Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - On a framework for the promotion of employee financial participation
Date: 2002-07-05
Institutions: European Commission
Subjects: EU action, Europe, action programme, exchange of information, labour relations, profit sharing, social dialogue (EU), type of business, wage earner, worker participation, workers' stock ownership

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 05.07.2002
COM (2002) 364 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT, THE ECONOMIC AND SOCIAL COMMITTEE AND
THE COMMITTEE OF THE REGIONS

On a framework for the promotion of employee financial participation

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT, THE ECONOMIC AND SOCIAL COMMITTEE AND
THE COMMITTEE OF THE REGIONS

On a framework for the promotion of employee financial participation

TABLE OF CONTENTS

Introduction.............................................................................................................. 3

Financial participation: main trends and challenges .................................................. 5

Forms of financial participation ................................................................................ 5

Benefits of financial participation ............................................................................. 6

Recent trends in employee financial participation ..................................................... 7

Synergies with other Community initiatives.............................................................. 9

Challenges for employee financial participation: the need for action....................... 11

General principles................................................................................................... 12

Transnational obstacles........................................................................................... 14

The problem ........................................................................................................... 14

What are the main obstacles?.................................................................................. 15

The way ahead........................................................................................................ 16

Towards a wider dissemination of financial participation........................................ 18

Developing favourable environments for financial participation ............................. 18

Developing social dialogue..................................................................................... 19

Extending the coverage of financial participation.................................................... 20

Improving information through research and studies............................................... 21

Building networks .................................................................................................. 22

Financial support for initiatives on financial participation....................................... 22

Conclusions............................................................................................................ 23

1.

2.

2.1.

2.2.

2.3.

2.4.

2.5.

3.

4.

4.1.

4.2.

4.3.

5.

5.1.

5.2.

5.3.

5.4.

5.5.

5.6.

6.

2

1.

INTRODUCTION

The debate on the financial participation of employees in profits and enterprise results – either
directly through profit-sharing or indirectly through share-ownership – has recently gathered
significant momentum across Europe.

While employee financial participation has already had a long and successful tradition in a
number of Member States, in many others only very little progress could be observed for a
long time. This has changed more recently. Many Member States have now embarked on
initiatives, which aim at promoting the use of financial participation schemes and at creating a
more favourable environment for their introduction.

There are a number of developments that have contributed to this renewed interest in the issue
of employee financial participation. At the Lisbon summit in March 2000, the EU has set
itself the objective of becoming “the most competitive and dynamic knowledge-based
economy in the world, capable of sustainable economic growth with more and better jobs and
greater social cohesion”.

Employee financial participation can make an important contribution to realising this goal.
Many studies and many concrete examples clearly indicate that if it is introduced in the right
way employee financial participation does not only enhance productivity and the
competitiveness and profitability of enterprises, but that it can at the same time encourage
workers’ involvement, improve the quality of work and contribute to greater social cohesion.

The positive experiences with financial participation schemes in many countries have
certainly contributed to putting this issue on the political agenda throughout the EU. In
particular the experience of the US shows the important impact financial participation can
have in terms of economic growth, fostering industrial change and making sure that all
workers participate in this growing prosperity.

In addition, a growing number of enterprises have started to realise the potential of employee
financial participation schemes. For them, employee financial participation has become
increasingly important as an instrument for motivating employees, aligning employees’
interests with those of shareholders and for recruiting and retaining staff.

At the same time, recent events in relation to the breakdown of a number of enterprises which
had share-ownership schemes in place have also demonstrated the potential risks that may be
involved in financial participation schemes. At least in some cases it has become obvious that
more could and should have been done to protect workers and to limit their exposure to
unreasonable risks. This is particularly the case for schemes which formed part of pension
plans and in which basic principles concerning risk diversification and transparency were not
applied. These examples have highlighted very strongly that in order to make the best use of
employee financial participation it is indispensable that some general principles are followed.

Main objectives

Following the announcement of a Communication and an action plan on financial
participation in the Commission’s Social Policy Agenda of June 2000, the main objectives of
this Communication are to

3

• provide orientation for the further development of employee financial participation in

Europe by outlining a set of general principles,

• promote a greater use of employee financial participation schemes across Europe by

presenting a framework for Community action for the years 2002-2004,

• address the transnational obstacles which currently impede the introduction of European-
wide financial participation schemes, proposing concrete actions for overcoming them.

This Communication builds upon a number of previous initiatives at EU level:

• In 1991 the Commission published the PEPPER I report on the ‘Promotion of participation
by employed persons in profits and enterprise results’1, which summarised the situation
concerning financial participation in Europe at the time.

• On the basis of this report, the Council adopted a Recommendation2 in 1992, which invited
the Member States to acknowledge the benefits of a wider use of financial participation,
taking into account the responsibilities of the social partners, in accordance with national
law and/or practice.

• The PEPPER II report3 on the application of the Council Recommendation underlined the
fact
that financial participation schemes are associated with a number of important
benefits, especially in terms of higher productivity levels, employment and workers’
involvement. It further stressed that the development of financial participation was strongly
influenced by government action, in particular through the availability of tax incentives.
However, it also concluded that the general approach of Member States’ policies to Pepper
schemes had not greatly changed and that there was little exchange of information.

• In its Resolution on the Pepper II report, the European Parliament made a number of calls
for action on the Commission, the Member States and the social partners, aiming at a wider
diffusion of financial participation schemes.

This Communication reflects the outcome of an extensive consultation process which was
launched by a working paper published in July 20014 and which involved all key stakeholders
and in particular social partners.

the responses

from Governments,

All
social partners, experts etc, welcomed the
Commission’s initiative to relaunch the debate on financial participation and encouraged
further actions to promote its wider use. Broad consensus existed in particular on the general
principles identified in the working paper, on the need to tackle transnational obstacles, and
on the desirability of an intensified exchange of information and experiences, including a
benchmarking exercise and the identification of good practice.

