ESOPs give employees a piece of the company they work for — aligning their interests with shareholders. Companies grant stock options (the right to buy shares at a set price) or restricted stock units (RSUs — shares given after a vesting period). If the company grows, employees benefit directly.
Famous ESOP wealth creation: early employees at Google, Apple, and Microsoft became millionaires through stock options. A Google receptionist hired in 2000 received options worth over $1 million by 2006. In India, Infosys created hundreds of "Infosys millionaires" — its driver and office staff became crorepatis through ESOPs. Flipkart's $16 billion Walmart acquisition made many employees wealthy.
Tax treatment matters: in India, ESOPs are taxed at two points — when exercised (as income) and when sold (as capital gains). Startups received a relief in Budget 2020 — ESOP taxation was deferred until sale of shares or 5 years, whichever is earlier. Companies use ESOPs to attract top talent without spending cash — especially crucial for startups that cannot match big-company salaries.