§ Mr. David Shaw (Dover)I am grateful for the opportunity to discuss approved discretionary share option schemes, which began as a result of the Finance Act 1984. Earlier this year, there was much heat thrown on the subject, but not as much light as a good debate in the House of Commons might be able to throw on it.
Earlier in the year, we had a rather unhealthy public debate about share options, which was largely started by people with no experience of running companies and absolutely no experience of recruiting, retaining and motivating employees. In fact, quite a bit of the comment came from the Opposition Front-Bench team, and they do not have much experience in any of the key areas of running British business or industry.
The debate was more about the politics of envy of a small number of people than common sense. It focused on about 100 people in the country—a small number of directors of privatised utilities—who were given the general name "fat cats". No one asked if the newspaper editors who commissioned many of the stories on the subject fell into the category of fat cats, yet I understand that many of them earn much more than the executives of privatised industries.
No one asked if media stars, such as the lady who draws the six lottery numbers on a Saturday night, fell into the category of fat cats, yet I understand that she earns more than the majority of directors of privatised utilities. While directors of privatised utilities may be able to do her job and draw the winning lottery numbers on a Saturday night, I am not sure whether she would be able to do theirs.
One of the tragedies of the debate earlier this year was that it did not really focus on what share options are about. Sadly, what also happened as a result of the debate was that the people who lost out, who were forgotten, were not the 100 or so so-called fat cats but the 600,000 or so thin cats, who have also benefited over the years from share options. Those 600,000 people are ordinary men and women and I hope that this debate will be seen as their chance to have someone speak up for them in the House of Commons and get the message across.
In speaking up for one of the thin cats, I can do no better than to select a poem by Kay Every, a security attendant in the Asda store in East Retford. If the House will allow me, I shall extract a couple of short paragraphs from her poem. It says:
She wants her share options, and I am not surprised.
- "I'm not a fat cat, just a skinny kitten.
- I can't understand why I've been bitten.
- PLEASE Mr. Chancellor, don't you see?
- It's BIG FAT CATS you want—not little me.
- So come on Chancellor, don't be mean:
- leave us thin cats our saucer of cream."
I joined the Conservative party way back, more than 25 years ago, because it was the party that stood up for the rights of the individual to own. In 1991, the Prime Minister reaffirmed his views in that area by saying that in the 1980s,
our aim was a life enriched by ownership, in which home, shares and pensions were not something for others—but something for everyone".984 He went on to say:But this revolution is still not complete. In the 1990s we must carry it further. We must extend savings and ownership in every form.I believe that share options are a form of extending ownership. How do they expand ownership? An option to acquire shares means that people become involved in the company for which they work. It enables them to feel part of the ownership structure of that company. Many go on to hold the shares that they can acquire as a result of share options.Some—I accept—sell those shares. But what do they do? In many instances they use the resulting proceeds to buy themselves pensions. They do not have the inflation-linked pensions of civil servants or—frankly—of Members of Parliament. Many people find that owning share options gives them the opportunity to acquire capital and savings for use in their retirement.
I accept that some people sell their share options when they have value—if they have value, because not every share option will result in value—and repay their mortgages as the first step to increasing their position on the ownership ladder. So we should never take the view that just because share options result in the disposal of shares, people are not expanding ownership and their capital standings.
The Greenbury committee was cited earlier in the year as being against share options and the current tax regime for share options. That is not entirely true. I spoke to Sir Richard Greenbury after that was cited. He made the point that his report was about directors; it was not about ordinary men and women, low income and middle-income people, and their ownership of share options. He felt that Parliament was the place in which the tax position of those people should be debated—not in the pages of his report, which was focused on directors.
I shall deal briefly with some of the Treasury arguments against share options. It has been suggested that they help fat cats. In fact, from further research, people have begun to realise that the fat cats have any number of other methods of remuneration open to them, and many thin cats—some 600,000 as I said earlier—working in 6,170 companies, have been helped by share option schemes. Indeed, in my constituency, the ferry company P and O operates a share option scheme, and many hundreds of people have benefited as a result.
The gains from share options are often much more modest than people recognise. Some have been in the thousands or even the very low tens of thousands of pounds—not hundreds of thousands of pounds, as much of the publicity has focused on. Although it was suggested in a parliamentary answer to a question I tabled that the average income in the past year of those in share option schemes was £45,000, research by Proshare, the independent pro-share ownership organisation supported by more than 400 companies, shows that the average income among the people it contacted is much nearer to £16,500 than the statistics produced by the Inland Revenue show. That is because share options are seen as a way of democratising ownership and bringing the opportunities for ownership of shares in companies and interest in companies much further down the income scale to the low-income groups.