This process also included a conference organised jointly with the European Foundation for
the Improvement of Living and Working Conditions

1

2

3

4

Supplement 3/91, Social Europe.
Council Recommendation of 27 July 1992 concerning the promotion of participation by employed
persons in profits and enterprise results (including equity participation) (92/443/EEC).
Report from the Commission Pepper II COM(96) 697.
Financial participation of employees in the European Union. Commission Staff Working Paper.
SEC(2001)1308.

4

Main elements

In line with the objectives set out above and with the outcome of this consultation process,
this Communication will focus on the following main issues:

• General principles for financial participation,

• Transnational obstacles,

• Promoting a wider dissemination of financial participation in Europe.

2.

FINANCIAL PARTICIPATION: MAIN TRENDS AND CHALLENGES

2.1.

Forms of financial participation

The financial participation of employees in enterprise profits or enterprise results can take
many different forms. The common element and the main distinguishing feature is that it aims
at associating employees – usually on a collective basis – in enterprise profits and/or results.

The Pepper reports and the Council Recommendation identified two main categories of
financial participation schemes: profit-sharing and employee share-ownership.

Profit-sharing 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.

Employee share-ownership provides for an indirect participation of employees in enterprise
results either through receiving dividends and/or through an appreciation of employee-owned
capital.

Share options constitute a further form of employee financial participation, which is closely
related to employee share-ownership but which has also some specific features. Share options
give employees a right to buy company shares at a certain price for a specified period of time.
They are similar to share-ownership schemes insofar as they can ultimately lead to the
ownership of shares. However, unlike share ownership schemes they do not necessarily imply
the actual ownership of a stake in the company.

Related to profit-sharing are so-called ‘gainsharing’ schemes. Such schemes are not linked to
the financial performance of an enterprise, but
to other criteria such as increases in
productivity, cost reductions or certain qualitative objectives. They are therefore in general
closer to performance-related pay than to financial participation. However, to the extent that
such schemes are based on relatively broad performance measures and that these measures are
applied at a collective level gainsharing can serve the function of financial participation. This
is of particular relevance with regard to the public or non-profit sector, where standard forms
of financial participation may not be applicable.

In practice, a large variety of financial participation schemes exists, which are not confined to
those just described but which may also combine different elements of different approaches.
Financial participation schemes may thus also include asset accumulation or employee
savings plans, provided that contributions to these schemes are related to enterprise results
and/or that these schemes contribute to establish some form of employee share ownership.

5

The great diversity of existing employee financial participation schemes not only across but
also within Member States reflects the variety of objectives associated with financial
participation. The existence of a variety of different financial participation schemes is
essential for the adaptation of employee financial participation to different respective needs
and objectives. In order to make full use of the various benefits offered by the financial
participation of employees it will very often be preferable to make more than just one system
available or to develop combinations of different forms.

This Communication does therefore not limit its attention to any specific form of employee
financial participation but will address the general issues that arise in relation to promoting a
wider dissemination of employee financial participation in its different forms. It is important
to acknowledge that the choice, which the variety of available schemes gives to enterprises
and employees, is an important asset, which needs to be further developed.

2.2.

Benefits of financial participation

The participation of employees in profits and enterprise results is associated with a number of
potential benefits for enterprises, employees and the economy as a whole.

According to a recent study carried out for the Commission5 the main reasons for enterprises
to introduce financial participation are to encourage employees to take a greater interest in the
success of the company, to create a feeling of belonging to the company and sharing common
goals, and to encourage a greater alignment of employees’ interests with those of the
instrument for recruiting and
shareholders. Financial participation is also an important
retaining staff. In addition, it improves the motivation of employees, enhances their loyalty
and long-term commitment,
increases productivity, and improves competitiveness and
profitability. Finally, financial participation can also be an important instrument for raising
capital, in particular in the case of start-up firms.

For employees, financial participation contributes to a closer
identification with their
enterprise and to a better involvement in its affairs and in its progress. Especially when it is
linked to other participatory management practices and to the modernisation of work
organisation, financial participation can improve the quality of jobs and boost job satisfaction.
Moreover, financial participation schemes support the wealth formation of employees and
allow them to participate more in the economic growth generated in an economy than it
would be possible through wage income alone.

A number of studies6 also suggest that financial participation has a positive impact on
employment levels and that it can in particular improve the stability of employment over the
business cycle. Financial participation can also enhance the link between overall income and
productivity, in the sense that enterprises with higher productivity levels are likely to enjoy
higher profits for a time, in which employees will share. This may also have beneficial effects
on labour market functioning and employment
levels. Especially in connection to the
financing of start-up firms and the provision of venture capital to new enterprises financial

5

6

F. van den Bulcke (2000): A company perspective on financial participation in the European Union.
Objectives and obstacles.
For an overview see for example European Foundation for the Improvement of Living and Working
Conditions (2001a): Recent trends in employee financial participation or European Foundation for the
Improvement of Living and Working Conditions (2001b): Employee share-ownership and profit-
sharing in the EU.

6

participation schemes can play an innovative and important role with regard to economic
growth and industrial change.

Financial participation schemes thus contribute also to the achievement of social policy
objectives by leading to a more widespread participation in wealth creation and better social
cohesion.

Many empirical studies on the impact of financial participation have found a positive
relationship between financial participation and different performance measures. This link is
strongest and best established with regard to profit sharing. A number of important studies
also report a positive impact on motivation and job satisfaction.

Some recent studies emphasise in particular that the positive effects of financial participation
schemes are greatest when they are well-designed and embedded in a general context of
participatory management based on partnership. The benefits of financial participation
schemes also seem to be most pronounced when they are used in combination with other
human resource policy instruments, such as training, or with the introduction of new forms of
work organisation.

Both theoretical as well as empirical studies thus highlight the important benefits employee
financial participation can have. This underlines the need for enhanced efforts by all actors at
all levels to make financial participation available at a larger scale and to extend its coverage.

