A leading company director recently published an enlightened view on the theme of profit sharing. In newspaper La Tribune dated 17 March,Xavier Fontanet,the chairman of Essilor,responded to the question “Added value or shareholder employees?” This article at times takes the form of an argument against Nicolas Sarkozy’s “three thirds” proposal. But the author does not limit himself to a mere critique and proposes an alternative which he has tried with success in his own company.
The three main points in his response are that:
- it is first useful to share the entrepreneurial risk and value created;
- the “three thirds” rule (investment,salaries and dividend) is too rigid to be relevant to every situation;
- a practical solution resides in the application of employee shareholding schemes.
As much as the first two points seem sound and well reasoned,the third remains debatable. This solution,although satisfactory in the framework of a specific application,is only recommended with certain precautions.
It seems best to read this article as an account by a businessman who has explored the subject in the context of a particular company,Essilor,and come up with a perfectly satisfactory solution. When the chairman of such a renowned company tackles a subject that we hold dear it presents a challenge,though the fact that he often agrees with our views is a major satisfaction:
- “In fact,far from being in opposition,capital and labor are allies and need one another”.
- “Many companies that experiment with associative formulas are unequivocal:morale within the company is transformed when the personnel hold some of the capital and play a role in governance”.
- “The shareholder also benefits,if the right dosage is applied”.
Among his objections to sharing profit as proposed by the government,we would underline:“It is not a matter of arbitrarily decreeing that companies must give part of their profit to employees (which would be robbing value from the pre-existing shareholders)…”. One sees here an objection to any restrictive laws in this field. And on this point,we can only acquiesce;profit sharing only makes sense if it is approved by shareholders who see it in their interests or to their benefit.
Xavier Fontanet writes:“In the first place,we have to remember that the risk is taken by the shareholder.” That may be. However,one cannot altogether ignore the corporate risk taken by the many employees whose fortunes,subject to the vagaries of the entrepreneurial adventure,are sometimes more intimately linked to that of the company than is the case for shareholders,with their diversified and movable investments. The risk of unemployment if the company project fails,just like the probability of being offered a rewarding post if growth and financial performance occur,are the two elements of corporate risk shared by employees. If the company wants to attract and keep the best talents,the salary offered to collaborators necessarily has to recompense the risk taken. For the record,the Institut Montaigne published an article in 2005 entitled “Employees,shareholders:a bigger share of the cake or a bigger share of the risk?” which analyzed in greater detail the risks taken by employees.
It’s not necessarily a bad thing for collaborators to bear some of the company risk. Sometimes the shareholders even want this to be the case. When attributing stock options to management,are they not sharing with certain labor providers a share of the value created against some risk in the company? This form of remuneration is supposed to motivate those who benefit from it and to ensure their loyalty;unfortunately,such schemes do not always meet with the anticipated success. In fact,on the one hand,theory tells how the alignment of interests is only partial,and on the other,practical observation casts serious doubts over the effectiveness of this mode of remuneration. It is quite natural for shareholders to want to extend this sort of incentive measure across the entire workforce,employee shareholding is a considerably more virtuous scheme than stock options.
Sharing the company risk in exchange for a fair share of the profit generated is the aim of our method. It is not however a question of despoiling the pre-existing shareholders. The variable part of remuneration must come with something in return,like the reduction of structural costs,the stabilization of the workforce or a reduction of fixed remuneration. Obviously,and here we are in agreement with the author,these things are not just decided on a whim;a remuneration policy must be the result of progressive and well-adapted evolution if it is to be efficacious.
In acknowledging the existence of human capital within the company,shareholders and managers create the conditions of optimal profit sharing between human capital and financial capital,a split which is motivated by the alignment of stakeholders’ interests. According to current criteria for performance incentives,for reducing structural costs and for corporate cohesion,this approach to profit sharing seems to largely dominate Nicolas Sarkozy’s proposal for three thirds. It provides incentive possibilities for managers that are economically more efficient than stock options,and is more prevalent than solutions based solely on employee shareholding.
Make no mistake,employee shareholders cannot be dismissed so easily. It’s not a poor response to the problem posed,and we’re convinced that the system’s many qualities deserve to be acknowledged. We don’t know the specifics of the Essilor case sufficiently well to judge exactly how adequate it is,but we don’t doubt that it is satisfactory. That said,we know many companies in which that solution would not be recommended.
From our point of view,employee shareholding does not absolve a company from seeking the alignment of interests of labor and capital. When interests – and therefore efforts – are aligned,there’s no need to feel schizophrenic about being both employee and shareholder. That is when employee shareholding becomes a long-term complement to the process of profit sharing,whose properties are more immediate.
This overview should not omit to mention that the Dassault Aviation group has applied the rule of three thirds for many years with some success. Charles Edelstenne would certainly be able to come up with an argument of a similar quality as that in Xavier Fontanet’s article and we would never aim to take sides between them. In terms of human resources and remuneration,each company benefits from its own experiences. Our aim is to help companies improve their remuneration practices in order to get the best out of them.
To answer the question posed:“Added value or employee shareholding?”,let’s say that sharing corporate value in the first place means sharing added value,and that after that,employee shareholding is an excellent complement in the longer term.