Proposal for a COUNCIL RECOMMENDATION concerning the promotion of employee participation in profits and enterprise results ( including equity participation )
Date: 1991-09-03
Institutions: European Commission
Subjects: competitiveness, exchange of information, job satisfaction, report, shareholding, worker participation

COMMISSION OF THE EUBOPEAN  COMMUNITIES 

C0M(91) 259 final 

Brussels,  3 September 1991 

Proposal  for a 

CQUNCIL RECOMMENDATION 

concerning the promotion of employee participation 

in profits and enterprise results 

(including equity participation) 

(presented by the Commission) 

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CONTENTS 

I. 

INTRODUCTION 

II. 

THE CONTEXT 

A. Antecedents and preparations 

B. Typology of schemes for financial  participation by employees 

C. Financial  participation schemes  in economic theory 

D. The existing  legal and fiscal  framework  for financial 

participation schemes  in the EC 

E. Financial  participation schemes  in practice 

F. Evidence on the effects of financial participation schemes 
G. Cross-border extension within the EC of financial 

participation schemes 

H. Related  issues and developments 

I. Role of the social  partners 

J. Role of governments 

I I I.  THE ELEMENTS OF THE PROPOSAL 

IV.  CONCLUSIONS 

3 

3 

3 

5 

6 

8 

10 

13 

15 

17 

17 

17 

20 

23 

-  3 -

EXPLANATORY  MEMORANDUM 

I. 

INTRODUCTION 

1. 

2. 

3. 

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. 

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. 

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 
the 
of  non-inflationary  growth,  the  Commission  considered  that  " 
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 
focus  on  employee 
participation  in  the  profits  and  capital  growth  of  their  enterprise 
and on employee  share-ownership. 

instrument  will 

context,  the 

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 
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. 

profit-sharing 

Following 

schemes. 

tax 

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. 

- 5 -

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. 

-  6 -

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. 

labour 

productivity 

The  first  is  the  Incentive  effect,  which  is  expected  to  result  in 
higher 
enterprise 
and 
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. 

improved  overall 

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. 

- 7 -

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) 

b) 

c) 

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. 

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. 

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). 

-  8 -

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. 

16. 

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. 

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-

- 9 -

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). 

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. 

17. 

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. 

-  10 -

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, 
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 
encouraged  by  law -  is the principal  form of  financial  participation 
applied  by  enterprises,  as  the  unfavourable  and  uncertain  fiscal 
climate  for  other  forms has  resulted  in  limited  practices of  profit-
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 
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 
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 
profit-sharing 
schemes), while only  16 % are profit-related pay schemes. 

share-ownership,  and 

12%  share-based 

I 
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I 
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; 

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-  11  -

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. 

f 
}• 

E.3 

Enterprise  size  and  sectoral  distribution 

-  12 -

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 
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 
in  some  countries  such  as 
large  variety  of  sectors,  while 
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%. 

E-5 

Employee benefits 

-  13 -

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. 

-  14 -

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 
comparable 
their  employees 
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 
corporate  identity  and  the 
participation  as a means of  reinforcing 
sense  of  belonging  to a multinational  group. Alternatively  they  may 

EC-countries  under 

in  different 

-  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 
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. 

participation 

application 

financial 

of 

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 : 

for 

Information, 

Consultation 

general 
procedures 
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. 

and 

:. 

Role of  the social  partners 

-  18 -

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  : 

lead 

participation  schemes  might 

they  are  unhappy  that  these  schemes  are  frequently  introduced 
unilaterally  by  employers,  which  makes  them  suspicious  about 
the  real  motives behind  the schemes; 
financial 
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. 

by 

are 

government 

action.  Governments 

The  development  of  financial  participation  schemes  is  strongly 
influenced 
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 
in  financial 
publication  of  the  PEPPER-report,  has  interest 
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. 

H I. 

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. 

EC  governments  but 
is  addressed  at  all 
The  Recommendation 
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. 

IV. 

CONCLUSIONS 

-  23 -

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 
financial 
of 
participation  schemes  to be used  community-wide under  comparable 
conditions; 
monitoring  further  developments  in this  field. 

creation 

types 

some 

the 

of 

ANNEX 

FINANCIAL  PARTICIPATION  SCHEMBS  IN  THE EUROPEAN  COMMUKITY  IN  THE LATB  1 9 8 0S  -

SUMMARY  OF  PRINCIPAL  FINDINGS  OF  THE PEPPER  REPORT 

A P h r r V l i l t i o n t ti 
r.n> 
PS:  p r o f i t - H h a r i n g;  SPS:  s h a r e - b a s ed  P ^ ' ^ - ^ -
DPS-  d e f e r r ed  p r o f i t - u h a r i n g / i n v c B t r o c nt 
s h a re  o p t i o n n;  ESOP:  e m p l o y ee  o h a re  o w n e r s h ip  p l a n s;  EBO:  e m p l o y ee  b u y - o u t ». 

f u n d n;  ESO:  e m p l o y ee  s n a re  o w n c r n n iF( 

' ^ ' ^ ^ ^ ^ c r B h i p; 

_.. 

