For decades, Employee Stock Ownership Plans (ESOPs) were the corporate world’s equivalent of alchemy—turning ordinary employees into company shareholders and potentially into millionaires. The promise was elegant in its simplicity: align workers’ financial interests with their employer’s success, fostering loyalty while dangling the carrot of wealth creation. In the halcyon days of bull markets and tech booms, tales of early employees at Infosys becoming crorepatis or Flipkart’s first hundred staff purchasing luxury homes with their stock grants became the stuff of corporate legend.
Today, that narrative has soured. Across industries, employees increasingly view stock options with scepticism, while firms struggle to maintain the motivational power these schemes once commanded. The culprits? Volatile markets, illiquidity problems and punitive tax structures have combined to tarnish what was once corporate compensation’s crown jewel.
Perhaps the most significant blow to employee confidence in ESOPs has been the market’s volatility. “The real advantage is when employees receive stocks before a company goes public,” notes Tanaya Mishra, CHRO, InSolutions Global. “Post-IPO, the stock price is influenced by market forces, making gains uncertain.” This uncertainty has been painfully demonstrated in recent years, particularly during the tech sector’s rollercoaster ride of 2020-21. Many employees at Indian and American unicorns who received options at peak valuations watched in dismay as their paper fortunes evaporated following public listings. Options granted at elevated prices became “underwater”—worth less than their original exercise price—leaving staff with the unenviable choice of paying to acquire shares worth less than they cost, or abandoning their options entirely.
“Companies must recognise that the traditional ESOP model may not work in today’s economic climate.”
Tanaya Mishra, CHRO, InSolutions Global
For privately held companies, the problems are even more acute. Without a public market for shares, employees face what might be called the “golden handcuffs paradox”: theoretically wealthy on paper but practically penniless until some distant liquidity event materialises. “A lot of startups include ESOPs in their compensation packages, but their future trajectory is uncertain,” explains Pradyumna Pandey, a senior HR leader. “Employees don’t know if the startup will go public or even survive long enough for them to cash out their shares.”
The tax treatment of options further diminishes their appeal. In many jurisdictions, employees face taxation at the point of exercise rather than sale—meaning they must pay tax on theoretical gains before realising any actual profit. “When employees sell their ESOPs, they are taxed,” Mishra points out. “Additionally, some companies require employees to pay the difference between the grant price and the stock’s market value. This means that employees may not end up earning anything significant.” In India, for instance, staff may be liable for tax on notional profits when exercising options, even if the share price subsequently collapses—leaving them with substantial tax bills but minimal financial benefit.
In response to these challenges, some forward-thinking firms are rethinking their approach to equity compensation. Alternative structures such as Restricted Stock Units (RSUs) and Phantom Stocks are gaining popularity. RSUs, which grant actual shares rather than options to purchase them, eliminate the need for employees to pay an exercise price and offer a more predictable tax treatment. Technology giants such as Infosys and TCS are pioneering Long-Term Incentive Plans (LTIs) that deliver cash rewards tied to company performance metrics, insulating employees from market vagaries while still promoting long-term thinking.
“Most companies still keep ESOPs as part of their employees’ CTC [cost to company]. While some may tweak the vesting period, a significant shift is unlikely in the near future.”
Pradyumna Pandey, senior HR leader
Other companies are attempting to salvage traditional ESOP models through structural reforms. “Companies must recognise that the traditional ESOP model may not work in today’s economic climate,” Mishra argues. “Shorter vesting periods, partial cash payouts, and guaranteed buybacks can make ESOPs more attractive.” These innovations aim to address the fundamental problem with options—their uncertain and distant payoff—by providing more immediate gratification.
Yet not all observers believe incremental changes will suffice. Pandey is sceptical about major reforms to ESOP structures: “Most companies still keep ESOPs as part of their employees’ CTC [cost to company]. While some may tweak the vesting period, a significant shift is unlikely in the near future.” He suggests that younger workers in particular have little patience for deferred, uncertain compensation, preferring immediate rewards such as “performance-linked cash incentives, retention bonuses and profit-sharing over ESOPs.”
This generational shift in priorities poses a challenge for employers who have traditionally relied on the promise of future riches to offset comparatively modest salaries. As immediate financial pressures like housing costs and student debt mount, the calculation for many talented professionals has changed: a bird in the hand is worth considerably more than two in the corporate bush.
The evolution of equity compensation reflects broader changes in the employer-employee relationship. The era of lifelong company loyalty has largely ended, replaced by more transactional arrangements where workers expect proportionate reward for their contributions rather than speculative alignment with corporate fortunes.
ESOPs are unlikely to vanish entirely from the corporate landscape. For early-stage ventures with limited cash, equity remains an essential currency for attracting talent. Well-structured programmes at thriving businesses can still provide meaningful wealth creation opportunities. But the days when stock options were universally viewed as golden tickets have passed. Companies that fail to recognise this shift risk losing top talent to competitors offering more tangible and immediate financial rewards.
The future of employee equity participation lies not in blind faith that stock prices will perpetually rise, but in transparent, flexible programmes that balance immediate compensation with long-term wealth creation potential. In the modern labour market, smart employers understand that while ownership may foster engagement, timely payment ensures retention.