly encourages workers to invest their cash 
| bonuses in the savings fund of the enterprise (which is then 
I reinvested, frequently in enterprise shares). In Germany, employee 
participation in enterprise capital is the dominant form, and 80 % of 
employees in firms using financial participation schemes hold capital 
; shares. In Ireland, since only share-based profit-sharing and share 
options are currently offered preferential fiscal treatment, these 
! forms are also the most widespread. In the UK. at present 84 % of 
all registered schemes are of this type (72% are various forms of 
! employee share-ownership, and 12% share-based profit-sharing 
schemes), while only 16 % are profit-related pay schemes. 
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In countries without specific legislation on employee share-ownership 
(Italy. Luxembourg. Spain), and in those with only limited, or fairly 
recently Introduced, incentives (Denmark. Greece, the Netherlands. 
Portugal), cash-based profit-sharing still today seems to be the 
prevalent form practised by firms. 
E.2 Diffusion 
21. Recently there has been a significant growth of various forms of 
financial participation schemes in the majority of EC countries. At 
present financial participation is most widespread in France, with 
over 10,000 agreements on employee participation in company growth, 
and an additional 7,000 agreements on cash-based profit-sharing. In 
the UK there are currently more than 7,000 different financial 
participation schemes in operation, applied by almost 30 % of all 
British firms (20 % have at least one all-employee scheme, and an 
additional 9 % have schemes for executives only). The large majority 
of schemes in the UK - over 4,300 - are discretionary share option 
schemes, as compared with 1,200 cash-based profit-sharing, around 900 
all-employee share option, and 900 share-based profit-sharing 
schemes, and only around 20 ESOPs. 
In general, in other countries financial participation schemes are 
less widely used. For some of these countries, only estimates are 
available at present. In some cases these are highly divergent 
depending mainly on the definition used. 
In Ireland there are currently around 250 registered schemes, of 
which 60% concern stock options and 40% share-based profit-sharing. 
In Denmark the overall number of schemes is estimated to be no more 
than 200, the most common being cash-based profit-sharing. In 
Germany some 1,600 firms have introduced employee financial 
participation schemes but if informal and less regular arrangements 
are also included, there may be as many as 5,000 firms practising 
some kind of financial participation. For Italy it has been 
estimated that 25% of large firms currently give their employees 
variable remuneration, but only In sompe cases directly linked to an 
indicator of enterprise performance; in addition, around 30 quoted 
companies have offered shares at preferential terms to their 
employees in recent years. In the Netherlands about 30 % of 
enterprises currently use related schemes, but only 6% can be said to 
have a "real" profit-sharing scheme. For BeIgIurn. no estimates are 
available at present on the use of profit-sharing; as to employee 
share-ownership, 20 quoted companies offered shares to their 
employees in 1989. In Luxembourg a recent survey found that 22 % of 
firms had introduced "profit-sharing" but without specifying which 
type. In Spain as many as 44 % of medium and large firms give 
employees a variable component of pay related to enterprise 
performance, but only in 6 % of firms are these payments directly 
linked to profits. For Greece and Portugal. no estimates are 
currently available on the use of financial participation schemes. 
Not all the schemes providing employee financial participation 
effectively link employee earnings directly to an indicator of 
enterprise performance. Sometimes this link is very loose indeed, 
particularly in Spain. Italy and the Netherlands. 
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E.3 Enterprise size and sectoral distribution 
22. No clear common pattern seems to emerge on the importance of firm 
size. In Germany employee financial participation schemes are 
adopted mainly by small firms, although quite a few very large 
enterprises (with over 10,000 workers) have also been involved. In 
the UK mainly large companies have adopted one of the registered 
schemes qualifying for tax benefits, while small firms have tended to 
introduce non-approved cash-based schemes. In France there is a 
mixture of both, since participation schemes used to be obligatory 
f primarily in larger firms, while small firms mainly introduce cash-
}• based profit-sharing. In BeIgiurn. Italy. Spain and Portugal large 
firms seem to be predominant. 
As far as the distribution of schemes by industry type is concerned, 
it appears that in most countries schemes are being introduced in a 
large variety of sectors, while in some countries such as 
Luxembourg. Portugal and the UK. the finance sector uses them more 
than the average. 
E-4 Employees involved 
23. In France and the UK large numbers of employees take part in 
financial participation schemes. In France, the different types of 
schemes cover almost 6 million employees, of whom around 4 million 
actually participate (around 18%"of all employees). This is not 
surprising considering France has had the longest tradition, and has 
made some schemes compulsory. In the UK 3.5 million employees are 
eligible to participate in financial participation schemes, but the 
actual number benefiting has been estimated to be 2 million (around 
8% of all employees). 
In other countries the percentage of employees participating is 
lower. In the Netherlands some 350,000 employees participated in 
profit-sharing schemes In the mid-1970s (around 7.4% of all, or 12 % 
of market sector employees), while in Germany 1.3 million employees 
are currently involved in financial participation schemes (around 5 % 
of all employees). For Ireland no official figures are available but 
an estimate suggests that some 40,000 employees currently participate 
in share-based profit-sharing schemes (more than 3% of total). 
Variable remuneration linked to enterprise performance is given in 
Italy to some 2% of employees. 
However, these figures may be overestimates considering that in some 
countries the same individuals may participate simultaneously in 
different types of schemes. Nor are these country figures directly 
comparable since they are sometimes related to quite different 
schemes. 