2.3.

Recent trends in employee financial participation

Two main features characterise the development of financial participation schemes in Europe:

• The overall use of employee financial participation is limited. While profit-sharing is more

developed, share ownership in particular is not very widespread.

• In addition, financial participation is very unevenly developed in different Member States.
While some Member States have a long tradition in promoting employee financial
participation, in others it is used only at a very limited scale.

According to a study by the European Foundation for the Improvement of Living and
Working Conditions (covering 10 Member States) 72% of enterprises did not have any
financial participation scheme at all in 1997.7 Share ownership schemes in particular were
very rare and existed only in 9% of companies. Financial participation schemes were most
common in France and the UK, with more than 50% of companies having such schemes.

Financial participation schemes were also more prevalent in larger enterprises. Eighty percent
of enterprises with less than 49 employees did not apply any financial participation scheme.
In contrast, around one third of larger enterprises with more than 200 employees had
introduced financial participation schemes.

More recent data for enterprises with more than 200 employees8 show that less than half of
the enterprises had profit-sharing schemes in place in 1999/2000 and that less than one third
had share-ownership schemes (see Table 1).

7

8

European Foundation for the Improvement of Living and Working Conditions (2001a).
European Foundation for the Improvement of Living and Working Conditions (2001b).

7

Table 1: Financial participation schemes by country (share of business units with
financial participation schemes in %, 1999/2000)

Share
ownership

Of which broadly
based (covering
more than 50% of
the workforce)

Profit-sharing Of which broadly
based (covering
more than 50%
of the workforce)

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Netherlands

Portugal

Spain

Sweden

UK

EU total

9

29

21

30

41

20

23

34

15

45

5

19

26

45

31

41

38

70

50

56

50

23

47

13

47

40

26

46

67

52

66

22

15

35

87

71

19

29

15

59

25

25

27

37

45

38

55

52

77

97

25

39

83

53

93

67

52

70

81

63

Source: European Foundation for the Improvement of Living and Working Conditions (2001b): Employee share-
ownership and profit-sharing in the EU.

The differences in the diffusion of financial participation in different countries are reflected in
different approaches of Member States policies. Employee financial participation has a long
tradition in both France and the UK, where government policies have continuously promoted
the use of financial participation schemes. In Ireland, Finland and the Netherlands, the
Pepper II report had noticed increased government support for financial participation,
including the introduction of new legislation and improved incentives. In the other Member
States government support for financial participation was either limited or completely lacking.
In some countries, including Germany, Spain and Italy, appeals had been made by the
governments to the social partners to put financial participation on their agenda.

In the meantime, the debate on financial participation has gathered momentum at a number of
levels. With regard to Member States, it is no longer only the traditional frontrunners that

8

promote very actively financial participation. Over the last years, new legislation and new
initiatives were adopted in a number of countries, including Belgium, Ireland, Finland,
Austria and the Netherlands. Further measures were also introduced in France and the UK.
In Italy employee financial participation has been included in a recent White Paper on labour
market reforms. In Germany, there have also been renewed appeals to the social partners to
take up financial participation as an issue in collective bargaining.

This new momentum can also be observed at social partner and enterprise level. Both at
national as well as European level, social partners are playing an increasingly active role in
the promotion of financial participation. Finally, employee financial participation schemes are
also more and more widespread at enterprise level, and have in many cases become an
indispensable instrument of human resource policy.

These recent initiatives clearly reflect the growing awareness for the benefits of financial
participation. Nevertheless, more needs to be done in order to promote the use of financial
participation even further. In addition, the uneven development across Europe makes this an
area where the exchange of experiences is particularly useful. This Communication therefore
proposes a number of concrete actions aiming at such an intensified exchange of information
and experiences as well as the identification of good practices.

In view of the upcoming enlargement of the EU, special attention has to be given to the
situation in candidate countries. On the whole, employee financial participation is only very
little developed in Central and Eastern European candidate countries. The privatisation
process brought about a certain surge in schemes for employee ownership and management
and/or employee buy-outs in a number of countries. Even in those cases, the importance of
employee ownership has in the meantime tended to decline again.

There exist a number of specific obstacles for the development of financial participation in
Central and Eastern Europe:

• Especially in cases where employee ownership emerged by default rather than by design,

employee-owned enterprises often face severe financial difficulties.

• Interest in employee share ownership on the part of employees tends to be limited; very

often employees have a preference for selling their shares almost immediately.

• With the completion of privatisation, favourable tax arrangements that existed in some

countries for the purposes of employee buy-outs are expiring.

• In virtually all candidate countries there is a complete lack of any legal or fiscal framework
or any supportive policy for the development of employee financial participation in its
different forms.

Given these challenges, this Communication will suggest a number of measures which are
particularly aimed at addressing the specific situation in candidate countries.

2.4.

Synergies with other Community initiatives

The different benefits of employee financial participation make it an integral element in
achieving the Lisbon objectives. Financial participation is an excellent example of a policy
which can simultaneously address economic, employment and social objectives in a mutually
reinforcing way. When introduced in the right way, financial participation can render

9

enterprises more profitable and competitive, improve the motivation, commitment and job
satisfaction of workers, enhance the quality of work and last but not least contribute to a more
equitable distribution of income and wealth.

Promoting employee financial participation thus also shows that investing in the quality of
work and industrial relations is not only and not primarily a cost factor but also a productive
factor contributing to higher productivity, social cohesion and higher social standards, as it
was outlined in the Commission’s communication of June 2001 on “Investing in quality”9.

In this context, financial participation can further play an important role for the development
of European capital markets and most notably risk capital markets. This was explicitly
acknowledged in the Broad Economic Policy Guidelines for the year 2000 as well as in the
Commission’s communication on “Risk capital: a key to job creation in the European
Union”10. Especially when compared to the experiences in the US, there exists still a huge,
largely unused potential for the further development of financial participation as part of an
overall strategy aimed towards stimulating the growth of new, dynamic companies. The
promotion of financial participation is thus also part of the structural reforms needed to realise
Europe’s potential for growth, employment and social cohesion.

