Employee financial participation in the New Member States — Estonia
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This report describes the current situation in relation to employee financial participation (EFP) in Estonia.
According to the European Foundation for the Improvement of Living and Working Conditions (Recent trends in employee financial participation in the European Union, 2001), definitions of “participation” abounds. Some authors insist that participation must be a group process, involving groups of employees and their employer. Others stress delegation, ie the process by which the individual employee is given greater freedom to make decisions on his or her own. There are those who stress participation as a process and those who are concerned with participation as a result. For present purposes, we will utilise the definition of participation adopted by the European Foundation: participation is a process which allows employees to exert some influence over their work, over the conditions under which they work and over the results of their work.
There are four basic pillars of employee participation in organisations:
- Direct participation, where employees have an influence on daily work-related issues;
- Indirect or representative participation, where employees have an indirect influence through their employee representatives who deal with work-related and organisation-related issues;
- Financial participation, which gives employees the opportunity to participate in profits and enterprise results;
- Collective bargaining, where parties try to influence labour terms and conditions at company and sectoral level.
In recent years, there has been a growing interest in the subject of employee participation in organisations. This interest is generally explained by some relevant changes (and, consequently, new needs) of a social and economic context that is characterised by factors such as global competition and increased flexibility requirements.
This comparative study intends to investigate the development of employee financial participation in profits and enterprise results, namely in the new EU Member States.
Originally defined in the Pepper I Report (1991), financial participation describes any arrangement under which employees may receive money or other assets with monetary value, linked to the financial performance of their employer. Financial participation involves the payment (or potential payment) of rewards that are over and above basic pay and in which all or most employees in a company are able to participate.
The wide range of financial participation schemes that exist can be classified into the following broad generic categories, which may co-exist and/or be interlinked (e.g. share-based profit sharing, see below) overlap:
- Profit-sharing, ie the distribution to employees of cash sums, according to the profits earned by the company in which they are working. Contrary to traditional bonuses linked to individual performance (such as piece rates), profit-sharing is a collective scheme applied to all or to a large group of employees. In practice, profit-sharing can take various forms. (1) It can provide employees with immediate cash (cash-based profit sharing). Cash-based profit-sharing is easily confused with gain-sharing. Gain-sharing is usually considered as a productivity-improving or cost-reducing activity, not directly related to the company profit levels. (2) It can provide employees with shares of the employer company (share-based profit sharing). (3) Profit-sharing (be it cash or share based) can also take a form of deferred compensation (deferred profit-sharing) under which the allocated profit share is held, most commonly, in trust and is not immediately available to the employee. In the latter case the profit share (a) is invested in enterprise funds or frozen in special accounts for a specific period or (b) if granted as a number of shares in the company, frozen in a fund for a certain period before employees are allowed to sell them.
- Employee share-ownership, ie an employee participation in enterprise results in an indirect way, either by receiving dividends or by the appreciation of employee-owned capital, or a combination of both. While such schemes are not directly related to company profits, they are related to company profitability and so enable participants to gain indirectly from company’s added value. Employee share ownership can be both individual and collective. (1) The broadest variety of models is offered by share ownership plans, where shares are distributed free or sold at the market price (non-discounted) or under preferential conditions. (a) These preferential conditions can be sale at a discount rate (discounted stock purchase plan), sale at a lower price through forms of delayed payment (usually within a capital increase), or by the grant of priority in public offerings to all or a group of employees. (b) In post socialist countries, employee share ownership occurred often in the context of privatisations in the form of shares which are distributed or sold to the workers of the company, or vouchers or coupons that are distributed to all citizens. (2) Collective employee share-ownership may take the form of Employee Share-Ownership Plans (ESOPs). An ESOP usually involves a loan to an employee benefit trust, which acquires company stock and allocates it through periodic contributions to each employee's ESOP account. The loan may be serviced by payments from the company out of company profits, out of dividends paid on the stock held by the ESOP or (in rare instances) from employee salary reductions. (3) Employee stock options unlike those granted to individual employees or small groups (especially in managerial ranks) to reward individual performance (“executive stock options”), are broad based.
