SHAREOPTIONS—MODIFICATIONS OF SECTION 186(2) OF TAXES ACT

HC Deb 17 May 1972 vol 837 cc579-621

The Chief Secretary to the Treasury (Mr. Patrick Jenkin)

I beg to move, Amendment No. 83, in page 50, line 9, at end insert: 'reduced by the amount or value (or, if variable, the least amount or value) of the consideration for which the shares may be so acquired'. I think that it would be for the convenience of the Committee if I were to speak about the Amendment briefly, to explain its purpose. Then the Committee, if it pleases, can accept it and move on to a wider debate on the Clause.

Section 186 of the Income and Corporation Taxes Act, 1970, is the Section which charges income tax on the exercise of a stock option. Subsection (2) of that Section contains a provision to prevent the double taxation of the gain on the stock option. This exemption in subsection (2) of Section 186 has, I fear, been exploited by a tax avoidance fraternity—some of them in the entertainment world—and they have been using the provision preventing the double taxation in the circumstances of the Section either to delay the liability for tax for many years or even to avoid the liability altogether by making sure that when they exercise the option they are abroad.

On the face of it, the Clause is fairly narrow and is intended to prevent the avoidance by this device. It would reinstate a tax charge on the grant of the option if the option is one which need not be exercised within seven years. Subsection (2) of the Clause seeks to avoid what might otherwise be a very contentious argument, namely, what is the proper value to be attributed to the option at the date of its grant so that it should form the basis of the charge to tax. The Clause provides: the value of a right shall be taken to be not less than the market value at the time the right is obtained of the shares which may be acquired by the exercise of the right or of shares for which shares so acquired may be exchanged. It has been represented to us that this goes too far. It is based on the assumption that the right is conferred for a purely nominal or, indeed, a nil sum, and it leaves out of account the possibility that the grantee may have paid a sum, possibly a substantial sum, upon the grant of the option. The Amendment puts this right. Therefore, it is a relieving Amendment to make the anti-avoidance provisions in the Clause effective but at the same time fair. I hope that the Committee will feel disposed to accept it.

Amendment agreed to.

Question proposed, That the Clause, as amended, stand part of the Bill.

Dr. John Gilbert (Dudley)

We did not wish to detain the Committee by discussing the Amendment we have just passed. We are in accord with the general principles behind it. However, I should like to make a few general remarks about stock options and stock incentive schemes. We can pursue many of these matters in much greater detail in Committee upstairs, particularly the provisions of Schedule 12, which are not appropriate for detailed discussion in Committee of the whole House. However, I predict for the Chief Secretary a quite warm reception, principally from Members on his own side of the Committee, when we reach Schedule 12. I assure him that, in large measure, we shall seek to protect him from the type of assault which we expect.

It is right, at the beginning of this debate, to acknowledge that there are considerable safeguards in Schedule 12 relating to all sorts of matters, such as the time at which the option or incentive is exercised, the relationship of the total amount of option or incentive available to the salary of the beneficiary, and the percentage of the company's capital stock which can be issued in schemes of this sort. We accept that the permitted schemes under the Bill as drafted are not as nearly obnoxious as we had feared, although we may well seek to introduce further safeguards in Committee upstairs. It will not have escaped the Chief Secretary's attention that quite serious criticism in the financial Press has been directed to the fact that the Bill is far more restrictive than those commentators would have liked to see.

Why do we have schemes of this sort? There is no lack of quotable material on this subject. One which came first to my hand was in an article by Mr. Henry Spencer in The Director of June, 1970, which said: One basis for incentive schemes"— the same applies to option schemes; it is largely a technical difference between the two— is the high marginal rate of tax on earned incomes; how can a board reward an executive who at—10,000 a year will be paying close to 75 per cent. marginal tax rate? That is a problem which exercises certain boards of directors. It will not exercise the railway men or the dockers. This is a method of transferring tax-free money into the hands of the better-off sections of the community at the expense of the general revenue.

These schemes are necessary because the 1966 Act, arising out of a well-known case, Abbott v. Philbin, changed the whole basis for share options, the benefits from which had, until then, been tax free, so that they are now subject to income tax. These arrangements were circumvented as soon as they were introduced in the 1966 Act. The fact that the arrangements were necessary is hardly denied by anyone. An article by a Mr. Oliver Stanley in one of the Sunday newspapers only about a month ago, referring to the pre-1966 Act situation, said The decision in Abbott v. Philbin meant that your company could grant an option to take up shares, requiring from you only a nominal sum for the privilege. If its share price rose, you exercised, bought and sold to make a certain tax-free profit. If the share price fell, you lost nothing.

Mr. Peter Rees

I am sure that the hon. Gentleman would not wish to mislead the Committee. He said that there was no tax charge. Under the decision in Abbott v. Philbin there is a tax charge on the grant of the option. It is important to make that point.

6.15 p.m.

Dr. Gilbert

I take the point, but it is not a significant element. As Mr. Stanley went on to say, That was a situation capable of exploitation. After one or two delicious little scandals—in which the real losers were the shareholders rather than the Inland Revenue—Mr. James Callaghan moved to block up the loopholes. He did not say "unsavoury little scandals"; he said "delicious little scandals".

However, as a result of the Act, we saw the end temporarily of share option schemes as they had been known until then and the emergence of share incentive schemes. The only basic difference is that under the share option scheme one has the right to acquire the share at a privileged price; under the incentive scheme one has to acquire the share, although there is nothing to stop one acquiring it, given certain safeguards. at a very considerable discount. As Mr. Stanley went on to point out, under the share incentive schemes You bought shares outright, but payment of the allotment price was deferred by one means or another. The company left it outstanding on loan, or used the mechanism of the partly-paid up share. Either way, the 1966 law was totally defeated". The proliferation of share incentive schemes over the last few years smacks of a serious laxity on the part of the Inland Revenue. There is, for all practical purposes, no element of risk in most schemes, and I could pray in aid, although I shall not do so unless challenged, innumerable quotations from the public prints in support of that view.

I revert for the last time to the article by the extraordinary Mr. Stanley. He said: Now Mr. Barber has decided that the share option per se is not an evil, and that gains upon options should be subject to capital gains tax, not income tax. That is so obvious a conclusion as not to need discussion. I have news for Mr. Stanley and for the Chanceller: it is not just discussion about share option schemes that we want; we intend to offer them strenuous opposition.

What are the reasons put forward for these schemes? One of the first is that they will attract and retain executives for the companies which give them. But we know from all the publicity coming out of the firms of consultants engaged in setting up these schemes for companies that they are becoming more widespread. About 750 to 800 schemes already exist, and I believe that they are growing at the rate of about two a week. Clearly the schemes are competitive one with another, and the more firms get their own scheme within the framework of the safeguards of Schedule 12, the weaker is the argument that a scheme is needed to attract and retain executives. It would be much simpler, if everybody had schemes, to get rid of them all so that nobody had schemes and one would be in exactly the same position.

Mr. Christopher Tugendhat (Cities of London and Westminster)

Surely the hon. Gentleman will agree that business activities cross frontiers. One cannot simply talk in United Kingdom terms. One must also talk in terms of attracting executives to work for foreign companies and attracting foreign executives to work for British companies.

Dr. Gilbert

That is a marginal point. The hon. Gentleman makes a fair point but, if he will allow me to develop my argument, the existence of these share and incentive option schemes, much as they are boosted in the handouts of the firms engaged in producing them, are crucial to individuals' decisions as to which country they work in or for which company they work.

Further to that argument, it is put forward that these schemes have a useful function as an incentive to executives in the firm for which they are working. I pray in aid a document to which I shall refer in the course of my remarks and which I commend to the hon. Gentleman. It is the "Management Survey Report No. 6" by the British Institute of Management, entitled "Share incentive schemes for Executives". It is a candid document which appeared in October, 1971. It directs detailed attention to many of these arguments and deals with the proposition that these schemes are an incentive to keep executives. It said: As the reward was tied to the share price, participants were asked whether they thought their individual efforts affected the price. That is the price of the shares. Generally they thought not, as individuals, but all the participants considered that as a group they certainly did. The effects of external factors, such as the state of the economy etc., were often mentioned as being important influences beyond their control, and protection against an adverse market price was therefore regarded as particularly necessary. Where an executive has a personal performance target to meet, or has responsibility for all aspects of the business —those are very restrictive conditions— an executive does feel his individual performance counts. In this case a share incentive scheme is an additional incentive, but for most participants this is not the situation. We have adequately dealt with the argument that these schemes are needed as an incentive. That was the reason put forward by the Chancellor in his Budget statement.

There are various refinements of this argument. One is that the schemes are needed to identify key men with a company, to give them a sense of being on a par with the owners of a company: The Press has often used the term 'to see the business with an owner's eye', to describe this new attitude of the executive. It is hoped that will be generated in executives benefiting from these schemes. The report continues: Most of the executives interviewed, including those in performance-linked schemes, thought this phrase did not describe their attitude. The owner traditionally invests his capital and effort and gets a return on investment proportional to the success of his performance. The participant is not in this position. His position is that of minor shareholder without overall control. Finally, the argument is put forward that we need these schemes to reward key men. Now we are getting closer to the heart of the situation. Mr. Thomas, in "Management Today" of December, 1970, wrote: Their beauty is that they allow the managers to accumulate capital, otherwise very difficult for a salaried man". From the company's viewpoint the great charm is that they cost very little compared to vast salary increases. In other words, the purpose of the schemes is to reward the high-salaried executive at the cost of the Revenue, rather than at the cost of the shareholders of the corporation that he is supposed to be serving. For remunerating executives it is difficult from the manager's viewpoint to find a better method. First, it provides the participant with capital and, secondly, it is an efficient system and costs the manager virtually nothing.

