German Workers Trade Wages for EquityMarkus Dettmer
The recent power struggle between Porsche (PSHG_p.DE) and the Volkswagen Group (VOWG.DE) produced one loser, dismissed Porsche CEO Wendelin Wiedeking, and one winner, VW patriarch Ferdinand Piech. But a labor union leader who acted behind the scenes, Berthold Huber, the chairman of the powerful IG Metall metalworkers union, also wants to be counted among the victors.
While the two adversaries fought openly, Huber prepared his coup, quietly and in secret. His plan is to enable the more than 380,000 employees of the combined VW-Porsche Group to hold shares in Europe's largest automaker. In addition to the Porsche and Piech families, the State of Lower Saxony and the Emirate of Qatar, Huber wants employees to "hold a significant share" of the company. He is aiming for 10 percent, and he wants to see employees share in the profits of the group's many brands, from Audi to Skoda.
Much of Huber's plan is still up in the air. Where will the shares come from? Why should the remaining shareholders give up a portion of their shares for the benefit of employees? Piech, a billionaire, is the most likely to agree. Or should employees, in return for receiving shares, work longer hours for the same pay?
Union officials concede that it is unrealistic to expect to achieve their goal of a 10-percent share of VW for employees, but they believe that 2 or 3 percent is within the realm of possibility. In any case, the proposal signals that Germany's most important trade union is rethinking its strategy on a core issue of the market economy.
Until now, the majority of IG Metall members believed that shareholding was a ploy used by the class enemy to undermine proletarian consciousness. But now that the financial crisis has forced some company owners to beg for help from the government and unions, IG Metall has discovered that the issue could work in its favor, and not just at VW.
Huber has already received a commitment from Maria-Elisabeth Schaeffler, the owner of troubled auto parts company Schaeffler. The union supported the firm in its efforts to receive government bailout funds. In return, the billionaire promised, among other things, to distribute shares in the company to her employees. This, she said, would enable them to "have a share in the subsequent recovery."
At Daimler, the works council is considering the conversion of employee bonus payments, worth a total of €280 million ($400 million), into Daimler (DAI) shares. Meanwhile, in return for accepting wage cuts, the employees at Opel want 10 percent of the entire company.
Gaining Power and Influence
The cases could set a precedent. "I am not concerned about ideological taboos, but about dealing with the crisis," says Huber. To secure jobs, more and more companies are asking their employees to agree to wage cuts. Until now, the companies have promised, in return, more investments or guaranteed jobs. Now IG Metall wants to accept, in selected cases, capital shares as its price, essentially as a wage of fear.
According to an internal memo sent to IG Metall management, the contributions of employees "should not be 'lost subsidies,' but should be converted into employee equity." This could be an approach, the memo continues, to "fundamentally gain more influence," because the role of employees "as investors" will likely lead to "rights to determine the course of the company."
IG Metall's position has been met with approval throughout the entire German Confederation of Trade Unions (DGB). It is "an interesting approach for allowing deferred money to be returned to employees through equity participation," says Hubertus Schmoldt, the head of the Mining, Chemical and Energy Industrial Union. DGB executive board member Dietmar Hexel is convinced. "Without employee capital and employee know-how, many companies would not survive the crisis," he says.
The service workers' union Ver.di already concluded a collective agreement years ago that was designed to safeguard the futures of hospitals. Under the agreement, when hospitals run into financial difficulties they can reduce wages by up to 10 percent, granting their employees shares in return.
"Ownership for All" was once a slogan of former Economics Minister Ludwig Erhard, a member of the conservative Christian Democratic Union (CDU). Today even the far-left Left Party has embraced Erhard's rallying cry. Instead of nationalization, the party is calling for employee equity participation: "We want to see employees given part ownership. The employee-owned company is the company of the future."
So far, few companies have taken Erhard's slogan to heart. About 10 percent of German businesses offer profit sharing to their employees, and only 2 percent give them equity ownership.
