34.

Equity ownership is key to the development of the vibrant technopreneurial environment in Silicon Valley and other high tech nodes. Talented people, including research scientists and engineers, high tech professionals, MBA holders, and even office staff, are nowadays prepared to accept low or even zero salaries in return for equity stakes in the companies they work in. They hope that their companies will succeed spectacularly, and their equity stakes will increase tens or hundreds of times in value. Their direct stakes in their firms' success motivates them to put their hearts and souls into building up the firms, and to slog long hours to outdo their competitors.

35.

Many of these equity stakes are offered to the employees through stock option schemes, commonly known as ESOPs (Employee Stock Options). The use of ESOPs is most pervasive among technopreneurialstart-ups. But even for mature companies, ESOP schemes have been shown to have a significant impact on corporate performance. The evidence that stock options play a pivotal role in good corporate performance is well established.

36.

The usefulness of stock options lies in their ability to recruit, motivate and retain employees. This is vital in the businesses of today. But it will be even more important in the businesses of tomorrow, which will place a growing premium on developing and applying knowledge, and committing the energies and creative juices of the people working for the company. They may still be called employees, but they are actually partners in the enterprise.

37.

Many developed countries have recognised the importance of employee stock options in helping high-growth companies to retain and motivate top talent. They have made significant changes to their tax systems to encourage employee stock options, or to introduce incentive ons. These countries include the UK,Scandinavian countries and even Japan. Under the incentive schemes, tax treatment for ESOPs is more favourable than cash payments.

38.

We must move in the same direction. We need to act quickly, to offer potential entrepreneurs that extra incentive to take the plunge, and to send a clear signal that we are strongly encouraging enterprise and wealth creation. Attractive tax treatment to encourage the use of ESOPs will also help our companies to compete for global talent, which is highly mobile not only across companies, but also across national boundaries. Talent will be attracted to places where opportunities and post-tax rewards are the greatest.

39.

We improved the tax treatment of ESOPs last year, by allowing the tax payable to be deferred by up to 5 years, with interest chargeable for the deferment. But this was only a modest first step. We need to improve the tax treatment of ESOPs further, particularly for the high tech start-ups. As this may have significant implications for our tax system, we need a little more time to complete the study. We will announce an enhanced scheme for high tech start-ups by the end of May this year.