Even the proponents of these schemes admit that there are serious disadvantages. They are not profit-sharing schemes. Those who benefit from them can share

in speculative gains as well as earned gains. If a competitor were to go bankrupt through no result of the competitive forces brought to bear by the company in question, or through the loss of a defence contract, the shares in the competing company would go up. Those who were participants in share incentive schemes would benefit accordingly without making any effort on their part.

I am glad to see that the Chief Secretary has armed himself with the same document. I will give him page references as I go through them to make it easier for him to follow.

Mr. Patrick Jenkin

It is fair that I should warn the hon. Gentleman that there are parts of the document to which I shall refer.

Dr. Gilbert

I have read it through from one end to the other. I think I know the sections to which the hon. Gentleman will refer. Another serious difficulty of these schemes, as even the most candid supporters would admit, is that they are not available to a great many employees in local government and nationalised industries. Civil servants have to watch those fortunate enough to he beneficiaries of these schemes make large amounts of capital acquisitions without paying tax. My next quotation is from page 10. Most of the schemes are not related to the performance of the individual. In only two cases out of 54 was individual performance a set requirement for participation. We can immediately dispose of the idea that the point of these schemes is to make the executive work harder in the interests of his business and its shareholders. I draw the hon. Gentleman's attention to an interesting article touching on this point which appeared on 30th April in the Sunday Telegraph. The article was written by Patrick Hutber. The article is entitled, The bad part of Mr. Barber's Budget". The parts that Mr. Hutber identifies as the bad parts will not be the same parts as my hon. Friends would identify. However, it is interesting that, talking about the reasons why the Chancellor thought the introduction of these schemes was advisable, he said: If you believe in a system of high performance and high rewards then there is everything to be said for giving key executives a chance to share in the prosperity of the company provided that their reward is linked to the success of the company. There is not a word about provided that their reward is linked to their own efforts or contributions to the success of the company, which is a different matter. The survey which I have just mentioned discloses that in hardly any cases is such a requirement part of the scheme.

Furthermore, these schemes are restricted in their application, certainly in this country, to a small minority of employees of companies which run the schemes.

The survey in the same paragraph states: Unless an executive is in the top I per cent. of a company's hierarchy the chance of being eligible is very small, although it does increase for those working for a smaller company. In other words, these schemes are restricted to a handful of people who are already top salary earners in their companies.

There are those who are honest enough to admit the divisive effect of schemes of this kind. I refer the Chief Secretary now to page 6 of that report. There will not be much left for him to quote by the time I am through, because I have a quotation from almost every page. The report goes on: Several people…are worried about the effects of share incentive schemes: 'Can you imagine anything more calculated to get away from the team spirit than to have a few men at the top included in some moneymaking scheme when those lower down are excluded?'. That remark was made by the well-known Marxian Socialist, Sir Halford Reddish, no less.

When we come to analyse these schemes in detail we see that they are extremely exclusive and prejudicial to company morale, at least so far as more intelligent management is concerned.

Abroad, the pattern is quite different. In the United States, for example, 49 per cent. of the schemes reach levels as far down as general foreman, supervisor and ordinary foreman. There is nothing of that kind in this country. Indeed, several company chairmen agree, as one said that these schemes. should apply only to top management as 'ordinary people' should not risk their small amount of savings in shares". How very kind and considerate of him to suggest that ordinary people should not risk their capital in such schemes. But, as the report states in the next sentence: Whilst this may be sound advice in general, in many schemes the actual risk element is small. Of course it is small. It is intended to be small. For all practical purposes it is a one-way option. It is the privileged few who are getting the joy ride while everyone else works away under PAYE to give them the benefits that they have earned or at least that they receive without any commensurate target performance to meet.

The injustice of the whole performance is seen in a quotation from Mr. W. Robinson in the Financial Times of 8th October, 1970, in which he said: It is a fundamental fact that profits are earned by the whole of the employees (and not just a select few) using assets provided by the shareholders. That is what creates the profitability of the company.

I come back to my earlier question: why do we have these schemes at all? No doubt we shall be told that they are by no means for large-scale tax avoidance by the lucky few; that they are not—perish the though—to save big companies paying more tax than they otherwise would have to pay; and that they are nothing to do with tax advantages.

To be fair, I will quote what I anticipate the Chief Secretary might want to quote from page 8 of the report: These figures illustrate that tax avoidance is certainly not the main aim of the majority of these schemes, as only some participants derive a tax benefit. It is those who derive a tax benefit who institute the schemes. What the British Institute of Management Survey of those paying surtax does not reveal is the percentage of stock options going to people who are getting the tax benefits. The wicked thought persists that these schemes are not unconnected with tax matters.

The funny thing is that when these incentives and options are taxed in the same way as the rest of us pay tax on our incomes, they melt away like the driven snow. There are a few honest men around who are prepared to admit that this is what the schemes are all about. We see this in an article by Mr. John Chown, the taxation correspondent of the Financial Times, who, on 10th February, 1971, talking about the schemes, said: Of course, there would be no point in simply paying the executive high dividends which would be fully taxed and the benefit of such a scheme can only be enjoyed if the deferred shares can eventually be sold in the market for a capital profit. All these schemes——

Mr. Patrick Jenkin

Will the hon. Gentleman tell the Committee what Mr. Chown's advice was in the rest of that article?

Dr. Gilbert

By all means. At the end of that article Mr. Chown says: An ingenious variant on the highly geared share approach is that adopted by Cunard.…The Revenue has agreed that these scrip issues —I am sure we do not want all these details— will not give rise to tax although there will, of course, be a capital gains tax liability when they are sold. The element in the schemes which commends them to Mr. Chown is: The revenue has agreed that these scrip issues will not give rise to tax". Mr. Chown is one of our most eminent taxation correspondents.

All the articles on the subject relate to tax and rewarding the high tax executive by participating in share incentive schemes. At the moment share incentive schemes virtually exclude the possibility of executives making a loss even if share prices and profits go into decline.

We get to the point where we are even asked for sympathy for those who are imprisoned in what is called the "golden handcuff". It almost makes one cry. One thinks that they are invoking the Truck Acts to help them escape from schemes which insist that they be rewarded with shares in the companies for which they work.

If the £10,000 or £20,000-a-year man needs bigger and better perks, his company should pay for them, not the general taxpayer. The company will not. It wants the rest of us to give the com- pany a free ride. It wants us to make a forced levy on ourselves for the sake of its profits and its executives' perks.

The affront lies not in that the managing director of Plessey or of British Leyland or whoever will be getting large pickings from income tax, because the amounts he gets bear no relation to the contribution he makes to his company's success, nor even that the tax benefits he enjoys are so large and are not enjoyed by the rest of us; it is that the man on the shop floor, on the assembly line, is subsidising him. The trade union movement, the Committee and the Chief Secretary know it. Therefore, I have no hesitation in asking my right hon. and hon. Friends to divide against the Clause.

Mr. Peter Hordern (Horsham)

I can agree with the hon. Member for Dudley (Dr. Gilbert) on at least one matter: namely, that many of the arguments of substance on stock option schemes can be addressed to Schedule 12 to which we shall come in our proceedings upstairs.

I was interested to know the attitude of the hon. Gentleman towards stock options and share incentive schemes. He seems to suffer from some confusion of thought. The Committee knows that the hon. Gentleman has considerable experience of American practice—in particular, American commercial practice. He mentioned that stock options were widespread in the United States, but he did not mention that 89 per cent. of companies in the United States adopt stock option schemes and that the stock options in some companies are given all the way down the chain to the foremen of the companies. I assume, therefore, that the hon. Gentleman approves of the stock options system as operated in the United Statese but not as it is proposed in the present Bill.

Dr. Gilbert

I do not approve of the principle of stock options, but, if we are to have a stock options scheme, I would far rather have one in which most employees could participate, not one for just the privileged few.

Mr. Hordern

I understand the hon. Gentleman's view, but, with respect, it does not seem a particularly good argument to draw attention to the American system of stock options, which is far more generous than anything proposed in the Bill. When we discuss Schedule 12 in our later proceedings, it will be not to the generosity of the proposed provisions but to their tautness and narrowness that one will draw attention. However, we can refer to those matters later.

The hon. Gentleman seems to be under a misconception about the meaning of the term "stock option". He seems to believe—I am sure that this view is prevalent in his party—that stock options are a method of transferring funds to surtax payers. In fact, the grant of an option does not of itself mean that any benefit has been conferred upon the recipient. Any benefit which may accrue is due to a variety of factors, depending in part—this is the reason why such options are granted—upon the work of the executive to whom they are granted, upon the movement of stock market prices, and so on.

