DEFINITION of 'Leveraged Employee Stock Ownership Plan - LESOP'

An equity compensation system in which the sponsoring company typically leverages its credit to borrow money, which it then uses to fund the plan, in order to purchase company shares from the company's treasury. The shares are used for the purposes of the stock ownership plan, and the company pays back the original loan with annual contributions.

BREAKING DOWN 'Leveraged Employee Stock Ownership Plan - LESOP'

Typically, companies choose to use stock ownership plans or equity compensation systems in order to tie a portion of their employees' interests to the bottom-line share price performance of the company's stock.  In this way, participating employees are given incentive to ensure the company's operations run as smoothly and profitably as possible. And by leveraging the company's assets to fuel a LESOP plan, the business is able to provide for its stock ownership plan without immediately putting up all the capital required to do so.

LESOPs use the proceeds of bank loans to purchase company stock from the company or its existing shareholders, at a sale price established by independent appraisers. The lending bank holds the purchased shares as collateral and typically requires payment guarantees from either the company, the remaining shareholders or the selling shareholders.
.LESOPs serve as a tax-advantaged methods of financing corporate growth because shares allocated to an employee's account are not taxed until distributions are received, which generally occurs after an employee ends his or her tenure with a company.

Due to deduction limitations dictated under tax laws, employer contributions made to make annual loan payments may not exceed 25% of a participating employee's annual compensation. Additionally, a company may limit LESOP participation to employees who are over age 21, who have completed at least one year of service.

Potential Downside

Despite the tax-deferred benefit  participating LESOP employees enjoy, this plan isn’t without potential downsides—chief among them: an inherent investment risk. Since a LESOP functions as a substitution for other type of qualified retirement plans, they lack the diversification of a typical retirement portfolio. But employees who reach the age of 55, who complete ten years of participation in a LESOP, are permitted to diversify 50% of their accounts, over a five-year tiem period, in investments other than their own company’s stock.

RELATED TERMS
  1. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  2. Key Employee

    A key employee is a staffer who is a stakeholder with a decision-making ...
  3. Revenue Per Employee

    Revenue per employee is an important ratio that looks at a company's ...
  4. Employee Share Ownership Trust ...

    Similar to other stock programs, an employee share ownership ...
  5. Accrued Benefits

    Accrued benefits are those benefits earned or accumulated by ...
  6. Deferred Compensation

    If part of an employee's pay is held for disbursement at a later ...
Related Articles
  1. Retirement

    A Guide to Employee Stock Option Plans

    Stock option plans are among the ways employers can compensate employees. Here's how they work.
  2. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  3. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  4. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  5. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  6. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
RELATED FAQS
  1. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center