For more than 20 years the EU Commission has been striving to stimulate a Union-wide discussion on employee participation models – to date with moderate success. At the same time, the most favoured models are already being implemented at many enterprises in other countries such as the USA. Particularly against the background of the approaching wave of successions at medium-sized businesses, these models could gain greater importance.
Already in the early 90s, the Commission investigated the "participation of employees in profits and enterprise" in its ten existing member states at the time. The results led to the PEPPER Report (Promotion of Employee Participation in Profits and Enterprise Report) and in recommendations of the highest EU bodies (inter alia Council Regulation EEC 92/443). They listed specific key points which can still be applied today virtually without limitation. Over the years, several further investigations were conducted (PEPPER Re-ports II – IV), without this resulting in a lively debate at the European level.
The European Economic and Social Committee made another attempt at this with its owninitiative opinion on "Employee Financial Participation in Europe" dated 21 October 2010. Substantial aspects of the Opinion concern the creation of a European framework concept for the financial participation of employees and to the possible resulting improvement of the financial situation of small and medium-sized enterprises. One of its focuses is the question of employee participation in the context of succession regulations at small and medium-sized enterprises – a wave of corporate successions is approaching, and not just in Germany.
Key concepts of the EU are the cooperative society model and the ESOP model. ESOP stands for Employee Stock (or Share) Ownership Plan. In this model, the shares – in any form of enterprise and in particular in small and medium-sized enterprises that are not publicly listed – can gradually change to a degree of up to 100% into indirect employee ownership. A fund holds the employees' shares in a fiduciary capacity in their favour. They do not have to contribute their own capital, but acquire shares by means of profit participation granted in addition to their employment remuneration. A decisive factor for the enterprise is that the ESOP fund can be financed through the enterprise itself, but also entirely through borrowed capital. The enterprise also decides how many shares go into the ESOP.
ESOP is widespread in the USA and has also gained in importance in Great Britain over the last few years; in the USA alone there are said to be more than 11,000 enterprises with ESOPs. They appreciate the advantages of this model: enterprises have virtually total freedom of decision on the structuring of the ESOP, the regulation of succession is secured, there is no additional financial risk for the employees, and employee motivation is increased.
In Germany, in contrast, there are only a few ESPOs. One reason is that many enterprises simply lack knowledge about them. However, this model also entails tangible disadvantages: from the enterprise's perspective, the contractual regulation of the structure is complex, especially if funded through borrowed capital. This complexity affects employees' perception hereof.
Moreover, the capital participation via a trustee or holding company can act as a deterrent for the employees. The key issue in this connection is how shareholder rights can (and should) actually still be exercised by the individual employees. After all, in the event of the enterprise's insolvency the shares no longer have any nominal value.
These and further points need to be clarified and structured transparently if ESOP models are to also play a greater role in future in Germany. As an increasing number of small and medium-sized enterprises face the question of succession, the political or business sector will sooner or later pick up the ball from Brussels and develop the concept further to achieve practicable solutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.