Not all schemes are available for all employees nor do all eligible 
employees necessarily participate. In the case of discretionary 
schemes for certain groups of employees, which are by far the most 
popular type of scheme in some countries (yK, Ireland). most often 
only a small percentage of employees benefit (in the UK usually no 
more than 10% of employees). At the same time, in share options or 
other types of schemes available to all employees, the degree of 
participation is not always high. Although for example in Germany. 
the participation rate of employees in schemes offered has been 
around 80%, in the UK. in SAYE-type share option schemes the 
participation rate has frequently not been higher than 15%. 
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E-5 Employee benefits 
24. At present the benefits accruing to workers from financial 
participation schemes, whether on the basis of profit-sharing or of 
employee share-ownership, in most cases remain small. 
The amount allocated to profit-sharing hardly ever exceeds 10% of 
average employee earnings and 5 % of enterprise profits. In France 
the profit share per employee in both cash-based and deferred profit-
sharing schemes amounts to around 3-4% of the wage bill, while in the 
Netherlands the share amounts to 4.5-6.5% of average employee 
earnings. In the UK profit-related pay accounts for around 7% of 
average earnings, but in share-based schemes it usually does not 
exceed 2-4% of total wages. Some ItalIan enterprises give their 
employees substantial variable pay, but the sectoral averages range 
from 3 to 8% of the minimum national wage. In Spain, variable 
payments to employees In some cases have amounted to 10-25% of total 
pay, but average payments linked to profits usually represent no more 
than 5% of labour costs. 
In employee share-ownership schemes, excluding share offers as part 
of privatization measures, the percentage of shares reserved for 
employees in most cases has not exceeded 5% of the total shares 
issued, and the discount on shares (if available) has usually been 
rather low. 
E-6 Summary Table 
25. The annexed summary table based on the findings of the PEPPER-Report 
presents an overview, in a comparative framework, of the EC Member 
States' general attitude towards financial participation, legislation 
and tax benefits, the most frequent types of schemes adopted by 
enterprises and, where available, some other relevant figures (on the 
number of schemes, firms and employees involved; and average profit 
shares per employee or other benefits). 
F. Evidence on the effects of financial participation schemes 
26. Sections 12 and 13 contain the main theoretical arguments advanced in 
favour of or against financial participation schemes. In this 
chapter the empirical evidence concerning these arguments is 
examined. 
Theoretical arguments advanced In favour of financial participation 
schemes claim the following principal types of beneficial effect : 
the incentive effect, which Is expected to result in higher labour 
productivity and improved enterprise performance; and major wage 
flexibility, which is expected to result in less variable employment 
and/or higher employment, both at the enterprise and at the macro-
economIc Ieve I. 
In evaluating the effects of financial participation schemes, two 
sources of information are available : econometric estimates and 
surveys on the attitude of employees and firms towards these 
schemes. 
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However, the evidence reported is preliminary and ought to be 
interpreted cautiously. On the one hand, attitude surveys are based 
on the perception of effects, and not the effects themselves. On the 
other hand, although econometric models are a more objective source 
of information, there are a number of specific problems involved, 
such as the high sensitivity of results to model specification, the 
indicators actually used and estimating techniques; difficulties in 
isolating the effects of profit-sharing from other organisational 
factors and external causes; ambiguity concerning the separation of 
cause from effect. 
F.1 IncentIve effects 
27. Econometric estimates of the effects of financial participation 
schemes on employee motivation have so far been few in number, and 
have exclusively concentrated on three countries: Germany, the UK and 
France (for which only one econometric study is available). Evidence 
from all three countries points to positive net effects on employee 
motivation and on productivity. The positive link between profit-
sharing and productivity is also supported by a number of similar 
studies on the US. However, these effects might for the moment be 
relatively small because of the low incidence of employee benefits on 
total earnings. 
There is no specific scheme which a priori has significant advantages 
over the others. The experience to date nevertheless suggests that 
cash-based schemes may have had more significant incentive effects 
than share-based schemes. This is supported by both econometric 
estimates and by attitude surveys. In some of these surveys, cash-
based profit-sharing was by far the most popular scheme, while many 
deferred profit-sharing and employee share-ownership schemes have not 
achieved the objective of increasing workers' involvement as 
shareholders and their greater identification with the interests of 
their enterprise. This seems to be confirmed by the fact that 
involvement of employees in capital participation schemes in Germany 
is below the maximum, and the frequent practice in both France and 
BrItain of workers selling their shares as soon as they are allowed 
to. From the point of view of the individual employee, the crucial 
difference between the two types of scheme seems to lie in resale 
restrictions, since workers usually prefer to be able to cash in 
their profit share at any moment (in spite of the fact that cash-
based schemes in general attract lower, if any, tax incentives). 
Therefore, when for whatever reason non-cash-based schemes are to be 
given priority, they may need to be accompanied by certain advantages 
over cash-based schemes. Provided that they are properly designed, 
share-based schemes could not only have similar motivational effects 
to cash-based schemes, but could also provide for a longer-term 
commitment by employees. Indeed, there are cases in which share-
based schemes may provide not only the right incentives, but would 
even be preferred. 
F.2 Wage flex lbiIity 
28. The effects of profit-sharing on employment through greater wage 
flexibility are much more debatable, as the econometric evidence is 
mixed. On the one hand, some earlier evidence for the UK suggested 
that profit-sharing had a positive and significant effect on 
employment, but more recent estimates show that the size of the 
effect may not be very large. On the other hand, evidence from 
- 15 -
France suggests that profit-sharing has resulted in greater wage 
flexibility, less frequent adjustments in employment, and in higher 
and more stable employment growth. 
