ESOP vs salary: the right pay mix for Indian startups
Is ESOP part of CTC, and is it worth more than a raise? A level-by-level guide to fixed pay, bonus and ESOPs at Indian startups.
ESOP vs salary has no single right answer, but there is a clear pattern. The more senior the role and the earlier the company, the more of the pay can sensibly come as ESOPs. Junior employees need most of their pay in cash. Senior leaders can take a larger share in equity, because they shape the outcome and can afford to wait for it. A good pay mix also leaves room for bonus and benefits, not just salary and stock.
Below are answers to the questions people ask most. Are ESOPs part of CTC? Do they beat a higher salary? How is a CTC split, how is each part taxed, and how do the new labour codes treat ESOPs? You will also see how Indian startups have mixed cash and equity.
What is total rewards?
Total rewards is everything an employer gives in return for work, not only the salary. The pay mix is how that reward is split between its parts. In India, it usually has four parts:
- Fixed pay. Monthly salary and allowances, the core of CTC (cost to company).
- Variable pay. Annual or quarterly bonus, sales incentives and commissions.
- Long-term incentives. ESOPs, RSUs, stock appreciation rights, phantom stock or deferred cash that pays out over several years.
- Benefits. Insurance, retirement contributions, leave, learning budgets and other perks.
Fixed pay covers living costs. Variable pay rewards this year's results. Long-term incentives reward building value over several years and keep people around while that value grows.
Is ESOP part of CTC?
It depends on the company. Some companies add an estimated ESOP value to the CTC figure in the offer letter. Others show ESOPs separately. There is no rule either way.
The clearer practice is to show them separately:
- Cash CTC: fixed pay plus target variable pay.
- ESOPs: the number of options, exercise price, vesting schedule and an estimated value.
Two related questions come up often:
- Is ESOP deducted from salary? No. A grant does not reduce your salary unless you have agreed to swap part of your salary for ESOPs, as some companies offer.
- Is ESOP included in monthly salary? No. ESOPs pay nothing monthly. You get value only after they vest, you exercise them, and the shares can be sold.
Because ESOPs are not cash, adding them into CTC makes an offer look bigger than the money it pays. If you are an employee, ask for the cash figure on its own. If you are an employer, show it on its own. It builds trust.
Is ESOP better than a higher salary?
Not always. ESOPs can be worth far more than a salary increase, or nothing at all. A higher salary is certain, taxed as you earn it, and yours even if you leave next year.
ESOPs tend to be the better choice when:
- you believe the company can grow a lot and reach a sale, listing or buyback;
- you can afford to give up some cash today;
- you expect to stay long enough for your options to vest.
A higher salary tends to be the better choice when:
- you need the cash for rent, loans or family;
- the company is early and its future is uncertain;
- the ESOP terms are weak, such as a short window to exercise after you leave.
Many people split the difference: they accept a fair salary and ask for more options instead of the last part of a raise.
How a CTC is split: fixed, variable and ESOPs
We could not find a recent Indian survey that splits startup pay into fixed pay, variable pay and ESOPs at every level. These are the most useful published data points.
Source | Who it covers | What it found |
|---|---|---|
Elevation Capital PayPulse 2023 | 200+ Indian startups | For entry and mid-level hires, ESOP grants were usually worth 10–50% of cash pay. Leaders received between 0.2% and 1.5% of company equity |
Siason Capital, State of ESOPs in India 2021 | 268 Indian startups | Senior leaders took roughly a fifth to two-fifths of their pay as ESOPs. For junior staff, ESOPs were less than a fifth of CTC. About 40% of startups had no ESOPs |
xto10x Compensation Trends 2024-25 | Indian startup leaders | At startups valued at $1 billion or more, CXO equity was a median 1.2 times their salary over their tenure |
Deloitte India Executive Performance and Rewards Survey 2024-25 | 400+ Indian companies across sectors | Professional CEOs were paid 40% fixed, 25% short-term incentive and 35% long-term incentive. 76% of companies had long-term incentive plans |
EY Future of Pay 2026 | Indian companies | Variable pay averaged 16.1% of fixed pay in 2025, up from 14.8% in 2024 |
Caption: Pay mix data points from Indian studies. Years and samples differ, so read them as a guide, not a rule.
Two messages stand out. Equity grows as a share of pay as people become more senior. And for startups, equity often stands in for cash they cannot yet pay, while large companies use long-term incentives widely too. Deloitte's 2026 edition found that a third of CEO pay in India now comes as stock awards.
How much pay should be ESOPs at each level?
Use this as a starting framework, then adjust it for your company's cash and stage.
Level | Lead with | Role of ESOPs | Why |
|---|---|---|---|
Junior and early career | Market-rate cash | A small grant that builds a sense of ownership | They need cash, and have less say in the outcome |
Mid-level | Cash, with a meaningful grant | A grant that grows with performance and refreshes | They are the core of the team and hard to replace |
Senior leaders | Cash plus a substantial grant | A real share of total reward, often a fifth to two-fifths | They influence results and can wait for value |
CXOs | Competitive cash plus large equity | At $1 billion+ startups, a median of about 1.2 times salary over the tenure | Their decisions drive the company's value |
Caption: A framework for setting the pay mix by level. The senior leader figure is from Siason Capital (2021) and the CXO figure from xto10x (2024-25).
