ESOPs in South Africa: Achieving B-BBEE Ownership Through Employee Ownership

An Employee Share Ownership Plan (ESOP) lets a South African company recognise black ownership for B-BBEE while aligning employees and shareholders behind the same goal: a more valuable business. Done well, an ESOP rewards the people who built that value, improves engagement and retention, and strengthens your empowerment credentials at the same time.

This guide explains what an ESOP is, the benefits of employee ownership, how ESOPs are structured in South Africa, B-BBEE recognition, the tax and accounting touchpoints, Competition Commission considerations, and why communication and trustee training matter.

One size does not fit all, so the goal is to identify the structure that makes the most sense for your business and your participants.

What is an ESOP?

An ESOP is a structure through which a company shares the economic upside of its equity with its employees. In South Africa, employees usually participate indirectly — as beneficiaries of a trust that holds the shares — rather than holding shares in their own names. Scheme rules set out who participates, how they benefit, and how the scheme is governed.

Although they remain relatively uncommon among South African companies, ESOPs have become a mainstream empowerment tool. According to figures from the Department of Trade, Industry and Competition (DTIC) reported in late 2024, employee ownership schemes hold greater than R70bn in equity value and have benefited more than 500 000 employees. Employee beneficiaries have received more than R3.3 billion in dividends. In 2024 the DTIC hosted the inaugural Worker Share Ownership Conference, where President Cyril Ramaphosa welcomed the expansion of worker ownership as a driver of economic transformation.

What are the benefits of an ESOP?

The main benefit is B-BBEE ownership recognition — achieved in a way that keeps the economic benefit “closer to home”, rewarding the employees who helped build the business. Certain ownership points are available only through broad-based vehicles such as an ESOP, or to defined black groups. Beyond the B-BBEE scorecard, employee ownership delivers:

• Aligned interests — employees and shareholders are both rewarded for improving performance and growing value.
• Higher engagement — research consistently links employee ownership to stronger engagement and a genuine sense of ownership.
• Attraction and retention — a meaningful edge in a tight skills market, helping retain star performers and reduce turnover.
• Broad-based wealth — real financial benefit across a wide base of employees, with positive knock-on effects for the wider economy.

We set these out in detail in 10 compelling reasons for employee ownership — for many businesses, the case for employee ownership is close to a no-brainer.

How are ESOPs structured?

Most South African ESOPs hold a 5%–25% minority stake through a trust that holds the shares on employees’ behalf. The size is tailored to the outcome you are targeting, and there are a few key steps to crafting an ESOP that apply regardless of complexity. Schemes range from structurally simple to complex: some focus on dividends, some have a fixed life, and some are evergreen. Some “ESOPs” use options or phantom shares rather than actual shareholding; these can achieve similar goals but may offer limited B-BBEE recognition.

Whatever the design, it must be legally compliant and must not be aggressive or create a risk of fronting, which is a criminal offence with serious consequences for the company and its management.

Common structural features look like this:

How does an ESOP earn B-BBEE ownership recognition?

Employee ownership is specifically recognised under Statement 100 of the B-BBEE Codes of Good Practice as a vehicle for black ownership, with points available for a qualifying ESOP. Ownership carries 25 points on the generic scorecard, and an ESOP can contribute meaningfully towards them — which is why employee ownership increasingly forms a core part of a company’s broader BEE strategy.

To be recognised, an ESOP must meet several requirements — for example, employees must appoint at least half of the trustees, beneficiaries and their entitlements must be clearly defined, the scheme must hold an annual general meeting, and residual value must go to participants on termination.

An ESOP is one route to ownership; alternatives such as a sale of assets to black investors (Statement 102) can also earn recognition, and for multinationals entering South Africa an ESOP is often the most practical way to meet ownership expectations.

A critical driver of the B-BBEE ownership outcome is Net Value. An ESOP needs to be structured to meet both the upfront and the evolving Net Value targets over the life of the scheme.

Government support is clear and consistent: the DTIC’s 2021 Practice Note confirmed that ESOPs support broad-based transformation and can be used to achieve ownership recognition, and it resolved earlier B-BBEE Commission concerns by confirming that evergreen schemes are acceptable and that fiduciaries may make decisions on behalf of the beneficiaries they represent.

What is the tax treatment of an ESOP in South Africa?

There is no dedicated ESOP tax dispensation in South Africa — treatment follows the scheme structure, so structure matters. For the company, there are limited opportunities for deductibility, and the funding structure (many ESOPs are vendor-financed) can create tax liabilities for the employer. It is worth confirming the tax treatment early, as similar outcomes can sometimes be achieved more tax-efficiently.

For employees, participation is commonly structured under section 8C of the Income Tax Act as a restricted equity instrument, with pay-outs taxed as income in the employee’s hands; under some structures pay-outs are taxed as dividends. Timing — when the scheme receives value and when it distributes to employees — should be managed to avoid adverse tax outcomes.

How are ESOPs accounted for in South Africa?

ESOPs are generally accounted for either as a share-based payment under IFRS 2, or as an employee benefit under IAS 19 — which applies depends heavily on the scheme structure:

• IFRS 2 (equity-settled): a cost and corresponding entry in equity are recognised based on the option value at grant date, with no annual revaluation.
• IFRS 2 (cash-settled): a cost and corresponding liability are recognised at grant date, then revalued annually as expectations and outcomes change.
• IAS 19: the cost is recognised in the same period employees earn the benefit — generally simpler treatment.

Understanding the impact on the employing company and on consolidation is important before committing to a structure. We cover this in accounting standards for ESOPs and our guide to ESOP accounting best practices in South Africa.

How do ESOPs affect Competition Commission merger approval?

The Competition Commission treats a well-structured ESOP as a favoured public-interest remedy in merger reviews. It places significant weight on the public interest, including a greater spread of ownership by historically disadvantaged persons and workers.

A 2019 amendment to the Competition Act sharpened this focus, and the Commission’s 2024 public interest guidelines expect a proposed ESOP to compensate for any dilution of worker or HDP ownership — reflecting the competition authorities’ role in promoting employee ownership.

As a result, ESOPs are frequently included as a condition of merger approval and can help pave the way for an M&A transaction — featuring in deals such as Burger King, Coca-Cola Beverages, AB InBev and PepsiCo.

Why do communication and trustee training matter?

Sustainable ESOP success depends on managing employee — and, where relevant, union — expectations. The two things that consistently make the difference:

• A strong employee communication programme: clear, simple materials and interactive sessions on the scheme rules, business value drivers and (where needed) basic financial literacy. This reduces scepticism and helps participants know what to expect, and when.
• Empowered trustees: trustees who understand the scheme, the business and their fiduciary duties — supported by proper trustee training — can confidently fulfil their role. Equally, senior leaders must be on board to drive adoption.

About the author

Shaun Smit, CA(SA), MBA

Director, Transcend Capital

With over a decade advising multinationals and South African corporates on ESOPs and B-BBEE transactions, Shaun has a proven track record in crafting and executing ownership strategies that support growth and lasting business success. He believes employee ownership is a powerful tool for engagement, performance and meaningful broad-based empowerment.