F.3 MacroeconomIc effects 
29. Given that profit-sharing for the moment is not sufficiently 
widespread in any single country to have significant macroeconomic 
effects, these effects cannot really be empirically verified. 
Nevertheless, several econometric studies suggest that enterprises in 
all three countries for which estimates are available - France. 
Germany and the UK - regard total remuneration, and not the basic 
wage, as the marginal cost of labour, thus contradicting the 
fundamental assumption of the Vanek-Weitzman hypothesis (see section 
12). 
F.4 Link with participation in decision making 
30. The link between the effects of financial participation and 
participation in decision making essentially depends on the specific 
effects being tested. With regard to employment effects, existing 
econometric evidence is mixed, in some cases offering support to the 
hypothesis that the effects may be higher if participation in 
decision making is absent. On the other hand, prevailing evidence on 
incentive effects from both econometric and more informal studies 
does suggest that the combination of financial participation with 
participation in decision making can have significant beneficial 
effects. The less positive attitude of employees towards share-based 
schemes seems to be related to the practice in several countries 
whereby employees are not always offered the same rights as other 
shareholders (primarily voting rights). More employee participation 
in decision-making may indeed, in many instances, substantially 
facilitate the achievement of some of the objectives of financial 
participation schemes. 
G. Cross-border extension of financial participation schemes in the EC 
31. The data in the three preceding chapters about the existing legal and 
fiscal framework, the practice of financial participation schemes and 
on the evidence of their effects, are essentially drawn from the 
PEPPER-Report. The examination of the practice of financial 
participation In the EC-countries, the legal framework etc. by the 
PEPPER-Report, was basically carried out within the existing legal 
and fiscal framework of each individual country, i.e. with a 
"national" perspective, and then compared with the other countries. A 
number of reactions to this approach have made the Commission realise 
that in this way certain intra-community aspects of financial 
participation are not sufficiently covered. 
A number of multinational enterprises operating at a European level 
(and this number is only likely to grow) want, for various reasons, 
to make the benefits of financial participation schemes available to 
their employees in different EC-countries under comparable 
conditions. In addition to the usual motives which companies may have 
for using financial participation schemes in a national context, 
these companies also have transnational motives like using financial 
participation as a means of reinforcing corporate identity and the 
sense of belonging to a multinational group. Alternatively they may 
- 16 -
be faced with practical problems arising when employees within the 
group wish to remain participant in a financial participation scheme 
also when they are transferred to work In a different part of the 
group in another country. In addition, when a multinational operates 
a successful scheme In one particular country, e.g. its country of 
origin, employees in other countries often ask for something similar. 
At present, enterprises wishing to cross borders with their 
financial participation schemes, are confronted with a number of 
obstacles. 
These obstacles can broadly be grouped into three general categories: 
a) socio-cultural differences between the member states-, 
b) differences in fiscal/financial treatment of schemes; 
c) administrative/procedural requirements. 
The socio-cultural differences between member states are in 
themselves not the major obstacle, but may require of the enterprise 
concerned additional efforts to explain what is intended or may 
require it to engage in different ways of dealing with employees and 
their representatives than what it is used to do. More information 
about all aspects of financial participation schemes distributed on a 
wide scale as this Recommendation will encourage,should already have 
a favourable impact on overcoming such imponderable barriers. 
The second category, differences in fiscal/financial treatment of 
financial participation schemes, is where the largest number of 
problems originate. In countries where some type of financial 
participation scheme is made attractive by government in particular 
through fiscal incentives, that type of scheme generally is the one 
most commonly introduced by enterprises (see also section 34). It is 
understandable that when those enterprises want to apply a similar 
scheme abroad and when these incentives then are not available, the 
scheme In question may become much less attractive and even 
conditions of taxation and social security contributions may make its 
use in certain countries prohibitively expensive. Enterprises 
recognize that each country has its own fiscal and social security 
system and that differences in those systems will persist for many 
more years in the EC. At the same time, however, they observe that 
certain details of these fiscal and social security regulations make 
cross-border application of financial participation schemes 
unnecessarily cumbersome and that things could be facilitated by 
revising such details without having to perform a major overhaul of 
these regulations. This could be done without any attempt to 
harmonize fiscal or social security systems - which would clearly 
lie beyond the scope of this Recommendation. Such observations are 
mainly related to the treatment of employee share-ownership and 
stock-option schemes in several countries. 
The third category, administrative hurdles, creates similar problems, 
although of a less fundamental character, and therefore in the end of 
a less prohibitive nature. 
In some countries there are procedures for recognition of financial 
participation schemes before one can benefit from an advantageous 
fiscal/financial treatment. These procedures can contain elements 
which are more difficult to satisfy by a foreign than by a domestic 
enterprise. There are often requirements for a considerable amount of 
- 17 -
information to be supplied e.g. when shares are issued to be made 
available to employees. Sometimes there is an obligation to use local 
intermedial ries for the handling of a scheme in order for it to be 
recognized. Employee share-ownership may cause problems when the 
shares are not quoted nor traded in a particular country. Schemes 
which use trusts or Joint investment funds may encounter problems 
when these entities are not easily recognized abroad (problem of 
legal status). 
Although most of theseobstacles can in the end be overcome, their 
existence may either discourage enterprises from extending their 
financial participation schemes abroad or often at least increases 
their costs. It is worth examining to what extent things could 
already be facilitated by a wider use of an approach based on mutual 
recognit ion. 
