Policy recommendations on supporting employee financial participation

Purpose From the first PEPPER report in 1991 until this PEPPER V Report the EU has not only expanded from 12 Members States to currently 27 but also faced complex and urgent challenges. Both the financial crisis of 2008/09 and the coronavirus disease 2019 (COVID-19) pandemic 2020/21 have left their marks on “Social Europe”. Although the overall dynamic of employee financial participation (EFP) across the EU 27 is positive, EFP is declining in terms of its share of household income in the light of the concentration of capital ownership and of capital income. Along with the issue of distributive justice, other challenges, such as business succession in small and medium enterprises (SMEs) that have been on the agenda for decades, and new ones like the extension of EFP to social enterprises, are calling for action. Design/methodology/approach From the comparison of the countries, the cluster analysis and the background of the importance of legal framework and fiscal incentives, two general principles can be derived: (1) establishing EFP schemes through legislation is of primary importance as countries that provide a stable and transparent regulatory framework for EFP also show a wider implementation of EFP practices; (2) when properly designed, fiscal incentives promote the spread of EFP effectively as both countries with a long tradition of tax incentives for EFP (e.g. UK, France) and those with a more recent development (e.g. Austria) confirm. Findings It is against this background that the following policy recommendations should be read. Tax incentives should (and in most countries they actually do) target those taxes, which constitute the heaviest burden in the national taxation system. (1) Tax incentives should be provided for both employees and the employer company. (2) Even substantial tax incentives may prove inefficient when the pre-conditions for eligibility are too restrictive, complex or inflexible. (3) Some forms of tax incentives are more suitable for certain types of plans, e.g. deferred taxation for employee share ownership (ESO), capital gains tax in lieu of personal income tax for dividends and sale of shares, or tax exemptions for matching contributions for European Employee Stock Ownership Plans (ESOPs). Originality/value In light of this need for SME action and the great potential for introducing ESO in this enterprise segment, from our recommendations we emphasise in particular: Alleviating the evaluation problem in unlisted SMEs through debt-to-equity-swaps. ESO may initially take the form of an employee loan to the company, creating corporate debt, which is subsequently converted into company shares. Facilitating share transfers in privately held limited liability companies (LLCs) by ending the requisite for notarial certification (Italy and France) or limiting it to the identity of seller and buyer. ESO in SMEs via intermediary entities, e.g. trusts, foundations, LLCs or other special purpose vehicle (SPVs) to hold and administer employee shares (AT, IE, UK, HU, FR, SI, USA).