Employer associations and unions have been partly responsible for these numbers remaining so low. Labor unions have traditionally viewed employee equity participation as an unwanted intervention in collective bargaining policy, arguing that employees who owned shares would be opposed to going on strike. They also feared that it would create a dual risk for workers, who would stand to lose both their jobs and their savings if their employers went out of business.
Many companies, for their part, were resistant to the idea, because they already feel that current laws giving employees a say in companies go too far. Many view the idea that employees could also play a key role as shareholders in the future as a back door to socialism.
In April, a law drafted by Germany's ruling grand coalition of social democrats and conservatives came into effect that provides explicit tax incentives for employee equity participation. In the future, employees who receive shares from their employer may benefit from an exemption from tax and social security contributions of €360, instead of the current, €135. But the scheme was devised at a time of economic growth and the tax emption favors equity shares that are envisaged as a supplement to an employee's wages.
'The Goal Is to Spread the Pain'
But in the current recession, "the distribution battles of the growth period are over," says Klaus Franz, the head of the works council at Opel. "Today the goal is to spread the pain." For years, during repeated rounds of restructuring at the company Opel employees have given up part of their wages in exchange for investment commitments and employment guarantees. But Opel is in trouble once again and Franz is back to fighting for the company's survival. "Now we want a commitment to a possible share in the profits in the future."
Opel employees are willing to waive wage claims worth about €1.2 billion. In return, they would receive a 10-percent share in the future Opel. A stock corporation would hold the employees' shares in trust, while the heads of the works councils of Opel's German plants would serve as shareholders.
The new strategy is not going to be easy to implement. Up to 25,000 employees at Opel will have to agree to a shared concept. But how voluntary would participation be? What would serve as the basis for the distribution of shares and possible profits? How much control would individuals have over their shares, and what steps would be taken to ensure that the employees' assets are not simply frittered away? The works council has already waived additional co-determination and voting rights as a major investor in the company.
Yet another issue has IG Metall chairman Huber concerned: How can employees be prevented from becoming more than just co-owners, but also speculators? Huber argues that if employees are to be turned into capitalists, then at least they should demonstrate their ability to be stable and responsible investors. "It is very tempting to sell one's shares when the stock price doubles," says Huber, pointing to the Siemens example.
At the Siemens company meeting in 2006, then CEO Klaus Kleinfeld pointed out that if all employees had held onto the shares they had received in connection with the employee stock program since 1969, they would collectively own 20 percent of the multinational corporation's capital. The actual percentage is much lower.
Providing Companies with Liquidity
It was not just for reasons of ideology that many companies shied away from making their employees into shareholders. In many cases, there are tax drawbacks to equity participation, both for companies and employees. For instance, Daimler is still looking into ways to avoid employee's new shares being taxed as income.
At the same time, equity participation models offer an advantage that is doubly beneficial in the financial crisis: They provide companies with liquidity. In the past, when employees agreed to waive their rights to benefits or pay, they were usually promised that they would be compensated for their sacrifice when the company's financial circumstances improved.
But such commitments require the establishment of reserves, which reduce profits. On the other hand, when funds are parked as an equity participation in the company, then its own equity capital is increased as a result. This makes it easier for companies to secure bank loans.
This was the experience of Eduard Appelhans, the chairman of Sorpetaler Fensterbau, a family-owned window construction business in the western German town of Sundern. When he introduced employee participation 20 years ago, the company had virtually no equity capital. Today the equity ratio is close to 20 percent, and the company's roughly 60 employees own more than 75 percent of shares, worth a total of €1.2 million. In the past 20 years, Appelhans has distributed more than €2 million in dividends to his employees.
"The construction industry is always in crisis, but thanks to employee participation, we've survived," says Appelhans. His company's high equity ratio also increases its creditworthiness. With total assets of about €6 million, Appelhans recently acquired new machinery for €1.5 million. "With our model," says Appelhans, "we will also survive the financial crisis."
Translated from the German by Christopher Sultan