At this stage the Commission can offer no ready-made solutions to the 
problems caused by administrative hurdles and/or by differences in 
fiscal/financial treatment. It therefore proposes to have them 
examined by a working party composed of experts from all member 
states. Cross-border application of financial participation schemes 
in the EC would benefit tremendously from the existence of formulae, 
which, when adhered to, would be more or less automatically 
recognized in all member states and would then qualify in each 
country for treatment which would be known in advance and operate as 
far as possible under comparable conditions. Thus it is suggested to 
charge the working party with examining possibilities for the 
creation of formulae of financial participation by employees at a 
European level for each one of the following three types of schemes: 
a) a profit-sharing scheme; 
b) an employee share ownership scheme; 
c) a stock options scheme. 
H. Related Issues and developments 
32. The promotion of financial participation schemes does not take place 
in a vacuum, but is related to several other relevant socio-economic 
developments. The most important of these related developments are 
mentioned here not only to draw attention to their relationship with 
financial participation schemes, but also to indicate unambiguously 
that these issues themselves lie beyond the scope of this draft 
Recommendation and are therefore not being dealt with in any detail. 
Related issues, not subject of this Recommendation are : 
general procedures for Information, Consultation and 
Participation in Enterprises; 
general trends in wage policies and wage negotiation, including 
(individual) performance related pay systems; 
general trends in private share-ownership and asset-formation; 
cooperative enterprises and the cooperative movement; 
the European Company Statute; 
the liberalisation of financial services and capital markets in 
connection with the achievement of the Internal Market; 
financing of (supplementary) pension provisions. 
- 18 -
:. Role of the social partners 
33. The social partners play a crucial role both in the preparation of 
financial participation systems and in their implementation. The 
positions and attitudes of the two sides of industry in various EC 
countries have so far been rather divergent. Of course, there are 
important differences concerning the extent to which financial 
participation schemes have been a topic for discussion between the 
social partners and this is reflected in their positions. 
In countries where these schemes are rarely used, employers 
associations do not yet seem to have adopted a definite standpoint. 
Elsewhere, employers associations generally have emphasised their 
support for enterprise-level schemes, provided they can be introduced 
on a voluntary basis and the final design of the schemes can be 
decided at enterprise level. The availability of tax facilities is 
an important incentive to use such schemes but not the overriding 
motive. Employers usually consider financial participation schemes 
an important instrument for improving employee motivation and 
commitment to the enterprise's interests. In this connection the 
employers'first preference generally seems to be for share-based 
types of schemes (where practicable). 
Trade unions have often been reluctant to facilitate the introduction 
of financial participation schemes. 
They have several major concerns : 
they are unhappy that these schemes are frequently introduced 
unilaterally by employers, which makes them suspicious about 
the real motives behind the schemes; 
financial participation schemes might lead to increased 
inequality between wage-earners, e.g. between those working in 
very profitable sectors and others in less flourishing sectors; 
financial participation schemes may lead to high risks for the 
workers involved if for example a very substantial part of their 
income becomes variable or if they build up substantial holdings 
of bonds or shares issued by their employer (see section 13); 
the introduction of such schemes might be used to circumvent or 
weaken collective wage negotiations; 
if tax-incent Ives were to lead to a serious loss of tax income 
for the State, this money would then have to be sought elsewhere 
or the State might be tempted to reduce the level of collective 
services. 
As an alternative trade unions have often put forward proposals on 
collective forms of profit-sharing by means of wage-earners' funds; 
these are regarded as an important instrument for a more even 
distribution of income and wealth. 
Nevertheless, many trade unions now have more pragmatic positions on 
financial participation. These have evolved with the actual diffusion 
of schemes in practice and range from giving more outright support 
in some countries to a more wait-and-see attitude in others. In 
several countries where the central trade union associations do not 
yet fully accept financial participation, many local trade unions 
have a more positive stance, actively participating in the signing of 
agreements, which they expect to produce positive effects for their 
members. 
- 19 -
In order to create a climate of constructive cooperation between the 
social partners on these matters, it seems therefore essential that 
when financial participation schemes are being introduced, this is 
done on a voluntary basis on both sides and seriously negotiated 
between them. The existence of financial participation schemes 
should not weaken nor substitute for the normal wage negotiations 
between the social partners dealing with basic wages and other work 
conditions. 
J. Role of governments 
34. The development of financial participation schemes is strongly 
influenced by government action. Governments are primarily 
responsible for the creation of a legal and fiscal framework that may 
favour such schemes but may also impede their introduction. This is 
illustrated by the finding of the PEPPER-report that in those 
countries where a particular type of financial participation scheme 
has been encouraged by government, the schemes most commonly 
introduced by enterprises are indeed the ones promoted through 
official government measures. In particular the availability of tax 
incentives makes a big difference. Such incentives may only be 
needed temporarily : once the relevant scheme has gained a certain 
momentum, the incentive may be reduced or phased out. The findings 
of the PEPPER-report suggest that the potential advantages of 
financial participation schemes would justify governments giving 
serious consideration to the introduction of such fiscal facilities. 
At present, different official government positions in individual EC-
countries must be seen against a background of differing traditions 
and especially large differences in actual experience in practise 
with regard to financial participation schemes. In countries like 
France and the UK government policies have been actively encouraging 
the use of financial participation schemes for a considerable number 
of years. In BeIgium. Denmark. Germany. Greece. Ireland. Italy and 
the Nether lands, financial participation schemes of various types 
have been the subject of national debate but government support has 
either been limited or lacking, or has emerged fairly recently. An 
important issue in political discussions in many countries has been, 
and to some extent still is, whether schemes at enterprise-level, or 
more central collective schemes, ought to be encouraged. In Denmark. 
