In view of the pressures and tensions generated by economic growth and membership of the "euro-zone", the Irish government and social partners have paid increased attention to new payment systems such as gainsharing, because they represent an alternative, and flexible, means of rewarding workers. In mid-2000, however, the coverage of such schemes is still relatively modest. This is unlikely to change to any significant extent in the future under Ireland's "voluntarist" industrial relations framework.
The economic context in Ireland has - as has frequently been noted - changed dramatically over the course of recent years from "managing crisis" to "managing growth and rising expectations". The continuing economic boom has thrown up a number of challenges and tensions. One such challenge is associated with the pressures to introduce new payment systems such as profit-sharing and gainsharing, which allow workers to share in the fruits of economic growth while also sustaining competitiveness. This challenge has become even more acute in 2000 as a consequence of recruitment and retention problems and rising inflation. Employers across many sectors of the economy have had problems attracting and retaining workers due to an increase in labour and skill shortages (IE0006152F), the implication being that some employers are finding it necessary to introduce new types of incentive and reward systems. Moreover, given that the inflation rate rose from 3% in November 1999 to 5.5% in June 2000, the pressure to introduce innovative reward systems has been fuelled further (IE0005151F).
The government and the social partners have recognised for some time now that new forms of financial participation need to be introduced in both the private and public sectors. In the private sector, it has been generally accepted that a greater emphasis than hitherto should be placed on promoting profit-sharing and gainsharing schemes at enterprise level. Establishing new forms of financial participation is a more complex and problematic issue in the public services, where the increase in industrial conflict has been perhaps the most intractable issue in Irish industrial relations in 1999 and the first half of 2000 (IE0004149F).
The new national agreement concluded in spring 2000 - the Programme for Prosperity and Fairness (PPF) (IE0003149F) - contains a number of provisions relating to the diffusion of financial participation at enterprise level. There is a "partnership clause" that builds upon the previous agreement, Partnership 2000 (P2000) (IE9702103F), and provides for the voluntary establishment and deepening of financial participation: "The government and the social partners acknowledge the role of employee share-option trusts (ESOTs), gainsharing, profit-sharing and other financial employee incentives in developing and deepening partnership and in increasing performance and competitiveness". A consultative committee involving the Irish Congress of Trade Unions (ICTU), the Irish Business and Employers Confederation (IBEC) and appropriate government departments and agencies has been established to prepare proposals on financial participation initiatives, particularly the tax treatment of these initiatives, for consideration in the context of the 2001 state budget in December 2000.
The incidence of new forms of employee financial participation
The most prominent financial participation initiatives that are being introduced in Ireland are as follows:
- profit-sharing involves the sharing of profits through providing employees with a variable income, in addition to their fixed income, which is directly linked to profits. Profit-sharing schemes may be cash-based, thereby providing immediate payment, or share-based, whereby shares are usually placed in a fund. Profit-sharing schemes are particularly common in the information technology (IT) and software sectors;
- employee share-ownership plans (ESOP s) are somewhat similar to share-based profit-sharing schemes because they both provide employees with shares in their enterprise. However, ESOPs differ in that they frequently provide employees with greater involvement, participation and control. ESOPs often incorporate a special "trust" that houses employee shares. They are largely confined to semi-state companies. The most prominent ESOP in Ireland is in Eircom (formerly Telecom Eireann). It provides workers with a 14.9% stake in the company (IE9807253N); and
- gainsharing usually incorporates a group incentive payment system whereby gains arising from productivity or cost-reduction improvements over a particular time period are shared with workers.
The most comprehensive survey to-date recording the incidence of employee financial participation schemes in Ireland was undertaken by researchers from University College Dublin (UCD) during 1996/7. It was estimated that 11% of Irish workplaces had approved profit-sharing schemes, while 11% had employee share-ownership. There is likely to be some overlap between the two. Gainsharing was not included in the survey.
Comparative data for the incidence of financial participation is available from the European Foundation for the Improvement of Living and Working Conditions EPOC survey of 1996, which covered 10 EU countries. The Irish figures were found to be below the EU average: profit-sharing was reported in 8% of workplaces (compared with an EU average of 23%) and share ownership in 4% of workplaces (compared with an EU average of 9%). Profit-sharing is particularly common in France (51% of workplaces) due to legislation making it compulsory in large companies.
Although the incidence of financial participation in Ireland has undoubtedly increased since the time the UCD and EPOC surveys were conducted, it is almost certainly still behind the EU average.
Employer perspectives
Some employers see financial participation schemes as providing a potential means of improving organisational performance in certain circumstances, as well as a non-inflationary and tax-efficient means of recruiting, rewarding and retaining workers. The key question for employers is whether or not they can contribute to competitiveness, productivity and profitability. Employers' associations believe that the decision whether to introduce a scheme should be left to individual enterprises and, as such, it is strongly emphasised that initiatives should be introduced only on a voluntary basis. "Voluntarism" is underlined several times in the PPF.
