Framework for promoting employee financial participation

This communication is intended to define a Community framework for promoting employee financial participation in profits and enterprise results. It sets out the general principles of financial participation, existing transnational obstacles and measures to be taken to introduce financial participation more widely.

ACT

Commission Communication of 5 July 2002, framework for the promotion of employee financial participation [COM(2002) 364 final - Not published in the Official Journal].

SUMMARY

At the Lisbon Summit, the Union set itself the goal of "becoming the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion". Employee participation can make a significant contribution to realising this aim. If it is handled properly, it can not only increase companies' productivity, competitiveness and profitability but also encourage employee participation, increase the quality of employment and contribute to greater social cohesion.

The positive results that financial participation schemes for employees have produced in many countries certainly have some bearing on the fact that this question has become a Union-wide political priority. Moreover, an increasing number of enterprises have started to become aware of the possibilities offered by such schemes, i.e. motivating employees and aligning their interests with those of the shareholders, and also recruiting and keeping staff. Employee participation in profits and enterprise results therefore goes hand in hand with a certain number of advantages for enterprises, employees and the economy as a whole.

Forms of financial participation

Financial participation of employees in the profits and results of the enterprise may take many different forms. The common element - and their main characteristic - lies in the fact that they are intended to give employees, usually all employees, access to the enterprise's profits and/or results.

The PEPPER reports (PEPPER I and PEPPER II) on promoting employee participation in profits and enterprise results and Council Recommendation 92/443/EEC divided the types of financial participation schemes into two main categories:

• participation in profits, i.e., sharing of profits between those providing the capital and those providing the labour by giving employees a variable income, in addition to their fixed pay, linked with the profits or another measure of the enterprise's results.
• employee shareholding, which offers employees indirect participation in the enterprise's results in the form of dividends and/or appreciation of the value of the capital they hold.

This communication deals with the following main aspects of employee financial participation:

• the general principles;
• transnational obstacles;
• promotion of more widespread financial participation.

General principles

A review of the various forms of financial participation has shown how different the schemes are. Nevertheless, there are some essential elements and principles which characterise the majority of the schemes and the Member States' policies.

The general principles defined in this communication may serve as a benchmark for identifying good practice;

• voluntary participation: schemes for financial participation must be set up to respond to the real needs and interests of all the parties concerned and should not therefore be imposed;
• the advantages of financial participation should be extended to all employees: some of the main advantages of financial participation are that employees identify more with the enterprise and it creates a sense of belonging and increases their motivation;
• clarity and transparency: the financial participation schemes must enable employees to fully weigh up the risks and potential advantages of the scheme;
• predefined formula: the rules on financial participation in companies must be based on a predefined formula and clearly linked to the enterprise's results. This is vital to guarantee the transparency of such schemes;
• regularity: these financial participation schemes must be applied regularly (this is important as the schemes are intended to reinforce and reward sustained loyalty on the part of employees);
• any unreasonable risk for employees should be avoided: compared with other "investors", employees generally bear the brunt of any economic problems their company runs into. This being so, it is important to take care to prevent any risks in setting up and managing the financial participation scheme;
• a distinction should be made between pay and income from financial participation schemes;
• compatibility with employee mobility: financial participation schemes must be set up so as to be compatible with employee mobility, both at international level and between companies.

Transnational obstacles

Differences in tax systems, social security contributions and the general legal framework or even cultural differences frequently make it impossible for enterprises to devise and apply a joint financial participation scheme in various places in Europe.

The main transnational obstacles are as follows:

• differences in tax systems, which can raise problems on two fronts: double taxation or no taxation and substantial administrative costs for enterprises wishing to set up financial participation schemes in various countries;
• the level of social security contributions, which can vary from one country to another and sometime discourages enterprises from extending financial participation schemes to certain countries;
• national differences in law which can delay the introduction of financial participation at transnational level;
• cultural differences and diverging views on financial participation, different national traditions or differences in social relations;
• a lack of mutual recognition of financial participation schemes;
• lack of information on financial participation schemes and policies in favour of existing financial participation.

How to promote financial participation

In order to increase employee financial participation in profits and enterprise results in Europe, the Member States have to pursue and intensify their efforts to set up a favourable legal and fiscal environment. Furthermore, as the extent to which financial participation has become established varies from one country to another, there is considerable scope for stepping up the exchange of information and experience.

The Commission will promote the exchange of information and good practice by activities such as making comparative assessments of national policies and practices, including financial participation in the peer review programme under the Employment Guidelines or organising national conferences.

Reinforcing social dialogue

All the evidence suggests that the advantages of financial participation are greater when the schemes are introduced in a partnership with employees and when they are part of an overall approach to participatory management.

The Commission attaches particular importance to supporting the social partners' initiatives on financial participation, including exchanges of information and experience, formation of networks and research and studies.

Financial participation and small and medium-sized enterprises (SME)

The advantages of employee financial participation are not confined to large enterprises with profitability concerns. SMEs can also benefit from these advantages. The Commission attaches particular importance to the specific situation of SMEs and encourages research into their specific problems.

Improving information by research and studies

The Commission continues to support and carry out research projects to provide supply any information which is missing. It focuses particularly on collecting data on how and where participation schemes are implemented, the impact of financial participation on company performance, quality of work, social cohesion and the situation of financial participation in acceding countries. It also asks the European Foundation for Improving Living and Working Conditions to pursue its activities in the field of employee financial participation.

Establishing networks

In order to step up dissemination of information and experience and to make the possibilities of financial participation more widely known, it is important to promote a permanent dialogue at European level. The Commission supports the establishment of the following networks: university networks and networks of experts, social partners, enterprises and institutes.

Financial support for financial participation initiatives

Financial support is available via various channels: the "Industrial relations and social dialogue" budget heading and Community incentive measures in the field of employment. Under Article 6 of the Regulation on the European Social Fund, the Commission may finance innovative action designed to promote new approaches and identify examples of good practice.

The activities set out in this Communication initially cover the period 2002-2004. Following this, the progress achieved in meeting the defined objectives will be assessed in a process that will closely involve all the parties concerned. A decision will be taken on future initiatives on the basis of this assessment.

See also

For more information, please consult the report [PDF] of 18 December 2003 of the high-level group of independent experts on transnational obstacles to the growth of employee financial participation in transnational enterprises.

Last updated: 13.09.2005