It is amazing that the Labour Party always imagines that stock market prices move constantly upwards. Having had a little experience on the Stock Exchange, I assure the hon. Gentleman that that is not always the direction in which they move. As I say, I do not believe that the hon. Gentleman fully appreciates the meaning of the term stock option, and I felt that his account of the course of the law during recent years demonstrated that to be so.

Dr. Gilbert

I am well aware that stock prices go down as well as up. Will the hon. Gentleman address himself to the many quotations which I took from specialists in this matter, which make quite clear that a characteristic of virtually all these schemes is that there is no element of risk on the down side to the beneficiary?

Mr. Hordern

I shall come to that, and I shall address myself to those points, although I have not the advantage of the article to which the hon. Gentleman referred.

The hon. Gentleman was right to refer to the case of Abbot v. Philbin, which established that any gain on the sale when a stock option was executed should be subject only to capital gains tax and not to income tax and surtax. He was right to point out that the last Labour Government reversed that judgment in the House in 1966.

As I understand his position, the hon. Gentleman then argues that share incentive schemes, which were allowed to continue after that date, ought not to be approved. That is a remarkable thing to say, since there was a Labour Government then in power, and every single share incentive scheme had to be separately allowed by the Inland Revenue, with, in effect, the direct permission of the Chancellor of the Exchequer at that time. I cannot, therefore, see the ground upon which the hon. Gentleman bases his extraordinary objections to share incentive schemes as a whole.

The Labour Party's position on this matter is difficult to understand. Last year, when we discussed stock options in the Standing Committee, my right hon. Friend the Member for Farnham (Mr. Maurice Macmillan), then Chief Secretary, said that the present system of share incentive schemes was unsatisfactory because of the administrative work entailed which required people in the Inland Revenue to make an assessment of each scheme as it came out, and that the large amount of time devoted to these matters, both in the Inland Revenue and in companies, should be avoided if possible. My right hon. Friend said that proposals would, therefore, be brought forward later, and it is those proposals which we see in the Bill.

6.45 p.m.

The interesting feature of that debate, however, was the response from the Opposition, in particular, from the hon. and learned Member for Lincoln (Mr. Taverne). The hon. and learned Gentleman did not object to share incentive schemes. He said: On the other hand, it would have been oppressive to have repressed them—so that the line advocated by the Chief Secretary is one which I do not find unacceptable."—[OFFICIAL REPORT, Standing Committee H, 21st June, 1971; c 939.] I do not know what is the Labour Party's position on these schemes. I find it difficult to know whether one should follow the hon. and learned Member for Lincoln or his hon. Friend the Member for Dudley. With respect, I know which one I would rather follow, but it rather bemuses people outside the House to know what the Opposition's attitude on these matters is from time to time. I suppose that we must now take it that they are set against stock option schemes and share incentive schemes of every kind. However, I do not believe that they would have taken that attitude if they had been in Government. I think that they would have adopted a sensible line. In fact, they did adopt a sensible line because, in doing away with the old form of stock option scheme which was subject to capital gains tax, they replaced it by a variety of share incentive schemes which were very largely adopted, and they certainly had no objection to those schemes at that time.

The arguments in favour of stock option schemes remain as valid now as they were when those debates took place in 1966. Obviously, stock option schemes act as an incentive. By definition, they are not grants or rewards which may be of definable value. They are prospective benefits if, and only if, the course of the market should take the shares in which the recipients are interested upwards in price. It cannot be said that the grant of an option confers any particular benefits on its recipient.

The hon. Member for Dudley knows very well that these schemes are extensively adopted in the United States, where very few of the restrictions proposed in the Bill are suffered. It is a matter of consequence that we should pay more and more heed to the standard of rewards to executives in various countries. In France, a man with an income of £5,000 a year will receive net £4,367. In Italy, the net figure is £3,789. In the United States, it is £3,853. In the United Kingdom, the figure after tax is still the lowest of all. In the £10,000 range, of course, the difference is even more marked.

It cannot be said, therefore, that the conferring of stock options to provide incentives is something to which we need not pay regard, considering the ease with which executives may move from one similar industry to another or from one country to another.

For those reasons, I am glad to welcome the principle of the stock option schemes set out in the Bill, though I must tell my hon. Friend the Chief Secretary that I welcome only the principle and not at all the detail. However, those are matters to which we can return on Schedule 12.

Mr. John Cronin (Loughborough)

I would agree with the hon. Member for Horsham (Mr. Hordern) in so far as I am strongly in favour of the maximum possible incentives being given to executives to do their work more efficiently, particularly in the export business. There is no escaping the fact that to a large extent the country rests on the shoulders of a relatively small group of determined men, the executives who sell our goods abroad and who also, by their technical innovations—I am referring to the engineers and scientists—improve our products so that they may compete better with other products abroad. I think they should be given every possible reward and both sides of the Committee would probably agree with that view. But I wonder whether stock options are the most satisfactory way of doing this. Come what may, stock options in the long term are a form of tax avoidance. They are creating a privileged class of persons who do not pay the same amount of tax as others who enjoy the same income.

There are so many anomalies in income tax that it is most undesirable to create more and to create this privileged class. One of the worst anomalies is the difference between people who pay tax under Schedule D and those who pay under Schedule E. One group is a very privileged class and the other has to pay income tax under very severe and onerous circumstances. I would have thought therefore that anything which increased the privileges and created a class which paid less tax than other people in the same income bracket should be discarded.

I do not think a case has been made out in favour of stock options. There are many ways of rewarding executives and the most obvious is to make sure they have a high salary if their work is good. I am a strong believer in Henry Ford's dictum that no salary is too high provided that it is earned. The proper way of rewarding a successful executive is to raise his salary. He then pays his income tax or surtax like everyone else and there can be no question of his having an unfair tax advantage.

There are many other incentives which could be given to successful executives. One of the most important relates to their status in the company. They could be given such things as company cars and numerous luxuries that could make life more pleasant for them. But certainly the most important way of rewarding the successful executive is through his salary. On the other hand I wonder whether all these incentives are so necessary because there is very hot competition in the labour market among executives. If an executive in his forties gets the sack, in spite of being a very able man his chances of getting another job are very slim. I would have thought that one of the problems was to make sure that all executives are employed to the maximum extent. There should be no need for incentives to make executives more efficient. Competition between them must by itself be a tremendous incentive.

My hon. Friend the Member for Dudley (Dr. Gilbert) in his very able speech said that stock options are not available to those who work in the nationalised industries or to civil servants. They are not available to people who work in the Armed Forces. Selling abroad, for instance, particularly selling military equipment, depends very much on the attaches who often do tremendously important work in obtaining contracts. But air and naval and other military attachés do not have this kind of reward. They live on their salary in the same way as executives live on their salaries and the whole idea of stock options seems unfair as between executives of companies and those people who work in the public service.

But there is a very unattractive circumstance attached to stock options because in this country they are restricted only to the very top layer of executives. This is most important. It is only the person who already commands a high salary who is given the privilege and can use this method of avoiding tax. This probably has a bad effect on company morale. Very often chief executives like sales directors depend for their success on sales managers under them. Some of these sales managers actually carry the sales director because they are so efficient and so effective. It seems bad for company morale that the sales director should be given a special privilege and ways of avoiding tax while the lesser executive should not. I cannot think that it is a good thing. It can only be divisive. The stock option system as it works now is a clumsy device.

One of its particularly unatttractive features is that its whole purpose is to save on salaries at the expense of the public. It seems an absurd situation that we should all have to subsidise enormous companies like ICI and British Leyland, through the taxes we pay, to enable them to give stock options to their employees and to enable them to economise on their salaries. All companies should face the facts of life——

Mr. Hordern

Can the hon. Member say exactly how the subsidy arises?

Mr. Cronin

The stock option eventually means that an executive receives stock which he can sell at a profit without paying tax on it. He would pay tax on any additional salary that was given to him which would give him the same amount of remuneration. It is quite wrong that public funds should be used to subsidise large companies and to help them to save on executive salaries.

Mr. John Hall (Wycombe)

I have been following the hon. Member's argument with great interest but I am not quite sure that it is entirely correct. If he examines the experience of most companies he will find that they have to employ executives at what is the market rate at the time, regardless of whether they give a stock option or any form of profit sharing. A profit-sharing scheme in most companies, certainly in my own experience, is paid only over and above the company's salary scale which would be comparable with the salary scales of other companies.

Mr. Cronin

I cannot say that it is my experience that that is the case. I am a director of a very successful company which exports about 85 per cent. of its products and we have not used stock options for many years. Certainly we have not come across any problem about paying people salaries higher than the market rate. There is no restrictive rate on salaries. I find this incomprehensible.

Mr. Hordern

The hon. Member has misunderstood the point. I understood him to say that stock options in some way enabled companies to pay less than the normal salary rates they would pay to an executive. I am merely pointing out that this is not so.

Mr. Cronin

The hon. Gentleman is now misunderstanding me. In effect, what the stock option does is to give an executive a financial privilege instead of being paid a higher salary. It is a financial privilege given to him at the expense of the Revenue, because it means that he pays less income tax and less surtax in the long run. Therefore, such stock options are a form of remuneration for executives which we must regard with considerable dubiety and suspicion. Although I am strongly in favour of executives being given every possible incentive to be successful, I shall have no hesitation in voting with my right hon. and hon. Friends against the Clause

Mr. John Hall

Will the hon. Gentleman tell the Committee whether the system operated successfully in the very successful company of which he is a director?

