incentivising performers

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Ale Brson (NIESR and CepLSE), Richard Freeman (Harard Uniersit and CepLSE),

Cladio Lcifora (Cattolica Uniersit and IZA), Michele Pelliari (Bocconi Uniersit)

and Virginie Protin (Leeds Uniersit Bsiness School and ERMESParisII)

(*) A preliminar ersion of this report as presented at the Annal FRDB conference in Cagliari (Ital) onthe 29th Ma, 2009. We are gratefl to Massimo Anelli, Tito Boeri, Loreno Cappellari, Piero Casadio, Fathi

Fakhfakh, Kein Lang, Albert Schenk, to seminar participants and to or discssants Oriana Bandiera and

Pietro Garibaldi for their comments. Massimo Anelli, Elena Cottini and Federica Origo proided ecellent

research assistance. The data sed in the Report hae been made kindl aailable b the Eropean Science

Fondation, the National Opinion Research Center, the OECD, Manageritalia and Federmeccanica. Part of

this report as completed hen Cladio Lcifora as isiting UNSW, hose hospitalit is gratefll

acknoledged.


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E

1. I

2. F 2.1 Indiidal performance pa

2.2 Grop performance pa

2.3 Financial participation

3. P P F P3.1 Empirical reglarities ithin contries

3.2 Empirical reglarities beteen contries

4. T

4.1 Heterogeneit and selection4.2 Risk aersion and performance measrement

4.3 Grop incenties and monitoring

4.4 The battle against free riding

4.5 The macro isses

5. E L5.1. Indiidal performancerelated pa

5.2. Grop incentie pa

5.3. Financial participation

6. N E 6.1. Incentie effects of PRP in a catering serices compan

6.2. Decentralised bargaining and firm performance: Eidence from the metal

engineering indstr

6.3. Incentie pa and financial participation in France

7. S

?

R


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3

E

In recent decades, the compensation packages of a groing proportion of firms inclde pa

schemes that are linked to emploee or compan performance. B motiating indiidal orkers

to be more efficient at ork and increasing their attachment and identification ith the interests

of the enterprise, incentie schemes are epected to improe interpersonal relationships, raise job

satisfaction, loer absenteeism and aste of intermediate material or capital, and loer trnoer

rates, all of hich shold prodce lasting effect on compan performance.

Most firms that se pa for performance sstems do not introdce them b themseles bt

rather as part of changes in ork organisation sch as team ork, emploee inolement

committees, or total qalit management that offer emploees a greater role in decisionmaking.

While there has been a lot of research done in recent ears on the economic effects of

incentie schemes, little is knon abot the patterns of performance related pa both ithin and

across contries. Aailable stdies sggest that hen firms hae good performance measres,

performance related pa is associated ith improed emploee prodctiit and better qalit of

the orkerfirm match. Still, e obsere significant heterogeneit in the share of firms adopting

incentie pa schemes as ell as in the tpe of schemes implemented. In this report e prodce,

for the first time, a ide arra of empirical reslts to docment sch heterogeneit, both beteen

and ithin contries.

In this std, e find that the diffsion of incentie pa schemes ranges from arond 1015

percent in some Eropean contries to oer 40 percent in Scandinaian contries and the US.

When e inestigate the relatie importance of the different tpe of schemes, e find that

indiidal pa and profit/gain sharing schemes are idel diffsed, hile share onership

schemes are mch less common (particlarl in Erope). We also docment a nmber of empirical

reglarities. Incentie pa is fond to be less common in contries here there is a large majoritof small firms or here the share of famil firm is larger. Higher prodct and labor market

reglation is associated to a loer diffsion of incentie pa. Capital market deelopment is a

necessar reqirement for a ider diffsion of incentie pa (i.e. in particlar sharing and

onership schemes). When e control for a large set of indiidal characteristics and compan

attribtes, e find that the probabilit that a orker is coered b an incentie scheme is higher in

large sied firms and in highskilled occpations, hile it is mch loer for females. Incentie

schemes are also mch less diffsed in the pblic sector.

In order to assess the effects of the introdction of performance related schemes on a

nmber of economic otcomes, e present three case stdies in personnel economics hich se

companspecific data. Each std pas particlar attention to the internal featres that goernthe organisation of ork, as ell as the instittional enironment in hich firms operate.

In the first case std, e look at the effects of changing the measre of performance from

sales to profits in a chain of cafes and restarants in hich the store managers receie incentie

pa hile reglar emploees onl receie a fied age. We find that, b linking the pa of the local

manager to store profits forces them to internalise prodction costs (namel, labor costs) ths


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increasing prodctiit (b abot 11.5%) and enabling managers to respond more efficientl to

changes in the demand b adjsting all prodction inpts.

The second case std ses data for all firms in the metal engineering indstr in Ital to

eplore the effects of a nationide collectie agreement that facilitated the introdction of

incentie pa. We find that the agreement did increase the rate of adoption of incentie paschemes and that, in trn, this reslted in an increase in prodctiit b abot 56%.

Or last case std looks at the effects of to particlar forms of incentie pa, namel

profit sharing and emploee share onership, on firm performance and a selfreported measre

of ork pressre. Reslts sho that profit sharing improes firms performance hile there is no

harmfl effects of ork pressre.

In the final part of the report, e bring together the reslts of all or analses and or

critical reading of the eisting literatre, both theoretical and empirical, and e ask hether

goernment shold interene to spport the implementation of incentie pa schemes. In

particlar, in the light of the crrent economic recession e ask hether the introdction or a

ider diffsion of incentie pa ma be regarded as a a to consolidate and speed p therecoer.

The case for goernment interention in this area is not obios. While in general

companies that se pa for performance do better (or no orse) than others, in terms of

prodctiit and profits; the large heterogeneit obsered, across firms and instittional contets,

sggests that not all firms in all circmstances are going to benefit from incentie pa.

To the etent that some firms esche pa for performance and financial participation

throgh lack of knoledge or adherence to the , then moing them in a more

prodctie direction can jstif a polic to encorage greater incentie pa or financial

participation. Polic interention ma range from training programs (abot best practices and

ho to implement them), to fiscal incenties or sbsidies or, een, to mandating programs.

Bt it ma be that goernments are the rong agenc for institting policies. Schemes thatgie ta breaks to firms ith performance for pa schemes ill primaril benefit the firms and

orkers that alread hae them, or ma indce firms to change the form of pa to gain ta

adantages ithot changing ho the actall operate. We arge that it makes little sense to

ndertake an reforms ithot detailed simlations of hat the ma do to the econom nder

alternatie economic scenarios based on sond analsis and etensie discssion ith labor,

management, and goernment decisionmakers.

Alternatiel, trade nions and emploers federations ma find collectie bargaining a

more efficacios a to press for changes in compensation and onership. Unions hae agreed to

greater decentralised prodctiit bargaining in Erope, negotiate oer the profit sharing schemes

in France and Ital, and hae a mied record of spporting and opposing emploee onership and

profitsharing in the US depending on economic conditions.There are policies that cold encorage the spread of grop incentie pa and financial

participation among firms that desere consideration. For eample, France has a mandator profit

sharing polic for medim sied and large firms. The US allos firms to dedct compensation

epenses as a cost of bsiness rather than as distribtions of profit, onl if the plans coer all

orkers in the firm proportionate to their ages or in some other fair a. Finall, another

possible innoatie a to encorage firms to eperiment ith more grop pa for performance


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schemes and financial participation old be to pblicise best practices and offer pries for

firms that had the most sccessfl innoations. In the US the best orkplaces hae better financial

performance and are far more likel to pa orkers throgh incentie pa and ith financial

participation than other firms.

More generall, gien hat e kno and do not kno the best approach old seem tobe to design eperiments or pilot projects that might tr seeral different as to encorage the

spread of grop incentie pa and financial participation schemes that seem to offer prodctiit

adantages oer other forms of organising and paing labor.

Can relating orkers pa more to the performance of firms help economies adjst in the

crrent crisis? To the etent that part of the crisis as de to the ecessie concentration of

incenties at the top of firms in finance and elsehere that generated hge risktaking that spread

toic assets arond the orld, increasing normal emploees share of performancerelated and

onership might help preent a restoration of the same incenties that contribted to the

financial disaster. It is possible that policies that gae adantages to ne firms in hich orkers

had grop incenties and financial participation might increase the rate of ne firms forming,

hich old help in recoer. Bt hile there is eidence that ne firms in hightech tend to sethese modes of compensation, there is no eidence that policies to encorage the practice old

in fact hae the desired impact in job creation. Eperimentation is the necessar path to a better

nderstanding of ho policies are likel to ork in different instittional contet and economic

conditions.


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6

1. I

In recent decades, the compensation packages of a groing proportion of firms inclde

incentie pa schemes pa schemes linking pa to emploee or compan performance. The

groth in incentie pa has been fostered b idespread concern oer the eistence of

inefficiencies in the orkplace and the belief that incentie pa can raise prodctiit groth and

improe profitabilit.

