Leveraged Employee Stock Ownership Plan
A leveraged employee stock ownership plan (LESOP) is an employee compensation program in which the sponsoring company leverages its own credit and borrows the money used to fund the plan and purchase shares from the company's treasury. These shares are then used for the stock ownership plan (ESOP), with the company subsequently paying back the original loan with annual contributions.
Definition: A Leveraged Employee Stock Ownership Plan (LESOP) is a type of employee compensation plan where a company uses its credit to borrow funds to purchase its own shares. These shares are then allocated to an Employee Stock Ownership Plan (ESOP), and the company repays the initial loan through annual contributions.
Origin: LESOP originated in the United States in the 1970s, aimed at motivating employees and improving company performance by allowing them to own company stock. In 1974, the U.S. Congress passed the Employee Retirement Income Security Act (ERISA), providing a legal framework for ESOPs and LESOPs.
Categories and Characteristics: LESOP is a special form of Employee Stock Ownership Plan (ESOP). Its main characteristics include:
- Company borrows to buy stock: The company uses its credit to borrow funds to purchase stock, rather than paying directly from company funds.
- Employee ownership: Through LESOP, employees can own company stock and benefit from the company's growth.
- Loan repayment: The company repays the initial loan through annual contributions, which are usually pre-tax, providing tax advantages.
Specific Cases:
- Case 1: A tech company implements LESOP, borrowing $5 million to purchase company stock and allocating these shares to employees. This significantly boosts employee motivation and company performance.
- Case 2: A manufacturing firm borrows $3 million through LESOP to buy stock and allocates it to employees. The company repays the loan through annual contributions, while the value of the employees' stock increases with the company's performance.
Common Questions:
- Does borrowing to buy stock increase financial risk? Yes, borrowing increases the company's financial burden, but if the company performs well, the appreciation in stock value can offset this risk.
- Is there a lock-up period for the stock held by employees? Typically, there is a lock-up period, the duration of which depends on the company's policy.
