The 8 basic principles of employee ownership

This article is meant as a good start of my "New Year Resolution":

Each week discover one (1) new lesson on co-ownership and capital distribution in Europe and then explain to you how this lesson can help us closer to "a fair share for each and everyone".

This week I got in contact with the EFES, this is the European Federation of Employee Share Ownership, and they have written fantastic reports on employee participation in Europe. One of the most and first remarkable things I read this week was about the 8 general principles of good practice in Employee Participation Plans, defined by the European Commission already in 2002 (link to EFES report):

1. Voluntary participation
2. Extending the benefits of financial participation to all employees
3. Clarity and transparency
4. Predefined formula
5. Regularity
6. Avoiding unreasonable risk for employees
7. Distinction between wages/salaries and income from financial participation schemes
8. Compatibility with worker mobility

The article explains in great detail what the reasoning behind these 8 principles is/was, already in 2002 and how these might even be more prominent today in both large corporate as SME's.

The reason this caught my attention is that these eight principles seem to clearly define the mandatory parameters our system (www.thesharecouncil.com) should agree on. It indicates extremely clearly how delicate a participation plan can be, but also how robust and simply it could be set up if managed with the right platforms. In short, most important for us seems: available for all, clear, transparent, defining formula's, regular updates, protection of users, financial inclusion and the dynamics.

I have highlighted some of the main lessons from these eight principles that will help anyone setting up a new employment participation plan or improving their current plan. I do know that these points (from 2002) skip the most crucial part of implementing employee participation plans, which is Financial (Tax) Incentives set by Governments, but that will be for next week.

Voluntary participation

• Employee share ownership should be voluntary for both enterprises and employees. The introduction of ESO schemes should meet the actual needs and interests of all the parties involved and should therefore not be imposed. Obviously, this does not exclude that some elements are made mandatory, or that it is introduced on the basis of legislation or collective agreements.

Extending the benefits of financial participation to all employees

• Access to ESO schemes should in principle be open to all employees. While a certain differentiation may be justified in order to meet the different needs and interests of employees, ESO schemes should aim at being as comprehensive as possible and treating employees on similar terms. Among the main benefits of employee share ownership are the increased employee solidarity, creating a feeling of belonging and improving motivation. Any discrimination between employees would run counter to these objectives and should therefore be avoided.

Clarity and transparency

• ESO schemes should be set up and managed in a clear and transparent way. This is important for the acceptance of such schemes and allows employees to assess fully the possible risks and benefits involved. Priority should be given to clear, comprehensible plans, with an emphasis on transparency for employees. In this regard it is particularly important that employees or their representatives are informed and consulted about the details of ESO schemes which are to be introduced. ESO schemes almost inevitably involve a certain complexity. It is therefore important to allow for adequate training for employees, to enable them to assess the nature and details of the scheme. Schemes should also be managed in a transparent way. Employees should receive regular information and should be informed about any developments which may have a major impact on their investment.

Predefined formulas

• This is a major element in ensuring the transparency of schemes. Also with view to the motivation, commitment and identification of staff it will obviously be preferable to adopt clear and predefined formulas.

Regularity

• ESO schemes should be implemented on a regular basis and should not be a one off exercise. This is all the more important, given that such schemes are aimed at enhancing and rewarding the long- term commitment of staff. Such regularity is also a factor for better financial performance and lower risk.

Avoiding unreasonable risk for employees

• Compared to other ‘investors’ employees tend to be more exposed to adverse economic developments affecting their enterprise. For them, it is not only their investment that is at stake, but potentially also their income and their job itself. However possible risks for employees depend to a large extent on the details of each plan, including for example the length of any retention period, provisions allowing an earlier sale of shares, or ceilings on the amounts that can be invested. Given the potential risks for the employees involved, due consideration should in any case be given in the introduction and running of ESO schemes to the avoidance of any unreasonable risks. At the very least, employees have to be warned of the risks of employee share ownership resulting from fluctuations in income or from limited diversification of investments.

Distinction between wages/salaries and income from ESO schemes

• A clear distinction has to be made between income from ESO schemes on the one hand and wages and salaries on the other. In some specific cases (for example for top executives or in the case of start-up firms) income from employee share ownership, and in particular stock options, may constitute an important part of the overall remuneration. In general, however, employee share ownership cannot be a substitute for pay and fulfils a different, complementary role. Any income from ESO schemes should therefore be paid in addition and above a fixed wage, which is determined according to national rules and practices.

Compatibility with worker mobility

• ESO schemes should be developed in a way that is compatible with worker mobility both internationally and between enterprises (whether company-driven or employee-driven). Policies towards employee share ownership in particular should avoid creating barriers to the international mobility of workers. One of the main objectives of ESO obviously is to enhance the long-term commitment and loyalty of employees to their enterprise. However, at the same time more and more employees are faced with increased demands for mobility and flexibility in working life. Adequate provisions that take into account both the company’s interest in long-term commitment by their employees and the employees’ right to mobility should therefore be included in the design of ESO schemes.

I'm curious to hear what you think of these eight principles, and if you (after 18 years) would still agree with the European Commission. I do think (if implemented across the board) that these principles will give us a better option to bring back the honest balance in our society.

Thanks for reading, Quintus