Incentie pa has a long standing tradition in economic analsis and policmaking. From

the Classical economists (Smith, 1776; Mar, 1867) to analsts and practitioners, compensation

sstems based on emploee performance are seen as a a to correct some of the imperfections

in labor, prodct and capital markets that affect the emploment relationship. B motiating

indiidal orkers to be more efficient at ork and increasing their attachment and identification

ith the interests of the enterprise, incentie schemes are epected to improe interpersonal

relationships, raise job satisfaction, loer absenteeism and aste of intermediate material or

capital, and loer trnoer rates, all of hich shold prodce lasting effect on compan

performance. Does etant eidence spport these epectations and hopes? What eplains thedifference in the diffsion of incentie schemes among firms in Erope and the US?

Firms hae introdced indiidal rated schemes, grop incentie schemes, profitsharing

bonses and deeloped emploee stock onership programs, often throgh retirement plans that

pt significant assets in the stock of the firm. Most firms that se pa for performance sstems do

not introdce them b themseles bt rather as part of changes in ork organisation sch as team

ork, emploee inolement committees, or total qalit management that offer emploees a

greater role in decisionmaking. Which, if an of these tpes of incentie schemes improes

economic otcomes the most?

Most stdies sggest that hen firms hae good performance measres, performancerelated pa is associated ith improed emploee prodctiit and better qalit of the orker

firm match. If this is so, h are these pa sstems not more idespread in indstrialised

economies? Perhaps retrns to incentie pa differ across firms and those ho are likel to

benefit hae alread adopted them? If all firms that old benefit from performance related pa

hae introdced it, then sbsidising other firms to sitch to performance related pa sstems

throgh ta breaks and other forms of state assistance ill ield loer retrns than those

estimated for crrent sers. Bt it is also possible that man firms stick ith stats qo modes of

pa hen the cold do better ith pa for performance sstems, hich old jstif state

promotion of some schemes. Making pa dependent on compan performance ma also be a a

for firms to share risk ith orkers throgh cost adjstments, hich cold presere jobs in

difficlt times. Bt there is also eidence that incentie schemes do not necessaril improeperformance in all contets and sitations. For eample, firms often introdce financial

participation schemes for reasons that hae little or nothing to do ith incenties.

The impets for this report is tofold. First, hile there has been a lot of research done in

recent ears on the economic effects of incentie schemes, little is knon abot the patterns of

performance related pa both ithin and across contries. A ne ae of stdies hae sed


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companspecific data to inestigate the effects of the introdction of performance related

schemes on some measre of emploees or establishments performance shedding light on the

casal effects of incenties on performance. In this std, e focs on a selected nmber of

stdies ith credible identification strategies that link performance pa to performance. This ne

literatre, knon as insider econometrics, neertheless rises important isses on the eternalalidit of the reslt, gien the sbstantial heterogeneit in the effects across time, place and

enironment.

Second, in seeral contries there has been a reneed in incentie sstems

that go beond shortterm effort and gie emploees a stake in the performance and srial of

the firms that emplo them. In the US, for eample, a bill as introdced in the Senate in

December 2009 that old proide for state programmes to promote emploee onership.1 In

France, emploee financial participation has been the sbject of reneed legislatie effort in 2006

and 2008, improing proisions for emploee access to information nder reglated profitsharing

schemes and making the schemes more fleible. In Ital, a ne sstem as introdced for the

20082010 period b la 247/2007, b hich firms benefit from a ta relief on the collectiel

negotiated prodctiit pa premia. In the UK, both of the main political parties hae recentl ptforard policies spporting a measre of emploee onership in pblic serices.

Finall, folloing economic recessions interest in firm practices that ma improe

performance and emploment gros considerabl, and so does interest in possible pblic policies

to promote sch practices. For eample, folloing the post oilshock recession more and more

companies looked toards pa for performance to increase bottomline reslts and obtain

prodctiit gains. General pa increases slol gae a to incentie pa and other forms of

monetar incenties.

In addition, this particlar recession and highl pblicised cases, like Enron, hae broght

ot the isse of the emploment and pension risks emploees bear, and goernance sstems that

might gie emploees a greater role in oerseeing the risks taken b companies somethinghich ma be associated ith emploee share onership. As economies from both sides of the

Atlantic are no starting to come ot of the recession, the introdction or an increase in the

diffsion of incentie pa ma be regarded as a a to consolidate and speed p the recoer.

We consider eidence pertaining to a range of qestions abot pa for performance

sstems. Ho significant are these forms of compensation and modes of emploee inolement?

Ho has their incidence eoled oer time? Do incentie schemes and financial participation

boost prodctiit, or do the signal here high prodctiit is rearded and ths attract the

most prodctie orkers? Which schemes ork better, in hich sitations and to hich ends?

Shold Goernment sbsidise the schemes and, if so, hich ones and ho? Ho do incentie

schemes interact ith contrleel instittions, sch as centralised age bargaining sstems?

The report is strctred as follos. Section 2, illstrates the different forms of incentie

schemes and financial participation. Section 3, describes the incidence of performance related pa

schemes across and ithin contries and oer time. Section 4 reies hat economic theor

sggests ma be important in assessing performance pa and financial participation schemes. In

1 Emploee Onership Fondation, Emploee Onership Blog. Legislatie HighlightS. 2909, April 29,

2010, on http://.esopassociation.org/blog/template_permalink.asp?id=268 accessed on 1 Ma 2010.


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section 5, e smmarise the empirical literatre and highlight difficlties in identifing the casal

effect of performance pa on economic otcomes. Section 6, presents eidence on the

determinants of performance related pa schemes. It incldes case stdies ith microdata

eidence on the economic effect of incentie schemes. Last, bt not least, e reie the role of

the Goernment in sbsidising performance related pa, and consider possible polic responsestoard performance related pa in the crrent economic crisis and into the foreseeable ftre.

2. F

The principle of relating pa to performance is as old as the practice of sharecropping, in

hich a farmer ho orks someone elses land is paid ith a share of the harest. Remnerating

orkers b the piece as said b Adam Smith (1776) to be the rle in indstr in the 18th

centr2 and pa for performance as immediatel eported to Astralia in the last ears of the

centr (Shields, 2002). Varios tpes of performance bons schemes, and plans in hich firms

shared profit ith emploees or encoraged them to on shares in the compan eisted at least

since the 1840s in France, the UK and the US, as ell as in Japan since the end of the first World

War (Hatton, 1988; Jones and Kato, 1993). In a separate deelopment, the first trading

organisations oned b orkers appeared in the UK, France and Ital in the first half of the 19th

centr (Cole, 1948; Desroche, 1976; Fornasari and Zamagni, 1997). Economists are generall

faorable to incentie pa schemes becase the are likel to motiate orkers to prodce more.

Belief that incenties ork lies at the heart of mch economic analsis, bt it is not an

ncontested belief. Some organisational pschologists arge that etrinsic incenties sch as pa

for performance displace intrinsic incenties to ork and actall redce otpt in some settings

(Kohn Alfie, 1993)

What differentiates performance pa from financial participation? Essentiall, propertrights sharing is hat distingishes the to forms of pament sstems: in the first case, the

schemes do not constitte an entitlement for the orkers bt are paid on a discretionar basis

(tied to indiidal or grop performance), hile in the second case emploees hae a residal

right to the firms srpls (income or ealth).

This section reies the different tpes of incentie pa. The incenties ma inole

relating emploees pa to their indiidal performance, as ith piece rates or most sales

commissions; or relating pa to the performance of their orking grop or team; and/or to the

performance of the hole firm (Bron and Heood, 2002). Schemes that connect remneration

to firmleel performance commonl inole emploees participating in propert rights, as

residal claimants to the firms profits. These forms of incentie schemes, hich inclde profit

sharing and emploee share onership, are often referred to as emploees financialparticipation. As e ill see, not all the schemes that come nder financial participation are,

strictl speaking, pa sstems, bt all are thoght to hae incentie properties and are sed as

incentie schemes.

2 P. 185 (1979 edition).


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Financial participation gies emploees a residal claim oer part of the firms srpls, in

the form of profit and gainsharing or diidends on emploeeoned shares and ariation in share

ale. Generall speaking, emploee participation inoles sharing propert rights ith emploees

(BenNer and Jones 1995). Ths, emploees ma share in firm srplses, i.e., profit, as in the case

of financial participation, and/or in firm goernance (hen emploees also take part in decisions).Financial participation incldes profit and gainsharing schemes hich e grop nder

the term profitsharing and emploee share onership.

Profit and gainsharing schemes make emploees pa depend in part on the firms

performanceprofit and/or other indicators of performance are sed in determining the

performance bonses paid ot to emploees. The term gainsharing is sometimes sed for

schemes that are not strictl based on profit. For eample, qalit or prodctiit indicators ma

enter the comptation of firm or establishment performance instead of, or together ith, profit.

BO 2.1 F G S I P

In a nmber of contries, the state reglates and spports certain tpes of incentie pa. Profitsharing and emploee

share onership schemes hae been the main forms sbsidised b goernments since the aftermath of the second

World War. Until the 1980s, the rationale for spport did not eplicitl inole improing firm performance. A

general desire to increase the inolement of emploees in the affairs of the firm seems to hae motiated, for

eample, the US ESOP legislation and the French spport for profit sharing nder de Galle (Ualić, 2008). Eqit

considerations, sch as the desire to redistribte ealth, seem to hae been as important as an oerall objectie to

promote groth in the French case, as ell as the perception that saings needed to be encoraged, as in the 1950s

and 60s legislations in France and German. While performance in the form of competitieness has been more

often cited as an objectie of state spport for financial participation since the 1980s, other goals sch as the

promotion of a shareoning democrac in Britain in the late 1980s or encoraging emploee inolement, remain

important.