R t.p.  b o n d - b a s ed  p r o f i t - H h a r i n g;  CPS :  c a s h - b a s ed 

p r o f i t - B h a r i n g; 
SO:  s t o ck  o p t i o n s;  DSO:  d i s c r e t i o n a ry 

.Count i Y 
OELGXUM 

G o n o r ol 
a t t i t u do 

M a i n ly  u n 
f a v o u r a b l e, 
b ut 
t o d ay 
d i s c u s s ed 

L  o  g  i  s  1  a 
l a ws  & 
i n t r o d. 

S p e c i f ic 
y e ar  of 
V a r i o u s,  b ut 
o n ly  on ESO 
( • l i n en  19  8 2 ), 
i n c l u d i ng 
( 1 9 8 4) 
SO 

t 

i  o  n 

Tax 

_,bcacfita 
R a t h er 
l i m i t e d, 
e s p e c i a l ly 
f or  SO 

DENMARK 

M a i n ly 
f a v o u r a b lo 
(,  d i s c u s s ed 

On  SPS  and ESO 
(r.inct!  19 5 8) 

Some for 
SPS  (uharcs 
or  bonds) 
(.  ESO 

CPJL 
SPS 

D£S. 
ESO 

f

D i
i on 
f u s
P r e v a l e nt  N o.  of 
_LYECja 
ESO 

CPS 

of 

s c h e m e s/ 
firm»  involved 
A r o u nd  2 0 
q u o t ed 
c o m p a n i on 
Multinationals 
Insurance 
Banks 
Diatribution 
Min.  50 schemes 
20 
27 
32 

: 

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 
ESO  & 
DPS 

PS  in 
g e n e r al 

2Q0  or  more 
1 , 6 00 
f i r ma 
( 0 . 1% of 
tolaJj 
Max.  5 , 0 00 
f i r m s,  m a i n ly 
s m a l l - s c a le 

P B P P KR 

B c h o m os 

Employee  benefits or 
profit  M hare/employee 
Shares  reserved  for 

Employees 
involved 
On average 
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 

1 .3  m l n. 
80%  u s u a l ly 
p f t r t i c i o a ta 
5.4%  of 
i n d i v i d u a ls 

E m p l o y ee  c a p i t a l:  DM  15 
( o n ly  5%  of 
b in 
a n n u al  b a l a n c e) 
6.8%  of  w a g es 

f i r m i i' 

D i f f u s i on 
P B P P BR 
prevalent  No.  of  schemes/  Employées 
t Y P„n 
DPS 

of 

firmn  invgivrrt 
12,000  firros 
t  10,200 
.^r^menta 
7,000 

involved 
4.6 mln. 
(3 
hrnfif i t U nn 1 
1.4  mln. 

raln- 

600,000* 

s c h e . es 

Employeo  b e n e f i ts  or 
Drofit  aham/cmo 1 oyrr 

Profit  shares on average 
3-4%  of  t ho  w a a ti  b i l1 

Profit  shareB on average 
4.1% of the waao  bill 
Frco distrib. of shared: 
1% of the waac  bill 

Country 
FRANCS 

O e n e r al 
attitude 

Very 
favourable 
t 
intensively 
discussed 

ORKBCB 

Growing 
acceptance 

IRELAND 

Favourable 
& discussed 

i n U O d. 

benefits 
Substantial 
for both 
firms & 
employees 

L e g i s l a t i on 
Specific  laws  b  Tax 
YCOX  Qt 
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. 
Provisions in 
several  laws:on  for CPS 
CPS  (Bince 1984) 
& ESO (primarily 
.uincu 19B7) 
SPS  (1982) 
SO  (1986) 

Modest 

Significant 

ITALY 

Not clearly  Non-existent, 
defined, 
but some 
forms 
discussed 

except  general 
provisions 
(1942 Civil 
Code) 

No 

LUXKHBOURO  Not clearly  Non-existent 

No 

defined 

CPS 

ES0< 

SO 

EBO 

CPS 

SO. 