Mr. Cronin

The hon. Gentleman has had a very fair innings, and must regard me as having sat down.

[Sir ROBERT GRANT-FERRIS in the Chair]

7.0 p.m.

Mr. Tugendhat

It is always a great pleasure to me when the hon. Member for Loughborough (Mr. Cronin) speaks in a debate in which I want to participate, because almost invariably I have the good fortune to catch the eye of the Chair immediately after him. Therefore, I hope that whenever I wish to speak he will come into the Chamber. I regard him as a fortunate omen.

I shall not detain the Committee long, because many of the economic points for and against stock options and incentive schemes have been put forward by hon. Members on both sides. I should like to make rather more of a social than an economic point. I most warmly support the Clause. I have reservations about the Schedule connected with it, which I think is too restrictive, but I warmly support the principle. One of the most important requirements of this country now is that more people should be enabled to accumulate capital out of income.

The most substantial point put by an hon. Member opposite was that schemes of the sort covered by the Clause tend to be too restrictive, in that they are confined too much to the very highest earners and do not go far enough down the ladder in our companies, unlike the position in the United States. I regard that as a very strong criticism, with which I agree. I regret that at present the schemes are confined to the rich, and I hope that to an increasing extent they will be made much more widely available. The principle that they enable people to accumulate capital out of income is most important.

Under a Labour Government, and indeed under past Conservative Governments, the level of taxation on income has been very high, and this has had the effect of making it very much harder for people to become socially mobile. Those who are born with large inherited wealth have been able to increase their wealth quite substantially in recent years in a variety of perfectly legal and reasonable ways, but those who have been born with ability but no money behind them have found it increasingly difficult to save out of income and to accumulate capital. I regard devices of the sort covered by the Clause, which help people to accumulate capital out of income, as socially highly desirable, and I wish these schemes to become as wide in their coverage as possible.

We live in an age in which many people, both on the shop floor and working in offices, find it very difficult to identify with their companies and with their work. I am not suggesting for one moment that stock options and share incentive schemes solve the problem single-handed. Of course not. But it is very important to try to bring about a much greater degree of identification between individuals of all types and their jobs, and schemes of this sort, which enable people not only to build up capital but also to acquire a stake in the company in which they work, play a part in that. I am not suggesting that it is an overwhelming part, but it is a part, and to that extent too they are welcome.

My final point in favour of the schemes relates to my intervention in the speech of the hon. Member for Dudley (Dr. Gilbert). We can no longer think of British industry simply in terms of this island or even in European terms. We must increasingly think of it in world terms. It is becoming very difficult for British companies or companies based in the United Kingdom to attract to London some of the executives who work for their foreign subsidiaries overseas whom they would like to have in their head offices here, both for the benefit of the companies themselves and for the benefit of the executives in their career development.

A converse to that is that increasingly some of the more advanced and progressive American and continental companies are becoming very anxious to enable executives working abroad—in this sense, Britain—to acquire shares in the subsidiaries for which they work. Restrictive conditions of the sort we have had here places British executives at a great disadvantage compared with executives working for the same companies in other countries which adopt more liberal rules.

Where possible—I realise that it is not always possible—it is highly desirable to encourage international and multinational companies to involve the people of the countries where they operate more closely in their activities. There are many complications and difficulties in the way of this. One is that our system does not enable British executives to enjoy the same advantages as executives in other countries. I should like to see that disadvantage removed, and the Clause moves in that direction. There are many other more important obstacles outside the realm of this debate.

I welcome the Clause most warmly, though there are many people in my constituency and outside who also support its objectives but believe that the Schedule does not enable them to be most satisfactorily achieved. In Standing Committee those of us who particularly support the Clause will be anxious to bring about certain improvements in the conditions relating to it.

Mr. Dalyell

The hon. Member for Cities of London and Westminster (Mr. Tugendhat) said that it was often his good fortune to be called once my hon. Friend the Member for Loughborough (Mr. Cronin) had spoken. It seems to be my good fortune to be called whenever the hon. Gentleman has spoken. I am rather glad about this, because much that I know about the multinational companies comes from reviewing the hon. Gentleman's book about a year ago. I should like to take the hon. Gentleman up on this point. In West Lothian we have a large number of multinational companies, providing many of the best jobs in central Scotland. I thought it my business as soon as the Budget announcements were made to discuss with those companies the subject of stock options. It seems that we in this country tend to have the worst of both worlds. As my hon. Friend the Member for Dudley (Dr. Gilbert) said, the system is far too restrictive at the top, and we do not have any of the advantages of the much wider system of options that exists in the United States.

It is curious that the hon. Gentleman should argue the matter on social grounds. If that argument is used, we must ask what the cost is and whether it would not be better for the money to be spent on children's clothes, medical equipment or any of the other items we discussed for many hours recently. Surely the money could be better directed elsewhere?

There is a serious issue here. If it could be proved that multi-national companies in this country are significantly less efficient than they would otherwise he because of the absence of wider stock options, we would listen to the argument, but where is the evidence for any such propositon? The situation has changed even since the mid-1960s. When we examine the figures of graduate unemployment, we realise the pressure of people trying to find suitable positions in industry, to which my hon. Friends the Members for Dudley and Loughborough referred. They are often very able people. Heaven help the man, able or not, who in 1972 for some reason loses his job as an executive and then finds he cannot get any other. In Plessey the graduate entry was down 40 per cent. between 1970 and 1971; in ICL it was 250 down, or 80 per cent.; in Shell, it was down by 15 per cent., which meant 200 fewer graduates; and in Courtaulds it was 130 down, or 46 per cent. So we could go on and on. That is at the junior level of executives. At the senior level positions are far more crowded.

Why, then, do we have to justify the schemes in terms of executives? The hon. Gentleman's whole arguments was conducted in terms of executives. If it is really important to have the feeling of identification to which he referred, surely foremen and many other long-serving people in every company should have the chance to buy shares? This is a question of going the whole hog.

Mr. Tugendhat

I thought I had made It clear that, as I think the hon. Gentleman will see in HANSARD tomorrow, my points were of general application and should apply as far down the line as possible. I was not arguing the case on whether or not stock options would make companies more efficient. There are arguments to be put forward in that regard, but I was not using them. I was using the straightforward argument that to my mind they were socially desirable.

Mr. Dalyell

I contest very strongly whether any scheme which is foreseeable under the present arrangement is socially desirable, because it is very much limited to the top. If it went further vertically down the tree of any company, if it went right down to the bottom, some of us on this side, while we might not agree, would listen with far more sympathy. It would mean a share-owning democracy, with the undoubted virtues that such a system would have. But it does not seem that realistically in 1972 Britain there is much of a chance of that.

I am not sure that I concede what the hon. Gentleman said in his intervention, because he talked earlier about the importance of bringing people to head offices, presumably to give them an identification with the company.

I have heard it argued that the whole system of share options does two things. First, it operates against mobility, because once a person starts having share options in a particular firm he feels, morally, legally or otherwise, to a certain extent bound to that firm. Secondly, who is to receive the share options? I should be much more extreme, as a result of my conversations in the past two or three months, than even my hon. Friend the Member for Dudley was. Inside industry, the question of who receives share options and who does not often leads to a great deal of bad blood and ill feeling. That is the experience in the north. It may be that others have a different experience. If some people who work for a firm are singled out to be beneficiaries under such a scheme and others are not, we can be certain that word will get around. These things cannot be kept secret. There is a good deal of bad blood unless the firm is one of the very few that operate a scale for everyone working in them. So I think that internally in industry there are serious disadvantages that should not be swept under the carpet.

7.15 p.m.

The social argument seems to me grotesque. If we are arguing about what should be given away socially, the proposals mooted from both sides in the last few days must take priority over share options. Here again, I must ask the Chief Secretary to spell out precisely why the Chancellor has gone on record as saying that we must do this in the context of international firms, because some of these firms do it and some do not. I do not think that there is any evidence that people who work in international companies or in British companies which do not have share options are in any way less efficient, or less identified with their firms, or less dedicated than those who work for companies which have such schemes. If such evidence exists, we must have it.

I have read the reports of the proceedings on the Finance Act, 1971. Is there not an obligation on the Government to demonstrate why it should be immediately obvious that company executives can be given shares at below market price and pay only capital gains tax on the discount?

Mr. Patrick Jenkin

Perhaps I might help the hon. Gentleman's argument. If a man is given shares below market value, he is taxed on the difference at the time of the grant to ordinary income tax and surtax. Any appreciation in the value of the shares between the date on which he is given them and the date on which he exercises his option is subject to capital gains tax.

Mr. Dalyell

That partly assumes some kind of risk and some kind of falling value of the shares. The fact is that this is an absolute concession of either greater or lesser magnitude to those who are well off. For the hon. Member for Cities of London and Westminster to argue that it helps the man on his way up, that it helps ability in this way, seems to me to be somewhat far fetched and unreal. In fact, this is reinforcing wealth. As I understand it, that is certainly the case. If I am wrong, then I ask the Chief Secretary to spell out why. But it means, I suggest, much greater incomes for those who are already at the top of industry, those who have made the grade.