Employers' associations have lobbied for the extension of tax relief on financial participation schemes. This is deemed to be very important at a time when there is intense competition for key personnel and high levels of labour turnover across various sectors of the Irish economy. Recruitment and retention problems are particularly acute in the IT and software sectors. The Irish Software Association (ISA), which is an IBEC affiliate, has perhaps been amongst the most vocal proponents of tax breaks on share option schemes. Software companies are particularly concerned with developing new incentives, given that they are finding it increasingly difficult to attract and retain key personnel.
Trade union perspectives
Trade union interest in the development of financial participation is largely based around ensuring that workers receive a fairer share of the gains emanating from the substantial increases in productivity and profits that have been generated in recent years. The unions do not just see financial participation as a means of securing a more equitable sharing of rewards, however, but also as a vital means of developing the broader employment relationship through underpinning and deepening workplace partnership, and facilitating the broadening of worker "stakeholding" in the modern enterprise.
Another major issue for the unions is how to reform public service pay. The Civil and Public Service Union (CPSU) has put forward innovative proposals for a new gainsharing fund in the public services, whereby a minimum percentage of the wage bill would be assigned to the fund and "shares" would then be allocated to employees. The union argues that if implemented, the fund could help to reduce some of the tensions currently surrounding public service pay.
Commentary
Despite the limited diffusion of financial participation schemes in Ireland, they have undoubtedly attracted increased attention in recent years. There are a number of reasons why this is the case. One reason relates to the relative distribution of the proceeds of economic growth. There is a widespread feeling amongst workers and trade unions that the proceeds of the ongoing economic boom have been unequally distributed because employer profits have substantially outstripped the rewards accruing to workers. Rising worker expectations and the "hype" surrounding Ireland's "Celtic Tiger" economy have generated a desire amongst workers for a fairer share of the gains of economic success. In this climate, there have been calls by unions for the wider diffusion of profit-sharing and gainsharing schemes as one means of redistributing wealth.
Another reason for the increased attention paid to financial participation is the growing concern over labour and skill shortages and rising inflation. As the labour market continues to tighten, with unemployment currently standing at 4.6%, employers in sectors such as IT are finding it necessary to introduce new incentive packages due to the difficulty of attracting and retaining workers as labour and skill shortages have increased. In addition, with inflation currently lying at 5.5% and set to rise further in the coming months, the 5.5% pay award for workers under the first year of the PPF has been cancelled out. There are real fears that the pressures on the PPF may prove to be uncontrollable, and that a "wage-price spiral" may ensue. The urgency of the situation means that significant pressure is now being exerted on the government to act constructively to address the problem, rather than indulging in what, so far, have been widely perceived as amounting to rather half-hearted measures. In part, this is likely to require action to promote the diffusion of non-inflationary payment schemes such as gainsharing in order to reward local productivity gains and help reduce the incentive amongst employees and their unions to use their "muscle" in the labour market to push up wages to compensate for price rises.
In terms of potential events in the future, a very important reason cited by many commentators for introducing initiatives such as gainsharing is the flexibility that they can facilitate through linking incomes to changing economic circumstances and possible "external shocks", such as a sharp depreciation in the UK currency. Innovations such as gainsharing may serve to stabilise "shocks" by enabling employers and workers to work together to deal with problems in a flexible and cooperative manner. This is particularly significant given that the government now has a limited number of fiscal tools at its disposal in the context of membership of the euro single currency. Crucially, it can no longer respond to economic fluctuations by adjusting exchange rate or interest rates. Another longer-term reason for diffusing financial participation schemes is that they provide a non-inflationary, means of rewarding workers, as an alternative to income tax cuts. This is important, given that it is arguable that there is limited scope for further income tax cuts in the future - at least not without some sacrificing of investment in the social and physical infrastructure - although there is still scope for tax reform.
It is doubtful whether, in the context of voluntarism, the "partnership clause" in the PPF can facilitate a wider diffusion of employee financial participation schemes across different sectors of the economy. As was the case under the rather vaguely worded partnership clause in P2000, there is a renewed emphasis on the voluntary nature of partnership initiatives. Employers are obliged only to engage in discussions on partnership topics, and nothing more. Under a voluntarist framework, the diffusion of financial participation is likely to be primarily confined to large companies in a relatively small number of capital-intensive sectors such as IT and pharmaceuticals, where the conditions and pressures promoting such schemes are particularly pronounced. Here, the pressures emanating from economic growth will continue to act as the driving force. There is unlikely to be a significant diffusion beyond these specific companies and sectors unless ambitious initiatives are introduced. To this end, it remains to be seen what proposals will be contained in the 2001 budget to promote financial participation. Whatever happens, without constructive policy initiatives, such as the wider diffusion of alternative forms of reward like gainsharing and profit-sharing, it would appear that wage pressures will be difficult to contain in the current economic climate. (Tony Dobbins, UCD)