In addition, financial participation is an important element in the modernisation of work
organisation. The Commission’s Green Paper on “Partnership for a new organisation of
work”11 emphasised the potential role of the participation of employees in profits and
enterprise results in modernising work organisation, making a valuable contribution to the
competitiveness of European firms, to the improvement of the quality of working life and to
the employability of the workforce. By enhancing the identification of employees with their
enterprise and their involvement
in its affairs, employee financial participation plays an
important role for the successful modernisation of work organisation and for giving greater
responsibility to employees.

Financial participation is thus also closely linked to the European Employment Strategy and
the Employment Guidelines. It reinforces the objectives of the adaptability pillar, rendering
both enterprises and the workforce more adaptable to economic change. Moreover, by
providing a possible source of financing for start-up firms and by fostering an entrepreneurial
spirit among employees it also makes an important contribution in relation to the
entrepreneurship pillar.

By contributing to a closer alignment of employees’ interests with those of other shareholders,
and by ensuring that employees take a more active and long-term interest in the development
of their enterprise, financial participation also supports the emergence of more transparent and
effective corporate governance.

The recent discussion on corporate social responsibility shows very clearly the importance for
enterprises to take into consideration the interests of their various stakeholders. This is not
only important in its own right and for making sure that enterprise policies are socially and
environmentally responsible. It is also associated with very tangible benefits for enterprises
themselves and is therefore in their own best interest. The Commission’s Green Paper on
corporate social responsibility12 underlines these benefits for both companies and society

9

10

11

12

Employment and social policies: a framework for investing in quality. COM (2001) 313.
Risk capital: a key to job creation in the European Union. SEC(1998) 552.
Partnership for a new organization of work. COM(97) 128
Promoting a European framework for corporate social responsibility. COM (2001) 366.

10

when companies acknowledge their social responsibilities and take on board social and
environmental concerns.

Promoting a wider dissemination of employee financial participation is therefore not only
important in respect to the immediate benefits associated with it, but also because of its links
with important policy areas and objectives. There is thus a clear need for intensified efforts at
all relevant levels to make sure that more enterprises and employees can benefit from the
advantages of financial participation.

2.5.

Challenges for employee financial participation:

The need for action

The discussion so far has clearly underlined the need for further action in the field of financial
participation. This is reinforced by a number of concrete challenges:

• There is a clear need to strengthen the use of financial participation schemes across
Europe. So far and despite some recent progress, the overall use of financial participation
in Europe is limited and is developed very unevenly across Member States.

• Experience with financial participation also reveals a need to extend the coverage of
financial participation schemes. As highlighted above, small and medium sized enterprises
in particular face a number of specific problems in introducing financial participation
to consider
schemes (see also section 5.3). At
possibilities for extending financial participation to the public and non-profit sector. In a
number of countries such as Finland or Ireland some steps in this direction have already
been made.

is also important

the same time,

it

• As more and more enterprises are operating at an international scale and start introducing
financial participation schemes for their employees in different countries, transnational
obstacles become increasingly problematic.

• These transnational obstacles are set to become even more relevant since the introduction
of the euro. The associated deepening of economic integration implies that companies will
operate even more at a European-wide level. In addition, with the euro financial
participation schemes – and the benefits derived from them – become even more directly
comparable for employees working in different countries.

• The enlargement of the European Union poses a number of further challenges with respect
to financial participation. In most candidate countries, employee financial participation is
only very little developed and in most cases there are no general
legal and fiscal
frameworks in place for its development.

Legal aspects concerning Community initiatives in the field

The purpose of this Communication, which is in line with Article 140 of the EC Treaty, is to
promote financial participation across the EU by relaunching a Community wide debate there
on, improving knowledge on various schemes and suggesting some actions which should be
undertaken at all levels for the intensification of the relevant efforts.

11

3.

GENERAL PRINCIPLES

The overview of different forms of financial participation has shown the great variety of
financial participation schemes. At the same time, there also exist a number of core elements
and principles which characterise most financial participation schemes and Member States
policies. The general principles identified here reflect this basic consensus and can act as a
reference point for the identification of good practice. They should thus inspire the promotion
of financial participation schemes across Europe and serve as a guideline for Member States,
social partners and enterprises.

Voluntary participation

Financial participation schemes should be voluntary for both enterprises and employees. The
introduction of financial participation schemes should meet the actual needs and interests of
all parties involved, and should therefore not be imposed. Obviously, this does not preclude
that some elements of
financial
participation is introduced on the basis of legislation or collective agreements. Government
support programmes and the provision of a clear legal framework are important elements in
promoting the use of financial participation schemes. The involvement of the social partners
can also be a major factor in making sure the success of financial participation.

financial participation are made mandatory, or

that

Extending the benefits of financial participation to all employees

Access to financial participation schemes should in principle be open to all employees. While
a certain differentiation may be justified in order to meet the different needs and interests of
employees, financial participation schemes should aim at being as comprehensive as possible
and treating employees on similar terms.

Among the main benefits of employee financial participation are the increased identification
of employees, creating a feeling of belonging and improving the motivation of staff. Any
discrimination between employees would run completely counter to these objectives and
should therefore be avoided.

Clarity and transparency

Financial participation schemes should be set up and managed in a clear and transparent way.
This is important for the acceptance of such schemes and allows employees to assess fully the
possible risks and benefits involved. Priority should be given to clear, comprehensible plans,
with an emphasis on the transparency for employees. In this relation it
is particularly
important that employees or their representatives are informed and consulted about the details
of financial participation schemes which are to be introduced.13

Especially share-ownership schemes will almost inevitably involve a certain complexity. In
this case, it is important to allow for adequate training for employees to enable them to assess
the nature and details of the scheme in question.