Seeral contries promote emploee financial participation throgh a range of fiscal incenties, hile other contries

offer little or no fiscal spport. In this respect, contries ar along a nmber of important dimensions:

• The ta rate applied (i.e. the ta rate applied to share schemes ranges from 0% in some contries to more than

50% in others)

• The tpe of ta applied: some contries appl income ta to gains from share schemes, hile others appl capital

gains ta. Seeral contries proide paroll ta and/or income ta eemptions on profitsharing bonses.

• The tpes of financial participation scheme eligible for ta relief (i.e. in Ireland and in the UK, for eample, ta

concessions are aailable for arios sharebased schemes bt not for cashbased schemes).

• Ta adantages ma be offered for companies, emploees or both, or een for banks proiding the finance to

prchase shares to be allocated to emploees, as in the US.

• Minimm retention periods The UKs ne Share Incentie Plan (SIP) reqires emploees to leae their shares in

trst for a minimm of fie ears to aail of ta relief, hile the Irish ProfitSharing Scheme imposes onl a threeear block. Deferred profitsharing bonses onl attract ta concessions if the are not cashed b emploees for

seeral ears in France.

• Different criteria for ta approal and differences in paroll and corporate ta sstems make it etremel difficlt

to etend financial participation schemes across national bondaries.

• The timing of taation differs beteen EU Members. Emploees ho moe across borders ma be taed tice on

the same benefits, or ma face no ta at all.


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The legal frameorks for emploee financial participation are er different across contries: some hae no legal

proisions at all, hile others hae qite elaborate and ellestablished legislatie strctres (Potsma, 2001). For

eample, in F here the legislation is highl spportie (e.g. profit sharing for medim sied and large firms is

mandator) incentie schemes are idespread; conersel in G, here the legislation is less spportie financial

participation schemes are less common.

Profitsharing bonses ma be paid in cash, or deferred, e.g., made aailable to the

emploees ith a dela of seeral ears after being aarded, ith the fnds kept in saings

acconts, inested otside the firm or kept ithin the firm. Firms sometimes also pa profit

sharing bonses in the form of shares of the compan (or share options) combining in this a

profit sharing and emploee share onership (see belo). Althogh most profitsharing schemes

in some contries (e.g., France) link bonses to compan or establishmentleel profit, man

combine this ith other indicators of collectie performance sch as sales, absenteeism, qalit,

etc. These indicators constitte the main basis for profit sharing in man firms and contries (e.g.,

German). Indiidal emploees bonses ma all be eqal in a gien firm or ma depend onages, lengths of serice ith the compan and/or on indiidal records, i.e., of absenteeism.

Reglated schemes, sch as the French ones or the former British profitrelated pa, ma specif

that all or most emploees mst be eligible (broadbased schemes) on the same terms.

An important isse for the potential economic effects of profit sharing is hether the

formla for determining bonses is knon beforehand to emploees (as in most reglated

Eropean schemes and Japanese ones) or hether the leel of bonses is left to the discretion of

management in an gien ear, as ith man US profitsharing schemes.

Profitsharing is idespread in Western Erope, the US, Canada (Long, 2002) and Japan, as

ell as in a nmber of other contries (see Section 3 belo). France and German startedsbsidising profitsharing (thogh onl modestl in the case of German) as part of postWorld

WarTo efforts in the 1950s and 60s to increase orkers saings and improe their chances of

oning their on hoses.3 France also promoted the schemes as a a of redistribting ealth

and encoraging groth. It reqired all firms ith 50 emploees or more in France to introdced

one profitsharing plan. Bonses paid nder both this and another, olntar, reglated French

plan are eempt from most paroll taes (see Bo 2.1). A nmber of other contries offer ta

adantages to the firm and/or the emploee, in the form of paroll and/or income ta eemptions

or redctions, etra ta alloances for inestment projects, etc., for schemes meeting certain

criteria (tpicall, schemes that do not eclde certain grops of emploees other than those on

er temporar contracts and do not offer better conditions to certain grops of emploees, and

deferred schemes). Meico, like France, has complsor profitsharing.

3 In both contries the legislation as part of the reconstrction effort and in part a response to postar

hosing shortages. The idea as that, ith sfficient saings, orkers might get hoses bilt for themseles and their

families. In German nder the la on the accmlation of capital V. See OECD (1995).


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Emploees ma on shares in the firm in hich the ork. Firms freqentl offer free or

disconted shares to emploees as part of a profitsharing scheme or an ongoing incentie plan.

Hoeer, in man cases emploees acqire shares in different circmstances, for eample as a

reslt of the priatisation of their emploing firm or an emploee takeoer (thogh emploee

onership ma still hae incentie effects). A ke difference is that an emploee share onershipscheme ill proide for acqisition of shares b ne emploees on a continos basis, hereas

priatisation, for eample, is likel to be a oneoff operation introdcing ftre differences

beteen contining and ne emploees.

Schemes in hich emploees on shares of the firm in hich the ork link the

emploees ealth to the firms performance b irte of their being shareholders as ell as

emploees. If the shares are tradable (the most common case in firms that are not entirel oned

b their emploees) emploees incomes ill be affected b the firms performance in the form of

diidends, and their ealth ill depend in part on the share price. In this sense, emploee share

onership, nlike profit sharing, ma inole losses as ell as gains for emploees. This risk,

added to emploment risk, ma make emploee share onership a poor ehicle for pensioninestment, thogh man emploee stock onership schemes sere as pension plans in the US

and an increasing nmber of Eropean compan pension schemes allo inestment in compan

stock.

Tradable shares also mean emploees can realise their ealth b selling their shares. This

possibilit ma ork to their adantage bt can make emploee share onership being nstable,

as happened in man transition contries here emploees often sold off their shares in the ears

folloing priatisation. On a to increase the stabilit of a scheme is to establish a trst that

holds emploees shares for part or all of the dration of the scheme. In sch a case, emploees

often hae a sa oer ho manages the trst and ma elect trstees or hae their trade nion

manage emploee oting rights. Hoeer, man emploee share onership schemes do not gieemploees shares oting rights, hich means that emploees participate in srpls bt not in the

goernance of the firm, jst as the do ith profitsharing schemes. The US term ESOP refers to a

specific tpe of goernmentsbsidised scheme, the Emploee Stock Onership Plan, nder hich

a firm can take ot a sbsidised bank loan to b some of its shares for its emploees. As the firm

pas back the loan from profits, the shares, hich are initiall held in trst for the benefit of

emploees, are gradall released to emploees. A similar sstem (thogh ithot the sbsid)

has been sed in the UK.

While it is clear that man firms adopt emploee share onership as an incentie scheme

or a a to reard emploee loalt, share schemes hae also been set p b firms as a

protection against hostile takeoers, especiall in the US. Another reason that is often inoked foradopting financial participation in general has been to keep labor nions ot, in particlar among

US firms. Hoeer, both in the US and in seeral Eropean contries, nions hae been

freqentl inoled in negotiating the introdction of financial participation schemes for their

members (see bo belo).


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13

Goernments hae also spported emploee share onership as a a to promote

emploee inolement in the affairs of the firm, as in the US ith sbsidisation of a scheme called

ESOPEmploee Stock Onership Plan. Under the scheme, a firm can take ot a goernment

sbsidised bank loan to b some of its shares for its emploees. As the firm pas back the loan

from profits, the shares, hich are initiall held in trst for the benefit of emploees, are gradallreleased to emploees. A similar sstem (thogh ithot the sbsid) has been sed in the UK for

managementemploee bots (Pendleton et al 1998). UK goernments hae spported

emploee share onership both as a form of emploee inolement and a a to promote share

onership generall. Ths, ta incenties ere shifted from profitsharing to emploee share

schemes in the 1990s. Earlier, emploee share onership had been a featre of a nmber of UK

priatisations, hich ere in part aimed at promoting ider share onership among the

poplation.

Mass priatisation as a featre of the earl transition from centrallplanned to market

economies in Eastern and Central Eropean contries, seeral of hich hae since joined the

Eropean Union or are epected to join, and in seeral contries of the Confederation ofIndependent States (CIS) formed b former Soiet repblics. The process reslted in an

nprecedentedand nepectedleel of emploee onership, thogh this as not as a rle set

p to inclde ne emploees in the ftre and has since largel disappeared (see Section 3).

BO 2.2 E

In some firms emploees share all the aailable profit among themseles and on all or most of the capital. A series

of stdies comparing the incentie effects of these to forms of financial participation among emploeeoned firms

(e.g., Estrin and Jones 1995) fond the amonts of both capital onership and profitsharing to increase total factor

prodctiit. In his reie of earl stdies of the effects of financial participation on prodctiit in conentional and

emploeeoned firms, Docoliagos (1995) conclded that profit sharing and emploee share onership had

stronger positie effects in emploeeoned firms.Famos emploeeoned firms inclde the grop of orker cooperaties (Mondragon

Corporacin Cooperatia, MCC) from the Basqe contr in Spain, and the Partnership, a chain of

department stores and spermarkets in the UK. MCC emplos oer 100,000 people orldide. John Leis has oer

60,000 emploees in the UK.