The Treasury suggested originally that share option schemes resulted in £80 million of lost revenue, but in an answer to a parliamentary question that I received 985 yesterday, I discovered that if any savings are to be made from the tax changes on share options, they will not be made until 2002 or 2003. The Opposition Front-Bench team should learn about that because the shadow Chancellor has regularly been on "Today" claiming some tax wheeze through which the Treasury could make enormous and immediate savings. Indeed, the calculation of those savings is only one side of the equation. It leaves out the important side, which is that no gains from share options can be made unless the inherent value of the company increases. Normally, that can be done only by an increase in profits. An increase in profits results in additional corporation tax revenues. So I believe that share options are self-financing or, if anything, result in more income for the Treasury because more corporation tax is paid by successful companies if gains are made through share option schemes by the employees.
It has also been suggested that alternative share schemes are available. While I accept that alternative schemes are available as a result of other financial legislation, they are not so popular. Answers to my parliamentary questions which I received yesterday show that the number of companies taking up those share schemes has been diminishing. My right hon. and learned Friend the Chancellor must take into account in his Budget the fact that those schemes have not been so popular in recent years. It looks as if the focus is moving back towards approved share option schemes, or ADSOS.
Another argument that has been made is that share option schemes were introduced when tax rates were higher and that they are largely focused on top people. My experience is that such schemes have always been used for low and middle-income people. I should perhaps declare an interest as someone who has never benefited personally from share option schemes but has been a non-executive director of a company which awarded share options. The companies of which I was a non-executive director always awarded share options to people at secretary level and in middle management as well as to directors. There was always a focus on motivating and retaining people who were extremely important to the future performance of the company.
So I do not accept that, simply because share option schemes were introduced with higher income earners in mind at a time when tax rates were higher, we should stop them now when they are so successful in helping low and middle-income people. I do not accept that the fact that some employees sell their shares is an argument for getting rid of the schemes. That sale of shares widens the ownership of capital, and that is important.
There has been a suggestion that option profits are income and not capital. I remind the House that it takes three years to realise any profits from a share option scheme and that many people hold them for 10 years. That is not in the nature of income but in the nature of capital. I should also point out that no one in their right mind who was granted share options would attempt in the first year to approach their bank manager for a loan and no bank manager would award a loan against a share option in a scheme. The fact is that share options are not income on which loans can be granted by any bank. They are capital.
Share options represent a transfer of wealth or capital from the existing shareholders of a company to new shareholders—the employees. It is definitely a transfer of 986 capital. That transfer is undertaken by the owners of the business. They are pleased to do so because they know that the employees are thereby encouraged to work harder and associate themselves with the overall benefits that the owners receive from the business. The identification of a common interest between employee and shareholder is something that we have certainly applauded and supported in the past.
I argue that we need share option schemes to help low and middle-income employees. We should never forget that the Proshare research has shown that the average income of a member of a share option scheme is more likely to be £16,500 today than the higher figures that have been quoted. We need share option schemes because they encourage the creation of a share-owning democracy. We need them because no money is required at the grant of an option so such schemes are particularly suited to help low-income employees, who do not have the capital to involve themselves in save-as-you-earn share option schemes.
We also need share option schemes because they are effective for companies and involve little bureaucracy, whereas the other schemes involve much more. I should mention that the campaign for share options with which I have been associated has received support from many companies including Forte plc, Cable and Wireless plc, Walker's Crisps Ltd.—a subsidiary of Pepsi Cola—Dixons Group plc, Tarmac plc, WH Smith Group plc, John Menzies plc, the Burton Group plc and Next plc. All those companies are large, but the House should not think that only large companies are interested in share option schemes.
Many smaller companies and high-technology companies regard share options as fundamental to the package that they offer their employees. Many high-tech companies in Britain today are under threat of having their employees recruited by silicon valley companies in the United States of America. Companies in America have share option schemes and we need them to retain the right type of people with their unique high-tech skills.
We should not forget how wide is the use of share option schemes among employees today. I understand from research that 96 per cent. of companies that are newly quoted on the London stock exchange have had share option schemes. They are not the larger companies, but small and medium-sized companies obtaining flotation on the London stock market for the first time. They regard share option schemes as a fundamental means of helping their staff accumulate capital. That is part of what my right hon. Friend the Prime Minister has talked about—helping us to develop a competitive, enterprise economy.
