Back home, India's homegrown tech giants Infosys Technologies and Wipro have gone a step ahead. First, both have suspended stock options this year. And second, unlike Microsoft, the duo did not even resort to 'stock awards'; they decided that good old cash was the best way to attract, motivate, retain, and reward talent. The decision was made after employee surveys conducted at the two companies showed that an overwhelming percentage of employees preferred cash to stocks.
Is this the beginning of the end of the golden era of stock options - an era which spawned more employee millionaires than any other phase in corporate history?

"Today it is only the CEOs and, maybe, the second-level guys who are willing to take stock options as part of the compensation," says Ronesh Puri, managing director of search firm Executive Access. "Stock options used to be a great, powerful and credible tool for attracting talent. But now prospective employees react to stock options like a bull would react to red cloth," says the human resources head of a large IT company. He couldn't have chosen a better metaphor.

During the 1990s, options were to employees what honey is to bees. That was when tech companies had borrowed and perfected what was essentially a manufacturing sector idea of the 1950s. The term Esop was more than a mere acronym for Employee Stock Option Plans. It was the password to a world of instant (well, three years to five years depending upon the vesting period) wealth and riches.

Employers, too, were initially excited about options. This was, after all, their most potent retention tool. Few employees were willing to throw away millions in options and head for a new job. And options were relatively cheap too - issuing options does not involve a cash outgo for the company.
Over the last three years, the global economic slowdown in general, and the tech meltdown in particular, has dunked stock options in deep water. The timing of the crash was particularly painful for Indian employees, who had come rather late to the global tech party. "A few made millions. But the options dream has turned sour for a bulk of employees," says the CFO of a large IT firm. That's because over 70% of the options were issued during stockmarket peaks.

Jayaram Easwaran is one of the many HR managers who have seen the pendulum swing. In December 2000, at the peak of the boom, he joined the human resources department of Tality, then the world's largest independent chip design firm. Tality was unlisted, but was on the verge of launching an IPO. Its nearest rival, the size of which was less than a third Tality's size, had a $3.5-billion market cap. Most expected Tality's stock to soar after the IPO.

That gave Easwaran a terrific recruitment tool. People were willing to join Tality at salaries that were 30-40% lower than their existing cost-to-company (CTC). That was because Tality was offering tantalising stock options.

But the dream was short-lived. In just a few months, as the stockmarket came crashing down, Tality's plans of going public failed to materialise and its options turned worthless.

Now HR managers are finding that prospective employees are just not interested in options anymore. Veena Manian, principal consultant and head of retention and productivity solutions at the Rs 100-crore HR agency Ma Foi, agrees. "Even senior management candidates in the 35-38 age group - people with greater risk-taking capacity - are shying away from options," she says. The most common demand, she says, is for a cash performance bonus that is over and above the agreed CTC. "Cash was, is and will continue to be king," declares Ravi Ramu, CFO, MphasiS-BFL.

There is another reason for the new preference. "Today, with higher spending on lifestyle products


and a greater need for free cash, most employees seem to prefer cash or cash-based payouts rather than Esops that take time to mature and also come with a certain risk attached to the quantum of return," says R. Shekar, senior vice-president (human resources), Polaris Software Lab. "This trend has been noticed across the board, be it lateral hires or campus recruits," he adds.

This clamour for cash is putting companies under enormous strain. Small start-ups, which have Options with options
Tips employers and employees could use to salvage underwater options
RE-PRICE OPTIONS
Reduce the price at which employees have the option to buy to reflect the fall in market prices. But the vesting period start afresh from the date of re-pricing. "Companies have missed the opportunity because stock price has recovered, though select companies are evaluating this route," says Harshu Ghate, managing director, EsopDirect, an Esop consultancy.

GUARANTEED GAINS
Former Amazon.com COO Joseph Galli negotiated a protection clause that guaranteed a $20 - million cash compensation if his options didn't pay off. Try negotiating that with your employer!

STOCK AWARDS
Microsoft awards shares, which vest over time, for free. An employer gains regardless of the price at the end of the vesting period (provided it is not zero). But companies have to expense the stock award in the profit and loss account. That's burden only big firms with huge profits can bear. Companies also have to get shareholder approval.


attracted talent with the siren call of stock options, are the worst hit. Even large established companies have trouble coping. Since manpower costs are already 40-50% of sales, any further increase would squeeze margins. As it is, the tech meltdown had already shaved off margins. "Moving to a fully cash-based compensation system would deal a body blow to the profit and loss accounts of most companies," says MphasiS-BFL's Ramu.

That is prompting companies to move to a variable pay structure. Of course, variable pay is hardly new - Infosys has had it since the 1990s. But there are two changes now. First, the share of the variable element has seen a dramatic increase. "Two years ago, variable pay was 20-30% of total salary. Now 50% is the norm," says Ma Foi's Manian.

Infosys, which was among the first companies to issue stock options, is leading the way here too. This year, 50% of top management pay will be variable. Middle and junior managers will have a 30% variable element and even software engineers will have 10%.

Second, variable pay was earlier linked mostly to company performance. But now as MphasiS-BFL's Ramu points out, a three-tiered structure is emerging. Variable pay is linked to company, team and individual performance.

But don't write off options yet. The past year, when the stockmarkets were in the doldrums, may have been the best time to issue stock options. Employees who plumped for options in the last 12 months, could well make a killing.
With reports by Shishir Prasad and Navjit Gill.