Employee share ownership in practice - whether shares are held individually or in some trust - does not necessarily entitle employees as shareholders to have a say in the running of the company. Employees may be issued non-voting stock, or may be issued voting shares, but have very little or no control over the management of the shares held in trust. In the latter case trustees may be appointed by management rather than be elected by the employees.
This study intends to investigate and compare the present features of employee financial participation in profits and enterprise results in the new EU Member States. It aims:
- to provide a general overview of the application of employee financial participation schemes in your country (Section 1);
- to collect information on recent changes in the legal regulation of employee financial participation. In particular, this study aims to collect information on legislative interventions on employee financial participation in your country since 2005. In order to do so, you find attached to this questionnaire the National Report prepared for your country in the framework of the PEPPER III Report “Promotion of Employee Participation in Profits and Enterprise Results in the New Member and candidate Countries of European Union” – please note that this document is strictly confidential and was made accessible for internal use only. The PEPPER III Report provides you with information on the legal framework until 2005; please include in your answer any changes that were introduced since then (Section 2. Part A).
- to provide an overview of collective bargaining regulation of employee financial participation and on the connections, if they exist, between legislation and collective bargaining regulation (Section 2. Part B);
- to update and integrate, as far as possible, data included in the PEPPER III Report on the diffusion and characteristics of employee financial participation schemes in your country (Section 3);
- to provide a brief description of specific and significant cases of employee participation in profits and enterprise results in your country (Section 4);
- to describe the position of the social partners on employee financial participation schemes (Section 5).
1. Overview of employee financial participation schemes
Please, provide a general overview of the application of employee financial participation schemes in your country. You should essentially refer to the main cases and to already existing analysis of academic or professional character, if available, or to your own assessment. In particular, please provide:
- The definition of employee financial participation commonly accepted and used in your country. Employee financial participation in most of the recent studies is any form of arrangement under which the employee receives assets of monetary value (most common in Estonia is share ownership) linked to the performance of the firm. More rarely the definition includes an arrangement under which money is received. The definition of employee financial participation is largely influenced by the privatisation procedure which started in the beginning of the 1990s and ended in 2001.
- The main employee financial participation schemes used in your country and the main reasons for their applications (such as promoting productivity increases; enhancing flexibility of remuneration; gaining tax advantages; providing employee with benefits and hence encourage an increased commitment of staff; gaining support for privatisation).
The most common form of employee participation in Estonia is employee share ownership which had been obtained mostly during privatisation and to which the provisions of company, securities and tax law currently in force are applicable. The employee share ownership is preferred since they do not have to pay income tax on dividends. The income tax on dividends is paid by the employer. (Eamets jt., 2006)
Even though special legislation concerning profit sharing with regard to employees does not exist (so there are no direct incentives or restrictions), profit sharing is not very widespread in Estonia. That is due to the taxation issues referred to above. (Eamets jt., 2006)
However, there have been some indications on forms of profit sharing where the bonus is not dependent on profit. For taxation reasons, it is more profitable for employees to be employed as self-employed persons rather than as wage-earners (better possibilities for tax deductions). Therefore, being employed as a self-employed person (for a single employer however) is the most evident form of profit sharing in Estonia (Eamets jt., 2006).
2. Regulation of employee financial participation
This section concerns both legislative regulation (Part A) and collective bargaining regulation (Part B) of employee financial participation.
Part A. Legal framework
There are no recent legislative interventions that have modified the national legal framework on employee financial participation. The legalt framework is outlined in the PEPPER III report.
- Does legislation in your country provide a legal framework to forms of employee financial participation?If yes, try to cover the
- Does the legislation promote financial participation schemes without any distinctions (profit sharing and employee share-ownership) or does it promote only specific schemes? If the latter is the case, please detail the types and the features of the employee financial participation schemes promoted by legislation and the rationale of such a preference.
- What are the incentives that the legislation has introduced to promote employee financial participation schemes? Are there any fiscal or other financial advantages for such schemes? Is there a legal framework for the collective exercise of the shareholders’ rights of ESOPs?Please give details of the incentives of any kinds provided by legislation to employee financial schemes, distinguishing between different types of financial participation, whenever relevant.
