What is an Employee Stock Ownership Plan and How It Benefits Workers

Key Highlights

1. Employee Stock Ownership Plans allow employees associated with the company to be not just employees but shareholders as well. They can build their retirement wealth as shares vest over time.
    
2. ESOPs are beneficial for employees and employers. They provide a source of passive income, high productivity, and often provide tax advantages for employees. For employers, ESOPs increase engagement, retention, loyalty and tax benefits.
    
3. There are no big risks except for savings in one stock till retirement, unequal allocation across employees, and administrative/legal complexity.

An Employee Stock Ownership Plan lets employees own shares in their company. It works as a motivation booster and builds wealth by tying their success to the firm’s success.

For example, Priya works at a mid-sized IT company earning ₹10,00,000 per year. Instead of just her salary, she also gets shares through an Employee Stock Ownership Plan (ESOP). So, as the comp grows, does her wealth. 

Here’s how it looks for Priya:
 

So, Priya continues to earn her salary, but along with that, ESOP has become a source of passive income for her. This motivates her to stay and work harder, as her success is tied to the company’s success. Let’s know more about it in this blog and see why it is so attractive to investors.

How Employee Stock Ownership Plans Work?

Did you know that Infosys ESOPs distributed shares to over 18,000 employees in 1994? The employees, including secretaries and drivers, turned into millionaires in rupees and dollars. The data might be old, but this shows how important ESOPs have been, and how they work.

An Employee Stock Ownership Plan (ESOP) operates through a trust, where the company contributes shares or cash. Sometimes, they borrow funds to do this. The trust holds the shares on behalf of employees, who gradually earn ownership over time through vesting. The table below summarises the steps involved, along with an example.

So basically: Company growth = Employee wealth growth. It’s like the company saying, “Work with us, grow with us, earn with us.”

How Does It Benefit Employees?

Employee Stock Ownership Plans offer various benefits to the employees. Some of them are discussed in this section. 

1. Ownership & Retirement Wealth
   Employees gradually build equity in the company through shares. Over time, this becomes a significant retirement fund. For example, if an employee accumulates shares worth ₹15,00,000 over 20 years, they can cash out at retirement.
    
2. Higher Engagement & Productivity
   Employees who are part-owners feel more connected to the company’s growth. This often translates into better performance, lower absenteeism, and higher innovation.
    
3. Tax Advantages
   Employee Stock Ownership Plans often defer taxes until shares are sold or distributed. In many cases, gains are taxed as capital gains, which are lower than regular income tax rates, making them financially attractive.

Employee Stock Ownership Plans are the perfect way to involve employees in the growth of the company rather than their regular 9 to 5 labour. They know if they work hard, they will earn more!
 

How Does It Benefit Employers?

For companies, Employee Stock Ownership Plans are helpful for acquiring good talent. They also offer a cost-efficient financial strategy to retain and grow workforce loyalty. 

1. Improved Retention
   Employees earn full ownership of their shares only if they stay longer, which builds loyalty and reduces job change.
    
2. Enhanced Performance
   
   When employees feel like owners, they work harder, smarter, and more collaboratively to boost the company’s value and performance.
3. Financial Efficiency
   ESOPs provide tax deductions and let companies reward employees without direct cash payouts, saving money while motivating staff.
    

We have summarised the benefits offered to employees and employers in the table given below.
 

Employee Stock Ownership Plans provide employees with financial growth while motivating them to stay committed. For companies, it improves stability, saves taxes, and builds a loyal workforce.

Real-Life Examples

You will find lies around the world, but not here. To back this statement, let’s discuss some real-world examples where ESOPs were implemented.

1. Employee-Owned Success: Publix Super Markets
   Publix stands out as the third-largest employee-owned company in the U.S.. It employs approximately 260,000 people, and these people hold the majority ownership of the company. 
    
2. Strong ESOP Returns: WinCo Foods
   At WinCo, ESOPs were introduced more than 30 years ago. There were certain criteria for employees to be eligible for the programs. Those criteria were:
    
   1. The employee should work at least 500 hours in the first 6 months of employment
       
   2. The employees must be 18 years of age or above
       
   3. There must be an accumulation of 1000 hours each fiscal year 

3. Zomato ESOPs Around IPO

In October 2024, Zomato approved nearly 12 million stock options (valued at ₹330 crore) under its ESOP 2014 and ESOP 2021 plans. By mid-2025, its parent company, Eternal, granted another ₹26,00,00,000 in stock options. In August 2025, over 140 executives, including those from Blinkit, bought the company shares worth Rs 419 crore.

These are just a drop in the ocean. Thousands of examples that back the statements we have made in this blog.

What are the Risks associated with ESOPs?

Though 6,000 U.S. companies support Employee Stock Ownership Plans, this does not mean they are risk-free. Let’s discuss a few of the risks associated with ESOPs in the table given below.

Eployee Stock Ownership Plans do come with lots of benefits, like loyalty, long-term association. However, if both employees and employers are aware of the drawbacks, they can make fairer decisions.

Conclusion 

Employee Stock Ownership Plans (ESOPs) are not new concepts. Companies have been using it for decades. For instance, the Infosys ESOP in 1994. It allows employees to be part of a company more than their 9 to 5 labour. They tend to work harder because they know their hard work will pay them back, if not by managers then by companies’ ESOPs. These plans have become a source of passive income for many. Along with it, they get benefits like tax exemptions, connect with fellow employees and more. 

The employers, on the other hand, get their employees' loyalty and a chance to grow with people who work for them. In spite of such benefits from both ends, ESOPs have their own set of disadvantages, like limited diversification, unequal distribution, etc.. These can be overcome by thoughtful and strategic planning. 

Frequently Asked Questions

Can I sell ESOP shares before an IPO?
Typically, no, private-company ESOPs are illiquid unless the company permits secondary sales, employee buybacks, or formal liquidity programs.

Will granting ESOPs dilute existing shareholders?
Yes, new shares issued for ESOPs increase outstanding shares and dilute ownership. Companies manage this with an ESOP pool and dilution schedules disclosed in the cap table.

Can small businesses implement ESOPs?
Yes, small businesses can adopt ESOPs, though costs for legal setup, annual valuation, and compliance may be higher relative to their size. Still, many small firms use ESOPs to retain talent and ensure succession planning.

How do ESOP payouts work after retirement?
After retirement or exit, employees typically receive the value of their ESOP shares in cash. The company buys back the shares at fair market value, providing employees with retirement funds or exit payouts, depending on policy.

Do employees have voting rights in ESOPs?
Employees generally gain indirect voting rights through trustees managing the ESOP. However, in major decisions like mergers or acquisitions, employees may directly exercise voting power, depending on company rules and ESOP structure.
 

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