Schemes should also be managed in a transparent way. Enterprises should strictly adhere to
existing accounting standards and disclosure rules. In addition employees should receive

13

This results also from the obligation under Directive 2002/14/EC of the European Parliament and of the
Council of 11 March 2002 establishing a general framework for informing and consulting employees in
the European Community to inform and consult employees or their representatives on changes in
relation to work organisation or contractual relations.

12

regular information and should be informed about any developments which may have a major
impact on their investment.

Predefined formula

Rules on financial participation in companies should be based on a predefined formula clearly
linked to enterprise results. This is a major element in ensuring the transparency of such
schemes. Also with view to the motivation, commitment and identification of staff it will
obviously be preferable to adopt a clear and predefined formula rather than decide on any
profit-sharing scheme only ex-post.

Regularity

Financial participation schemes should be applied on a regular basis and should not be a one-
off exercise. This is particularly important if such schemes are aimed at enhancing and
rewarding the long-term commitment and loyalty of staff. It is obvious that this regularity in
the application of schemes does not imply that the benefits derived from them remain stable
over time. It lies in the nature of financial participation schemes that the bonuses received will
vary depending on enterprise results and profits and that in some years no bonuses will be
paid at all or that there may be a fall in the value of employees’ investments.

Avoiding unreasonable risk for employees

Compared to other ‘investors’ employees tend to be more exposed to adverse economic
developments affecting their enterprise. For them, it is not only their investment that is at
stake, but potentially also their income and their job itself.

The extent to which financial participation schemes involve risks for employees depends,
however, on the details of each scheme. In general, cash- or fund-based schemes are likely to
involve only limited risks. Also in relation to share-ownership plans possible risks for
employees depend to a large extent on the details of each plan, including for example the
length of any retention period, provisions concerning an earlier sale of shares, or ceilings on
the amounts that can be invested.

Given the potential risks for employees involved, due consideration should in any case be
given in the introduction and running of financial participation schemes to the avoidance of
any unreasonable risks. At the very least, employees have to be warned of the risks of
financial participation resulting from fluctuations in income or from limited diversification of
investments. As set out above, financial participation schemes should also be introduced and
managed in a clear and transparent way. When designing financial participation schemes,
consideration should be given to develop mechanisms or to give priority to such schemes,
which avoid excessive risks for employees taking into account the objectives pursued with the
respective scheme.

Distinction between wages and salaries and income from financial participation schemes

A clear distinction has to be made between income from financial participation on the one
hand and wages and salaries on the other. In some specific cases (for example for top
executives or in the case of start-up firms) income from financial participation, and in
particular stock options, may constitute an important part of the overall remuneration. In
general, however, financial participation cannot be a substitute for pay and fulfils different,
complementary roles. Any income from financial participation should therefore be paid in
addition and above a fixed wage, which is determined according to national rules and

13

practices. In this respect, social partners can of course bargain over pay and terms of financial
participation as they see fit.

Compatibility with worker mobility

Financial participation schemes should be developed in a way that is compatible with worker
mobility both internationally and between enterprises. Policies towards financial participation
in particular should avoid creating barriers to the international mobility of workers.

One of the main objectives of financial participation obviously is to enhance the long-term
commitment and loyalty of employees to their enterprise. However, at the same time more
and more employees are faced with increased demands for mobility and flexibility in working
life. Adequate provisions that take into account both the company’s interest in a long-term
commitment of their employees and the employees’ right to mobility should therefore be
made in the design of financial participation schemes for dealing with any problems resulting
from a termination of contracts.

4.

TRANSNATIONAL OBSTACLES

4.1.

The problem

Financial participation schemes and policies towards financial participation in Europe are
characterised by a huge diversity. As such this diversity does not pose any problems and
should in fact be welcomed as an important factor in making sure that employee financial
participation systems are best suited to the respective circumstances at national and enterprise
level.

However, these differences can also imply severe obstacles to the use and development of
employee financial participation at a transnational level. Differences in tax systems, with
regard to social security contributions,
legal framework or also cultural
differences make it very often impossible for enterprises to develop and apply a common
financial participation scheme across Europe.

in the general

Where enterprises introduce schemes that are open to all their employees in different Member
States, this will normally involve substantial costs and a huge administrative burden. In many
cases, these costs will be prohibitively high for enterprises. Moreover, even if such schemes
are applied across Europe, they will need to be adapted to different national circumstances.
This implies that employees in different countries will in fact not be treated equally even
though they participate in what should be the same financial participation scheme.

Moreover, existing differences do not only put a burden on enterprises, they can also act as a
barrier to the free movement of workers and in some cases also to the free movement of
capital, especially where they give rise to problems of double taxation.

Overall, these transnational barriers therefore prevent a wider dissemination of financial
participation schemes in Europe. It would obviously be more logical and easier for companies
to set up one and the same financial participation scheme, with only a few and limited
national adjustments. This will be particularly relevant in the case of a European Company,
which will operate under one single set of rules in many important areas, and where it would
only be consistent if it could use a common financial participation scheme as well.

14

4.2.

What are the main obstacles?

Taxation

Differences in taxation systems can lead to two sets of problems. Firstly, such differences can
give rise to double taxation issues. This is primarily a problem in relation to stock options. For
employees of an enterprise who move from one country to another these differences can mean
that they are either taxed twice or in some cases not taxed at all. None of the current double
taxation agreements between Member States have specific provisions covering the taxation of
stock options. However, the existing, more general provisions, for instance those on income
from employment (Article 15 of the OECD Model Convention), could possibly be interpreted
in such a way as to provide a solution, as is currently being explored within the framework of
the OECD.

Secondly, differences in fiscal systems can also imply substantial administrative costs for
enterprises wishing to introduce financial participation schemes in different countries. They
will inter alia have to take into account different rules on the deductibility of costs, different
rules on minimum retention periods, different rules on any potential discount offered to
employees, different rules on the timing of taxation, or different rules concerning the
eligibility for any preferential tax treatment.