Another direct question arises from the article by Mr. Oliver Stanley, which has already been quoted. Mr. Stanley writes: Subject to that major reservation, the new code must hasten the growth of share schemes in Britain. One side-effect is that future allotments of shares under existing incentive schemes fall within the regulatory power of the code. All such schemes will therefore need review, and possibly amendment to bring them within its scope. That will give both the Revenue and practitioners a mass of onerous work over the next year or so. It is hoped that scheme participants come to appreciate the efforts which need to be made by companies on their behalf. I have referred to some economic and financial simplifications. What are the administrative costs? I suspect that they might be out of all proportion to any kind of financial benefit that is given to those who are the beneficiaries, let alone to the economic health of the nation.

I address myself now to the Government, to the hon. Member for Cities of London and Westminster and to the hon. Member for Horsham (Mr. Hordern). Are they sure that arguments which might have held good a couple of years ago hold good now? One can admit that there was a shortage of top quality management, or at least a supposed shortage, in 1970. One can talk in these terms now, although I am reluctant to do so because people when called upon will so often rise to the occasion. But that argument cannot be said of 1972.

One of the most alarming features of 1972 is not only the graduate unemployment, about which some of us are questioning Ministers because the figures are alarming, but also the many pathetic cases of those who are by no means incompetent managers but find it impossible to get positions at present. The situation which many hon. Members know to have existed in the United States for five years or more along the big industrial highways outside Boston, Minneapolis and other industrial centres—pathetic cases of highly-skilled people in their fifties and early sixties who cannot get jobs—is unfortunately coming to Britain and be- coming more and more marked. I have no magic solution to offer, but it is a fact of life.

Granted that there is serious managerial unemployment, is it really sensible to bring in this kind of stock option scheme which really is a red rag to the unions, which makes negotiations with powerful unions much more difficult? The Government must not be blinkered on this fact, because such schemes are seen as a concession to those who are already there and who are better off. If I am wrong, I hope that the Government will tell me so.

Mr. Peter Rees

I hope the hon. Member for West Lothian (Mr. Dalyell) will forgive me if I do not follow him into the byways of graduate unemployment, because that would enlarge the debate beyond what the Committee would perhaps tolerate.

The hon. Gentleman asked about administrative costs. I have no doubt that the Government will give the answer that if they are too high, then, as I hope to demonstrate, the only logical course would be to go back to the pre-1966 position. The hon. Gentleman described the social argument as grotesque. There is a big distinction in principle between a decision as to how the Government should spend money collected or to be collected and as to whether they should fail or should decide not to collect money in a given situation. That must blur the argument and we cannot have a meaningful debate if we take that kind of point.

Tax avoidance is a theme running constantly through speeches of hon. Members opposite. But they do not follow the argument to its logical conclusion. They should ask why people have to go in for what they choose to describe as "schemes of tax avoidance". Why were stock option schemes virtually unknown before 1939 and certainly unknown before 1914? It was because rates of tax were so low that it was possible to give a person a salary net after tax which made him feel adequately compensated for his work. For the hon. Member for Loughborough (Mr. Cronin) to say that he wants people just to get a straight salary, albeit a high salary, may be sound enough if he is not going to vote against the Government's endeavours to bring down the rates of direct taxation, but he cannot have it both ways. He cannot ride both horses. He must have it one way or the other.

Various other curious points have been made against stock option provision. One does not get them in the nationalised industries, for example. I know that this is not the responsibility of my hon. Friend the Chief Secretary, but perhaps we might consider whether we can reorganise these industries to enable some employees to take part in a share option scheme. This might inject a greater sense of realism and competitiveness into the nationalised industries.

The argument about civil servants and members of the Armed Forces is also rather curious. By definition, they are not commercially motivated people They have joined their services for a different sort of life on a different basis with different values. Because they cannot come in on share option schemes is no real argument against such schemes elsewhere.

Mr. Dalyell

Cannot the hon. and learned Gentleman picture, in the nationalised industries in particular, that a manager given a wallet full of options is going to be in a very difficult position to argue in wage negotiations? Who is to get these options? It would make delicate negotiations almost impossible if they were known—and if they were not known, there would be grave objection to that.

Mr. Rees

The hon. Gentleman has pontificated with enormous assurance on the response of the unions to share option schemes in given situations. I must defer to his specialised knowledge. I would not presume to look into the thought processes of trade union leaders. But I recall that Sir Sidney Greene had great difficulty in getting his salary raised from £3,000 to£5,000. If one could get some share options in the railways, one might have a healthier situation. But that is a rosy view, perhaps, of nationalised industry. I must stick more closely to the debate. On other occasions perhaps I shall be able to discuss these matters with the hon. Gentleman.

Like my hon. Friend the Member for Cities of London and Westminster (Mr. Tugendhat), I see at least two good arguments adduced in favour of stock option and incentive schemes. I know that he will forgive me for echoing his theme that in a capitalist society—and I am delighted that we are still in one—it must be right to diffuse capital as widely as possible and to give those who have no inherited wealth a chance to build up a capital stake. On that ground, share option schemes can be defended.

Secondly, it is right to give everyone a chance to acquire a capital stake in the companies for which they work. I am sure that it is unhealthy to create a managerial class with no real equity stake in the companies for which they work. I hope that this scheme will in course of time be extended as far down the company range as possible. But unfortunately experience does not augur very well. One knows various companies which have offered their workpeople a chance to acquire shares at reasonable rates and which shares have unfortunately found their way on to the market all too quickly. It may be that the provisions of the Bill will encourage companies to extend their share option schemes.

In the pre-1966 position, it may be that share option schemes were abused. But I do not believe that the abuse was on such a scale as to vitiate their undoubted advantages. In any event, the weapon adopted by the right hon. Member for Cardiff, South-East (Mr. Callaghan), as so often in his fiscal enterprises, was very crude and blunt. In effect, it put an end to share option schemes. But why was it that after orthodox share option schemes were effectively ended in 1966, people searched round for other schemes? It was because the need was there.

Dr. Gilbert

The greed was there.

Mr. Rees

The hon. Member for Dudley (Dr. Gilbert) chooses to make a rather cheap point, as he has done on other occasions. He looks at these things with a characteristically jaundiced eye and has to buttress his speeches with liberal quotations from other people's work, as his own original thinking does not bear close examination, if that is an example of it.

Mr. Hordern

The hon. Member for Dudley (Dr. Gilbert) said that the motivation was greed. Every one of the schemes to which the hon. Member referred had to be separately passed by the Inland Revenue at the time, and as the then Chancellor was solely responsible, who was following greed but the then Chancellor?

Mr. Rees

Perhaps the then Chancellor recognised that occasionally one has to play with human nature rather than against it. In any event, the schemes were all checked. I do not know whether Somerset House was concerned with the motives of the parties. I presume it was concerned purely with the consequences.

One comes back to the point that there is much more pressure for this kind of scheme. I therefore welcome the moves introduced in the Finance Bill to bring the schemes within an ordered framework as, for instance, retirement benefit schemes have been brought within an ordered framework. I am sure that hon. Gentlemen opposite would accept that if we are to have these schemes it is better that they should be looked at comprehensively and should be covered by ground rules.

Here I regret that I must slightly take issue with my hon. Friend the Financial Secretary, because the ground rules which are found in Schedule 12 are not realistic. They do not match the requirements of most companies. Very few schemes introduced prior to this year will qualify for approval under Schedule 12. I hope, therefore, that when the Bill goes upstairs my hon. Friend will be able to look more liberally at the rules. I will single out one or two which I have no doubt have been drawn to his attention.

It is not realistic to limit a person's right in each year to 40 per cent. of his salary. It is not realistic to limit his accumulated rights to twice his salary in any one year. It may be that he has let the scheme run for three or four years, in which case he will be unduly penalised. It is not realistic to limit option rights to companies in which the employee works, because he may work in an unquoted subsidiary of a public company; nor is it realistic to limit the schemes to full-time employees and directors. Time and again one comes across people who have a variety of jobs in a variety of companies inside one group. By definition they would not qualify.

These are points of detail, but significant points of detail. I have no doubt that my hon. Friend will look carefully at them when the Bill is in Committee upstairs. I do not expect an answer tonight but I hope he will bear in mind my criticism, which I put forward in a constructive spirit. Subject to that I welcome the Clause and will support it.

[Mr. HAROLD GURDEN in the Chair]

7.30 p.m.

Mr. Patrick Jenkin

For those of us who were here until five o'clock this morning it has been an interesting and revealing debate. I had hoped that the area of difference between the two sides of the Committee would be seen to be more a difference of emphasis than of principle but, having heard the hon. Member for Dudley (Dr. Gilbert), my impression is that he has a root-and-branch objection to any scheme along these lines and that he is inviting his hon. and right hon. Friends to pursue him into the Division lobby on such a platform.

Mr. James Wellbeloved (Erith and Crayford)

Hear, hear.

Mr. Jenkin

The hon. Member for Erith and Crayford (Mr. Wellbeloved) says "Hear, hear" but it was not wholly on one side. The phrase "capital-owning democracy" fell from the lips of the hon. Member for West Lothian (Mr. Dalyell). That is a concept to which may of us would subscribe.

The Opposition have stated their view, and it is right that the Government should take the opportunity of this Clause to state theirs. We start from the broad proposition that we are operating in a mixed economy with a public and private sector where the great preponderance of manufacturing and service industries are to be found in the private sector—certainly the great preponderance of exports has come from the private sector.

