The government has rejected a demand from Royal Mail's management that 20% of its shares be handed to employees.
The scheme would have been worth about £5,000 to each worker
Royal Mail chairman Allan Leighton had spent several months trying to persuade the government to support the plan.
Trade and Industry Secretary Alistair Darling rejected a share scheme worth about £5,000 to each worker.
He and the Royal Mail are working on a plan for "phantom shares" that behave like normal shares but confer no ownership fights.
It is hoped this plan will allow workers to benefit from increases in the value of the company.
Mr Darling said: "Those discussions are at a fairly advanced stage. We have decided not to go down the road of an employee share ownership scheme, but we want a scheme that will bring equivalent benefit.
"Given the scale of the challenges in front of the Royal Mail, it is only right there should be some reward for employees."
Meanwhile, a Royal Mail spokesman said the new share scheme being agreed with the government which would still be worth up to £5,000 per worker.
"We will shortly agree with the government a John Lewis-type share scheme which will give our people 20% of the economic value of the company and will be worth up to £5,000 per employee," said the spokesman.
"These phantom shares will perform as normal shares and will be tradable within the company."
Mr Darling told the Trade and Industry Select Committee of his concerns about the scheme originally proposed by Post Office management.
He said primary legislation would have been needed for the scheme to go ahead, which would have taken at least 18 months.
The minister also said it was a matter of "great concern" that the Royal Mail had lost a number of major contracts in recent weeks, adding that the company faced "formidable" competitive pressure in the postal market.
"The Royal Mail has got to make some pretty fundamental changes to the way it works," he said.
Billy Hayes, general secretary of the Communication Workers' Union, said the Government was keeping its manifesto commitment on public ownership of the Royal Mail.
He said: "That is great news for postal workers, for the public and for the Government.
"We have always supported employee incentives and we have made that plain, but we expect the union to be involved in any negotiations and agreement on that issue."
Liberal Democrat Trade and Industry spokeswoman Susan Kramer accused the Government of wasting time trying to find a solution that kept its backbench MPs happy and of starving the Royal Mail of investment.
She said: "The DTI must put Royal Mail's customers' interests ahead of the outdated sensibilities of Labour backbenchers and left-wing unions.
"This political decision is a disgraceful insult to Royal Mail's 200,000 employees and could seriously destabilise the company."