Social security contributions

Differences in the treatment of income from financial participation with regard to social
security contributions can add to the complexities involved in introducing such schemes. Not
only the level of social security contributions may differ across countries. In some cases
income from financial participation may be exempted completely from social security
contributions.

In addition, the level of social security contributions sometimes deters firms from extending
financial participation schemes to certain countries. This is particularly the case because very
often the actual income from financial participation schemes will only be known ex post.
Facing very high potential social charges can thus entail incalculable risks for enterprises.

The actual rules on social security contributions themselves need not always be totally clear-
cut. This legal uncertainty for enterprises and employees acts as an additional obstacle to
extending financial participation schemes.

Legal differences

Legal differences between Member States also play a role in impeding the introduction of
financial participation at a transnational level.

In the case of share-ownership plans, differences in securities laws and in particular in relation
to prospectus requirements can be problematic. In accordance with Council Directive
89/298/EEC there should be an exemption from prospectus requirements for employee share
plans. However, in practice this may not cover all schemes, the exemption may not be
automatic, and the details of this exemption may differ from one country to another.

Specific problems may arise also in relation to employment law, concerning for instance
eligibility criteria or the termination of contracts, including severance pay or the portability of
shares or stock options. Differences in data protection laws can also complicate the actual
administration of financial participation schemes.

15

Cultural differences

Enterprises may further encounter problems in introducing financial participation schemes at
a transnational level, because of cultural differences, different attitudes towards financial
traditions or differences in industrial relations systems.
participation, different national
Depending inter alia on national traditions and policies, employees and social partners may
have different attitudes to different forms of financial participation.

For the most part, these differences obviously have to be taken as given. At the same time,
more information and a more intensified exchange of experiences may go a long way towards
reducing any potential problems arising from these cultural differences.

Lack of mutual recognition of financial participation schemes

A fundamental problem for the introduction of employee financial participation in an
international context is the general lack of mutual recognition.

In a number of countries there exist special, tax-approved financial participation schemes
which sometimes enable enterprises and employees to benefit from preferential treatment
with respect to taxes or social security contributions. In some cases this may also involve
separate institutions or funds which are created with regard to the administration of such
schemes. In most cases it is not possible to open these schemes to employees in other
countries. Enterprises which operate internationally will therefore usually have to forego the
benefits offered by such schemes, if they do not want to introduce financial participation
schemes for only part of their employees.

Lack of information

The introduction of financial participation schemes at an international level is also hampered
by a general lack of information about existing financial participation schemes or policies
towards financial participation. Overcoming this lack of information may be prohibitively
costly especially for smaller enterprises and may deter them from even contemplating the
introduction of such schemes. In addition, this lack of information can also limit the potential
for national authorities being willing to recognise existing financial participation schemes in
other countries and making it possible for employees in their own country to contribute to
them.

4.3.

The way ahead

It is clear that the different obstacles call for different solutions, also depending on the kind of
financial participation scheme under consideration.

In many cases, better information and an intensified exchange of experiences may go a long
way towards alleviating obstacles. This is especially the case with regard to cultural
obstacles..

In the other cases and in relation to the current lack of mutual recognition and the variety of
national fiscal or social security systems the Commission considers that it has to be very
attentive to the possible negative effects deriving from the application at national level of such
schemes, as to the free movement of capital or to the right of establishment. Until now
however no existence of such barriers to the free movement of capital or to the right of
establishment came into the knowledge of the Commission.

16

The Commission has also considered seriously obstacles created by double taxation. In order
to avoid such problems it is crucial that financial participation schemes are covered by double
taxation agreements. Here several possible ways are open: Either there is the possibility that
existing agreements could be interpreted as covering such schemes, as currently explored
within the OECD with regard to cross-border tax issues raised by employee stock options.
The OECD work, where the EU Member States as well as the Commission are actively
participating, has led to proposals for possible interpretations and solutions, notably in
relation to timing mismatches, the determination of the period of employment to which an
option relates and cases where the employee’s country of residence changes.

Or if sufficient solutions are not found within the existing framework of double taxation
agreements, new provisions could be included. This would necessitate the re-negotiation of
existing double taxation agreements and would therefore be a cumbersome procedure. As
outlined in the Commission Communication “Towards an Internal Market without
tax
obstacles – a strategy for providing companies with a consolidated corporate tax base for their
EU-wide activities” 14 a way forward may be to agree an EU version of the OECD model
convention and commentary (or of certain articles) which meet the specific requirements of
EU membership. In the Communication the Commission announced its intention to start
technical discussions with Member States on these issues with the aim of coming forward
with a communication on the matter in 2004.

Regarding differences in tax systems, social security regulations and legal systems a number
of different options exist. It has to be emphasised that a full-scale harmonisation of existing
rules on financial participation schemes is not necessary in this respect. There exist, however,
a number of possibilities which would make it easier for enterprises to introduce financial
participation schemes at European level.

A closer co-ordination of current practices in the field of financial participation,
the
formulation of certain voluntary guidelines, or an agreement on certain general principles
(concerning, e.g., such issues as the timing of taxation, retention periods or coverage ratios)
could already make an important difference. Other options would include steps towards an
easier mutual recognition of existing systems, or the development of one or more European
financial participation schemes which would be adaptable to different national contexts.

Actions

• The Commission will set up a working group of independent experts in 2002. The mandate
of the group will be to identify and analyse the existing transnational obstacles in more
detail and in particular with regard to the Treaty rules, and to explore the different options
that are available for alleviating them. Member States experts and social partners will be
closely associated in the work of this group. The group is to present its final report and a
set of recommendations in 2003. Based on this report a decision on further actions will be
taken. As regards the taxation problems these will primarily be dealt with in the context of
the follow-up to the study on “Company taxation in the internal market”.15

14

15

COM(2001) 582 final, pp. 14-15.
SEC(2001) 1681.

