Securing the Company’s Success through Employees Participation - Mazars - Germany

How can enterprises assure their employees’ motivation and commitment in economically hard times without entirely consuming their liquidity reserves?

One possibility might be the participation of employees in the company. However, the notion of employee participation is manifold and it is worth examining which instrument could be adequate for the individual company on an individual case by case basis.

Assignment of shares in the company

The most classic case of employee participation is the assignment of company shares to employees. This is easily realized in corporations: Here a “stock option plan” is frequently introduced, which represents a model for the reduction or the distribution of the wage tax burden especially for employees with a higher remuneration (“deferred compensation”).

However, in the case of partnerships or limited liability companies, this option is generally excluded. The necessity for the notarization of the assignment of shares presents a major obstacle especially in a limited liability company, so that a direct participation is only suitable for a small select circle among the executive staff. Moreover, while co-determination is often necessary on the operational level (work council) or on the management level (supervisory board), particularly small and medium enterprises prefer not to be exposed to the participation of employees also at shareholders level. However, in the case of the assignment of shares, this would be indispensible as the employees would become full equivalent shareholders.

Besides a direct participation, there are other schemes for employee participation at staff level:

The simplest form of employee participation is to implement a system to grant “employee company loans.” In such a scheme, employees give a certain part of their remuneration as a loan to the company. The company pays a certain guaranteed interest rate on this loan plus variable interest in relation to the company’s success.

However, this solution would lead to an increase of the debt ratio on the company’s balance sheet. This could be avoided if the employer issues corresponding profit participation rights to the employees. These are contractual claims with which the employer “sells” the right to participate in the company’s profits to the employee. If a sufficiently long term is agreed for the loan, the profit participation capital can be designed in such a way that it can be shown as equity or similar to equity on the balance sheet.

In addition to supporting employee motivation, both alternatives present the employer with a simple possibility to raise funds without being obliged to undergo a Basel II rating by its bank. The improved equity ratio in connection with the issuance of profit participation rights may even facilitate conventional fundraising through the improvement of key figures.

Indirect participation

In addition to the loan/profit participation solution, an indirect participation might also be considered. For this purpose, a GbR (partnership under the German Civil Code) is frequently chosen, in which employees can hold participations without the obstacle of important formal requirements. As a dormant partner, this GbR invests the capital placed by the employees into the employer’s enterprise. Although the employees “pooled” in the GbR participate in the profit distribution through the GbR’s dormant partnership, a co-determination at shareholder level is excluded.

Current political trend

Political legislation also supports the implementation of certain schemes of employee participation at the level of the employees. In spring 2009, when Bundestag and Bundesrat passed the law on the Development of Employee Capital Participation [Gesetz zum Ausbau der Mitarbeiterkapitalbeteiligung], the promotion of the employee savings bonus for investments in employee participation schemes was increased from 18 to 20 percent. Among the relevant preconditions, the amended Sec. 3 no. 39 EStG (German Income Tax Act) provides the possibility for a tax exempt, gratuitous or reduced in price allocation of employee participations in the employer’s enterprise in the amount of 360 Euro per year (formerly 135 Euro). Additionally, the legislator has introduced the employee participation fund as another vehicle for employee participation.