Reasons for Introducing EFP – Higher Productivity and Better Competitiveness for Companies
The issue of employees participating in the financial results of their company has become an important political issue across the European Union. It is seen as a mean of promoting greater co-operation between management, owners and employees, eventually leading to a reduction in workplace conflict and, consequently, increasing efficiency, productivity and flexibility. Several reports conducted at the EU level have highlighted the potential benefits of financial participation, which have also been corroborated by a large number of empirical studies.
The resultant growth of productivity and profits creates the potential for a “win- win” situation, with workers and the firm sharing the benefits of the increased production. A decade ago, the European Commission’s Communication (COM 2002 364 Final) identified several specific benefits of financial participation for SMEs, over and above the general benefits available to all firms. More recently, the EESC’s ‘Own Initiative Opinion’ SOC 371 in 2010 stressed the importance of EFP for improvement in competitiveness in particular pointing out that it:
- helps increase purchasing power;
- helps deal with demographic change by offering employees an attractive place to live and work which makes it easier for companies to recruit specialist employees;
- increases productivity;
- improves financial indicators, thus making external capital cheaper; and
- is a vehicle to facilitate transitions in ownership and management of family enterprises and SMEs in order to secure their continuity.
Furthermore, financial participation can help to recruit employees with high qualifications and skills and retain them by providing benefits for employees in addition to wages. It offers highly skilled employees an attractive place to work. Capital participation of employees as shareholders ensures that the long-term interests of the company would tend to dominate and excessive risk-taking by managers is largely constrained. In addition, employee ownership offers the opportunity to involve employees and solicit their suggestions concerning enterprise strategy, thus enriching the company’s decision-making process.
Finally, EFP offers a solution to the succession problem, the transitions in ownership and management, of family enterprises and SMEs securing their continuity and the stability of jobs and production.
On the other hand, EFP can provide employees with benefits which are supplementary to their wage income and contributes to the accumulation of productive capital, which makes them less vulnerable in recessions. More about this in the next post.