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Profit-sharing

Profit-sharing is the simplest form of financial participation. This can be understood as a collective regulation that, in addition to the stipulated wage, provides a variable income component dependent on enterprise profits.

 

Profit-sharing practice exists in many enterprises, even if it is not always laid down in an agreement, but is based on a voluntary decision on the part of the management.

 

Profit-sharing can either be paid directly or diverted to various forms of investment for later disbursement. Basically, the following schemes can be distinguished:

 

  • profit-sharing through bonus payments (cash-based profit-sharing);
  • profit-sharing with deferred payment/savings plan (deferred profit-sharing);
  • profit-sharing on the basis of share ownership (share-based profit-sharing).

 

What is particular about profit-sharing plans in many European countries is that to a certain extent they are subject to tax benefits (after recognition of the agreement by the state authorities). This applies primarily when they are set up for the medium-term accumulation of assets by employees. In these cases allocation rights, prescribed holding periods, forms of investment, and so on, are legally regulated. Examples include France, the Netherlands, Sweden and the UK.

 

In Europe the link between profit-sharing plans and old age insurance schemes has so far not been emphasised to the same extent as in the USA. This can be attributed to the fact that in Europe state old age pension systems are as a rule much more developed. To that extent European deferred profit-sharing plans are generally more directed towards accumulation of assets. Furthermore, a link with wage negotiations is the exception in most European countries. Having said that, in recent years there have been increasing tendencies from the employers’ side towards creating such a link.

 

Conceptually, profit-sharing schemes are part of remuneration and are linked to employment in the enterprise. They are linked to the ownership issue only if the profit claim derives from equity participation.

 

Among profit-sharing plans that foresee payment in the form of a share in the company (shares or other documented share in the company) there is a logical link with equity participation. This is because here permanent (or at least for an agreed period) mandatory participation in the company and its future results is developed from the inflows of profit-sharing. Whether advanced rights to be consulted go together with this participation, alongside claims to a share in future results, depends on the legal and economic form of the company share.

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.

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