LETTER : Looking for better options to encourage employees

From Mr Graham Bates

Sir: In view of the Greenbury report's stated objective of encouraging wider share ownership, I am surprised by your description of its recommendation that the exercise of share options be taxed as income rather than as capital gains as "a small, but sensible, change" (leading article, 18 July). Among the press coverage of how top earners may find themselves virtually unaffected by this change, my own circumstances provide a useful illustration of what can happen "lower down the salary scale".

I am employed by a company in which every employee participates in a share option plan. Earlier this year, I exercised some options that my employer granted to me in 1989. On paper, this transaction will earn me an instant gain - the excess of the current value over the cost - of approximately pounds 2,000. While this is a very welcome "windfall", it is not a fortune; and it has arisen after six years of loyalty to my employer.

Had I exercised these options today, I now know I would face a pounds 500 tax bill (25 per cent of the gain), which might have led me to sell some of the shares. But I also know that to make sure I collect the remaining pounds 1,500, I must sell all of the shares straight away. After all, a relatively small drop in the future share price might reduce my unrealised gain to, say, pounds 1,000; but my tax bill would still be pounds 500.

My employer, having spent 10 years encouraging employee share ownership, now finds itself having to consider how best to mitigate the effects of this tax change, not with the purpose of helping its employees to avoid taxation, but so as to persuade them of the continued benefit of retaining shares in "their" company.

Yours faithfully,

Graham Bates

Reading,

Berkshire

20 July