Variable pay depends on the function
Sales and growth roles carry more variable pay because their results are easy to measure. The xto10x study found about 15% variable pay for HR, finance and engineering leaders, 25–50% for marketing and growth leaders, and usually 50% for sales leaders. Using one bonus percentage for every function rewards the wrong things.
How company stage changes the mix
The same role should get a different mix at a seed startup and at a company preparing to list.
- Seed and early stage. Cash is tight and the upside is large. Pay below market in cash and offer more ESOPs. Be honest that most of the reward is long-term and uncertain.
- Growth stage (Series B onwards). Move cash closer to market rates. New grants get smaller as a percentage, but their rupee value can be large. Refresh grants matter more than new grants.
- Pre-IPO and listed. Cash is at or near market. Equity becomes a retention tool, tied to vesting and sometimes to performance targets. Liquidity becomes real, so employees value equity more.
Swapping salary for ESOPs: Indian examples
Some Indian startups have let employees decide how much of their pay comes as ESOPs. It respects different cash needs and builds a sense of ownership.
- Meesho announced MeeSOP in November 2021. Any full-time employee, at any level, could swap up to a quarter of annual CTC for ESOPs, with a minimum of ₹50,000. The ESOPs were worth more than the cash given up and vested fully within one year.
- CARS24 offered ESOPs worth twice the salary given up when employees took voluntary pay cuts in April 2020. Its four co-founders said they would forgo their entire salary for six months.
- PhonePe gave ESOPs to all of its 2,200+ full-time employees in January 2021, worth about ₹1,500 crore in total. Every level got a minimum grant of about $5,000.
- Razorpay gave ESOPs worth ₹1 lakh each to more than 3,000 employees in December 2024, its tenth anniversary. For many, it was their first grant.
A choice-based plan works best with clear rules. Cap how much cash can be swapped, set a fair exchange rate, keep vesting short for the swapped part, and explain the tax in plain words.
ESOP vs RSU vs SAR vs phantom stock
ESOPs are not the only long-term incentive. These are the ones Indian companies use most.
Tool | What the employee gets | How it is taxed | Best for |
|---|---|---|---|
ESOPs | The right to buy shares at a set price | As salary at exercise, then capital gains at sale | Most startup employees |
RSUs | Shares at little or no cost once they vest | On the full value when the shares are allotted, usually at vesting | Listed companies and multinationals |
SARs | The rise in share value, in cash or shares | As salary when paid in cash; if paid in shares, at allotment and then on sale | Listed companies, or limiting dilution |
Phantom stock | Cash equal to the value of notional shares | As salary when paid | Startups that want to avoid dilution |
Retention bonus or cash LTIP | Fixed cash after a set period or targets | As salary when paid | Key people, or when equity is not available |
Caption: Common long-term incentive tools used in India.
Are ESOPs taxed twice?
No. ESOPs are taxed at two moments, but on two different gains. Salary is taxed differently again.
- Salary is taxed at your slab rate, with TDS deducted every month.
- ESOPs are first taxed when you exercise. The gap between the fair market value and your exercise price is a perquisite, taxed as salary. When you later sell, any further rise is taxed as capital gains.
So the first tax is on the gain up to exercise, and the second only on the gain after it. Nothing is taxed twice. The Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026, keeps this two-stage approach. Employees of eligible startups can defer the tax due at exercise.
Are ESOPs wages under the labour codes?
The four labour codes came into force on 21 November 2025. They define "wages" for PF, gratuity and other benefits. Some items are left out of wages, such as HRA, conveyance allowance, overtime and commission. If they add up to more than half of total pay, the excess is added back to wages. The Code on Social Security uses the same rule, so it affects PF and gratuity.
ESOPs are generally treated as outside "wages", and most legal commentary takes that view. But the codes do not mention ESOPs by name, and the Labour Ministry's March 2026 FAQs do not address them. Awards with a fixed or guaranteed cash element, such as some retention bonuses or phantom stock payouts, carry more risk of being counted as wages. Check your structure with an employment lawyer.
How to mention ESOPs in an offer letter
A clear offer letter, with a grant letter behind it, should state:
- the cash CTC, split into fixed and variable pay;
- the number of options, and what percentage of fully diluted shares they represent;
- the exercise price, as a fixed rupee amount;
- the vesting schedule and cliff;
- what happens to vested options if you leave;
- that the grant is subject to the company's ESOP scheme and board approval.
If an estimated ESOP value is shown, it should say how the value was worked out and that it is not guaranteed.
How to set your pay mix in six steps
- Know your cash position. Decide what share of market cash pay you can afford for each level.
- Set target total reward by level. Use market data for each role, and add a premium for startup risk.
- Fill the gap with equity, carefully. Use ESOPs for the part of reward that depends on long-term growth, and cash for the part people need today.
- Set variable pay by function. Higher for sales and growth, lower for other functions.
- Show the whole package. Put insurance, retirement contributions and leave next to cash and ESOPs, because employees value them too.
- Review every year. As the company grows and cash improves, move the mix closer to market cash, and keep refresh grants flowing.
This article is general information, not legal, tax or financial advice. Speak to a tax adviser or employment lawyer before you change how you pay your people.