I shall conclude my remarks so that my colleagues, especially my hon. Friend the Member for Hendon, South (Mr. Marshall), will have time to speak. Share option schemes are fundamental to the enterprise economy and important for recruitment, retention and motivation of employees. They encourage the development of a common interest between employees and shareholders. They are terribly important in what we are trying to achieve as a Conservative party in Britain and what the Conservative Government are trying to achieve.
§ Mr. John Marshall (Hendon, South)I congratulate my hon. Friend the Member for Dover (Mr. Shaw) on his 987 success in the ballot and on his single-minded determination in conducting this campaign. The suggestion that share options should be taxed as income and not capital has no relevance to the vast majority of fat cats. They use up their capital gains tax exemptions elsewhere and pay tax on gains from their share options at the same rate as their marginal rate of income tax. It is the small cats who would suffer from such a change—the Asda checkout girl rather than the chief executive of Asda.
It is also wrong to suggest, as the Government did, that share options should be taxed when they are exercised. The Confederation of British Industry has pointed out in its Budget submission that if that happened, there would be every incentive for shareholders to crystallise the gain and sell the shares overnight. No one wants to be taxed on a paper gain when there is a risk that the share price will go down rather than up.
There is no doubt that share options increase the loyalty of employees and are a useful recruitment tool. I remember asking the chairman of a newly quoted public company in the 1980s what was the benefit of a public quote to him. He said, "Very simple. I can offer employees a share option. That has enabled me to attract people who would otherwise not have come to the company." I hope that the Government will, even at this late time, have second thoughts on the proposal.
§ The Financial Secretary to the Treasury (Mr. Michael Jack)I join my hon. Friend the Member for Hendon, South (Mr. Marshall) in congratulating my hon. Friend the Member for Dover (Mr. Shaw) on securing this debate. He has pursued this particular campaign with vigour and made his views known to the Government and people outside. I hope that we can agree on one thing—that our party is the party of wider share ownership. Since 1979 the number of individuals holding shares has increased from 3 million to 10 million. Many of those first bought shares in privatised companies. That was a policy that we pursued vigorously. Around 2 million people now hold personal equity plans and getting on for 2 million hold shares or options under all-employee share and option schemes. Those are achievements of which we can be proud. However, my hon. Friend the Economic Secretary does not believe that that goes far enough and she is working on other ideas to try to expand yet further the number of those owning shares. We very much wish to encourage share ownership.
My hon. Friend the Member for Dover has set out his views forcefully. He advocates share options as incentives and as a means to wider share ownership. Let me take a few moments to pick up on his theme of shedding some light on the matter by describing the Government's position.
Share options and shares both have a place in rewarding and incentivising employees. But share options and share ownership are different things. Share options can play a role in providing incentives to work and encouraging loyalty. They bring rewards if the company's share price performs well, but they carry no risk.
My hon. Friend referred to the former Chancellor, Lord Lawson. When he introduced the relief for approved share options he said that it was designed 988
to increase the incentives and motivation of existing executives and key personnel by linking their rewards to performance.The tax relief was designed to encourage share options as incentives. That was when income tax was charged at up to 60 per cent. and capital gains tax at 30 per cent. Share options are now an established part of the incentive packages of executives and, as my hon. Friend has said, others too.In the light of the way in which share options granted under the 1984 relief had developed, my right hon. and learned Friend the Chancellor of the Exchequer decided that the relief should be ended. That does not mean that companies cannot continue to use options to incentivise, but they will have to do so without a tax break. However, that will not kill off options. Many companies have been offering unapproved schemes for many years and even within approved schemes around one quarter of option holders chose to exercise their options without qualifying for the tax relief. Option schemes can and will continue without tax relief. If companies and shareholders think that options are right for their employees, they can continue to use them.
My hon. Friend mentioned some of the research undertaken by Proshare. I had the opportunity to read its latest report this morning and I shall study it further and carefully because it contains some important messages. It is interesting to note that, in reaction to the current situation, it is evident from table 5.1 in that research that some 86 per cent. of the companies who were questioned clearly, in one way or another, remain committed to using shares or share options as a way of rewarding or incentivising their staff. There is no flavour in the research furnished by Proshare that they have been put off the idea. However, I shall consider the matter carefully because it is a thorough piece of work and worthy of further reading.
My hon. Friend referred to the number of people in various schemes and I would like briefly to deal with that. My data may differ from his because he quotes from a selective sample and I quote from a sample taken by the Inland Revenue. He talked about the number of people in schemes and referred to figures of up to 600,000. Our returns show current membership at some 200,000. We talked to a number of companies with approved executive share option schemes. Some say that there are 6,000; we say 4,000. In terms of the average income, which my hon. Friend attested to based on the Proshare analysis, the Inland Revenue sample of individuals granted options in 1994–95, showed an average figure of £45,000. We may have to beg to differ because we come at these figures from different points of view.