Germany and Italy in particular, the issue of economy-wide wage-
earners' funds was at the centre of the debate, but due to the 
absence of a general consensus and insufficient support for 
compulsory collective arrangements, none of the proposals advanced 
have been adopted. In Luxembourg. Portugal and Spain, the financial 
participation issue has so far received only limited attention, nor 
has it been among the priority issues for discussion between the 
social partners. Only very recently and possibly in connection with 
the Commission's announcement of a Community instrument and the 
publication of the PEPPER-report, has interest in financial 
participation matters increased in some of these countries. 
Governments have so far basically operated from a national 
perspective in matters of financial participation. As set out in 
section 31, the existing national legal and fiscal frameworks do 
contain a number of obstacles for enterprises practising a financial 
participation scheme in one EC-country, when they want to make the 
benefits of that scheme also available, under comparable conditions, 
to their employees in another EC-country. Solutions for such 
problems can only be found with the active help of governments. 
- 20 -
Finally, governments can encourage the use of financial participation 
schemes by supplying adequate information to all potentially 
Interested parties including in particular information about the 
experiences acquired in other Member Sates. 
HI. THE ELEMENTS OF THE PROPOSAL 
35. This proposal is the product of a range of preparatory activities. 
These include the research project carried out at the European 
University Institute in collaboration with experts from the member 
states resulting in the PEPPER-report. There has also been a wide 
measure of consultation between the two sides of industry both 
centrally (under the social dialogue) and on an industry basis, 
involving all types of undertaking, including small and medium sized 
bus Inesses. 
These consultations have enabled the Commission to take note of the 
various points of view regarding both the timeliness of a Community 
proposal in this field and the legal nature and content of the 
proposed instrument. A Recommendation, a Community instrument of a 
non-binding nature, was chosen, because in the circumstances it was 
considered to be the most appropriate oneto obtain voluntary and 
active support for the introduction of financial participation 
schemes from all parties concerned. 
36. Objective and scope 
The objective of the proposal is to encourage the widespread use of 
different forms of participation by employees in profits and 
enterprise results, either by means of profit sharing, or through 
employee share-ownership or by a combination of both. 
The Recommendation is addressed at all EC governments but 
acknowledges that there is a great diversity in the schemes currently 
encountered in the Community which it is not seeking to reduce. At 
the same time there are large differences between the member states 
as regards their actual experience with financial participation 
schemes, which makes it very useful, in particular for the less 
experienced countries, to spread adequate information about the 
different schemes practised, their possibilities, effects etc.. 
37. The proposed approach 
More specifically member states are recommended: 
to ensure that legal structures are adequate to allow the 
introduction of the forms of financial participation referred to 
in this Recommendation; 
to consider the possibility of according fiscal or other 
financial incentives (the importance of such incentives was 
indicated in section 20); 
to facilitate the supply of information and to take account of 
experiences acquired elsewhere in the EC; 
- 21 -
to allow the social partners a sufficiently wide range of 
options, from which to chose at a level close to the employee 
and to the enterprise; 
to encourage consideration of a number of key characteristics 
(described in section 39) when setting up new schemes or when 
reviewing existing ones; 
to examine after three years to what extent financial 
participation by employees has increased in their country and to 
communicate the results within four years to the Commission. 
38. In order to deal with the cross-border aspects of financial 
participation, described in section 31, the Commission will set up a 
working party with a view to examining possibilities for the creation 
of formulae for the following three types of financial participation 
schemes by employees at a European level, in order to improve the 
opportunities for the application under comparable conditions 
throughout the Community of such schemes: 
a) a profit-sharing scheme; 
b) an employee share ownership scheme; 
c) a stock options scheme. 
39. Key characteristics of financial participation schemes 
In this draft Recommendation the importance of allowing for a wide 
range of alternative schemes from which the most appropriate ones can 
be chosen has already been underlined. However, since the success of 
these schemes mainly depends on certain key features, it would seem 
advisable to take into account experiences already acquired 
elsewhere In the EC. When new schemes are set up or when existing 
schemes are being reviewed, it is therefore recommended that special 
attention should be paid to the following characteristics, which 
appear to be of crucial importance: 
a) Regularity: schemes benefit from application on a regular basis 
and from awarding any "bonus" at least once a year or over 
shorter periods, if major motivational effects are to be 
obtained; 
b) Pre-determined formula: the formula setting employee benefits 
should be determined unequivocally before the beginning of each 
reference period. Individual governments may decide whether one 
or more parameters of the formula should be established at the 
national level (e.g. through specific legislation), or whether 
the formula can be freely negotiated between the two sides of 
industry, possibly within a legal framework set up to facilitate 
and encourage financial participation schemes. The formula 
itself should not be fixed once and for ail, as it could be 
renegotiated; but neither should it be subject to too frequent 
(e.g. annual) changes, since a number of years' application will 
be required before sufficient experience is gained; 
c) No substitute for wage negotiations: the existence of financial 
participation schemes is not to be considered a substitute for 
normal negotiations dealing with basic wages and other 
conditions of employment. The benefits of these schemes should 
be received in addition to basic wages and should not interfere, 
for example, with the existence of statutory minimum wages. 
