One of the most cherished dreams of any professional is to own the company he works for. For software professional Hiren Shah that dream became a partial reality when Mastek, the company he worked for, came out with a public issue in 1995 and offered shares to some of its employees at a discounted price. The idea was to offer employee stock options (ESOPs) to valuable employees so that they don't look for greener pastures. While the price for the public was Rs 70 a share, Shah and some others could buy them for Rs 20. Within days, each of Shah's 700 shares was worth Rs 90 and two years later he sold 200 shares at Rs 235 each, making a neat profit of Rs 43,000. In 2000, when Mastek's share price had shot up to Rs 4,000, he sold another 200 shares, this time making a profit of close to Rs 8 lakh.

Shah is not alone. For over a decade, ESOPs have turned hundreds of young professionals into millionaires. In fact, they were a key ingredient in the Indian it success story. Infotech companies followed their global peers and offered stock options to lure the brightest talent. Since most of them were start-ups, they could not afford five- and six-figure salaries. ESOPs helped keep their wage bill under control. Typically, the compensation package offered to an employee comprises two-thirds as salary and one-third in stock. More than anything else, ESOPs was the great hr tool of New Economy companies. The prospect of owning a part of the company boosted productivity and reaffirmed loyalty. The realisation that their personal wealth was linked to their company's performance made employees think less like workers and more like entrepreneurs. Says Ashank Desai, chairman and managing director, Mastek: "esops give a sense of ownership to the employee and strike an emotional bond."

There is a tragic twist in this ESOP opera. While Shah might think that his decision to continue in Mastek paid off handsomely, many of the recent entrants in his company have no reason to cheer. Last year, Mastek issued ESOPs at Rs 320 a share. The share price rose to Rs 559 last month before falling to Rs 292 on April 10, almost 10 per cent below the issue price. The steep fall in the share prices of most it companies over the past three years and a 1999 sebi rule have taken the sheen off ESOPs. The rule requires companies to record as an expense on their balance sheets the difference between the market price and the price of an option. So instead of the phenomenal discounts, companies now price ESOP shares close to the market price. "ESOPs are no longer something that make you a millionaire in 90 days flat. Those days are gone," says Jayanth Varma, professor at IIM-Ahmedabad, who headed the SEBI committee on ESOP regulations.

Since the allotment is staggered over a long period-sometimes up to five years-the uncertainty is greater. A study by ESOP Direct, a Pune-based consultancy, found out last year that the shares of 73 per cent of the firms studied were trading below the issue price. The perception is that ESOPs don't fatten your wallet any more. The reality is that they might burn a hole in your pocket. "The ability of ESOPs to add value is no longer what it used to. Companies must devise alternative strategies," says Pratik Kumar, corporate vice-president, hr, Wipro.

The feeling of disenchantment runs across the IT industry. In 2002-3, employees of Wipro rejected offers of over 6,00,000 shares of the company. Since 1999, when Wipro introduced its ESOP schemes, 24,00,000 options have been rejected, almost a fifth of the total options issued. In 2001-2, more than 3,00,000 Infosys shares were refused by employees. In addition to these, a huge number of stock options issued by it companies have still not been exercised. Perhaps, the employees to whom these options have been given are expecting share prices to improve before they decide. A Wipro employee who was issued ESOPs in 1999 at Rs 1,000 and Rs 1,500 has never exercised his options. According to Hewitt Associates, a global hr consultancy, fewer companies are using ESOPs as incentives for employees.

Clearly, the days of luring talent by showing them the price of the stock on a ticker are gone. Not only that, but more and more New Economy employees are insisting on good old-fashioned cheques instead of stock in their compensation packages. "Two years ago, the big question was, 'How much stock will I get?'. Not any longer. People are definitely valuing cash more," says Uday Chawla, partner in Heidrick & Struggles, a placement firm. This means a higher wage bill for a sector that is already facing squeezed margins.

Worse, what was supposed to be an hr tool is working in just the opposite direction. ESOPs have created two classes of employees in software firms. Some of the employees are millionaires who were issued stock options at relatively low prices and sold them during the boom years of 1999 and 2000. Others are new recruits who can expect nothing but losses. "I was given options at Rs 3,800 a share in 2001. They are only worth framing because the share price is now below Rs 3,000," says an Infosys employee.

The volatility of the stock market has made the carrot look like a stick.