In firms oned b their emploees, emploeeoners sall elect senior management and receie an

profits that are not ploghed back into the firm. Cooperatie rles sometimes allo limited otside inestment and

emploment of nonmember orkers, bt the blk of capital is oned b emploees and the majorit of emploees

are members.

There are of emploeeoned firms.

In the US, and in part of the cases in the UK, as ell as in man cases of priatisation b emploee b ot,

the firm is set p like a , , ith shares that are to a certain etent tradable

(the firms rles often reqire approal b the membership before a share is sold otside the crrent membership)and appreciate in ale ith the ale of the firm. Hoeer, members tpicall hae one ote per person, hether

becase the are reqired to hold the same amont of capital or becase the firm has a one member, one ote rle,

as in cooperaties.

The other, more freqent tpe of emploeeoned firm is the , hich can be fond in

Ital, Spain, France and the UK, for eample. In this tpe of emploeeoned firm, orker members on some of the

capital indiidall bt their membership shares are not tradable. The cooperatie rles ma allo members to

accmlate indiidalloned capital oer their career ith the cooperatie, as in Mondragon and in the French case

(Arando et al 2010). The remainder of the cooperaties capital is oned collectiel b the members and cannot be


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14

split. The one member, one ote rle applies, as ell as other cooperatie principles like open and olntar

membership.

There are more than 25,000 orker cooperaties in Ital4, seeral thosand in Spain, abot 2,000 in France,

and probabl more than 500 emploeeoned firms of both tpes in the UK. Emploeeoned firms are larger on

aerage than conentional ones in France and Ital, and can be fond in most indstries, thogh the are relatiel

more present in manfactring and less in serices than conentional firms (Pencael et al 2006, Fakhfakh et al 2010).

Worker cooperaties often srie er long, and the oldest crrentl trading ones in France and the UK ere created

in the late 19th

centr (Protin 2006). Stdies on the US, Ital and France sggest emploeeoned firms are at least

as prodctie as conentional firms (Pencael and Craig 1994, Estrin 1989, Fakhfakh et al 2010). A groing bod of

eidence indicates emploeeoned firms adjst pa more than emploment to changing demand conditions and ma

ths presere jobs better in recessions (Craig and Pencael 1992, Pencael et al 2006, Brdn and Dean 2009).

4 We are gratefl to Alberto Zei for sppling this estimate.


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3. P P F P5

In recent decades, the incidence and diffsion of incentie pa schemes and financial

participation has gron in Erope and the US along most of the dimensions discssed in the

preios section.

Indiidal incentie schemes hae a long standing tradition in agricltre and

manfactring indstries, here periods of rapid groth alternate ith declining phases. For

eample, the diffsion of piecerates after increasing significantl dring the indstrialisation

phase (ith the groth of the manfactring indstr), hae progressiel declined together ith

the shrinking of manfactring, hile the are qite idespread in some serice occpations sch

as sales. More recentl, the adances in information and commnication technologies (ICT), b

redcing the costs of monitoring performance i.e. collecting and processing information , hae

altered the benefits and costs of different incentie pa schemes. On the one hand, ICT has made

it easier to appraise otpt and design optimal incentie schemes (i.e. throgh qalit of line

prodction), ths contribting to a resrgence of indiidal pa schemes (sch as, piecerates). On

the other hand, ICT also contribted to a better monitoring of inpts ths redcing opportnitiesfor shirking and the need to pa incentie premia. At the same time, the rise of team prodction

and the recognition that most jobs een simple ones are mltitask has redced the ambit for

indiidal performance based pa in faor of sbjectie measrement in indiidal performance

sstems (sch as, merit pa). In particlar, firms make choices regarding the technologies the

deplo in the orkplace to operate efficientl, these choices hae important opportnit costs

that depend on the economic enironment as ell as on contrspecific instittional featres.

When deciding their pa sstem, firms need to take into accont all the releant featres (i.e. at

the micro and macro leels), as ell as the role of the State, in order to proide in each contet

the appropriate set of incenties to managers and emploees.

In this section, e proide crosscontr eidence on the incidence and groth of incentiepa and its relation to contr differences in reglations of the labor and prodct markets.

Stdies for the US in the 1980s1990s reported that 5 to 10% of emploees had some form

of incentie pa, ith ide differences b indstr (i.e. ranging from 2% in the chemical indstr,

to 26% in the serice sector) and occpation (i.e. from 2% in lo skilled blecollar occpation p

to 21% in sales occpations) (see Carlson, 1982; Bron, 1990; Bonars and Moore, 1995; Barkme

and Moehrle, 2001; MacLeod and Parent, 1999). Stdies for the US in the late 1990s2000s, report

mch higher figres for incentie pa, sggesting significant groth in the percentage of

emploees coered b incentie pa schemes. Indeed, comparing data from 1994/95 to 2003/04

in a ariet of US data sets Dbe and Freeman (2010) conclde that indeed there as a hge

increase in grop incentie pa from the 1970s throgh the 1990s. Lemie, McCleod and Parent(2009), sing PSID data, estimated that 15% of orkers ith incentie pa in a gien ear hile

37% held jobs in hich a orker eer receied incentie pa, and 45% of orkers ere in one of

the to grops. In the PSID the share of emploees in jobs ith incentie pa ranged from 30% for

craftsmen to 78% for sales orkers; hile share b indstries ranged from a lo of 33% in mining

and drables to a high of 65% in finance, insrance, and real estate. Laear and Sha (2008) report

5 This section has benefited from the collaboration of Elena Cottini, see Cottini and Lcifora (2010)


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that close to 67% of firms sed indiidal incenties for more than 20% of orkers hile 24% of

firms had gainsharing schemes for more than 20% of orkers. Eidence from the 2002 and 2006

special modles of the GSS sho that financial participation schemes (i.e. profit sharing, gain

sharing or emploee share onership) coer p to 47% of emploees (Freeman, et al. 2009; Krse,

et al. 2010).

Sres of compan pa practices in Erope sho idespread adoption of the schemes in

the late 1990s, at least among larger firms (Cranet esre and EPOC). Nearl one in to

companies (45%) ith more than 200 emploees reported haing some form of sharing schemes,

ith onethird (31%) haing an emploee share onership scheme. Hoeer, comparable figres

for emploee coerage sho loer incidences of 1012% for sharing schemes and 2% for

onership schemes. This reflects the fact that in most firms onl a small minorit of orkers

receies incentie pa hile fe firms ith less than 200 emploees are likel to hae an

scheme. Een in indstries here a large proportion of companies hae schemes, the takep is

limited to a small share of total pa. Eidence from selected stdies and EU reports on emploees

financial participation6

shos that the oerall incidence of grop incentie pa in the priatesector has been groing, bt at 12% to 15% falls short of the leels in the US. On aerage less than

onefifth of Eropean emploees hae eer receied some form of incentie pa. In the pblic

sector there is eidence of declines in the se of incentie pa in seeral contries (see Bo 3.4).

Researchers hae inestigated the patterns of incentie pa among firms, determinants of

the tpe of compensation chosen b firms and the effects of the mode of compensation on

performance in some Eropean contries.7 These stdies sho that mandator proisions for

incentie schemes (often aboe a gien firm sie leel), or the introdction of strong fiscal

incenties (sch as redced taation for ariable components of pa) are among the main

determinants nderling the diffsion of incentie pa in a gien contr, and accont for the

significant differences in the incidence in sharing and onership schemes in Eropean contries.

It is difficlt to make strong comparatie statements abot contr differences becase

data from official sorces on the incidence and diffsion of incentie pa is relatiel scarce. In the

US, ntil the General Social Sre asked abot the strctre of incentie pa schemes in special

modles on qalit of ork life (2002 GSS) and shared capitalism (2002, 2006 GSS), there as

no single nationall representatie sorce of data aailable. Similarl, in the EU, ith the eception

of the Cranet, EPOC and EWCS sres there are no official sorces of representatie data

on incentie pa. Most aailable data on earnings do not proide information on the nmber of

orkers coered b incentie schemes, hether a bons tied to performance has been paid, or on

the share of indiidal or grop incentie bonses on total pa (see Bo 3.1 for a discssion of the

eisting data and measrement problems). Frthermore, there is often confsion on the natre of

the incentie schemes as firms ma label er different schemes the same a and as the samenominal scheme ma be implemented differentl b firms. For eample there are significant

differences in the design and implementation of incentie schemes in pblic and priate sectors

6 Bron and Heood, 2002; Eropean Commission, IV Pepper report, 2009; Potsma, 2001; Eropean

Fondation for the Improement of Liing and Working Conditions, 20077 Blinder, 1990; Cahc and Dormont, 1992; Meade, 1986; Estrin et al., 1997; Conon and Freeman, 2001; Kato

and Morishima, 2002; Barth et al., 2008, 2009; Pendleton et al., 2009


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becase prodctiit measrement and appraisal in pblic sectors is difficlt. There are also

differences beteen in profit erss nonprofit oriented firms, here emploees intrinsic

motiation ma make incentie pa conterprodctie. Similarl, incentie schemes for

emploees ith permanent as opposed to fiterm contract can differ sbstantiall, particlarl

hen the incentie schemes take the form of deferred paments.