- 22 -
d) Voluntary participation: both enterprises and individual 
employees should be able to choose whether or not they 
participate in schemes. 
e) Calculation of employee benefits: bonuses should not be fixed in 
advance but be variable and linked to enterprise performance 
(expressed in terms of profits or some other enterprise 
indicator) over a certain period of time, according to a 
previously agreed formula; this formula should also specify 
unequivocally the indicator of enterprise performance to be 
used. The findings of the PEPPER-report suggest that average 
benefits amounting to less than 5% of guaranteed employee wages 
in a year of regular profitability, can in themselves not be 
expected to produce substantial motivational effects. 
f) Risks: apart from a degree of income variability inherent to 
financial participation schemes, employees may incur additional 
risks when they acquire risk-bearing securities (e.g. shares or 
bonds); when these risks are heavily concentrated (e.g. 
securities issued by the employing firm) and large in relation 
to the employee's total assets, they may come to be considered 
unacceptably high, even though additional risks linked to 
profit-sharing schemes may already to some extent be compensated 
for by the higher employment security which profit-sharing is 
expected to provide. Under such circumstances it may be 
advisable either to seek a better spread of risks or to examine 
possibilities of insurance against too heavy losses in the value 
of these assets. 
g) Beneficiaries: beneficiaries are primarily employees, i.e. wage-
earners covered by employment contracts; benefits should as far 
as possible be made available to all or at least the larger part 
of the enterprise's employees including part-time and temporary 
employees. 
h) Enterprise type: schemes can be applied by both privately-owned 
firms and public enterprises, as long as suitable indicators of 
enterprise results or profits are, or can be, made available. 
I) Enterprise size: small and medium-sized firms should have 
adequate opportunities to apply financial participation schemes; 
in particular it is important to ensure that administrative 
obligations are reasonable and minimum financial requirements, 
if needed at all, are not too high; in larger enterprises, 
especially multi-national companies, it may be useful to link 
all or part of employee benefits to the performance of separate 
profit units, rather than to overall enterprise results. 
j) Complexity: schemes of a complex nature are to be avoided, as 
the results are likely to be better if the scheme can be easily 
understood by all employees. 
k) Information and training: for the success of any type of scheme 
a substantial effort will be required to supply adequate 
information to all employees concerned. In this regard the 
implementation of financial participation schemes can also 
provide a link with activities promoted by the Community in 
other areas: information and consultation, training, education. 
- 23 -
IV. CONCLUSIONS 
40. In submitting this proposal for a Recommendation to the Council, the 
Commission, in accordance with its Action Programme relating to the 
implementation of the Community Charter of the Fundamental Social 
Rights for Workers, aims to underline the importance which it 
attaches to employee participation in profits and enterprise results 
either by means of profit-sharing, or through employee share-
ownership or by a combination of both. This is the light in which the 
present draft Recommendation should be viewed. 
Action at the Community level will mainly consist of: 
encouraging the use of financial participation schemes and the 
exchange between users of experiences with these schemes; 
the supply of relevant information about financial participation 
schemes ; 
encouraging the creation of some types of financial 
participation schemes to be used community-wide under comparable 
conditions; 
monitoring further developments in this field. 
ANNEX 
FINANCIAL PARTICIPATION SCHEMBS IN THE EUROPEAN COMMUKITY IN THE LATB 1980S -
SUMMARY OF PRINCIPAL FINDINGS OF THE PEPPER REPORT 
APhrrVliltiontti _.. r.n> Rt.p. bond-based profit-Hharing; CPS : cash-based profit-Bharing; 
PS: profit-Hharing; SPS: share-based P^'^-^-'^'^^^^crBhip; SO: stock options; DSO: discretionary 
DPS- deferred profit-uharing/invcBtrocnt fundn; ESO: employee snare owncrnniF( 
share optionn; ESOP: employee ohare ownership plans; EBO: employee buy-out». 
.Count i Y 
OELGXUM 
DENMARK Gonorol 
attitudo 
Mainly un­
favourable, 
but today 
discussed 
Mainly 
favourablo 
(, discussed L o g i s 1 a 
Specific laws & 
year of introd. 
Various, but 
only on ESO 
(•linen 19 82), 
including 
SO (1984) 
On SPS and ESO 
(r.inct! 19 58) t i o n 
Tax 
_,bcacfita 
Rather 
limited, 
especially 
for SO Diffusion of 
Prevalent No. of schemes/ 
_LYECja firm» involved 
ESO Around 2 0 
quoted 
companion 
CPS 
Some for 
SPS (uharcs 
or bonds) 
(. ESO CPJL 
SPS 
D£S. 
ESO 32 PBPPKR Bchomos 
Employees Employee benefits or 
involved profit M hare/employee 
Multinationals 
Insurance 
Banks 
Diatribution 
Min. 50 schemes 
20 
27 : On average Shares reserved for 
5% (varying employees: 4% on average 
from i-28*i of total shares iouued 
Around 5% of distribut­
able profits; 
8-15% of perforroance-
rclatcd pay 
2% of Bharo capital 
DKR 3.4QQ per employer 
Less than 2% of total 
.share capital 
GERMANY Mn inly 
f ovourabl».* 
except for 
CPS; 
intensively 
discussed Some : on DPS 
(sinco 1961) 4 
ESO (primarily 
since 1984) Minor until 
1984, only 
for DPS & 
ESO JCalai 2Q0 or more 
ESO & 1,600 firma 
DPS (0.1% of 
tolaJj 
PS in 
general Max. 5,000 
firms, mainly 
small-scale 1.3 mln. 
