Commission issues working paper on employee financial participation

A European Commission working paper on employee financial participation was published in late July 2001. The Commission is asking all interested parties for their views on this subject, in order to form the basis for a Communication and action plan.

The European Commission published a staff working paper on the financial participation of employees in the European Union on 26 July 2001. The document was issued in accordance with a commitment to publish a Communication and an action plan in this area, made in the Commission's social policy agenda, issued on 28 June 2000 (EU0007266F). The Commission states that the new working paper will promote debate on financial participation at European level and form the basis for the Communication and action plan. The paper focuses on three main issues:

• identifying the general principles underpinning national policies in the area of employee financial participation;

• addressing transnational barriers in this area. These are essentially tax, the social and cultural environment and differing levels of social security contributions; and

• establishing a series of Community measures to improve the understanding of the different financial participation systems.

Defining financial participation

The Commission states that in its paper it is interested in examining company financial participation schemes which are available to all, or a majority, of employees. These are essentially:

• profit-sharing, taking the form of a variable payment, in addition to a fixed wage, which is directly linked to profits or some other measure of company results;

• employee share-ownership, taking the form of either the employee receiving dividends, or the appreciation of employee-owned capital following the sale of shares, or a combination of the two; and

• share options, giving the employee an option to buy shares at a price normally at or below the market price at the time the option is granted. These schemes are increasingly being opened up to a wider group of employees than solely senior management.

Community action on financial participation

The Commission has been engaged in work in the area of financial participation since the late 1980s. In 1991, it produced a report on the 'Promotion of employee participation in profits and enterprise results', known as the Pepper I report. A Council of Ministers Recommendation (92/443/EEC) on the basis of this report was adopted on 27 July 1992. This invited Member States to acknowledge the potential benefits of wider use of a range of financial participation schemes and to take account of the role and responsibility of the social partners in this area.

The 1991 report was followed by the Pepper II report issued by the Commission in January 1997 (EU9702106N). This report focused on two aspects: how Member States have promoted employee financial participation since the 1992 Council Recommendation; and an identification of the general principles to be taken on board and promoted by Member States and social partners in order to encourage financial participation schemes. The Pepper II report also proposed a series of general principles designed to encourage financial participation. The report drew the following conclusions:

• employee participation in company profits is associated with higher productivity levels in all cases. The development of these schemes is strongly influenced by the government, particularly through the means of tax incentives;

• no great change was noted in the general approach of Member States to financial participation;

• France and the UK are countries where there is a tradition of financial participation. Government support for such schemes had increased in Ireland, Finland and the Netherlands, while the social partners had made calls for the promotion of financial participation in Germany, Spain and Italy;

• in all other Member States, although Pepper schemes had been discussed, they received little or no government support; and

• active campaigns to promote financial participation had been organised in France, Finland, the Netherlands and the UK.

Key aims of the working paper

The Commission hopes to consult all interested parties on all aspects of financial participation, concentrating particularly on three strands: general principles; transnational barriers; and Community measures

General principles

Drawing on the conclusions of the Commission's two Pepper reports and the Council Recommendation, the paper lists a number of general principles for the promotion of financial participation:

• the schemes should be voluntary;

• they should be open to all employees, including part-time, temporary and fixed-term workers, and access to the schemes should avoid all discrimination;

• the schemes should be based on a predefined formula linked to enterprise results and should be applied regularly;

• potential risks associated with the schemes should be made clear to employees; and

• it should be made clear that financial participation is not a substitute for pay and should be no barrier to the conclusion of collective wage agreements.

Transnational barriers

The Commission is of the view that there are three main obstacles to the growth of financial participation schemes:

• differences in national incentives, and particularly tax incentives;

• a lack of legal clarity concerning the payment of social security contributions on income from financial participation; and

• social and cultural barriers, largely differing traditions which are more or less favourable to financial participation in particular Member States.

The Commission is of the opinion that the first two obstacles 'may require specific, targeted measures at Community level'. The Commission notes that differences in incentives will not be ironed out unless there is gradual convergence between national systems. It envisages that such a convergence could be facilitated by a process, coordinated by the Commission, of exchange of information, definition of common objectives and regular follow-up on progress achieved.

Community measures

The paper is rather vague on this point, stating that 'a number of actions' could be taken within a transnational framework in order to encourage the more extensive application of financial participation in the EU. It suggests that these could form the basis for an action plan. Further, in the run-up to European Union enlargement, the Commission might promote measures in this area in the candidate countries.

Specific questions for consultation

The Commission concludes its paper by listing a number of specific questions for consideration by interested parties. In addition to contributions on the three main strands of the paper, it would like to receive responses to the following questions:

• should we plan for a Community initiative on financial participation?

• is it necessary to lay down general principles at European level to encourage greater and more efficient recourse to financial participation and if so, which principles?

• what Community measures should the Commission include in its planned Communication and action plan in this area?

• are the obstacles identified here the most important ones and are there other obstacles? and

• should other strands be added to the three main strands identified here? If so, what are they?

All comments should be sent in writing or by electronic mail (no e-mail address given) by 30 October 2001 to the European Commission, Directorate-General for Employment, Rue de la Loi, 200, B-1049 Brussels.

Commentary

As the Commission points out in this working paper, a good deal of work has been done at European level on this theme over the past decade. The Pepper reports identified a number of significant areas for consideration by Member States when trying to encourage the growth of employee financial participation. Unfortunately, as the working paper also points out, not a great deal of progress in terms of the expansion of existing schemes has been made over the past few years, despite the best efforts of the social partners in many countries.

It is clear that there is a significant divergence of practice in this area across the European Union. In countries such as France, employee participation is compulsory in companies over a certain size, under the 'participation' scheme. Further, a second voluntary scheme (intéressement), actively encouraged by the government, enjoys broad acceptance across the French economy. However, financial participation is nowhere near as widespread in any other Member State and it would seem that the Commission is right when it states that the only way to ensure greater expansion of financial participation across the EU is to put into place some kind of Community-level framework to encourage convergence of national systems, particularly in the areas of tax and social security contributions. (Andrea Broughton, IRS)