I am not seeking to belittle the public sector, whether central Government and local authority or nationalised; all I am saying is that it is different. My hon. and learned Friend the Member for Dover (Mr. Peter Rees) made the point admirably when he said that on the whole those who go into the public service tend to be differently motivated, and go into it for perfectly laudable and frequently honourable reasons. But I do not accept the argument that, because a particular institution is inappropriate for and cannot operate in the public sector, therefore it must be wrong and inappropriate for the private sector. We are dealing with different animals.

The private sector does not operate on simple laissez faire capitalist lines such as perhaps existed in an earlier age. Society is now too complex for that. The Government have a regulating function and are pursuing social and political objectives which make inroads into the operation of a capitalist system. Nevertheless, the private sector operates a modern and complex form of capitalism based mainly on the principle of consumer choice, where the main if not the only consideration is to optimise the utilisation of resources. If the resources are to flow to the areas from which they get the greatest return there must be the greatest flexibility. Only in that way can the private enterprise system properly reflect consumer choice. This means that we are operating in a competitive framework and one of the functions of government is to regulate that competition. In a competitive framework one is relying upon incentive to maximise the return on capital.

In a simple Victorian style of capitalism that is perhaps a relatively easy matter. There is a great identity of interest between the owners of a business and its managers, and often they will be the same people. The success of the managers will be directly reflected in the value of the enterprise. It will be able to attract new capital, it will be able to expand and prosper and thus reflect the area of consumer choice.

Today, with our large businesses and large public companies that simple pattern is less clear. There is often a divergence of interest between the owners and managers of a business. In part it is the purpose of company law to regulate that and to make sure that the law and the principles of the law are observed. Here I come to the point of the Clause and of our debate.

It has become increasingly necessary over recent decades to provide some means of reducing and, if possible, eliminating that divergence of interest between the owners and the managers of the business so as to inject into the business the dynamism and enterprise which has through the ages characterised the owner-manager. In other words, where managers have remote control, where shareholders cannot exercise a detailed day-to-day surveillance—and it is insufficient for them merely to exert their pressure through the market—something else is needed.

I warmly agree with those who have said that the growth in the share incentive schemes since the 1966 legislation is a direct reflection of the need for the stimulus which is provided by these schemes and by the stock option schemes. They are the device which in this country and in Europe—and to an even greater extent in America—has been chosen to seek to link the performance of the managers and the performance of the company, so that part of the rewards of the success of management should accrue to the managers individually and collectively in a form which is identical with the benefit that accrues to the shareholders. That is what a stock option scheme or a share incentive scheme is primarily intended to achieve. Its case rests on the extent to which it seeks to align the interests of the managers with the company as a whole.

Mr. Dalyell

The Financial Secretary is concentrating on the managers in a way that sets the managers, or, more likely, some of the managers, apart from the rest.

Mr. Jenkin

I have been arguing the case in the context of the schemes as most of them exist, and I shall be coming to the wider question. I entirely agree with my hon. Friend the Member for Cities of London and Westminster (Mr. Tugendhat) who said that we want to see the schemes more widely enjoyed and going further down the ladder within organisations.

There is no doubt that the schemes give company employees a greater sense of participation in the affairs of their company and a greater identity of interest. Employees have an incentive not just to maximise their remuneration but to maximise the success of the company. The company finds the schemes a valuable way of attracting and retaining men and women of enterprise.

If the hon. Member for West Lothian asked what evidence there is of this, I do not suppose that one would be able to prove statistically the cause and effect relationship between the existence of schemes and any special feature one might see in a particular company. It is a matter of common sense that, if the reward accruing to a man is in part of the same nature as that which accrues to the shareholders in a successful company, he is more likely to align his interest with them, to seek a community of purpose and thus to ensure the success of the company. It is common practice for schemes of this sort to be introduced and many of the most successful companies are those in which the managers are motivated to some extent by the existence of a share option scheme.

Mr. Cronin

The hon. Gentleman underestimates the extent to which a well-paid executive can buy shares in a company in the stock market from his own salary, just like everyone else, if he has so much faith in the company.

Mr. Jenkin

I accept that sometimes that is possible, but there are advantages in the stock option scheme in that the company is in a position to get the benefit of the motivation, the alignment of interest and the congruity of purpose—the argument about the executive putting all his eggs in one basket is examined in the report to which I shall refer—and without putting his own assets too greatly at risk.

Dr. Gilbert

On the hon. Gentleman's premise—which for the purposes of argument I accept—that it is desirable to link the remuneration of the executive with the improvement in the profitability of the company and the increase in the price of shares, why is it not possible to do that by linking his salary to those criteria? Why is it necessary to give him a tax free gimmick?

Mr. Jenkin

With respect, the hon. Gentleman has missed the point. The attraction of the scheme is that the reward comes to him in the same way as it comes to the owners of the business.

The hon. Member for Dudley referred to the survey of Share Incentive Schemes for Executives published by the British Institute of Management at the exorbitant price of£5 to non-collective subscribers. The hon. Gentleman made several quotations from the survey, but I will confine myself to three, all on page 29 under paragraph 7 "Key Points of Report". I am tempted to read the whole two columns all of which virtually supports my case, but I will confine myself to three quotations: There is plenty of evidence that the most stated aim, retaining and attracting top executives, does and will continue to play an ever-increasing part in executive recruitment. This can only help both the companies' and the country's prosperity. That is the case which my hon. Friends have been making throughout the debate: The attitude of participants interviewed dispelled other criticisms levelled at the schemes. From their view point as participants they definitely thought the scheme an additional incentive and surely it is their attitude that counts. Again, an argument that has been repeatedly advanced on this side of the Committee. Finally: …it was evident from the investigation that they… the schemes— …had a lot to offer participants, companies, shareholders and indeed, the country. That is the case we make for the reintroduction of the schemes. They are to the benefit of the economy as a whole and, by motivating individuals and stimulating initiative and enterprise in companies, the whole country will benefit and we shall have a more dynamic economy.

7.45 p.m.

There are the other arguments—the international argument, about which there is no one better qualified to tell us than my hon. Friend the Member for Cities of London and Westminster; the argument that we need to weight the acquisition of assets more to those who will accumulate them and without so much emphasis on those who inherit wealth; that we need to provide means whereby companies can be restructured, so that company doctors can come in. This is a favourite way of rewarding company doctors to ensure that they have a very keen and clear incentive to restore the company's health. There is also the argument about the need to achieve a closer assimilation between the man who works for a large public company and the owner-proprietor of a smaller company.

The essence of the scheme is that the enhancement of the shares in the option or of the shares in the share incentive scheme should be treated as a capital gain and should be subject to capital gains tax. This is right, because in many of these cases the holder of the option risks a loss as well as a gain. What the Government have to do is to balance the economic benefit to the country as a whole, and the other social objectives to which my hon. Friends have referred, with the interests of the Revenue.

In 1966 the Labour Government had, and to some extent they still have, this obsession with tax avoidance, and the balance swung much too far in their efforts to counter tax avoidance. In that aim they killed off the stock option schemes by taxing the whole of the gain to income tax and surtax. As my hon. Friends have pointed out, the result was the mushrooming growth of share incentive schemes, with a very rapid rate of expansion, to find a way round the 1966 legislation.

My hon. Friend the Member for Horsham (Mr. Hordern) quoted briefly the exchange that took place in Committee last year when my right hon. Friend my predecessor as Chief Secretary said: Our object should be to provide incentives to the employee…to deal with stock option and share incentive schemes, and to ensure that all companies, through the spectrum of size and ownership, are equally able to introduce such measures should they wish to do so. At the same time we must ensure that adequate and proper provision is made against using such schemes as tax avoidance devices. My hon. Friend the Member for Horsham also drew the Committee's attention to the reply of the then Labour Front Bench finance spokesman, the hon. and learned Member for Lincoln (Mr. Taverne): I do not disagree with much of what the Chief Secretary has said. To be frank, I was not entirely happy about the course which the law has taken in the past…the line advocated by the Chief Secretary is one that I do not find unacceptable."—[OFFICIAL REPORT. Standing Committee H, 21st June, 1971; c. 938–9.] It was on that basis that I had hoped to find not so much a difference of principle between the two sides as perhaps a difference of emphasis.

The legislation is now before the Committee in its main features. It aligns the law on share incentive schemes and stock options and it provides a machinery and rules for Revenue-approved schemes.

The hon. Member for Dudley seemed to suggest at one point that the growth of share incentive schemes represented some sort of laxity on the part of the Inland Revenue. That view must be utterly refuted. The Revenue was exercising an unofficial scrutiny of share incentive schemes because the only legislation that was on the Statute Book was the 1966 legislation against stock option schemes. The Revenue had no power to deal with share incentive schemes. It was asked to undertake a scrutiny of those. It did so and it indicated those to which it could not reasonably take exception.

We now have the rules, the limits on the amounts of options, the limits on the proportion of share capital, the requirement of shareholder approval, the length of time that an option should be held or that the shares bought should be held and the qualifications of the option shareholder. We shall be able to examine these in Standing Committee when we discuss Schedule 12.

Our purpose is to achieve the objects for the benefit of the economy while not opening the door to widespread tax avoidance.

