Despite the robust position that employees hold in the governance of German firms, occupying half of supervisory board seats, the country does not have the same record when it comes to share ownership.  

That may be changing.  

On October 30, 2017, a total of 60 German listed and non-listed companies signed an appeal to the new central government to make it easier for employees to build up a shareholding in the company they work for (the “Berliner Appell”).  

As noted in the appeal, only about 1 in 7, or 1.1 million, employees of listed companies participate in share schemes through their employer, with a similar ratio for small and medium enterprises. Only half of DAX companies offer share participation plans to their employees, with SMEs offering about 3,500 plans. 

In part, that reflects the market culture (the German Kodex governance code does not explicitly recommend the use of equity awards), and in part, the market’s regulations. The current annual tax exemption threshold of €360, which was increased from €135 in 2009, is still substantially lower than those applied in other European countries, like neighbouring Austria, where the exemption ranges from €730 to €1,460, or the UK and Ireland, where it reaches £3,600 and €12,700 (for Approved Profit Sharing Schemes, or “APSS”), respectively.  

In order to achieve greater employee participation, the appeal calls for specific measures: 

  • An increase of the minimum threshold for the annual tax exemption on employee participation income, from the current €360 to a minimum of €3,000; 
  • No taxation of dividends and interests gained in the long-term, over a minimum of ten years; 
  • A simplification of the relevant regulations; and
  • A direct intervention from the European Commission, to allow for a straight-forward implementation of these rules across borders.  

Signatories to the appeal include international issuers like Siemens, BASF, thyssenkrupp, RWE, Deutsche Telekom and Deutsche Börse, as well as auditors Ernst & Young and KPMG, and asset manager BVI.  

Siemens has put itself in the vanguard of this movement. CEO Joe Kaeser declared their goal is to increase the number of employees holding company shares from 165,000 to 200,000 by 2020. Siemens also participated in a study by the University of Göttingen, aimed at testing the effect of employee share participation and performance. All three models run in the study showed a positive effect on employee engagement and performance, both at the individual and at the organisational level. 

This is the line of thinking that has seen equity-based long-term awards become a standard part of executive pay packages, a tool for attracting and retaining top talent and for aligning their interests with those of shareholders. Share plans are now a common feature of the pay packages of executive directors, although even here the transition from cash to equity awards occurred at a slower pace in Germany, due to stricter financial and fiscal regulations. One knock-on effect of executive equity awards has been to further increase the pay gap between top managers and employees. While the payouts from share participation schemes are unlikely to rival the CEO’s LTI, a wider use of equity schemes among below-management employees may nonetheless mitigate concerns regarding disparities.  

In making the case for increased employee participation in companies’ share capital, the appeal notes that it has the effect of promoting alignment between the interests of the individual and those of the company.  Besides serving as a motivator, equity-based compensation is seen as a good way to share the fruits of a growing economy while alleviating the pressure of pension expenditure. 

However, some argue that share participation plans have the potential major drawback of amplifying negative economic developments. Poor company performance may have a double-whammy effect on employees, who face an increased risk of losing their job just as the company shares they hold sink in value. As such, while there’s a clear allure for bosses to increase employee engagement by giving the rank and file skin in the game, financial experts suggest that investing in external companies to diversify risk may ultimately make more sense for the employees themselves. 

On December 1, the supporters of the Berliner Appell will gather at the Ownership Day (Tag der Teilhabe), an event focusing on fostering greater employee participation, in Berlin to discuss the next steps of their campaign.  

Silvia is an analyst covering the German market.