Employee Stock Option Plans (ESOPs) are one of the most powerful wealth creators in today's corporate world. They align an employee's growth with the company's success, rewarding loyalty with ownership. However, when ESOPs form too large a share of an employee's portfolio, they can create a hidden risk: concentration.

Take the case of Meera, who had been with her company for nearly a decade. Over the years, she accumulated a large chunk of ESOPs. As the company's stock price soared, she exercised most of her vested options, and soon, nearly 70% of her portfolio was tied up in a single companyher employer. This initially felt like a windfall, but it also meant her financial future was overly dependent on one firm. When business slowed and the company's shares fell by half, her wealth and job security were both threatened. This is the double aged sword of ESOPs: your portfolio and your salary depend on the same company.

Why Employees Prefer Holding ESOPs

Employees often hold on to ESOPs because they believe strongly in their company's growth and want to benefit directly from its success. Being insiders, they see the business potential first-hand and develop a sense of ownership that goes beyond a salary. ESOPs also offer the chance of creating significant wealth if the share price multiplies, which makes them more attractive than traditional investments. In many cases, tax planning, lock-in restrictions, or limited liquidity in private companies also encourage employees to hold their shares longer.

At the same time, this choice is influenced by softer factors like loyalty, emotional attachment, and even peer influenceemployees feel proud to be part owners and fear missing out on potential windfalls. While these reasons explain why ESOPs are held tightly, relying too much on a single company's stock is risky. Diversification is essential to balance optimism with financial security, so that an employee's entire future isn't tied to one employer's fortunes.

Managing ESOP Concentration

1. Understand Vesting & Exercise

ESOPs vest over time, giving you the right to purchase shares at a fixed price. Once exercised, they become part of your portfolio and can be sold in the market.



2. Know Your Tax Implications
• At exercise, the difference between Fair Market Value (FMV) and your exercise price is taxed as salary income.
• At sale, capital gains tax applies:
  • Short-Term (STCG): Held < 24 months ? taxed at your income slab.
  • Long-Term (LTCG): Held ? 24 months ? taxed at 20% with indexation (unlisted) or 10% above ?1 lakh (listed).
3. Avoid All-or-Nothing Selling

Selling everything at once can result in heavy tax liability and poor timing. Instead, adopt a Systematic Sale Planjust like a SIP in reversewhere you sell small chunks periodically.



4. Reinvest and Diversify

Proceeds from ESOP sales should be reinvested across equity mutual funds, bonds, and emergency funds. This balances growth with stability and ensures your financial well-being is not tied to one company.

Conclusion

ESOPs are valuable, but they should be treated as a part of a portfolio, not the portfolio itself. A disciplined approachunderstanding tax rules, selling gradually, and diversifying into other assetsensures that employees benefit from their company's growth without putting their entire financial future at risk.