BO 3.1 D

Information on performance related pa is scarce, not alas representatie or ptodate and dispersed in a ariet

of sorces both at the national, as ell as the international leel. This heterogeneit is also reflected in the differences

that eist in the reported figres for the prealence of incentie pa. Different sorces of the data and differences in

the measrement of the incentie ariable are the main reasons for the heterogeneit in the figres reported in most

comparatie stdies. While a ide set of nationall representatie data set also eists ith detailed information on

incentie pa (for eample, Workplace Emploment Relations Sre (UK), Enqte Rponse (FR), Integrated

Database for Labor Market Research (DK), German SocioEconomic Panel (DE), California Establishment Sre (US),

etc.) in this bo, e onl focs attention on the main international sres (for the EU or US) hich hae been sed in

empirical stdies, and discss some of the measrement isses.

ECS, E C S (E) It is a random samples of indiidals in EU contries, condcted

since 1991 at approimatel 5ear interals. All member states of the EU (since 1991) and acceding, candidate and

EEA contries (since 2005) are coered. Etended information on incentie pa sstems (i.e. piece rate, profit/gain

sharing, and share onership), as ell as orkers characteristics, job/firm attribtes as ell as HRM practices. (see

http://.erofond.eropa.e/eco/sres/)

EPOC, E D P O C S (E) It is a random sample of establishments

ith more than 50 emploees in the nonagricltral sector. It coers 10 EU member states. The sre as onl

occasionall condcted in 1996. It proides information on profit/gain sharing schemes and share onership (broadl

defined) in the establishment. (see

http://.erofond.eropa.e/areas/participationatork/epocsre.htm)

CRANET, C S I HRM (I) This is a sre condcted in 30 contries, it has

been rnning since 1990 sing standardised qestionnaires sent to priate and pblic organisations. It is not a

representatie sre, and response rates are 15%, on aerage, of the total nmber of qestionnaires. It coers oer

5,500 EU companies (in 2005) ith more than 200 emploees, and proides information on the presence of

collectie/grop bonses, profit sharing and share options, as ell as a nmber of HRM practices.

(see http://.cranet.org/data/data.htm)

GSS, G S S (S) The GSS is a representatie samples of US indiidal and contains a standard 'core'

of demographic, behaioral, and attitdinal qestions, pls topics of special interest. The first sre dates back to

1972, bt special modles ith information on incentie pa sstems are aailable in 2002 (qalit of ork life

modle) and 2006 (shared capitalism modle). Detailed information on piecerate, indiidal and grop bonses,profit/gain sharing and share onership is aailable. (see http://.norc.org/GSS+Website)

PSID, P S I D (S) The PSID is a longitdinal std of a representatie sample of U.S.

indiidals. The sre proides information on hosehold composition, indiidal characteristics, health conditions

and ork stats. Data hae been collected since 1968 on nearl 70,000 indiidals (in 2005) spanning as mch as 37

ears. Along ith emploment stats, it proides information on the composition of pa and hether the indiidal

has receied indiidal, grop or other tpe of bonses. (see http://psidonline.isr.mich.ed/)


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RPS, R P S (S, K, IR, CAN, AS, N) These are national sres

condcted in a nmber of Englishspeaking contries. The sres ere condcted in the arios contries at

different point in time (started in 1994 in the US, b Richard Freeman and Joel Rogers, and contined p to more

recent ears), and coer seeral thosands of emploees per contr in the priate sector in medimlarge sied firms.

The data proide information on orkplace practices and attitdes of orkers, on modes of compensation, inclding

indiidal and grop bonses as ell as share onership schemes.

(see http://.lse.ac.k/collections/manpoer/datasets/rps.htm)

ECI, E C I (S) It is a qarterl sre measring changes oer time in the cost of

ages and arios nonage compensation costs. The data are deried from emploers administratie records and

coer, first establishments (in priate, nonagricltral indstries) and then jobs (one to eight jobs) ithin each

establishment. The data proide information for the sampled jobs on ages, components of pa and fringe

benefits. (see http://.bls.go/data/#ages)

NLS79& NLS97 N L S (S) It is a nationall representatie sample of ong men and

omen born in selected ears (195764 & 198084) and first interieed in 1979 and 1997, respectiel. It proides

information on labor market eperiences, training inestments, schooling, famil income, health conditions,

geographic residence and components of pa. (see http://.bls.go/nls/)

There are arios a to measre the releance of incentie pa schemes. Depending on the natre of the data, the

sampling frame and the qestions asked, the indicators can take different forms. Table B3.1 belo list some of the

indicators more freqentl sed in the literatre.

TABLE B3.1 I :

________________________________________________________________________________________________

C:

Workplaces or organisations sing PRP schemes (as % of those sreed)

Workplaces or organisations ith at least 20% of emploees coered

Emploees in orkplaces ho are coered b PRP schemes (as % of all emploees in the firm)

Emploees ho receie incentie pa (selfreported)

T:

indiidal bons (merit pa or piecerates)

grop bons (occpation or team)

profit sharing (compan leel: discretional, prespecified formla, etc.)

gain sharing (bons based on other otpt)

share onership (deferred and others)

C :

nmber of incentie schemes in place

share of incentie pa oer total compensation

________________________________________________________________________________________________

While the aboe indicators all cone important information on the incidence, coerage and diffsion of incentie pa

schemes, information from sre data is rarel aailable ith sch detail. In most cases, the incentie pa indicator is

based on a dichotomos ariable recording hether the firm has an incentie pa schemes in place, or hether

indiidal emploees are coered b incentie pa. The information on the share of total pa acconted for b

incentie pa is onl er seldom aailable. Hence one lesson that can be dran from the aboe discssion of

measrement isses indicates that particlar care shold be sed in crosscontr comparisons and that harmonised

sre data are to be preferred to comparison of contr specific sre.


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To help deal ith the data problem, e hae eamined eidence on incentie pa and financial

participation in to sres of indiidals in hoseholds the EU's EWCS and the US's GSS, hich

hae a similar mltistage stratification procedre. While the EWCS onl coers emploed orkers,

this creates no problem so it is eas to dra onl emploed orkers from GSS. The sres

proide detailed information on indiidal bonses and piecerates, profit/gain sharing and share

onership schemes, emploees characteristics, firm attribtes and additional ork organisation

practices. One draback is that EWCS data do not proide separate information on orkgrop

performance pa (hile GSS does), ths in the empirical analsis that follos, e inclde all kind

of gropperformance bonses ith profit/gain sharing schemes. We se the latest aes

aailable, the 2000 and 2005 sres for EWCS data, and the 2002 and 2006 sres for the GSS.

Since, data on ne member contries of the Eropean Union is aailable onl in 2005, e focson the EU15, giing attention to ne member contries in Bo 3.3. Detailed information on

sampling procedre and the eact ording of the incentie pa qestions are reported in the Data

Appendi. Moreoer, in order to minimise potentiall confonding factors, e restrict attention to

emploees ith a permanent contract, emploed in priate sector and in profit oriented firms

onl. We also do not consider managers and CEOs, hich are coered b Conon et al., (2010).

Figre 3.1 reports the ranking of contries b the share of orkers ho receie an form of

incentie pa (i.e. indiidal, profit/gain sharing and share onership schemes). It shos striking

differences in the diffsion of incentie pa across contries8.

F 3.1: I , ( )*

8 Problems of comparabilit de to measrement error, crosscontr differences in definitions and

measrement of incentie pa, differences in instittions, and goernment policies as ell as longterm

macroeconomic conditions are not large enogh to gainsa the pattern in the figre.


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0

10

20

30

40

50

60

POR GRE BEL UK I RE GER AUS SPA NETHE DK LUX EU15 ITA FRA SWE FI N US

Incentie pa Incentie pa(standardised)

Sorce: EWCS (pooled 20002005) and GSS (pooled 20022006) data

Notes: Indices are compted sing sampling eights

Figres range from arond 1015 percent in some Mediterranean (Portgal and Greece),

Continental (Belgim and German) and AngloSaon (United Kingdom and Ireland) contries, to

30 and oer 40 percent in Scandinaian contries (Seden and Finland) and the US. Adjsting for

some obserable indstr and firm attribtes to create or standardised inde)9, does not change

the ranking of contries.

The aggregate figres do not sho ke differences in the prealence of the schemes

adopted and in the diffsion of incentie pa oer time across Erope and the US. To get a finer

pictre of the crosscontr differences, in figre 3.2 (panel a, b) e compare the incidence (for

priate sector orkers) b tpe of scheme (i.e. indiidal PRP, profit/gain sharing and shareonership schemes), oer the 20002006 period10

.

F 3.2 : I E S

a) Erope (20002005) b) US (20022006)

9 The standardised inde is the mean incidence of incentie pa, conditional on indstr and firm sie.

Technicall, it is deried as the estimated contr fied effects from a crosscontr panel regression that incldes

firm sie and a fll set of indstr dmmies as additional controls.10

Notice, that this eidence onl concerns emploees coerage of incentie schemes and sas nothing

abot the contribtion of incenties to total compensation.