17

5.

TOWARDS A WIDER DISSEMINATION OF FINANCIAL PARTICIPATION

5.1.

Developing favourable environments for financial participation

The use of employee financial participation schemes is strongly influenced by supportive
government policies. In some cases, Member States have already developed clear and
comprehensive legal frameworks. Very often, this is combined with financial incentives to
make these schemes even more attractive. In a number of countries, the creation of such
favourable environments has taken place in close co-operation and with the support of the
social partners. In others, government support for financial participation is largely limited to
selected incentive measures or to appeals to the social partners to include financial
participation as a topic in collective agreements.

In order to further develop the financial participation of employees in profits and enterprise
results in Europe, it will be important that Member States continue and intensify their efforts
in providing a favourable legal and fiscal environment, taking into account the Treaty rules on
state aid and EU policies on harmful tax competition. The general principles of financial
participation outlined above should give orientation and act as a guideline in this respect.

Given the different state of development of financial participation in different countries, there
is a huge potential for an intensified exchange of information and experiences. So far, there
have been only little initiatives in this regard and it seems that there is still a widespread lack
of information on the potential and possibilities of employee financial participation.

Actions

The Commission will promote the exchange of information and identification of good
practice through the following actions:

• Financial participation will be included in the peer

the
Employment Guidelines. A first peer review concentrating on the UK Partnership Fund
will be organised in 2002. Member States are invited to present further initiatives to this
peer review programme.

review programme under

• In order to organise a more structured exchange of information the Commission will
prepare a benchmarking of national policies and practices. In this respect, a feasibility
study will be carried out in 2002, which will explore practical and conceptual issues. The
actual benchmarking exercise will be carried out in 2003. The results will be presented and
disseminated in 2004. After this first round of benchmarking it will be decided whether
this should become a regular exercise and at what intervals this should best take place.16
The results of the feasibility study and the benchmarking exercise will be submitted for
discussion to the Group of Directors-General for Industrial Relations.

• The Commission will continue to support projects, studies and the creation of networks

that aim at a larger dissemination of information about financial participation.

16

The intention is not to add to the existing processes for policy co-ordination, but to put in place a
flexible instrument for a systematic exchange of information and experiences as well as the
identification of good practice.

18

• The Commission will promote the organisation of national conferences which bring
together the key stakeholders in the field of financial participation, aiming at the transfer of
information and experiences across Europe.

• In order to tackle the particular challenges faced in candidate countries, the Commission

will continue to support initiatives aimed at

–

–

–

–

raising awareness for the benefits and possibilities of financial participation,

improving information about existing policies and schemes,

developing appropriate legal and fiscal frameworks,

establishing and developing networks.

5.2.

Developing social dialogue

Social partners have a crucial role to play in the further development of employee financial
participation. In many cases, social partners have already taken a very constructive approach
with some remarkable results. In a number of cases, however, there exist still a number of
reservations and apprehensions especially on the part of trade unions.

These apprehensions very often have to do with the possible risks involved for employees,
with the implications for wage flexibility and the wage bargaining process, and with the
implications for industrial relations. It is important to note that there exists no systematic
evidence that would link employee financial participation with lower wage rates or that would
show a negative impact on collective bargaining. To the contrary, a recent study by the
European Foundation for the Improvement of Living and Working Conditions (2001b)
concluded that financial participation does not weaken the role of trade unions or works
councils, and that
there is even a positive correlation with other forms of direct or
representative participation.

There are a number of reasons why social partners’ contributions to the further development
of employee financial participation are critical:

• There is strong evidence suggesting that the benefits of financial participation are greatest
when such schemes are introduced through a partnership approach and when they are
embedded in an overall approach of participative management. It is therefore crucial to
further develop social dialogue on this issue and to make sure that financial participation is
introduced in a way that makes the best use of its potential.

• The general principles outlined above suggest a number of areas where social partners
could play a key role in making sure that existing financial participation schemes are
indeed in line with these principles. This concerns in particular such issues as the
avoidance of unreasonable risks, the clarity and transparency of schemes or training needs.

• Given the fact that many businesses are operating on an increasingly international level,
financial participation should be promoted further as an issue for discussion in European
Works Councils and in relation to the European Company Statute.

• Social dialogue can make an important contribution to overcoming some of the obstacles
that still exist, including at transnational level, for a wider use of employee financial

19

participation schemes. This includes an exchange of information and a sharing of
experiences at social partners’ level, which could address existing apprehensions and
problems and could lay the foundation for the further, balanced and mutually beneficial
development of employee financial participation.

Actions

• The Commission will place particular emphasis on supporting initiatives of social partners

on financial participation, including

–

–

–

the exchange of information and experiences,

the creation of networks,

research and studies.

• Social partners are invited to explore further the possibility for social dialogue, including at

sectoral and multinational level.

5.3.

Extending the coverage of financial participation

The benefits of employee financial participation are in principle not confined to those sectors
where it is currently most common, i.e. larger, profit-oriented enterprises. The development of
schemes that are applicable to sectors and enterprises which at the moment do not normally
take advantage of employee financial participation is therefore an important challenge for a
wider diffusion of employee financial participation. This concerns in particular SMEs, but
also the public and non-profit sectors.

SMEs face a number of particular problems in relation to introducing financial participation
schemes for their employees. Very often,
the costs and administrative complexities in
developing such schemes will be prohibitively high for smaller firms. When taking into
account the limited number of employees of SMEs the (fixed) costs of such an undertaking
may also appear disproportionate relative to the potential benefits.

At the same time, employee financial participation schemes entail some important advantages
specifically for SMEs. In addition to the general benefits mentioned above, financial
participation can for instance play a particular role in the provision of start-up finance for new
enterprises. Financial participation can also be an important
instrument for SMEs for
attracting and keeping key personnel. Finally, financial participation schemes often offer
solutions in cases where the succession in family-run SMEs poses difficulties.