§ Mr. David ShawWill my hon. Friend give way?
§ Mr. JackI hope that my hon. Friend will forgive me, but I should like to make a little progress. I may well be able to give way to him as I come towards the end of my remarks.
My hon. Friend has argued that approved schemes are an important way in which to promote wider share ownership. But, as I have said, there are other views on the matter. I want to put on record the findings of two independent surveys. Proshare, an organisation with which, as my hon. Friend said, he is associated, drew our attention to the fact that, with regard to the actions of those who hold options,
In 60 per cent. of cases, companies indicate that 90 per cent. or more executives immediately sell their shareson exercise of the option.989 A second survey by the Monks partnership states:
In the majority of companies, most employees sell all their shares on exercise. The percentage of employees who retain all of their shares is typically around 5 per cent.I draw my hon. Friend's attention to those two perspectives because they rather weaken the case for claiming that there is an element of long-term share ownership. Either way, both surveys show that there is a marked desire by option holders to sell their shares on exercise.
§ Mr. John MarshallWill my hon. Friend give way?
§ Mr. JackI hope that my hon. Friend will forgive me, but I have given up some of my time so that he could make his own contribution to the debate and I want to make some progress. I shall try to give way at the end.
Those figures question the arguments of my hon. Friend the Member for Dover that approved executive share option schemes are the best vehicles to promote wider share ownership.
My hon. Friend touched on the alternatives, about which I shall say a word or two in the time remaining.
Share ownership is important to some people. I remember meeting the managing director of one of our regional electricity companies who told me of a modestly paid linesman who, at the time of privatisation, had bought shares and had continued to invest through one of the schemes that I have mentioned, save-as-you-earn. He was incentivised. He would tell his managing director just to keep the share price going up. We understand that psychology.
But there are alternatives. Profit sharing schemes allow an employer to give an employee free shares worth up to £8,000 a year. Around a million people currently hold shares in those schemes. Save-as-you-earn schemes give tax relief to employees who save up to buy shares by means of exercising share options under the scheme. Again, about a million people have a stake in that scheme. Some of my hon. Friend's constituents in Dover, working for P and O, also follow that route. I looked at that company's annual report and found that it, too, had a SAYE scheme.
Both those schemes have to be offered widely to employees. Both are designed to encourage employees to hold their shares and both really do achieve wider share ownership.
My hon. Friend claims that profit sharing and save as you earn schemes are not flexible enough, so in addition we need approved share option schemes. Let me put that 990 point into context. About 4,000 companies currently have approved share option schemes. They currently cover some 200,000 employees—less than 1 per cent. of the private sector work force. Profit sharing schemes and save-as-you-earn schemes cover nearly 2 million people—one in eight of the total private sector work force—covering, in 1993–94, shares worth more than £1.5 billion in total. That is evidence that the schemes are popular and work.
We have not closed our minds to the way in which those schemes operate and are constructed. As my right hon. and learned Friend the Chancellor said, the door is still open for us to receive representations. Already many, including one important representative from the high street, have made some constructive suggestions on the matter. We also have, as I have said, personal equity plans and venture capital trusts, which are a further way of disseminating wider share ownership. I said that I would try to find a moment to give way to my hon. Friend the Member for Dover, and I now do so.
§ Mr. David ShawMy figures were taken from Inland Revenue statistics. The figure of 600,000 shows the widespread numbers of people in low income groups who have come into share option schemes. I hope that my hon. Friend will bear that in mind. In the Budget, we should be looking at helping many people on low incomes own a stake in the country. Even if they have to sell their first round of share options, they may not have to sell their second one. Once they have sold their first one and repaid their mortgage, they will be in a position to hold shares for the long term.
§ Mr. JackTo paraphrase the words of my right hon. and learned Friend the Chancellor of the Exchequer, my hon. Friend can say that but I cannot possibly comment at this stage, although I have noted carefully what he had to say.
My hon. Friend the Member for Dover also touched on the smaller company and the start-up company. It is important to put it on record that there are ways in which a company can organise its initial issue of equity to deal with the recruitment and retention of people who are there at the start and who may well be anticipating future increases in the value of the company, so their getting a share in the future gain is not wholly reliant on the issue of share options.
I am grateful to my hon. Friend the Member for Dover for securing this opportunity for both of us to shed a little more light on this particularly important subject and to put it on the record. Our minds are certainly not closed on reviewing modifications to the save as you earn and profit sharing schemes and my hon. Friend has done the House a service in securing this important debate.