80% usually 
pftrticioata 
5.4% of 
individuals Employee capital: DM 15 
bin (only 5% of firmii' 
annual balance) 
6.8% of wages 
Country 
FRANCS 
ORKBCB 
IRELAND 
ITALY Oeneral 
attitude Legislation 
Specific laws b Tax 
YCOX Qt inUOd. benefits 
Very 
favourable t 
intensively 
discussed Various : 
CPS (1959) 
DPS (1967) 
SO (1970) 
ESO (since 1973) 
Employeo invest, 
funds (1973) 
EBO (1984) 
Unique legisl. 
on all forms in 
1986, amended in 
199Q. Substantial 
for both 
firms & 
employees Diffusion of PBPPBR sche.es 
prevalent No. of schemes/ Employées Employeo benefits or 
tYP„n firmn invgivrrt involved Drofit aham/cmo 1 oyrr 
DPS 12,000 firros 4.6 mln. Profit shares on average 
t 10,200 (3 raln- 3-4% of tho waati bil1 
.^r^menta hrnfif i tUnn 1 
CPS 
ES0< 
SO 
EBO 
Growing 
acceptance 
Favourable 
& discussed Provisions in Significant 
several laws:on for CPS 
CPS (Bince 1984) 
& ESO (primarily 
.uincu 19B7) 
SPS (1982) Modest 
SO (1986) CPS 
SO. 
_P-S-
Not clearly Non-existent, 
defined, except general 
but some provisions 
forms (1942 Civil 
discussed Code) No CPS 
ESO 
LUXKHBOURO Not clearly Non-existent 
defined No CPS 
ESO 7,000 
350 firma 
(7^1 minted) 
600 quoted 
companies 1.4 mln. Profit shareB on average 
4.1% of the waao bill 
600,000* Frco distrib. of shared: 
1% of the waac bill 
10-20 per year 
in 1980-90 
Limited; 
in banking, 
insurance, 
clothing, 
_____ . 
I .19 Rf hemes 
___. 
All in the 
private sector 
25% of all 
largo firms; 
60 private 
fjpn* *" 1988 
30 quoted 
companies 
22% of firms 
Mainly in 
..hnnKiaq 
•Refers only to free diatribution of enterprise shares to employees Lump sum of GD 30,000 
50,000 
KxccutivcM Probably high 
TS.QQO 
400,000; 3% of average earnings 
applied to (but can bo as high as 
80% of all 10% or more) 
ftrnploveoB 
Lees than 5% of total 
share capital 
Usually not more than 
0.5-2 months' salary v/i 
Ooooral 
attitude 
Cotintrr L o g i » 1 
Specific laws 
if intro 
NBTHB«I--n)S Favourable «, Some incentive 
intensively offered only 
discussed to CPS 
PORTUGAL 
SPAIN 
UK Not clearly 
defined & 
mainly not 
riinTnnacd 
Not clearly 
defined, 
but 
discussed Only genera-
provisions c: 
PS & ESO 
f f fWnWTP"^ • t i o n 
Tax 
T benefits 
Minor, 
conditional 
on freezing 
of CPS 
Primarily 
for PS Diffusion of 
Prevalent No. of schemes/ 
__EC_ firms involved 
CPS 6-30% of 
J lima PBPPBR scho-os 
Employees Employeo benefit:» or 
involved profit iiharo/em»loyc»M 
350,000 in 4.5 - 6.5% of 
.1975 flvernqp oarninqu 
SPS, BPS Very limited(3% 
E. ftO nf ^11 BCh____L 
Mainly 
CPS Limited,but most 
diffused form. Sometimes 
Large firms restricted to 
jn finance eurmitlvca 
Only general 
provisions i 
Statute of 
Workers; & 
EDO (1986) Minor, 
except 
for EBO CPS 44% of medium 2% of 
& largo firms salaried 
but only in 6% employees 
directly linked (often 
to profits restricted 
o executives! Profit-linked payments 
5% of labour costs; in 
some cases as high an 
10-25% of total pay o* 
Very 
favourable 
& 
discussed SPS (1978) 
SO (1980) 
DSO (1984) 
CPS (1987) 
ESOPo (1989) 
ESO (1978 -Substantial 
for both 
firms & 
employees lu:mea fiUhHt.ftnt.ial 
7S7.0QQ ?f employee pay 
2-4% of total wages 
SU. __891. ^•^•QQQ 
Total: 7,282 schemes 2 mln 
30% of firms employees 
benefitting 
S_____: Compiled on the bas is of infor_»tion contained in Chapte rs 4-15 on individual countries1 experiences 
- 27 -
Proposal for a 
COUNCIL RECOMMENDATION 
concerning the promotion of employee participation 
in profits and enterprise results 
(including equity participation) 
THE COUNCIL OF THE EUROPEAN COMMUNITIES 
Having regard to the Treaty establishing the European Economic Community, 
and in particular Article 235 thereof, 
Having regard to the proposal from the Commission, 
Having regard to the opinion of the European Parliament, 
Having regard to the opinion of the Economic and Social Committee, 
Whereas in its Communication concerning the Action Programme relating to 
the Implementation of the Community Charter of the Fundamental Social 
Rights of Workers the Commission announced its intention to present a 
Community instrument on equity sharing and financial participation by 
workers; 
Whereas a report on the promotion of employee participation in profits and 
enterprise results in the Member States of the European Community has been 
prepared and whereas this report has established that there is a great 
variety in the types of scheme encountered in the Community, including cash 
payments, share-based and deferred profit-sharing schemes and various types 
of particular employee share-ownership schemes-, 
Whereas encouragement at Community level of schemes of financial 
participation by employees is to be seen as a means of achieving a better 
distribution of the wealth generated by enterprises, while encouraging a 
greater involvement of employees in the progress of their companies; 
Whereas while the body of empirical research about the effects of such 
schemes in practice does not yet provide overwhelming evidence of strong 
overall advantages, there are sufficient indications that such schemes 
contribute to a number of positive effects, including improvements in 
employee motivation and productivity and in the competitiveness of 
enterpr ises; 
Whereas it is appropriate to promote a larger diffusion of financial 
participation schemes within the European Community, without seeking an 
active harmonization or a reduction in the existing wide range of available 
schemes ; 
Whereas the ultimate success of this Community in itiative wi 11 to a large 
extent depend on the active interest and involvement of the social partners 
themselves; 
- 28 -
Whereas in the context of the completion of the internal market it is 
necessary to study the possibilities for the development of transnational 
formulae for employee participation in profits and enterprise results; 
Whereas the present action appears necessary to attain, in the course of 
the operation of the common market, one of the objectives of the Community, 
I. HEREBY INVITES THE MEMBER STATES: 
To acknowledge the potential benefits of a wider use of a broad variety of 
schemes to increase the participation by employees in profits and 
enterprise results either by means of profit-sharing, or through employee 
share-ownership or by a combination of both. 
