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Vienna, Austria - Employee participation models can have positive effects when they are compatible with the corporate culture. It’s much easier for publicly traded companies to implement these models, but there are also ways for small and medium entities to let employees share in the company’s success.

The situation looked bleak: After almost 20 years, Gerhard Stocker's business partner wanted to leave Stasto, the pneumatic and hydraulic fittings company that they co-founded, to face new challenges. So what now? Buying him out seemed impossible, and even financial experts shook their heads and advised Stocker to get an investor on board. But the founder took a different path: a co-entrepreneur model. He had been thinking about the problem for a long time – how could Stasto better integrate and retain employees? "My father was concerned that the model should be transparent, that employees can access everything and see everything," says Dieter Stocker, who now runs Stasto with his brother Christof.

Initially, just five employees entered the business as silent shareholders. This meant a reduction in salary down to the level agreed in the contract, and the risk of insolvency, but on the other hand they would henceforth participate in the annual distribution of profits. These five employees were soon followed by other Stasto employees. Currently about 90% of the 43-strong workforce are co-owners. At the annual shareholders' meeting, they hold 50% of the voting rights, with Christof and Dieter Stocker holding the other 50%.

50% of SMEs are interested

However, not every owner wants more employee participation and transparency. In a 2005 study, around half of SMEs that did not have an employee participation model expressed interest in developing one, but in fact it is unusual for companies to have truly implemented such a system, and only about 6% of employees are participants in their companies. Companies with such models hope to achieve higher employee motivation and retention, as well as fostering entrepreneurial thinking and productivity.

Employee participation definitely paid off for Stasto, with positive effects on corporate culture and savings.  Travel costs have decreased by 30%, because people now think long and hard about whether each journey is really necessary – “the company will pay anyway” no longer holds water as a reason to travel. Stasto has also seen a reduction in fixed costs. If business is bad, the employees receive no bonuses and are only paid as per the wage agreement – but this has only happened once.

Tax benefits (some strings attached)

The tax advantages provide another incentive to employee equity participation. But beware – employee participation is only tax-supported under certain conditions. Capital shares must be passed to the beneficial ownership of employees, who must then pay taxes on them. Each employee has a tax-free allowance of 1,460 euros per year (which also applies to social security and salaries). As staff expenses, employee shares are deductible business expenses for the employer. However, if an employer has the right to repurchase the shares at a fixed price or if the shares are returned to the employer at the end of the employment relationship, there is no beneficial ownership for the employee and therefore no tax advantage. The implementation of such a participation model can be very delicate, especially with regard to charges and taxes. Stasto is a good demonstration of that – the company has been in a legal dispute for years due to taxes and social insurance deductions. Stasto’s wage tax assessments were made retroactively, although the employees have already paid income tax in full as partners, and according to Stocker, the company refuses to pay double taxation. Stocker has the feeling that the tax authorities don’t want any new systems.

The legal dispute is still ongoing. In the meantime, Stasto has changed its system – from silent shareholders to atypical silent shareholders. The background: Silent shareholders are (as employees) only involved by means of their contribution to the losses of the company. The general business risk is borne by the general partners.

SMEs: Profit-sharing is easier

In any case, it is advisable to instigate a bonus model for employees in SMEs. While this is not the same as profit sharing, it offers good opportunities for allowing employees to take part in the company’s success and profit. Equity participations can be implemented more easily in listed corporations or cooperatives, because it is easier to define the value of the participation, but the form of SMEs makes this more difficult. According to Ralf Kronberger, head of the Finance and Commercial Policy Department of the Austrian Federal Economic Chamber, profit-sharing is easier to implement in smaller companies.

And how does it work? “Profit-sharing means that a certain percentage of the company profit will be paid to the employees or agreed on in advance,” says Conrad Pramböck, salary expert at Pedersen & Partners. The employee only receives the amount when the company is doing well (in a classical bonus system, targets must be defined in advance). It is common success that is rewarded, and this strengthens team spirit. “Common success must be rewarded, from the housekeeper to the sales representative,” says Stocker. Pramböck adds: “Employee participation and profit sharing only make sense when this is consistent with the corporate culture. They provide motivation when the working environment is good.”