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-1

1

3

5

7

9

11

13

15

ind .perfo rmance p ro fi t gainsharing share ownersh ip

2000 2005

0

5

10

15

20

25

30

35

40

45

ind. per form an ce pro fi t gai ns har ing s har e o wner shi p

2002 2006

Sorce: EWCS (20002005) and GSS (20022006) data.

Note: figres are compted sing sampling eights

This shos that indiidal pa schemes after declining for some ears hae no began to increase

again. Hoeer, indiidal pa schemes combine merit bonses and piecerates, that can be

either an innoatie indiidal compensation method alloed b the loer monitoring cost of

ne prodction technologies , or traditional piecerates. Also, the diffsion of profit or gain

sharing schemes is likel to depend on hether mandator proisions or goernment sbsidies

throgh fiscal incenties and other forms of contribtion are present (see Bo 2.1). This

heterogeneit is apparent hen combining incidence and trends of incentie pa across contries.

In table 3.1, e classif contries according to their (aerage) diffsion of oerall incentie pa (i.e.

an of indiidal/piecerate, profit/gain sharing and share onership) at the beginning of the

period, and the change occrred oer the 20002006 period.

T 3.1: C

Change in incidence (20002005)

High Lo

High AUS, SPA, ITA FRA, SWE, FIN, US, GERIncidence

(2000) Lo POR, GRE, BEL, IRE, LUX DK, UK, NETHE

Sorce: EWCS and GSS data.

Note: 20002005 EWCS; 20022006 GSS. Compted sing sampling eights

Astria, Ital and Spain ehibit both a highincidence and a significant (positie) change in the

diffsion of incentie schemes oer the 20002005 period. Most other highincidence Eropean

contries (FIN, FRA, SWE, GER) and the US are characterised b a fairl moderate increase in

incentie pa schemes oer the same period.

Conersel, contries ith initiall loer incidence and diffsion of incentie pa (BEL, GRE,

IRE, LUX, POR) sho a catchingp ith respect to highincidence contries. Finall, there is a

grop of contries (DK, NETHE, UK), that sho a loer than aerage incidence and moderate

(positie) rate of change in incentie pa diffsion.


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22

BO 3.2 F /

F

− increased competition and openness (de to prodct market dereglations and globalisation) hich drieintensie search for efficiencenhancing measres at the leel of the firm

− skill biased demand for highl prodctie orkers (i.e. technological change and globalisation increase the relatie

demand for high prodctiit orkers and the need of performancepa schemes)

− need to increase age fleibilit (i.e. incentie pa can grant greater fleibilit of the age bill oer the bsiness

ccle)

− falling cost of collecting and processing information ith adances in information and commnication

technologies

− goernmental spport for financial participation plans (i.e. fiscal incenties or contribtions)

− diffsion of decentralised and local bargaining

− decline in nion inflence and diffsion of participatie management

− adoption of High Inolement Management practices (sch as, fleible ork assignment, cross training,

teamork, etc.)

F

− High prodct market reglation

− Small sied firms and famil rn companies

− High labor trnoer (i.e. job chrning)

− Less deeloped financial market (i.e. particlarl ith respect to share onership schemes)

− Union opposition and the general indstrialrelations climate: (i.e. incentie pa ma conflict ith traditional

nion policies of pa compression)

− Intermediate or sectoral age bargaining (i.e. limits the possibilities of differentiating pa depending on indiidal

compan performance)

Determining the relatie importance of the different factors is not straightforard, as implied b

some of the literatre on these isses (for a reie see Eropean Commission, 1991, 1997 and

2006), since seeral ariables are hard to measre and a large nmber of potentiall confonding

effects are at ork. In Bo 3.2, e simpl reie the main factors that hae been proposed in the

literatre as the main determinants (or impediments) to the diffsion of incentie pa schemes,

hile in the forthcoming sections, e frther eplore some empirical reglarities that characterise

the patterns of incentie pa ithin (section 3.1) and across contries (section 3.2).

BOX 3.3 : Incentive Pay in New Member Countries of the European Union

The literatre looking at incentie pa and financial participation in ne member contries of the Eropean Union,

particlarl for Eastern Eropean contries, has often made reference to the legislatie frameork deeloped in the

transition phase ith respect to the idespread priatisation of preiosl pblicl oned companies, and b the

proisions of other las, most importantl those on cooperaties (Earle and Estrin, 1998). Althogh the legislatie

frameork as primaril designed to transform onership of all or parts of companies from state to priate, and not

directl aiming at the diffsion of incentie schemes, the effects on emploees and financial participation hae been

sbstantial (for a detailed reie see PEPPER III Report, 2006).

In this bo e se the most recent ae of ECWS data (i.e. ear 2005) to report on the incidence of incentie schemes

and financial participation patterns in ne member contries of the Eropean Union.


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23

Figre B.3.1. shos the percentage of emploees in ne member contries hose pa incldes some form of

incentie pa and participation in compan profits or shares in their companies. For comparison prposes, e also

report the EU15 aerage and the incidence for the US.

F B3.3.1. I I , (2005) (*)

0

10

20

30

40

50

60

70

CYP CRO MAL HUN * EU15 ROM* EU12 BUL * LAT LIT * CZ * SLO * EST * US SLK

Sorce: ECWS data

Note: (*) In HUN, ROM, BUL, LIT, CZ, SLO, EST the indiidal pa c omponent acconts for more than 15% of total pa.

With fe eceptions, the incidence of incentie pa schemes is higher in Ne Member Contries as compared to the

members of the EU15. Contries sch as Sloenia, Estonia and Sloakia hae incidence rates that are comparable to

the US. This partl reflects factors sch as nion eakness in the transition and posttransition phase and the salience

of piece rates in some of the ne member states. The incidence of financial participation in the ne member states

(as reported in Figre B.3.2) is close to the EU15 aerage.

F B3.3.2. T I

0

2

4

6

8

10

12

14

16

18

20

piecerate profitshare sharecompan

EASTERN EU15

Sorce: ECWS 2005 data

Emploee share onership declined posttransition in some of the ne member contries of the Eropean Union.

Emploees hae not held onto their shares and hae progressiel sold them, hile there ere no share onershipproisions for ne emploees (for recent eidence in transition contries see, Jones, 2004; Estrin et al. 2009).

3.1. E


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24

We report some empirical reglarities that characterise the diffsion of incentie pa in

Erope and in the US b occpation, indstr and firm sie. In comparing or figres ith other

stdies e note that or sample onl incldes priate sector emploees ith a permanent

contract.11

Figre 3.4 reports the distribtion of indiidal pa schemes, profit/gain sharing and shareonership schemes b selected occpations in Erope and the US. In both Erope and US, the

diffsion of profit/gain sharing schemes and share onership is greater in high skilled than lo

skilled occpations. In Erope, indiidal schemes appear idel diffsed also in loskilled

occpations hile in the US incidence of indiidal schemes is higher in highskilled jobs.

F 3.4: I PRP, , E S

a) Erope

0 2 4 6 8 10 12 14 16 18

elementar occpations

plant and machine

operators

craft, trade orkers and

agricltre skilled

serice orkers

clerks

technicians

professionals

indiidal performance profit gainsharin g share onership

b) US

0 10 20 30 40 50 60

elementar occpations

plant and machine

operators

craft, trade orkers and

agricltre skilled

serice orkers

clerks

technicians

professionals

indiidal performance profit gainsharing share onership


Note: CEO and Managers are eclded. Sampling eights are sed in the calclations.

Trning to the distribtion of incentie schemes b indstr (figre 3.5), or data sho

that the are more diffsed in manfactring and financial serices, and less prealent in hotel

and restarant and in other serices indstries. The main difference beteen Erope and the US

lies in the relatie importance of indiidal and piecerates pa schemes relatie to financial

participation schemes.

F 3.5: I PRP, , E S

11 Managers and CEO hae been eclded from the present analsis since the are the eclsie focs of

another chapter in this report.


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25

a) Erope

0 2 4 6 8 10 12 14 16 18

Agricltre

Manfactring

Constrction

Wholesale

Hotel&restarant

Transport

Financial Serices

other serices


b) US

0 10 20 30 40 50 60

Agricltre

Manfactring

Constrction

Wholesale

Hotel&restarant

Transport

Financial Serices

Other Serices

individual performance profit gainsharing share ownership


Note: Sampling eights are sed in the calclations.

Finall, there are significant differences in the distribtion of incentie pa schemes b firm

sie (figre 3.6). While a priori, the relationship beteen incentie pa and firm sie is not obios

since on the one hand, monitoring costs of orkers are likel to be higher in large firms, hich

ma make it more profitable to adopt incentie modes of pament bt, on the other hand, free

riding behaior shold make the incentie effects eaker. Empiricall, the distribtion of

incentie schemes shos an almost monotonic increase ith sie of firm.

F 3.6: I PRP, , E S

a) Erope b) US

0 5 10 15 20 25 30 35 40 45 50

19

1049

5099

100499

500+



Note: firm sie bands differ beteen EWCS and GSS data. Sampling eights are sed in the calclations.