2. Since the 1990s, did the privatisation of state-owned enterprises foster the diffusion of employee financial participation?If yes, please specify briefly:
- how privatisation sustained employee financial participation;
- what kind of employee financial participation it promoted (profit sharing, share-ownership, both);
- which groups of employees were involved in such schemes (managers, workers, both) and to what extent;
- which was the impact in terms of continuity and consolidation of such experiences? These experiences have weakened or even disappeared after privatisation or have they developed further?
Part B. Collective bargaining regulation
Are there collective agreements which cover employee financial participation?
There is no evidence on the presence of collective agreements in employee financial participation.
Are there any connections between legislation and collective bargaining? For instance, does legislation reserve certain incentives to employee financial participation plans introduced by collective agreements?
There are no connections between legislation and collective bargaining.
3. Incidence, features and effects of employee financial participation
Please provide any update to information and data included in PEPPER III Report, as for the attached National Report, which may derive from either official data or recent research and studies.
There is no comprehensive statistics on the financial participation schemes in Estonia. Only number of commercial associations can be provided which is one type of financial participation schemes regulated by the Commercial Associations Act: according to Statistics Estonia there were 669 commercial associations in 2006. Unfortunately there is no statistics on other financial participation schemes. Information on financial participation schemes is mostly based on case studies.
|Sector||Number of financial participation schemes||Of which: Profit-sharing only||Of which: Share-ownership only||Of which: Mixed||Total number of firms in the sector|
|Agriculture, hunting and fishing||10,514|
|Industry, including Energy||6,590|
|Trade, transport and communication services||24,636|
|Business activities and financial services||15,896|
** Education, healthcare, social care and other community, social and personal services
Source: Statistics Estonia, 2005
|Occupational group||Number of financial participation schemes||Of which: Profit-sharing only||Of which: Share-ownership only||Of which: Mixed||Total number workers in the occupation**|
|Senior officials and managers||63.0|
|Technicians and associate professionals||78.0|
* Clerks, service and shop and market sales workers, skill agricultural and fishery workers, craft workers, plant and machine operators and assemblers.
Source: Statistics Estonia, 2005
|Size||Number of financial participation schemes||Of which: Profit-sharing only||Of which: Share-ownership only||Of which: Mixed||Total number of enterprises in the size class|
|Less than 49||49,022|
|50 - 99||813|
|100 - 199||417|
|200 - 499||155|
|More than 500||69|
1. In addition to the abovementioned variables (sector, occupational group and size), please indicate if, drawing on existing research, any relations between employee financial schemes and the following set of factors seem to exist:
- Structural: ownership (domestic, foreign).
A survey by Jones, D. and Mygind, N. “Corporate Governance Cycles During Transition, Theory and Evidence from the Baltics” (2004) reviews ownership changes between the first known ownership type after the privatization and the last year with available information (2002). It shows that foreign owned enterprises have a quite stable ownership structure and none of the 133 foreign owned enterprises had changed to employee ownership enterprises by 2002. Also, firms with external domestic ownership had mostly turned to foreign or management owned enterprises by 2002. Only companies, that where initially management-owned, had changed to employee-owned enterprises by 2002 (3 of the 140 enterprises had changed to employee ownership).
- Market and economic situation: a) degree of competition (high, low); b) degree of innovation (high, low).
a) A survey by Jones and Mygind (The effects of privatization on productive efficiency: Evidence from the Baltic Republics, 2000) has suggested that the case of Estonia supports the mainstream hypotheses that outside ownership is preferred to insider ownership, where the findings indicate that it is majority ownership by foreigners that has the largest impact on productive efficiency (therefore having a competitive advantage in the economy). At the same time, when considering inside ownership, majority ownership by employees is found in some cases (Estonia in 1994) to deliver better business performance than does majority ownership by managers. This evidence refutes the hypotheses that the preferred form of insider ownership is ownership by managers.
b) Unfortunately there are no readily accessible empirical evidence on the relations of employee financial participation schemes and degree of innovation.