I come to the point raised by the hon. Member for West Lothian and my hon. Friend the Member for Cities of London and Westminster. It is not our intention that these schemes should be confined to executives only. Incentives via shareholdings for men on the shop floor are equally valuable but they raise different issues, notably the need to protect the individual's capital and to recognise that there is inevitably a much less direct link between the value of the shares and the individual's own efforts.

My right hon. Friend the Chancellor is having a full study carried out into how these schemes for employees generally can be given greater encouragement, hearing in mind the importance of ensuring the proper safeguarding of the employee's capital.

Mr. Dalyell

When is it likely to report?

Mr. Jenkin

I am not able to tell the Committee that at this stage. The study is at an early stage.

My hon. and learned Friend the Member for Dover made a number of criticisms and expressed the view that the conditions set out in Schedule 12 are altogether too restrictive, that we have drawn the line between encouraging the economy and preventing tax avoidance in the wrong place, and that the restricted terms upon which Inland Revenue consent will be forthcoming, coupled with the extension of the 1966 legislation to share incentive schemes, has left the situation, not better, but worse than it was before the Budget.

Similar criticisms have been voiced by many outside the House of Commons and among them have been some of the most responsible bodies in the country—not only men concerned with the efficiency of the economy and incentive for management but men who are acutely aware of the vital importance of preserving and improving relations at both firm and industry level with the representatives of the shop floor.

I think that it is unwise to exaggerate the so-called provocative effect of this. This is not the view of the men in industry and those who are responsible for conducting negotiations with trade unions.

Our aim in drawing up these terms was to hold the balance. My right hon. Friend the Chancellor of the Exchequer has considered the many representations that have been made. I have taken the most careful note of the points which a number of my hon. Friends have made this afternoon. These are matters which fall for discussion on the Schedule. We still have a week or two before we are likely to reach the relevant Clauses and Schedules.

I assure the Committee that in this period we shall give the most careful thought to all the views that have been expressed. It would certainly not be our wish to place on the Statute Book a code of conduct for what, as I have already said, is an important area of policy towards industry which in the eyes of many reasonable people could be taken as frustrating rather than en- couraging the objectives we have in mind. On the other hand, it is important to recognise that, although the 1966 legislation went much too far, as the hon. and learned Member for Lincoln indicated last year, the Government has a responsibility to ensure that the schemes properly serve the purpose for which they are designed and are not simply a way of putting remuneration into the hands of executives in a form which attracts tax at a significantly lower level than if it were paid as salary.

As I have said, we must hold the balance. It will be my right hon. Friend's purpose over the next week or two to come to conclusions whether the Bill fairly holds that balance or whether modifications are required.

Mr. Gurden, you and your predecessors have allowed the debate to range very wide. For this the Government and, I am sure, all those who have participated wish to thank you. The Clause is confined to one aspect of the scheme, but the debate has covered the issue of principle. I believe that the Clause is fully justified. I believe that the principle is fully justified. I hope that my right hon. and hon. Friends will join me in the Lobby in declaring that conviction.

Dr. Gilbert

The Financial Secretary said that he was surprised at the attitude of this side of the Committee. He will have noticed that every hon. Member who spoke from this side expressed fundamental objections to stock option and share incentive schemes. I become a little weary of hearing how good an incentive these schemes are. I repeat the one statistic I used earlier, from page 10 of the report of the British Institute of Management. In only two cases out of 54 covered by the survey was the individual performance of the executive a set requirement for participation in the scheme.

The Chief Secretary at no time addressed himself to the fact that executives can make very considerable gains which will be taxed at a highly preferential rate resulting from effects in no way contributed to by their own efforts. This, as my hon. Friend the Member for Loughborough (Mr. Cronin) pointed out in a most eloquent speech, is what is so basically unfair about these schemes. That is the great criticism we have of them. They are unfair. They help very few people. They help those who need help least. They help people who ride on top of the backs of the employees of the companies of which those who are helped are usually directors.

We have been talking about the fact that only 1 per cent. of executives have participated in these schemes. In the larger companies this drops to about 0.2 per cent. However, nearly 90 per cent. of directors participate.

I endorse what my hon. Friend the Member for West Lothian (Mr. Dalyell) said about the social divisiveness of these schemes. The hon. Member for the Cities of London and Westminster (Mr. Tugendhat) made a frank and generous admission about certain defects of these schemes, and I congratulate him on that. I would not expect anything else of the hon. Gentleman. I was as surprised as was my hon. Friend the Member for West Lothian that the hon. Gentleman should detect elements of social desirability about these schemes. They are, as the hon. Gentleman himself admits, designed or are at least operating almost exclusively for the benefit of the rich. That is another reason why we reject them.

The most preposterous argument was that put forward by the hon. and learned Member for Dover (Mr. Peter Rees). It was not so much an argument as an assertion. He asked: why do people have to enter stock option schemes? The answer quite simply is that people do not have to do so; they want to enter them. The hon. and learned Gentleman rightly identified reasons that made these schemes attractive. He cited the view that, in his view, rates of tax on earned income were too high, and from his point of view that is a perfectly valid point. The hon. and learned Gentleman may say that the salaries paid to high executives by his standards are too low, which, again is a perfectly valid point.

Neither the hon. and learned Gentleman nor the Chief Secretary at any time addressed himself to our fundamental objection, which is this: if it is desired to reward an executive, he should be rewarded in the same way as everybody else. If it is thought that an executive is not getting sufficient reward, the remedy should be either to reduce the tax rate or to increase his pre-tax salary. The remedy is not that he should be the beneficiary of a system of taxation which will be a privilege to him that no other employees in his company enjoy.

Mr. Peter Rees

May I take it, therefore, that the hon. Gentleman will vote in favour of the reduction of the higher rates of income tax?

Dr. Gilbert

Certainly not. I carefully said, "by the hon. and learned Gentleman's standards", not by mine. I think that income differentials are quite high as it is. There is no reason to add to them by tax gimmicks of this sort.

I end by making one last quotation from this Management Survey Report of the British Institute of Management. I have to apologise to the Official Reporters who have been waiting for it so long, but I did not dare to let it out of my hands before I heard which sections of it the Chief Secretary would quote. On page 22 he will find a section headed "Labour Party" which says: The Labour Party's views are also important because schemes are long term, sometimes ten years or more, and continuity of legislation is important…If legislation is to be changed it would be preferable to have the agreement of both parties, for if the fortunes of these schemes are to fluctuate with each change of Government they could fall into disuse. It will be no surprise to the Committee that the Labour Party has not been consulted in drawing up any of these schemes. In no way are the views of the Labour Party represented in the operation of those schemes.

8.0 p.m.

I have very little doubt that the policy statement which will go before the Labour Party Conference in October this year will include passages tantamount to the total rejection of schemes of this sort, and I have no hesitation in inviting my hon. and right hon. Friends to divide against this Clause.

Question put That the Clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 188, Noes 166.