The patterns described aboe sggest different propensities for orkers and firms to end p

ith performance related pa schemes depending on hat the do and here the do it. We net

seek to drill deeper into the factors that are more freqentl associated to incentie pa schemes

b looking at the correlates of the probabilit that the compensation an indiidal orker receies

0 2 4 6 8 1

0

1

2

1

4

1

6

1

8

1

4

5

9

10

49

50

249

250

+

indiidal

performance

profit gainsharing share

onership


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26

is linked to performance and the correlates of firms adopting incentie pa and financial

participation.

BOX 3.4 : Incentive pay in the public sector

The diffsion of incentie schemes in the pblic sector of most indstrialised contries is reported to be mch loer

than in the priate sector (Eropean Fondation, 2007). In this bo, e ask h this is the case and e inestigate the

patterns of incentie pa in the pblic sector across contries. A nmber of eplanations hae been discssed in the

literatre. First, incenties in the pblic sector cold simpl be optimall lo. Highpoered incenties (i.e. sch as

indiidal PRP) ma be disrptie in certain circmstances as the indce ecessie competition, hereas pblic

serices reqires emploees cooperation. Second, pblic sector otpt is hard to measre: team ork, mltiple

objecties (mltitasking) or mltiple principals are among the main cases discssed in the literatre (see Brgess and

Ratto, 2003; Brgess et al., 2009, for a reie). Third, the contors of pblic sector can differ sbstantiall across

contries, from core pblic administration, as to inclde state oned companies. In this respect, the scope of

incentie pa schemes ma differ sbstantiall. Forth, pblic sector emploees are generall more nionised, ths

there is stronger opposition to pa discretion and ider age differentials. Forth, it is generall arged that pblic

sector emploees hae higher intrinsic motiation and as sch do not reqire to be incentiised to perform ell,

conersel pecniar incentie ma become conterprodctie as the redce the intrinsic motiation effects(Brgess and Metcalfe, 2000). It has also been arged that, being pblic sector jobs tpicall more protected, the

tend to attract orkers ho are relatiel more risk aerse and, as sch, the are also less illing to accept incentie

pa schemes (Alesina et al., 2001).

Figre B4.3.1. reports the incidence of incentie pa schemes in the pblic sector across Erope and the US.

F B4.3.1. I I ,

0

2

4

6

8

10

12

14

16

18

i r e l a n d

n e t h e r l a n d

s

g r e e

c e

s e d

e n

a s t r i a

k

g e r m

a n

l e m b

r g

b e l g i m

d e n m

a r k

p o r t g

a l

e 1 5

f r a n

c e

f i n l a n d

s p a i n

i t a l

U S A

Sorce: ECWS data

Incentie pa is less common in the pblic sector than the priate sector in Erope and the US. Across the EU, 5

percent of pblic sector orkers hae incentie pa compared ith a 15 percent in the priate sector. In the US the

figres are 15 percent and 48 percent respectiel. There is also a significant spread across contries. In particlar,

France, Finland, Spain, Ital and the US featre aboe the EU aerage.A nmber of stdies hae focsed on the specificities of incentie pa in the pblic sector, especiall in the area of

health and edcation (Atkinson et al., 2009; Brgess and Ratto, 2003; Diit, 2002; Eberts et al., 2002; Kahn et al., 2001;

Le, 2002 ). One of the ke isses discssed in these stdies is the role of incentie pa as a tool to attract more and

better orkers (Banjeree et al. 2008).


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27

Table 3.2 reports the sample characteristics of orkers in performance related pa jobs

and in jobs ith fied pa onl, respectiel. Emploees on incentie pa, as compared to those on

fied pa, are more likel to be males, more highl edcated, and to hae longer tenre. Incentie

pa is more diffsed in larger firms, in highskilled occpations like professional, hile it is loer in

serice jobs. Differences are generall more prononced in the US, here pa leels are mchhigher for emploees coered b (an) incentie pa scheme than for those ho are not so

coered.

T 3.2 : D : , E S

Erope US

I F I F (1) (2) (3) (4)

female 0.310 0.461 0.436 0.542

loedc* 0.208 0.295 0.067 0.130

midedc* 0.403 0.395 0.644 0.711

highedc* 0.389 0.311 0.289 0.158

age


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28

characterised b a mch higher probabilit to be in incentie pa jobs, as compared to emploees

in small firms.

We also inestigated the association of incentie pa ith arios indicators of high

inolement management practices12

Using the probit model described in the appendi and

different specifications ith random and fied contr effects. The reslts, reported in table 3.3,sggest that high inolement management is, , positiel associated ith the

probabilit that a orker receies incentie pa. In particlar, lo job atonom (3 percent in EU;

14 percent in US) and performing repetitie tasks (2 percent in EU; 12 percent in US) are

associated ith a loer probabilit that the orker is in a job coered b an incentie pa scheme.

This is consistent ith the notion that in jobs here the pace of ork is dictated b the

technolog, orkers can be more easil monitored and are less likel to receie incentie pa.

Conersel, orking in shifts and performing comple tasks are positiel associated ith the

probabilit of a orker receiing incentie pa schemes. Long orking hors defined b more than

40 hors per eek sho opposite effects in Erope and the US: in Eropean contries long hors

of ork are associated ith higher probabilit of incentie pa (+5 percent), hile in the US the

probabilit is loer (5 percent). One possible eplanation for this is the greater hors orked inthe US, hich old make, the threshold of 40 hors a different meaning than in Erope.

T 3.3 I , E S

Erope US

(1) (2) (3) (4)

Repetitie ork (=1) 0.023*** 0.016** 0.114*** 0.124***

(0.007) (0.006) (0.022) (0.021)

Shift (=1) 0.027*** 0.016* 0.030 0.028

(0.012) (0.008) (0.040) (0.040)

High ork intensit (=1) 0.040*** 0.036*** 0.011 0.011

(0.007) (0.006) (0.049) (0.049)

Lo Job atonom (=1) 0.034*** 0.029*** 0.151*** 0.138***(0.009) (0.006) (0.022) (0.020)

Comple tasks (=1) 0.025** 0.022*** 0.033 0.027

(0.012) (0.006) (0.039) (0.041)

Working hors>40 0.037*** 0.044*** 0.050** 0.047***

(0.010) (0.009) (0.020) (0.024)

Contr random effects#

Contr fied effects#

Rsqared 0.058 0.06 0.101 0.113

Nobs 14,544 14,544 1,530 1,530

Note: All estimates inclde also emploee, firm characteristics and ear

dmmies. Eclded categories are: males, primar edcation,


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29

attention to indiidal incentie schemes and financial participation. In table 3.4, e report the

estimates of the probabilit of receiing incentie pa fitting or preferred specification (as in

colmn 4 an 8 in table A3.1 in the appendi). Indiidal characteristics appear more correlated

ith financial participation rather than the indiidal schemes. In Erope, high edcation is not

statisticall associated ith haing an indiidal incentie , hile the ble collar dmm is positieand statisticall significant the opposite for the pattern in the US. The likel reason is that that

indiidal pa schemes for emploees in Erope are more often old stle piecerates rather than

merit pa based on objectie and sbjectie assessments of performance. In Erope, firm sie

monotonicall increases the probabilit of incentie pa ith similar magnitdes for both

indiidal and financial participation schemes hereas in the US, there is no statisticall significant

effect of firm sie for indiidal schemes and mch larger effects on financial participation than in

Erope.

T 3.4 : T , E SErope US

Indiidalschemes

FinancialParticipation

Indiidalschemes

FinancialParticipation

E C

Female (=1) 0.044*** 0.049*** 0.128*** 0.112***

(0.005) (0.004) (0.026) (0.030)

Midedc (=1) 0.008 0.022** 0.029 0.119***

(0.009) (0.010) (0.040) (0.045)

Highedc (=1) 0.005 0.052*** 0.171*** 0.257***

(0.010) (0.012) (0.056) (0.052)

age 2534 ears (=1) 0.008 0.034*** 0.006 0.063

(0.007) (0.008) (0.037) (0.043)

age 3544 ears (=1) 0.013* 0.034*** 0.038 0.143***

(0.007) (0.008) (0.039) (0.044)

age 45+ ears (=1) 0.001 0.024*** 0.031 0.091**(0.007) (0.008) (0.035) (0.042)

White collars (=1) 0.006 0.001 0.013 0.026

(0.010) (0.007) (0.037) (0.045)

Serice orkers (=1) 0.017 0.020*** 0.096*** 0.181***

(0.012) (0.007) (0.040) (0.050)

Ble collars (=1) 0.034*** 0.056*** 0.150*** 0.136**

(0.011) (0.008) (0.038) (0.049)

F C

Indstr (=1) 0.013 0.012 0.016 0.064

(0.016) (0.017) (0.093) (0.112)

Serice (=1) 0.009 0.004 0.034 0.054

(0.016) (0.017) (0.094) (0.113)

small (EU59; US1049) (=1) 0.014* 0.009 0.011 0.114***

(0.009) (0.008) (0.035) (0.040)

medim (EU1049; US5099) (=1) 0.027*** 0.024*** 0.041 0.217***

(0.008) (0.007) (0.042) (0.044)

large (EU50249; US100499) (=1) 0.047*** 0.056*** 0.015 0.241***

(0.009) (0.009) (0.036) (0.039)

er large (EU250+; US500+) (=1) 0.074*** 0.089*** 0.012 0.291***

(0.015) (0.016) (0.038) (0.039)


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30

Rsqared 0.079 0.104 0.077 0.106

Nobs 14,583 14,583 1,530 1,530

Note: See table 3.3. Probit partial effects reported.