The unique problems and opportunities of SMEs with regard to employee financial
participation call for specific targeted solutions and measures of support. It is important to
develop financial participation schemes that are adapted to the particular needs of SMEs
which allow them to take advantage of the different benefits offered by financial participation.

The logic underlying the benefits of financial participation is also not confined to profit-
oriented enterprises. In principle, it should be possible to realise the same benefits also in
other sectors, such as the public or non-profit sectors. Moreover, if financial participation
schemes were limited exclusively to commercial enterprises this would imply that large parts
of the working population would be excluded from the benefits of financial participation.

20

It is obvious that standard forms of financial participation can hardly be applied in these
sectors. However, the notion of financial participation is not necessarily confined to a
financial measure of enterprise results. This has already been emphasised in relation to
gainsharing as a possible form of financial participation. As with the case of SMEs there
seems to be a clear need for further research on the possibilities of extending financial
participation to these sectors and enterprises.

Actions

• The Commission will give special attention to the particular situation of SMEs in its

different initiatives proposed in this Communication.

• The Commission will carry out studies and promote research on the particular problems

faced by SMEs in introducing financial participation.

• The Commission will support research and other initiatives studying the possibilities for

extending financial participation to the public and non-profit sector.

5.4.

Improving information through research and studies

Despite the significant amount of information and research that has become available over the
past decades on various aspects of employee financial participation, there still remain some
important gaps. More research is for instance needed on the framework conditions that need
to be satisfied for a successful introduction of financial participation. Other aspects, including
inter alia the links between financial participation and employment also merit further
attention. The same is true for macroeconomic implications of financial participation
schemes.

At a more fundamental level, only patchy data is available in general on employee financial
participation. This includes basic issues such as coverage ratios or amounts involved. More
research is therefore also needed on the incidence of financial participation.

A further important gap in the literature concerns the interrelationship between financial
participation and other aspects of enterprise policies and industrial relations. Some recent
research has started to address these questions, but much more work will be needed in this
context.

Actions

The Commission will continue to support and to carry out research projects which are aimed
at filling existing gaps. Particular attention will be given to the following dimensions:

• Collection of data on the use and dissemination of financial participation schemes.

• Implications of financial participation for enterprise performance, employment, the quality

of work and social cohesion.

• Links between financial participation and other elements of enterprise policies and

industrial relations.

• The situation and particular problems for the development of financial participation in the

candidate countries.

21

The Commission also invites the European Foundation for the Improvement of Living and
Working conditions to continue its work in the area of employee financial participation.

5.5.

Building networks

In order to enhance the dissemination of information and experiences and to raise the
awareness for the potential of financial participation it will also be important to foster an
ongoing dialogue at European level. This should cover all relevant aspects, including the co-
operation at technical levels, for example on issues such as taxation or accounting practices,
but also the continuous exchange between social partners, or a co-operation between Member
States on issues of common interest.

It is also important that the different measures envisaged in this Communication are supported
and accompanied by a continuous debate between all actors concerned. In order to provide a
more permanent basis for this, the creation of networks or the extension of existing networks
will be particularly useful. The Commission will therefore continue to support the building of
such networks at all relevant levels.

Actions

The Commission will promote and support the building of networks in the following areas:

• Academic networks,

• Networks of experts,

• Social partners,

• Companies,

• Institutes,

• Associations active in the field of financial participation.

5.6.

Financial support for initiatives on financial participation

Financial support for the actions identified above will be available through different channels:

• Promoting employee financial participation is one of the key objectives under budget line
B3-4000 on Industrial Relations and Social Dialogue. Projects and initiatives to be
supported within this framework concern especially the exchange of information and best
practice, raising awareness, improving knowledge of financial participation systems, and
the provision of training for the social partners.

• Projects on employee financial participation can also be supported in the framework of
Community Incentive Measures on Employment. This concerns particularly initiatives
exploring the links between employee financial participation and the European
Employment Strategy, notably in relation to the adaptability pillar and the entrepreneurship
pillar. The Council and the European Parliament reached a political agreement on these
Community incentive measures, covering the period 2002-2006, in February.

22

• Under Article 6 of the European Social Fund Regulation, the Commission can finance
innovative measures that seek to promote new approaches and identify examples of good
practice which can subsequently improve the implementation of the operations supported
by the ESF, including especially in the areas of corporate social responsibility or the
modernisation of work organisation.

• Research on employee financial participation will also be eligible for funding under the
Commission’s Framework Programme for Research and Technological Development.

6.

CONCLUSIONS

Despite recent progress towards a wider dissemination of employee financial participation in
Europe, its actual use remains limited and very uneven between Member States. Given the
various benefits of financial participation for enterprises and employees and its potential
contribution to realising the objectives set out at the Lisbon summit, there is a need for all
actors at all relevant levels – Member States, social partners, enterprises – to step up efforts to
promote a wider use of employee financial participation throughout Europe.

This Communication has set out a framework for action at Community level with a view to
support such a wider diffusion of financial participation. Its main elements are

• Raising awareness and improving information on the benefits of employee financial

participation;

• Intensifying the exchange of information and experience as well as the identification of
good practice through benchmarking, the creation of networks, and the promotion of
national conferences;

• Addressing and alleviating transnational obstacles;

• Encouraging the further development of social dialogue on the issue;

• Supporting further research and studies on the different dimensions of employee financial

participation.

The Communication has also identified a set of general principles which should guide the
development of financial participation in order to make the best use of its potential. These
principles act as a reference framework for Member States, social partners as well as
enterprises.

The actions outlined in this Communication initially cover the period 2002-2004. At the end
of this period, the progress made in relation to the objectives set out in this Communication
will be assessed, closely associating all the stakeholders in this issue. On the basis of this
evaluation a decision on appropriate future initiatives will be taken.

23