II. HEREBY RECOMMENDS THE MEMBER STATES: 
1. To ensure that legal structures are adequate to allow the 
introduction of the forms of financial participation referred to in 
this Recommendation; 
2. To consider the possibility of according incentives such as fiscal 
or other financial advantages to encourage the introduction of 
certain schemes; 
3. To encourage the use of such schemes by facilitating the supply of 
adequate information to all relevant parties; 
4. To take account of experiences acquired elsewhere in the European 
Community when considering giving preferential treatment to 
particular types of financial participation schemes; 
5. To ensure that the social partners have the opportunity to choose 
from a sufficiently wide range of options on the basis of 
consultations between employers and employees or their 
représentât Ives; 
6. To ensure that this choice can be made at a level which, taking 
account of the national practice in this regard, is as close as 
possible to the employee and to the enterprise ; 
7. To encourage consideration of the key issues set out in the Annex 
when new financial participation schemes are being prepared or when 
existing schemes are being reviewed; 
8. To examine, after a period of three years following the adoption of 
this Recommendation, the data available at a national level on the 
development of financial participation by employees and to 
communicate the results to the Commission; 
9. To enhance social partners' awareness of the above matters. 
- 29 -
III. TAKES NOTE OF THE COMMISSION'S INTENTION 
10. To set up a working party to examine possibilities for the creation 
at a Community level of formulae of financial participation schemes 
by employees , in order to improve the opportunities for the 
application under comparable conditions throughout the Community of 
such schemes; these would include the following three types: 
a) a profit-sharing scheme; 
b) an employee share ownership scheme; 
c) a stock options scheme. 
11. To submit a report to the Council on the application of this 
Recommendation within four years of its adoption on the basis of the 
information supplied to it by the Member States. 
Done at Brussels, For the Council 
The President 
- 30 -
ANNEX 
Key issues to be considered when new financial participation schemes 
are being prepared or when existing schemes are being reviewed 
1. Regularity; schemes benefit from application on a regular basis and 
from awarding any "bonus" at least once a year or over shorter 
periods. 
2. Pre-determined formula: the formula setting employee benefits should 
be determined unequivocally before the beginning of each reference 
period. 
3. No substitute for wage negotiations: the existence of financial 
participation schemes is not to be considered a substitute for normal 
negotiations dealing with wages and other conditions of employment. 
4. Voluntary participation: both enterprises and individual employees 
should be able to choose whether or not they want to apply for or 
participate in schemes. 
5. Calculation of employee benefits: bonuses should not be fixed in 
advance but variable and linked to enterprise performance (expressed 
in terms of profits or some other enterprise indicator) over a 
certain period of time, according to a previously agreed formula; 
this formula should also specify unequivocally the indicator of 
enterprise performance to be used. 
6. Amounts: in order to produce the expected motivational effects the 
average size of bonuses should on the one hand be significant in 
relation to the fixed part of employees' wages, while on the other 
hand a ceiling (in amounts or in percentages) might be advisable in 
order to avoid wide fluctuations in total income. 
7. Risks: apart from some income variability inherent to schemes, 
employees may incur additional risks when they acquire risk-bearing 
securities (e.g. shares or bonds); when these risks are heavily 
concentrated (e.g. issued by the employing firm) and large in 
relation to the employee's total assets the possibility of some form 
of insurance against too heavy losses in the value of these assets 
merits careful examination. 
8. Beneficiaries: beneficiaries are primarily employees, i.e. wage-
earners covered by employment contracts; as far as possible access to 
schemes should be open to all employees of the enterprise. More 
generally, workers in the same objective situation should have equal 
rights with regard to access to participation schemes. 
9. Enterprise type: schemes can be applied by both privately-owned firms 
and public enterprises, as long as suitable indicators of enterprise 
results or profits are, or can be, made available. 
- 31 -
10. Enterprise size: small and medium-sized firms should have adequate 
opportunities to apply financial participation schemes; in particular 
it is important to ensure that administrative obligations are 
reasonable and minimum financial requirements, if needed at all , are 
not too high; in larger enterprises, especially multi-national 
companies, it may be useful to link all or part of employee benefits 
to the performance of separate profit units, rather than to overall 
enterprise results. 
11. Complexity: schemes of a complex nature are to be avoided, as the 
results are likely to be better if the scheme can be easily 
understood by all employees; 
12. Information and training; for the success of any type of scheme a 
substantial effort will be required to supply adequate information 
and training, if necessary, to all employees concerned. 

ISSN 0254-1475 
COM(91) 259 final 
DOCUMENTS 
EN 08 
Catalogue number : CB-CO-91-328-EN-C 
ISBN 92-77-74685-8 
Office for Official Publications of tie European Communities 
L-2985 Luxembourg