- Company strategies and performance: a) economic performance (growth; stability, decline); b) employment trends (growth, stability, decline); c) management’s attitude towards employee participation (promotional, neutral, adversarial); c) management’s attitude towards industrial relations regulation (promotional, neutral, adversarial);
a) Different empirical researches over time have pointed out that the foreign owned enterprises have advantage over domestic owned firms. In addition, some surveys have found that firms belonging to insiders had worse economic performance.
b) According to a survey by Kalmi, Mygind and Terk (The Performance of Enterprises in Estonia 1993-1997, 1999), considering employment, the differences in different types of ownership structures are quite pronounced: foreign firms are clearly better than domestic firms in creating employment. If in 1994 employee and management owned firms were the two most capable type of domestic firms to increase employment (namely 39% of the employee owned enterprises increased employment in 1994), then by 1997 employee ownership has declined to be the type of ownership that is least capable of increasing employment (22.7% of the employee owned enterprises increased employment in 1997).
c) According to different surveys, management’s attitude may be regarded as rather adversarial. It is mentioned in many studies that many employee owned enterprises have turned to management owned enterprises when old employees sell their shares to managers at a lower price and new employees do not get a change to buy shares. Unlike managers, many employees do not have adequate knowledge about the real economic situation of the company, and therefore managers are able to buy employee shares at a lower price. As seen by managers, employee financial participation is mostly just a transitional period from privatization to a stable economy.
d) Since trade unions have not been present in employee ownership, different research does not cover the management’s attitude toward industrial relations regulation.
- Industrial relations: a) presence of a collective agreement (yes, no); union membership (high, low).
Collective agreements are not very widely spread in Estonia. The main Estonian social partners have stated that they have not involved the current subject in their agenda. As a result, there is no empirical evidence on the connection between the presence of collective agreements and employee ownership structures. There is also no research evidence on the connection between union membership and employee ownership.
2. On grounds of existing studies or accounts, what are the typical features of profit sharing schemes in your country, especially in terms of:
In case of Estonia, it is not possible to speak of typical features of profit sharing, since it is not widely developed. However, as referred to above, self-employment contracts are used as a feature of profit sharing in some cases. The following features will be drawn upon these cases.
- source of introduction (unilaterally by the company management, through collective agreement); It may be assumed that the company management has introduced this form of profit sharing, since this form of employment brings more instability to employees (self-employed persons have less social securities and warranties than persons employed with regular employment contracts).
- groups of workers involved (top executives, managers, middle-managers, blue-collar workers, white-collar workers); There are no typical features when it comes to groups of workers involved. There have been some examples in realtor firms, where self-employment contracts are used in the case of most estate agents and heads of departments (therefore middle-managers). Also in some book-keeping companies, self-employment is used by bookkeepers (clerical workers). The situation is also evident in taxi-firms, where taxi drivers are employed with self-employment contracts.
- incidence on annual pay for the workers involved; and In previous cases, the income of these groups of workers depends directly on the turnover of their activities.
- types (cash-based, deferred)? Profit sharing in this case may be referred to as cash-based. The income is directly dependent on the turnover of employees’ activities.
3. On grounds of existing studies or accounts, what are the typical features of employee share-ownership schemes in your country, especially in terms of:
- source of introduction (unilaterally by the company management, through collective agreement); Employee share ownership has mostly emerged from privatisation that started in the early 1990s and basically ended in 2001. Although in some cases employee share ownership is introduced later (see Case 2 below) and in these cases, the source of introduction is mostly the management. The presence of collective agreements in employee share ownership is not documented.
- groups of workers involved (top executives, managers, middle-managers, blue-collar workers, white-collar workers); There are no typical groups of workers involved, in many cases all employees have (or have had) an opportunity to obtain the shares of the company (in most cases this is optional).
- types (individual, collective); and An opportunity to obtain shares have mostly been collective, however the conditions on obtaining the companies’ shares are in large part individual.
- capacity to effectively exercise shareholders rights? Shareholders rights are protected by a legal regulation, Commercial Code (Äriseadustik, in English). However, there are no indications whether collective agreements are applied to protect the rights of the shareholders.
4. Are there any analysis on the main impacts of the introduction of financial participation schemes on aspects such as productivity and profitability of enterprises; employment and wage flexibility; employees’ attitudes and behaviour?
