what is a leveraged employee stock ownership plan lesop 
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 understanding leveraged employee stock ownership plans lesops typically companies choose to use esops or other equity compensation programs 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 an incentive to ensure the company s operations run as smoothly and profitably as possible companies often use esops as a corporate finance strategy to align the interests of their employees with those of their shareholders by leveraging company assets the business can provide for its stock ownership plan and give workers ownership interest in the company 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 tax considerationslesops serve as a tax advantaged method 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 their 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 and who have completed at least one year of service potential downsides to a leveraged employee stock ownership plan lesop 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 types of qualified retirement plans they may lack the diversification of a typical retirement portfolio such as a 401 k plan and be too concentrated in company stock employees who reach the age of 55 and have completed at least ten years of participation in a lesop are permitted to diversify 50 of their accounts over five years in investments other than their own company s stock additionally since a lesop involves borrowing it can mar a young company s debt to income dti or debt to equity d e ratio making it appear as a less attractive investment than it may otherwise be moreover if a company cannot repay its lesop debts the lender can seize the assets put up as collateral 