Another a to eamine the decision of firms to offer schemes is to ask ho manincentie sstems the hae. Table 3.5 gies the distribtion of indiidals b nmber of incentie

schemes receied: no incentie pa scheme (i.e. onl fied ages), one incentie scheme (either

indiidal or financial participation) or both. There are significant differences beteen Erope and

the US. Onl a er small proportion of Eropean orkers (1.4 percent) is coered b to

schemes, hile oer one qarter (25.2 percent) of US orkers is in a job that combine indiidal

and financial participation schemes. The coefficients in the table are for an ordered probit

eqation that estimates the partial effect for the probabilit of receiing at least to incentie

schemes. Women, the less edcated, ong persons and orkers in ble collar and serice jobs

are less likel hae more than one incentie scheme than orkers ith opposite characteristics.

Sie of firm also increases the chance of haing a financial participation and an indiidal incentie

sstem.

T 3.5 : N : ( ),

E S

Erope US

0 84.21 49.72

1 14.38 25.08N

2 1.41 25.2

E C

Female (=1) 0.068*** 0.113***

(0.004) (0.025)

Midedc (=1) 0.019** 0.111***

(0.008) (0.038)

Highedc (=1) 0.040*** 0.248***

(0.010) (0.043)

Age 2534 ears (=1) 0.028*** 0.048

(0.007) (0.036)

Age 3544 ears (=1) 0.032*** 0.118***

(0.007) (0.035)

Age 45+ ears (=1) 0.018** 0.083**

(0.007) (0.035)

White collars (=1) 0.001 0.015

(0.008) (0.039)

Serice orkers (=1) 0.014 0.159***

(0.009) (0.045)

Ble collars (=1) 0.023*** 0.124***(0.008) (0.042)

F C

Indstr (=1) 0.020 0.083

(0.017) (0.089)

Serice (=1) 0.009 0.058

(0.016) (0.091)

small (EU59; US1049) (=1) 0.018** 0.067**

(0.008) (0.034)


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31

medim (EU1049; US5099) (=1) 0.039*** 0.172***

(0.007) (0.035)

large (EU50249; US100499) (=1) 0.075*** 0.181***

(0.008) (0.030)

er large (EU250+; US500+) (=1) 0.105*** 0.216***

(0.011) (0.031)

Rsqared 0.0814 0.112

Nobs 14544 1530

Note: The dependent ariable indicates the nmber of incentie pa schemes. It takes ale 0 for fied pa, 1 for

indiidal PRP and 2 for both indiidal PRP and financial incenties. All regressions inclde ear dmmies, and

for Erope e inclde contr effects, hile for US macro regional dmmies. Robst standard errors in

parentheses. Ordered probit partial effects reported for top otcome=2. Significance leels: *** if p


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32

Note: BlinderOaaca tpe decomposition for non linear estimation.

Data are pooled oer to sres (20002005; 20022006)

Een controlling for a relatiel large set of indiidal and firm characteristics, cross contr

differences in the probabilit that a orker receies some form of incentie pa remain large. Weeamine contr differences net.

BO 3.5 S :

Onl a limited nmber of stdies hae inestigated the diffsion of incentie schemes across different contries. The

eidence presented in this section begins to fill this gap docmenting the incidence and groth of incentie

schemes in Eropean contries and the US.

The share of orkers ho receie an form of incentie pa (i.e. indiidal, profit/gain sharing and share onership)

is strikingl different beteen contries, ranging from: 1015 percent in some Eropean contries to oer 40

percent in the US.

Indiidal pa schemes and financial participation appear to be on the rise, althogh still mch loer than the US.

There is some eidence of a catchingp for those contries ith incidence belo the median.

Some empirical reglarities, ithin and beteen contries, seem to characterise the diffsion of incentie pa andthe probabilit that a orker is coered b an incentie scheme. First, the diffsion of profit/gain sharing is higher

in highskilled occpations. Second, incentie schemes are more prealent in large sied firms and manfactring

and financial serices.

Incentie schemes are mch less diffsed in the pblic sector. Seeral reasons ma eplain h: less need of

incenties de to (higher) intrinsic motiation, more problems in otpt appraisal (mltitasking, team ork, etc.),

higher orkers risk aersion.

The probabilit that a orker is coered b an incentie scheme is, , 9 to 12 percent loer if female, 5

to 14 percent higher at 3544 ears of age, 13 to 24 percent higher in er large sied firms (EU and US

respectiel), hile occpation and indstr controls appear to pla a minor role. High Inolement Management

practices are often associated to incentie pa schemes.

A decomposition of the differences in incidence beteen periods and across Erope and the US, shos an important

contribtion of coefficients (erss characteristics), sggesting a significant change in the mechanisms that

determine incentie pa ithin and across firms.


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33

3.2. E

Becase e hae relatiel fe contries in or data set, e eamine the links beteen thediffsion of incentie pa schemes and contr ariables ith simple to ariable comparisons of

the incidence of performance pa ith measres of particlar contr characteristics. Patterns

that replicate those fond ithin contries are more likel to hold p nder more detailed

inestigation.

The first empirical reglarit is beteen incentie pa and the sie distribtion of firms.

Figre 3.7 shos that incentie pa is less common in contries ith relatiel more orkers in of

firms ith less than 50 emploees (rho= 0.35)15

. These also tend to be Mediterranean contries

here the share of famil firm is larger, hich is independentl likel to limit the introdction and

diffsion of emploee financial participation schemes (Pendleton et al, 2001).

F 3.7 : I (


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34

the effectie nion poer in bargaining, in Figre 3.8 b) e sho the relationship beteen

incentie schemes and ecess bargaining poer, that is the abilit of the nion to etend the

effects of collectie bargaining oer and aboe their membership16

. The negatie correlation

shos that incentie pa schemes are more diffsed in instittional settings here nions are

eak or here the are encompassing; conersel hen bargaining poer is based on (ecess)coerage there is likel to be strong opposition to performance related and discretional pa.

F 3.8 : I ,

a) Union densit

BEL

US

DK

GER

GRE

SPA

FRA

IRE

ITA

LUXNETHE

AUS

POR

FIN

SWE

UK

. 1

. 2

. 3

. 4

. 5

0 20 40 60 80union

b) Ecess bargaining poer

BEL

US

DK

GERSPA

FRAITA

NETHEAUS

POR

FIN

SWE

UK

. 1

. 2

. 3

. 4

. 5

0 20 40 60 80excess bargaining

Sorce: EWCS, GSS and OECD instittional data.

Note: contr aerages (20002005 EWCS; 20022006 GSS)

Figre 3.9 a) displas the relationship beteen a measre of the reglation of prodct marketsand the diffsion of incentie pa. Figre 3.9 b) shos the relation beteen a measre of the

reglation of labor markets and the diffsion of incentie pa. Both measres of reglation are

negatiel correlated ith the diffsion of incentie pa (rhoPM = 0.384; rhoLM = 0.434).

Contries ith highl reglated prodct and labor market sch as Mediterranean and (some)

Continental Eropean contries ehibit a loer diffsion of incentie pa. One possible

mechanism at ork is that greater reglation redces competitie pressres to introdce

performance related pa to attract, retain and motiate high abilit emploees.

F 3.9 : I

a) Prodct market reglation b) Labor market reglation

16 Ecess bargaining poer is compted as the difference beteen collectie contracts coerage and nion

membership. In France, for eample, nion coerage is close to 95% hile nion membership is less than 10%;

conersel in Seden both coerage and nionisation are er high and ecess bargaining poer is lo. The etent of

ecess bargaining coerage depends on mandator (or ) etensions of nion contracts to the releant

occpation/indstr.

rho=0.34


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35

BEL

US

DK

GER

GRE

SPA

FRA

IRE

ITA

LUXNETHE

AUS

POR

FIN

SWE

UK

rho=-0.384

. 1

. 2

. 3

. 4

. 5

1 1.5 2 2.5Product market regulation

BEL

US

DK

GER SPA

FRA

IRE

ITA

NETHEAUS

POR

FIN

SWE

UK

rho=-0.434

. 1

. 2

. 3

. 4

. 5

0 1 2 3 4 5Labour market regulation

Sorce: EWCS, GSS and OECD instittional data.

Note: contr aerages (20002005 EWCS; 20022006 GSS)

Capital market deelopment is also associated ith the diffsion of incentie pa. Sharing andonership schemes are more likel hen a larger proportion of companies are listed on the stock

echange or capital markets are otherise more deeloped. Figre 3.10, shos a strong positie

correlation (rho= 0.51) beteen an inde of capital market deelopment17

and the diffsion of

incentie pa. Bt note that the UK and the US hich are in capital market deelopment and

shold ths eperience a higher diffsion of sharing and share onership schemes (Festing et al

1999, Pendleton et al 2001; Potsma, 2001

incentivising performers

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