Research by Jones, Kalmi and Mygind (Choice of ownership structure and firm performance: Evidence from Estonia, 2003) has measured the performance of companies with different types of ownership structures. Empirical evidence showed that productivity (measured by output per employee) is clearly higher for foreign owned firms than for other firms and employee owned (and also former employee owned) have showed the least productive results. However, the productivity statistics are from year 1993, so these results may have been changed by now.
The same research has also turned attention to other aspects. When employee owned firms were the largest at the beginning of 1990s, then by the end of the decade they have become much smaller. During the 1990s the shrinkage of employees in employee owned companies was the highest, namely employment decreased by almost 10% annually. However, employee owned firms continue to be the most profitable. It is also noted that the most resilient employee owned firms are those that are successors of collective farms, operate in agriculture, and are located in rural areas. Therefore it is stated by some authors that employee-owned firms bring benefits to depressed areas and industries.
The survey also refers to findings that are consistent with the hypotheses that employees prefer to be owners in less volatile firms (or industries) and, other things equal, that they put heavy weight on the profitability of the firm.
Since other surveys support the results referred to above, other examples of analyses will not be delivered here.
4. Specific cases
Please, provide a brief description of at least four of the most significant cases of employee participation in profits and enterprise results in your country. Please try to cover both profit-sharing and employee share-ownership schemes and include at least a case where collective bargaining played a significant role.
- the company
- Elva consumer co-operative (Elva Tarbijateühistu)
- based on private capital, its’ share capital is based on the contributions of the members
- the domain of consumer co-operatives is providing trade services in retail businesses.
- the employee financial participation scheme
a) Type of employee financial participation in Elva co-operative is employee share ownership. Employees are free to become member of the co-operative and contributions (in order to become a member) are small at the level of EEK 40 (€2.55). According to Commercial Associations Act (Tulundusühistuseadus) and the statutes of the Elva consumer co-operative, the payable dividend rate is no larger than 8% of the contribution. Therefore the dividend rate of a member per year is only EEK 3.20 (€0.20). Since the annual sum is very small, meeting of the representatives has decided not to pay out dividends and to add it to the profit of previous years. Therefore there is no direct profit for the members.
However, members of the co-operative receive a client card, which enables them to receive a 3% bonus from all purchases in all co-operative’s stores over the country (500 stores). Bonuses are paid out annually, each year a sum of EEK 4.5 million (about € 287,000) is paid to members of the co-operative (including employees). The bonus received by each member depends directly on the sum of their purchase per year.
Some of the employees are also involved in the management of the co-operative. They are elected to the management body of the co-operative as a representative. The meeting of representatives gathers once a year to approve annual report and balance sheet, in every 5 years the meeting of representatives chooses the co-operatives’ supervisory board.
b) the Elva consumer co-operative was established in 1921
c) there are currently about 10,000 members, most of them are clients, approximately 250 of them (2.5%) are employees
d) the status of the co-operative has remained the same since the beginning. Co-operatives have been very popular in the Soviet period and also after Estonia gained its’ independence, but only a small part of them are commercial associations. According to Statistics Estonia, in 2005 there were only 371 commercial associations in Estonia.
There is no readily accessible comments by the co-operative.
- the company
- Playtech Estonia
- Playtech Estonia is a limited liability company, which is affiliated to an international concern Playtech Group.
- Playtech Estonia is concentrated on the creation of complex solutions of online-games, their development and administration. The solutions are sold to its dominant company Playtech Group, which hires them to different online casinos.
- the employee financial participation scheme
- The type of scheme in Playtech Estonia is employee share ownership. Before Playtech Group started issuing its shares, it made an option contract with all its employees (this means that all of the employees are able to buy later shares of the company at a fixed price). This gives the employees a chance to receive personal gains since the company went to stock exchange market.
- the financial participation scheme was introduced in spring 2006.
- the 230 employees in Playtech Estonia entered into an option contract with their employer. All groups of employees are covered by the scheme.
- at present the company is active in the London stock exchange market and has been quite successful. As a result employees have been able to receive personal gains from the option contracts they have made with their employer.
The management of the company sees the option contracts with employees as means of motivating them. According to the manager of Playtech Estonia Mr Rein Lemberpuu, the human resource is an important part of the concern itself since the software products are created and developed here. In mediation of media the employees have expressed satisfaction with the employee financial participation scheme.
