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LETTER : Looking for better options to encourage employees

From Mr D. J. Bell

Sir: Executive share options are ineffective as an incentive, because their value depends much more on the stock market than on the company's performance. Nor do they encourage employee share ownership because, as a matter of fact, most holders sell their shares on exercise of the options. Why, then, did companies introduce them?

There are two main reasons. First, they offered a way of paying selected employees tax-free sums, because of the pounds 6,000 exemption under the capital gains tax rules. Second, they offered a way of paying relatively large sums to senior staff without it affecting the company's profits. This is because payments under such schemes totally bypass the company accounts, the cost being borne by the shareholders, through dilution of their holdings, rather than the company.

So, tax relief and a quirk of accounting practice has brought into being remuneration schemes that are not an effective incentive and do not encourage share ownership. The Labour Party, the Greenbury Committee and, belatedly, the Chancellor are therefore quite right to favour their discontinuance by withdrawing tax relief.

Since the Greenbury report, a new myth has grown up - that "ordinary employees" are adversely affected by the withdrawal of tax relief. First, the number of schemes which cover employees at all levels is minimal. Where they do, their purpose is to pay employees without their incurring tax: if the Government wishes to encourage this, it would be better to offer tax relief on more effective incentive schemes. It might perhaps allow past awards of options to run out under the old rules where the scheme applies to all staff (if there are any).

Second, there is talk of large numbers of "middle managers" suffering under the change. I used to have responsibility for running a share option scheme in a large public company, and I know that in most schemes these so-called "middle managers" are on salaries of pounds 50,000 or more. I wonder if your readers realise that these are the people for whom they are encouraged to feel sorry.

The Chancellor and the Labour Party should stick to their guns.

Yours faithfully

D. J. Bell

Standon, Hertfordshire

22 July