Room for improvement employee engagement through participation

A representative survey of 410 SMEs in the Netherlands with 10-250 employees shows that 11% of companies offer some form of employee participation. The Netherlands lags behind compared to other (European) countries. Research by the Utrecht University School of Economics (U.S.E.) shows that knowledge-intensive companies mainly use shares, certificates and/or options to engage (potential) employees for the benefit of overall company performance. Other companies deploy employee participation primarily as part of a broader social mission. Both types of companies face obstacles. They lack information and run into restrictive, non-transparent or inconsistent tax rules. Certainly the valuation of a company is a hurdle. As a result, companies sometimes refrain from employee participation. This leaves room for improvement in attracting and engaging staff through employee participation.

Commissioned by the Regionale Ontwikkelingsmaatschappij Utrecht Region (ROM) (Utrecht Region Regional Development Company), researchers from the Utrecht University School of Economics (U.S.E.) carried out an exploration of the current use of employee participation in the Netherlands and how it can be further stimulated, specifically in the Province of Utrecht. This provided more insight for the follow-up on the Provincial Council's Motion 'Give every Utrecht citizen the opportunity for entrepreneurship'.

Besides conducting a survey among SMEs, the Utrecht researchers held in-depth interviews with companies and service providers in the field of employee participation. These companies can roughly be divided into two (overlapping) categories: knowledge-intensive companies that focus more on financial value creation and those that emphasize social value creation.

Employee participation with stake in company

Of all the forms of employee participation, the researchers focused particularly on those that give employees an actual stake in the company. These include beneficial ownership of shares, share certificates, non-voting shares, stock options, regular shares and employee cooperatives.

The representative survey of 410 companies in the Netherlands with 10-250 employees shows that 11% offer some form of employee participation. These companies are mainly found in Trade, Industry, Information and Communication, Specialist Business Services and Healthcare.

Employee participation can help motivate employees, and contribute to a company's overall performance and productivity, according to academic research. At a macro level, it can contribute to new business creation, smaller wealth inequality and a more stable and resilient economy.

Financial and social value creation

The forms and effects of employee participation do vary from company to company. Knowledge-intensive companies - often in specialised business services - focus more on financial value creation. For them, participation schemes are a way to attract, engage and retain highly skilled staff. Some of the growth-oriented startups and scaleups then opt for shares, options and/or certificates. With luck, this allows employees to participate in the value development of the company. Employee participation thus aligns the interests of employees with the interests of the company.

Instead of one CEO hitting the jackpot of a hundred million, you can also share that among twenty employees, for example.

If you look at an innovative startup with a good product and growth ambitions, offering options to employees is financially accessible to a large proportion of employees, explains Anne-Sophie Halbertsma, U.S.E. researcher. Especially if the company has just started up and its value is not yet very high. If the company does well, that's a just scenario: instead of one CEO hitting the jackpot of a hundred-million, you can also share that among twenty employees, for example.

Employees feel engaged, valued and seen

The second group of companies focuses primarily on social value creation. They want to realise a fairer distribution of wealth, autonomy and/or cooperation through employee participation. They pay great attention to properly distributing control and participation of all employees, and these organisations are often non-hierarchical, transparent and informal. The benefits of employee participation they refer to, are that employees feel involved, valued and seen, and therefore stimulated. This translates into lower absenteeism and growth in FTEs and turnover at company level. By doing so, you not only let employees experience their value but also convey that the company really contributes to something.

You can organise control in a STAK, an Administrative Office Foundation, Halbertsma goes on. The composition of this can vary per company; it can be the CEO and management but it can also be all employees, or a representation of them, with voting rights. The STAK can contain few, but also a large proportion of shares. Employees can thus have great influence on the company's development.

In addition, we have seen schemes especially within companies with fewer than 30 employees where they met once or several times a year with all staff. Very transparent consultations about annual accounts, the payment of dividends or the level of wages. These are direct forms of managing a company and thus extensive participation and control.

From obstacles to incentives

There seems to be a slight increase in employee participation in SMEs in the Netherlands. At the same time, the researchers note that there are still obstacles for companies. Companies indicate that they would consider employee participation in particular to increase employee engagement. Their reasons for not setting up a participation scheme after all, often have to do with a lack of information (33%) or because companies do not consider it a long-term priority (37%).

Tax rules are obscure

Almost all companies name obstacles related to tax rules. For instance, according to many of the interviewed companies, the rules are obscure when it comes to complexity, transparency, and fragmentation at Dutch and European level. Revising and harmonising the tax rules could therefore be stimulating.

Company valuation is also sometimes an obstacle.

If your company is not listed, it is quite difficult, Anne-Sophie Halbertsma explains. Unfortunately, there is no clear standard for valuation at national level that you can request as an entrepreneur; there are differences per region. It is a risk to opt for employee participation in that case, because the valuation of a company can be much too low or much too high for employee participation to become a success.

Some innovative companies that are a bit more focused on (international) growth also object to the fees they have to pay in the Netherlands, compared to other European countries or the US, Halbertsma continues. That is not insignificant for international competitiveness. Recently, though, there have been some changes in the regulations on stock options in favour of employees.

Socially-oriented companies face more challenges in balancing participation and efficiency, engaging employees sustainably, and dealing with complex information.

It would be nice if information was less fragmented, more complete and accessible

In the still lacking information on employee participation, parties such as Regional Development Companies (ROMs) can play a bigger role, the researchers say. Together with other experts such as consultants, lawyers, tax specialists, notaries, accountants, valuers and the Tax Office. SMEs now often still lean on their own network, but it would be nice if information was less fragmented, more complete and accessible.

The ROM Utrecht Region, for instance, has a large network and can connect people and share information. The researchers therefore suggest that the ROM should take a proactive role. This could include organising workshops, training sessions and creating an umbrella website with information on employee participation. Possibly together with the other ROMs. Other cooperation partners could be Techleap, the Dutch Startup Association (DSA) or the KVK. Moreover, the ROMs can also mediate with the (regional representation of the) Tax Office.

It would be nice if people could turn to the ROM as a starting point, says Anne-Sophie Halbertsma. The knowledge is still very fragmented at the moment. A third of the companies we surveyed said they had too little information. We also recommend taking this up with all other ROMs. And other parties can also play a role in this.

Research team

The research team consists of: Anne-Sophie Halbertsma, Mees Keukens (Wageningen University), Ronald Kleverlaan and Erik Stam.

More information and full report

Would you like to know more? Please download the full research report (in Dutch). Or contact Anne-Sophie Halbertsma: a.s.m.halbertsma@uu.nl

Want to read more about employee participation and what it can mean for social entrepreneurship? Please read 'Employee participation: more equal distribution of wealth and stimulus for entrepreneurship' (in Dutch): ‘Medewerkersparticipatie: gelijkwaardiger vermogensverdeling en stimulans voor ondernemerschap’ on this website.