_P-S-

CPS 

ESO 

CPS 
ESO 

350 firma 
(7^1 minted) 
600 quoted 
companies 

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 

v/i 

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 

Ooooral 
attitude 

L o g i » 1 
Specific laws 
if intro 

Tax 
T  benefits 

t i o n 

Cotintrr 
NBTHB«I--n)S Favourable «, Some incentive 

PORTUGAL 

SPAIN 

UK 

intensively  offered only 
discussed 

to CPS 

Not clearly 
defined & 
mainly not 
riinTnnacd 
Not clearly 
defined, 
but 
discussed 

Only genera-
provisions c: 
PS & ESO 
f f fWnWTP"^ • 
O n ly  g e n e r al 
i 
p r o v i s i o ns 
S t a t u te  of 
W o r k e r s;  & 
( 1 9 8 6) 
EDO 

Very 
favourable 
& 
discussed 

SPS  (1978) 
SO  (1980) 
DSO  (1984) 
CPS  (1987) 
ESOPo  (1989) 
ESO  (1978 -

f

i on 

D i
f u s
P r e v a l e nt  No.  of 
__EC_ 
CPS 

of 
s c h e m e s/ 
firms involved 
6-30% of 
J lima 

P B P P BR 

s c h o - os 

E m p l o y e es 
i n v o l v ed 

3 5 0 , 0 00 
.1975 

in 

E m p l o y eo  b e n e f i t :» 
p r o f it 

i i h a r o / e m » l o y c »M 

or 

-  6 . 5%  of 

4 .5 
flvernqp 

o a r n i n qu 

S P S,  BPS  V e ry 
E. 

ftO 

M a i n ly 
CPS 

CPS 

l i m i t e d ( 3% 
nf 
^ 11  B C h _ _ _ _L 
L i m i t e d , b ut  m o st 
d i f f u s ed 
L a r ge 
jn 

f i n a n ce 

f i r ms 

f o r m. 

S o m e t i m es 
r e s t r i c t ed 
e u r m i t l v ca 
2% of 
salaried 

44%  of medium 
&  largo firms 
but only  in 6%  employees 
directly  linked  (often 
to profits 

restricted 

to 

Profit-linked  payments 
5% of  labour  costs; in 
some cases  as high  an 
10-25%  of  total  pay 

o* 

Minor, 
conditional 
on freezing 
of CPS 
P r i m a r i ly 
f or  PS 

M i n o r, 
e x c e pt 
f or  EBO 

Substantial 
for both 
firms & 
employees 

o  executives! 

f i U h H t . f t n t . i al 

lu:mea 

?f  employee  pay 

2-4%  of 

t o t al  w a g es 

SU. 

__891. 

7 S 7 . 0 QQ 

^ • ^ • Q QQ 

T o t a l: 

7 , 2 82  schemes 
f i r ms 
30%  of 

2  mln 
e m p l o y e es 
b e n e f i t t i ng 

S_____:  Compiled  on  t he  b as 

is  of 

i n f o r _ » t i on  c o n t a i n ed 

in  C h a p te 

rs  4 - 15  on  i n d i v i d u al  c o u n t r i e s1 

e x p e r i e n c es 

-  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 
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; 

at  Community 

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. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

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  incentives  such  as  fiscal 
or  other  financial  advantages  to  encourage  the  introduction  of 
certain schemes; 

To  encourage  the  use  of  such  schemes  by  facilitating  the  supply  of 
adequate  information  to all  relevant  parties; 

To  take  account  of  experiences  acquired  elsewhere  in  the  European 
Community  when  considering  giving  preferential 
treatment  to 
particular  types of  financial  participation schemes; 

To  ensure  that  the  social  partners  have  the  opportunity  to  choose 
from  a  sufficiently  wide  range  of  options  on  the  basis  of 
consultations 
their 
représentât Ives; 

employees 

employers 

between 

and 

or 

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 ; 

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; 

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. 

III.  TAKES NOTE OF  THE COMMISSION'S  INTENTION 

-  29 -

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. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

Regularity;  schemes  benefit  from  application  on  a  regular  basis  and 
from  awarding  any  "bonus"  at  least  once  a  year  or  over  shorter 
periods. 

Pre-determined  formula:  the  formula  setting employee  benefits  should 
be  determined  unequivocally  before  the  beginning  of  each  reference 
period. 

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. 

Voluntary  participation:  both  enterprises  and  individual  employees 
should  be  able  to  choose  whether  or  not  they  want  to  apply  for  or 
participate  in schemes. 

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. 

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. 

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. 

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. 

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. 

11. 

12. 

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. 

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; 

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