Home > Careers, Entrepreneurship, India, Venture Capital / Private Equity > ESOPs in India: stock options as compensation

ESOPs in India: stock options as compensation

My previous post on equity compensation for corporate executives was inspired by my experiences as a technology entrepreneur/investor in the US but is generalized enough to be relevant in any geography.   The situation in India is somewhat different and merits a discussion of specifics.

  1. Most Indian employees, especially the rank and file, are motivated primarily by cash compensation.   The concept of employee ownership is foreign to them.  Although there have been many instances of employee wealth creations via stock options at great companies like Infosys (NASDAQ:INFY), there are few among workers at its peers.
  2. The investor funded early stage startup is an exception.   Most Indian businesses are family owned and most have evolved over generations.  They have reached scale only after a lot of sweat and blood has been expended and sharing equity with anybody not in the “family” is anathema.  This propogates a culture of cash-only compensation.
  3. As Indian businesses seek aggressive growth, and bring on growth capital, their investors have sought to broaden the management talent base.    Concurrently, several large businesses have realized that they need to bring on “professional” management to compete in the global marketplace.   Both of these have led to the creation of “employee stock option plans”  (ESOPs).
  4. The tax man has not helped the case for ESOPs – over the years the regime has evolved to some maturity now but it continues to attract taxes and evokes complexity when linked to securities listed abroad.   Companies that use US GAAP and IFRS compliant accounting standards generally expense their stock based compensation but others generally do not.
  5. As a result, when ESOPs exist, they rarely exceed 10% of ownership.   The norm is more 3% to 5% of the total share pool.   Some companies incubated by investors and angels do have more generous pools but there are very few of those.  Depending on how relevant you are to the success of the business, a professional manager can get a whole point but more often than not, awards are several basis points of stock equivalents.
  6. The ESOPs generally are structured so employees derive monetary value but do not generally enjoy benefits of true equity ownership.

As a potential new employee transitioning from a large corporate set up, it is important to realize that these businesses have most of the risks already addressed.   Your cash compensation and other benefits will be competitive with larger established corporations.   Given the phenomenal growth that most Indian companies are seeing, the equity in the right business can be of significant value.  Take the plunge for more responsibility, more visibility, more adrenaline and some equity upside.

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