The giveaway is worth just under $200 million (£130m) and will be distributed based on staff performance. If they were given out equally, each staff member would reportedly receive $55,000.
Dorsey, who was appointed chief executive earlier this month, took to Twitter to outline his plans.
“I’m giving 1/3rd of my Twitter stock (exactly 1% of the company) to our employee equity pool to reinvest directly in our people,” he tweeted.
“As for me: I’d rather have a smaller part of something big than a bigger part of something small. I’m confident we can make Twitter big!”
It will prove a much-needed fillip for staff morale after Dorsey announced earlier this month that 8 per cent of staff would be laid off as “part of an overall plan to organise around top product priorities”.
Sotirios Paroutis, of Warwick Business School, said: “After the stick, we now have the carrot. After the decision to lay off 8 per cent of staff last week, Jack Dorsey now sends a motivational signal inside the firm that he is also taking steps to retain Twitter’s talent pool. It also sends a signal to investors that he is prepared to take bold decisions to make sure Twitter keeps up the pace with its innovations to market.
“He now has a second chance to revive Twitter in a way that convinces its primary stakeholders that there is a viable business plan behind the firm that can help it deliver both credible user innovations and future growth.”
In an eventful month for the tech giant, Twitter also announced the appointment of Google chief business officer Omid Kordestani to its board of directors.