- the company
- Krooni Takso
- Krooni Takso is a limited liability company, which is a management owned company.
- Krooni Takso is a taxi company, which offers its services mainly to frequent costumers. They also offer contract based transport services. The main markets are based in Tallinn, the capital of Estonia.
- the employee financial participation scheme
- Krooni Takso is one of the few examples of profit sharing in Estonia. Taxi drivers are formally self-employed persons, but actually they are employed by a single employer. As referred to profit sharing above, this is used because of taxation issues. In this case the income of employees is directly dependent on the company profits and the amount of their work.
- self-employment in taxi companies is used since the year 2000, when the new Public Transport Act was introduced.
- All of the 60 taxi drivers in Krooni Takso are self-employed persons. Clerical workers and dispatchers are employed by regular employment contracts.
- at present, taxi drivers are still self-employed persons. The ones working in larger taxi companies are employed under a single employer, some taxi drivers are self-employed (and are not under a certain taxi company).
The Estonian Taxi Drivers’ Association (Eesti Taksojuhtide Liit) has stated that self-employment has made the status of taxi drivers as employees more vulnerable. This is also the reason why the respective association was established- in order to protect the economic and vocational interests of taxi drivers. Therefore it can be stated that the self employment in many cases is not a voluntary choice but a forced move. Formally the association is a trade union in of the domain, however there are no collective agreements signed by the association.
- the company
- Nordea Bank Estonia (Nordea Eesti)
- Nordea Bank Estonia is a branch of Nordea Bank Finland which is part of the biggest financial group in the Nordic Region. Nordea Bank Estonia belongs to the Retail Banking Poland and Baltic countries.
- Customers of Nordea Estonia are Estonian companies, subsidiaries of foreign companies doing business in Estonia, companies in neighbouring countries, and private individuals. Services of Nordea Bank include payment services (salary and reference payments, standing orders and direct debiting), cash services, currency exchange, deposits, investment funds, documentary payments for import/export, loans and guarantees, corporate and private banking services.
- the employee financial participation scheme
- the concern has established a profit sharing program, where employees receive cash sums according to the economic results of the bank. The sum received is not dependent on the salary of the employee (department managers and clerical workers receive the same amount of money).
- a part of the profits is distributed to employees since the year 2003.
- All of the 230 employees in Nordea Bank Estonia are covered by the scheme. Top managers of the bank are covered by a different profit sharing program (the shared cash sums are larger). However there is no differentiation in the scheme in terms of other groups of employees.
- the profit sharing program is in force and all of the employees in the bank are covered. The management of the bank is planning on raising the sum of profit sharing in 2006 (in 2005 € 65 million was allocated for the profit sharing program).
According to the official documents of Nordea Bank Estonia, the researches inside the company have showed that employees are generally motivated and satisfied with their work. This may partly as a result of the profit sharing program. The views of the management are generally supportive, since they are also included in the program (there is a special profit sharing program for the managers of the bank).
5. Position of the social partners
Private sector companies are represented by the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) and the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK).
The legal secretary at the EAKL Ms Tiia Tammeleht has declared earlier that the question of financial participation of employees is not on the agenda of the Confederation. The other social partner, ETTK is strongly opposed to any extension of employee participation rights. Also the subject has not been on the agenda of the organization recently.
6. Commentary by the NC
Financial participation in Estonia is not very widely developed, there are no legal regulations on the subject and social partners have not included the subject on their agenda. An article in an Estonian newspaper “Äripäev” has addressed the issue of financial participation in Estonia. According to the newspaper many of the largest firms in Estonia have not used profit sharing, they prefer to allocate the profits for investments and development of the firm. Employees receive monetary incentives mostly by performance bonuses linked to their individual work results and not to the profits of the company. It is also suggested in the article that Estonian companies should take Sweden companies as a model, where most of the biggest companies have profit sharing schemes in order to include employees to the economic results of the company.
Therefore it should be stated that employee financial participation has not been on the agenda in Estonia (not for political actors or social partners). However, these schemes are somewhat used in Estonian companies and legal regulations and/or collective agreements on the subject should be further developed.