Division No. 188.]	AYES	[8.1 p.m.
Adley, Robert	Grylls, Michael	Neave, Airey
Allason, James (Hemel Hempstead)	Hall, Miss Joan (Keighley)	Noble, Rt. Hn. Michael
Amery, Rt. Hn. Julian	Hall, John (Wycombe)	Normanton, Tom
Astor, John	Hannam, John (Exeter)	Nott, John
Atkins, Humphrey	Harrison, Brian (Maldon)	Onslow, Cranley
Baker, W. H. K. (Banff)	Hastings, Stephen	Oppenheim, Mrs. Sally
Balniel, Lord	Havers, Michael	Osborn, John
Barber, Rt. Hn. Anthony	Hawkins, Paul	Owen, Idris (Stockport, N.)
Beamish, Col. Sir Tufton	Hayhoe, Barney	Page, Graham (Crosby)
Bell, Ronald	Higgins, Terence L.	Pardoe, John
Bennett, Dr. Reginald (Gosport)	Hiley, Joseph	Parkinson, Cecil
Biffen, John	Hill, James (Southampton, Test)	Peyton, Rt. Hn. John
Biggs-Davison, John	Holland, Philip	Pike, Miss Mervyn
Blaker, Peter	Holt, Miss Mary	Pink, R. Bonner
Boardman, Tom (Leicester, S.W.)	Hooson, Emlyn	Powell, Rt. Hn. J. Enoch
Body, Richard	Hordern, Peter	Price, David (Eastleigh)
Boscawen, Robert	Hornby, Richard	Proudfoot, Wilfred
Bossom, Sir Clive
Bowden, Andrew	Howe, Hn. Sir Geoffrey (Reigate)	Pym, Rt. Hn. Francis
Braine, Bernard	Howell, David (Guildford)	Reed, Laurance (Bolton, E.)
Bray, Ronald	Howell, Ralph (Norfolk, N.)	Rees, Peter (Dover)
Brinton, Sir Tatton	Hutchison, Michael Clark	Ridley, Hn Nicholas
Brocklebank-Fowler, Christopher	Jenkin, Patrick (Woodford)	Roberts, Wyn (Conway)
Bruce-Gardyne, J.	Kaberry, Sir Donald	Rost, Peter
Buchanan-Smith, Alick(Angus,N&M)	Kellett-Bowman, Mrs. Elaine	Royle, Anthony
Butler, Adam (Bosworth)	Kilfedder, James	St. John-Stevas, Norman
Campbell, Rt. Hn.G.(Moray&Nairn)	King, Evelyn (Dorset, S.)	Sharples, Richard
Carr, Rt. Hn. Robert	King, Tom (Bridgwater)	Simeons, Charles
Chapman, Sydney	Kinsey, J. R.	Sinclair, Sir George
Chataway, Rt. Hn. Christopher	Kirk, Peter	Skeet, T. H. H.
Churchill, W. S.	Knox, David	Soref, Harold
Clark, William (Surrey, E.)	Lane, David	Speed, Keith
Clegg, Walter	Langford-Holt, Sir John	Spence, John
Cooke, Robert	Legge-Bourke, Sir Harry	Stainton, Keith
Coombs, Derek	Le Marchant, Spencer	Steel, David
Cooper, A. E.	Longden, Gilbert	Stokes, John
Cormack, Patrick	Loveridge, John	Stuttaford, Dr. Tom
Costain, A. P.	Luce, R. N.	Stcliffe, John
Crouch, David	McCrindle, R. A.	Taylor,Edward M.(G'gow,Cathcart)
Crowder, F. P.	Maclean, Sir Fitzroy	Taylor, Frank (Moss Side)
Davies, Rt. Hn. John (Knutsford)	McNair-Wilson, Michael	Tebbit, Norman
Deedes, Rt. Hn. W. F.	McNair-Wilson, Patrick (NewForest)	Thatcher, Rt. Hn. Mrs. Margaret
Dixon. Piers	Maddan, Martin	Thorpe, Rt, Hn. Jeremy
du Cann, Rt. Hn. Edward	Madel, David	Trafford, Dr. Anthony
Dykes, Hugh	Maginnis, John E.	Trew, Peter
Edwards, Nicholas (Pembroke)	Marten, Neil	Tugendhat, Christopher
Elliot, Capt, Walter (Carshalton)	Mather, Carol	Turton, Rt. Hn. Sir Robin
Eyre, Reginald	Maude, Angus	van Straubenzee. W. R.
Fell, Anthony	Maudling, Rt. Hn. Reginald	Waddington, David
Fenner, Mrs. Peggy	Mawby, Ray	Walker-Smith, Rt. Hn. Sir Derek
Fletcher-Cooke, Charles	Maxwell-Hyslop, R. J.	Warren, Kenneth
Fookes, Miss Janet	Meyer, Sir Anthony	Weatherill, Bernard
Fortescue, Tim	Mills, Peter (Torrington)	Wiggin, Jerry
Fox, Marcus	Mills, Stratton (Belfast, N.)	Wilkinson, John
Gardner. Edward	Moate, Roger	Winterton, Nicholas
Gibson-Watt, David	Molyneaux, James	Woodhouse, Hn. Christopher
Gilmour, Sir John (Fife, E.)	Monks, Mrs. Connie	Woodnutt, Mark
Goodhart, Philip	Monro, Hector	Worsley, Marcus
Goodhew, Victor	Montgomery, Fergus	Wylle, Rt. Hn. N. R.
Gorsl. John	Morgan, Geraint (Denbigh)	Younger, Hn. George
Gower, Raymond	Morgan-Giles. Rear-Adm.
Grant, Anthony (Harrow, C.)	Morrison, Charles	TELLERS FOR THE AYES:
Gray, Hamish	Mudd, David	Mr. Michael Jopling and
Green, Alan	Murton, Oscar	Mr. Kenneth Clarke.
Griffiths, Eldon (Bury St. Edmunds)	Nabarro, Sir Gerald
NOES
Albu, Austen	Blenkinsop, Arthur	Concannon. J. D.
Allaun, Frank (Salford, E.)	Booth, Albert	Cronin, John
Allen, Scholefield	Broughton, Sir Alfred	Crosland, Rt. Kn. Anthony
Archer, Peter (Rowley Regis)	Brown, Bob (N'c'tle-upon-Tyne,W.)	Cunningham, G. (Islington. S.W.)
Ashton, Joe	Brown, Hugh D. (G'gow, Proven)	Cunningham, Dr. J. A. (Whitehaven)
Atkinson, Norman	Buchan, Norman	Dalyell, Tarn
Bamett, Joel (Heywood and Royton)	Buchanan, Richard (G'gow, Sp'burn)	Davies, Denzil (Llanelly)
Baxter, William	Campbell, I. (Dunbartonshire, W.)	Davies, Ifor (Gower)
Benn, Rt. Hn. Anthony Wedgwood	Carter, Ray (Birmingh'm, Northfield)	Davis, Terry (Bromsgrove)
Bennett, James (Glasgow, Bridgeton)	Carter-Jones, Lewis (Eccles)	Deakins, Eric
Bishop, E. S.	Castle, Rt. Hn. Barbara	de Freitas, Rt. Hn. Sir Geoffrey
Dell, Rt. Hn. Edmund	Lamond, James	Rees, Merlyn (Leeds, S.)
Dempsey, James	Lawson, George	Richard, Ivor
Doig. Peter	Lee, Rt. Hn. Frederick	Robertson, John (Paisley)
Dormand, J. D.	Lestor, Miss Joan	Rodgers, William (Stockton-on-Tees)
Douglas, Dick (Stirlingshire, E.)	Lever, Rt. Hn. Harold	Roper, John
Duffy, A. E. P.	Lewis, Ron (Carlisle)	Rose, Paul B.
Dunn, James A.	Lomas, Kenneth	Ross, Rt. Hn. William (Kilmarnock)
Dunnett, Jack	Loughlin, Charles	Rowlands, Ted
Eadie, Alex	Lyon, Alexander W. (York)	Sandelson, Neville
Edwards, Robert (Bilston)	Lyons, Edward (Bradford, E.)	Sheldon, Robert (Ashton-under-Lyne)
Edwards, William (Merioneth)	Mabon, Dr. J. Dickson	Short, Mrs. Renee (W'hampton,N.E.)
Ellis, Tom	McBride, Neil	Sillars, James
Evans, Fred	McCartney, Hugh	Silverman, Julius
Ewing, Henry	McElhone, Frank	Skinner, Dennis
Fletcher, Ted (Darlington)	Mackenzie, Gregor	Smith, John (Lanarkshire, N.)
Foley, Maurice	Mackintosh, John P.	Spearing, Nigel
Galpern, Sir Myer	Maclennan, Robert	Spriggs, Leslie
Garrett, W. E.	McMillan, Tom (Glasgow, C.)	Stallard, A. W.
Gilbert, Dr. John	Mallalieu, J. P. W. (Huddersfleld, E).	Stewart, Donald (Western Isles)
Golding, John	Marks, Kenneth	Stoddart, David (Swindon)
Gourlay, Harry	Marsden, F.	Stonehouse, Rt. Hn. John
Grant, George (Morpeth)	Marshall, Dr. Edmund	Strang, Gavin
Hamilton, William (Fife, W.)	Mason, Rt. Hn. Roy	Summerskill, Hn. Dr. Shirley
Hamling, William	Meacher, Michael	Swain. Thomas
Hannan, William (G'gow, Maryhill)	Mellish, Rt. Hn. Robert	Taverne, Dick
Harper, Joseph	Mendelson, John	Thomson, Rt. Hn. G. (Dundee, E.)
Harrison, Waller (Wakefield)	Millan, Bruce	Tlnn, James
Horam, John	Miller, Dr. M. S.	Tuck, Raphael
Hughes, Rt. Hn. Cledwyn (Anglesey)	Mitchell, R. C. (S'hampton, Itchen)	Urwln, T. W.
Hughes, Mark (Durham)	Morgan, Elyslan (Cardiganshire)	Varley, Eric G.
Hughes, Robert (Aberdeen, N.)	Morris, Alfred (Wythenshawe)	Walnwright, Edwin
Hunter, Adam	Morris, Charles R. (Openshaw)	Walden, Brian (B'm'ham, All Saints)
Janner, Greville	Murray, Ronald King	Wallace, George
Jay, Rt. Hn. Douglas	O'Halloran, Michael	Watkins, David
Jenkins, Hugh (Putney)	Orme, Stanley	Wellbeloved, James
Jenkins, Rt. Hn. Roy (Stechford)	Oswald, Thomas	Wells, William (Walsall, N.)
John, Brynmor	Padley, Walter	White, James (Glasgow, Pollok)
Johnson, James (K'slon-on-Hull, W.)	Pannell, Rt. Hn. Charles	Whitlnrlr William
Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)	Parry, Robert (Liverpool, Exchange)	Wilson, Alexander (Hamilton)
Jones, Gwynoro (Carmarthen)	Pentland, Norman	Wilson, Rt. Hn. Harold (Huyton)
Jones, T. Alec (Rhondda, W.)	Perry, Ernest G.	Woof, Robert
Kaufman, Gerald	Prentice, Rt. Hn. Reg.
Kclley, Richard	Prescott, John	TELLERS FOR THE NOES:
Kerr, Russell	Price, J. T. (Westhoughton)	Mr. Ernest Armstrong and
Kinnock, Neil	Rankin, John	Mr. James Hamilton.
Lamb, is David

Question accordingly agreed to.

Clause 73, as amended, ordered to viand part of the Bill.