A leveraged employee stock option plan (LESOP) offers many advantages to both the company’s employees and the issuing company. It is often used as a motivational tool for companies not only to motivate their employees, but also to increase their productivity. Employees benefit from the appreciating stock portfolios over time and can readily withdraw their money at the appropriate time.
What is a LESOP?
A LESOP is an equity compensation system through which the company sponsoring the plan uses its leveraging credit capabilities to borrow funds. The borrowed money is then used to fund the stock option plan. The company then uses the money to buy company stock from the company’s treasury. The purchased shares are then used for the purposes of the stock option plan. The company uses the annual contributions to the plan by employees in order to pay back the original loan.
The key feature of the plan is to fund the employee stock options. Employee contribute money to the stock option plan, their contribution is matched by the employer (the percentage of the match varies, depending on the company), and the money is then used to buy company stock on behalf of the employee. Meanwhile the lender received a guarantee which forms the basis of the amortization of the loan on an agreed payment schedule.
The employee stock option plan benefits the company financially. Through the plan, the company makes contributions matching those of participating employees. The company contributions are tax deductible. The participants in the stock option plan usually sell their stock in the open market without any cost to the company. The employer can sell the stocks on behalf of the employees and pay cash to the employees. Under such scenario, that transaction becomes tax deductible for the company.
LESOP Benefits to the Employee
Employee stock options and stock ownership plans have benefits for the employees as well. One of the obvious benefits for employees is the issuing of stock to them. The benefits of stock options could also be seen as a form of profit sharing. Contributions by the employee into the plan are also matched by the employer. In general, stocks tend to appreciate in value over time, so employees' stock option portfolios are likely to increase in value as well.
LESOP Benefits to the Issuing Company
In addition to the tax deductions, companies benefit in several additional ways through employee stock option plans. Companies can generate additional revenues which they may use for business expansion or for any other purpose. The initial loan the company received from the bank could be paid off through employee contributions to the plan. Companies can also do stock splits from time to time and benefit from such a process by significantly increasing the number of shares outstanding. They can also use the excess money generated through the stock option plans to buy back their stock.