In the dot-con days, ESOPs money trains ran out of steam on the locomotive side of things. But in this case, the passengers pulled the chain. Over the past few quarters, tech major Infosys Technologies has suspended its stock option scheme for employees, on the plea that the "whole options space is clouded". Besides, Infosys employees, the company said, were now saying no to ESOPs, instead, preferring to factor the same into their pay hikes.

Infosys is also debating the ESOP issue against the absence of a proper accounting methodology, according to Kris Gopalakrishnan, COO and deputy MD. "We need to figure out how it is accounted for as we are listed in both India and the US and the accounting methodology is quite different in both the countries," Gopalakrishnan said.

Infosys has brought to the fore the lack of an accounting model for ESOPs, and the conflicting norms on pricing laid down by Indian and US regulators. Coming at a time when employees of brick-and-mortar companies too have clambered aboard the ESOPs bandwagon, the present accounting roadblocks confronting Infy, given the company’s brainstorming on how options are to be treated and expensed on the balance-sheet, are a far cry from its scrupulous maintenance of a well-disbursed ESOPs portfolio in the 1990s.

All smiles: But what’s their next option?

Now, Infosys is awaiting clarity on the accounting and expensing issues vis-a-vis India and the US—it’s biggest market. As Infosys CEO, president and MD Nandan Nilekani observed, "It is an Indian as well as a US issue."

Given that Infosys is listed both in India and the US (on Nasdaq), there could be huge disparities in the issuance of ESOPs. SEBI, for example, requires pricing at an average of two weeks’ value, while as per US-GAAP, it is at the closing price of the previous day, according to company sources.

The sub-text of the issue is diverting: for some time, pressure is known to be building up on Indian IT giants to scale up their business models in a bid to ensure long-term growth. Infosys, which is in the process of widening its global reach and service offerings, is no exception. Indian firms still have to work hard to manage client expectations in areas like service offerings, size of contracts and the level of engagement with the client. A number of surveys conducted across US and European corporations reveal that large clients in US are expecting more bang for their buck, and the ability to scale up and provide specific domain expertise. With more metrics entering the picture, the Daedalian accounting process can only get more complex by the quarter, with factors like pricing, delivery, onsite-to-offshore ratio, technology and business models—which are addressed locally—being given increased weightages on the Infosys balance-sheet. The "feedback" within the company for pay hikes instead of ESOPs could also be a function of the above factors, besides the recent salary hikes in the company, which were much higher than the industry average. So, while the duration of the ESOPs suspension is as yet unclear, Infosys maintains that its staff were "not keen" on ESOPs and the decision to suspend the ESOPs was taken from May 2003.

Interestingly, in 2003, Infosys had under its two ESOPs of 1998 and 1999, issued 56,948 shares valued at Rs 13.5 crore, against the 28,013 shares (Rs 4.6 crore) it had issued in 2002. More importantly, of the 8.2 million shares earmarked for allotments under ESOPs, only 104,278 shares (1.3%) were issued till March 2003, before the Great Freeze set in.

Prior to this, the year 2002-03 was witness to the great ESOP goldrush. ESOPs of Infosys, Wipro, Satyam Computer and Digital Global had reported an over 100% increase in demand and allotments in when the equity markets bounced back that year. Infosys so far has had three ESOP plans—the 1994, the 1998 and the 1999 schemes. Under the 1994 plan—the most lucrative—2,575 employees were given stock options.

Understandably, Infosys used its lucrative ESOPs programme to pay below-market wages to its employees, which it rightly remedied in February, well after the suspension took effect. Infosys’ ESOP scheme was the stuff of fables when it made millionaires out of chairman and chief mentor Narayana Murthy’s personal assistant and chauffeur, besides a host of lower and middle-level employees. It had all the colours of a sop story, but Infosys has seemingly chosen not to argue with a volatile market, and demanding overseas clients; and the clashing India-US regulations on pricing these stock options. Even the company which pioneered the ESOPs revolution can ill-afford to ignore these factors. Or the hard "accounting model" reality of laying out the ESOPs fable on a balance-sheet.

RAVI MENON in Bangalore

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