What’s the difference between an ESS, ESOP and ESAP?

Kearney Group Colour 8219583 Business Culture Social Issue Equality Icon
1 March 2023 Read time: 3 min


In today’s tight labour market, many businesses are searching for new and innovative ways to attract and retain talented people. One such way is by offering your team to participate in an employee share scheme. In this article, we delve deeper into shares and options. And, we help you decode the difference between Employee Share Schemes (ESS), Employee Share Option Plans (ESOP) and Employee Share Award Plans (ESAP).

Shares versus options.


First off, let’s talk about shares and options.




Simply put: a share (or a stock) is a unit of ownership in a company. When you’re granted shares as part of an employee share scheme, you own a piece of the company. Just like any other shareholder, you own a percentage of the capital and receive income in the form of dividends, if the company pays them out.

To illustrate – let’s take Made Up Company Pty Ltd which has 100 shares divided between three owners; Lucy with 85 shares, Tony with 10, and Charlie with 5 shares. Made Up Company Pty Ltd is paying out $100,000 in dividends this year. As 85% shareholder, Lucy will get an $85,000 dividend. Tony will receive $10,000 and Charlie will take home $5,000 in dividends.




On the other hand, options are like a contract that give you the right, but not the obligation, to buy or sell a specific asset at a specific price (‘exercise price’) within a specific time period (‘vesting date’). In the case of an employee share scheme, that asset is usually shares in the company you work for.


So what is the difference between an ESS, ESOP and ESAP?


An ESS, ESOP, and ESAP are all related to employee share ownership, but they have different meanings and implications.




An Employee Share Scheme (ESS) is a program where employees are given the opportunity to purchase shares in the company they work for, often at a discounted price.

Upon purchasing their shares, the employee assumes both voting rights and the right to receive dividends like any other shareholder.




An Employee Share Option Plan (ESOP) is a program where employees are given the option (i.e. the right, but not the obligation) to purchase ordinary shares, before a certain date (‘vesting date’), and at a predetermined price (‘exercise price’).

When an option vests, the employee must pay the exercise price or forfeit their option. The exercise price will reflect the fair market value of the shares at the date that the option was granted.

Upon exercising their option, the employee will be issued their shares and assumes both voting rights and the right to receive dividends like any other shareholder.




An Employee Share Award Plan (ESAP) is a program where employees are awarded company shares or options, directly as a form of compensation.

Under this type of scheme (and unlike traditional ESS or ESOPs), employees do not purchase the shares. Rather, they are given them as part of their remuneration or bonus arrangements.

The shares are typically awarded based on performance, tenure, or a combination of both. However, such programs can also act as a way to attract and retain employees in times when cash flow is too tight to offer a really competitive base salary.


ESS, ESOP and ESAP in summary.


In summary, ESS allows employees to purchase company shares, frequently at a discounted price, ESOP offer employees the option to buy shares during a specific time period at a pre-agreed price, and ESAP awards employees company shares as a form of compensation.


Some fine print.


Can an employee shell shares that were purchased as part of an employee share scheme?


Under employee share schemes, employees can sell their shares, but there may be restrictions or penalties for selling them before a certain date. Furthermore, the sale may be subject to capital gains tax. So it’s important for employees to understand the specific rules of their program and seek professional advice before deciding to sell their shares.


What happens if an employee leaves the business?


If the employee exits the business (i.e. retires, resigns or is terminated), generally the rights to unvested shares automatically lapse and the company can purchase back the vested shares at either fair market value or a discounted rate depending on the circumstances in which the employee leaves (e.g. “good leaver” and “bad leaver” conditions, terms of the specific ESS).


How are employees taxed on shares purchased as part of an employee share scheme?


Well how long is a piece of string? And now imagine that string is being pulled by the ATO *wink*.

That’s all to say taxation arrangements for employee share scheme vary widely and are ever-changing. You should always seek professional advice before buying or selling shares that are part of an employee share scheme.

But in general, there are two main tax implications for employee share schemes: Income Tax and Capital Gains Tax (CGT). There’s also a specific incentive called a deferred taxing point. If you’re curious, these articles provide additional information about the tax implications of employee share schemes and are part of the broader series of ESS content.

Learn more.

Speak to the team.