CELEX: 51991PC0259
Language: en
Date: 1991-09-03
Title: Proposal for a COUNCIL RECOMMENDATION concerning the promotion of employee participation in profits and enterprise results ( including equity participation )

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