Leveraged ESOPs are generally seen as complex systems but in reality it is more about confusion and not knowing how things work. This short article will give an introduction to the leveraged ESOP as developed by Louis O. Kelso back in 1958.

The leveraged ESOP allows employees to become owners of the company by obtaining shares through the ESOP plan. The shares are bought from a loan that the company takes and not by private funds of the employees. A key point, allowing all employees to become owners of the company they work for – this was an aim of Kelso.

The advantages of the company taking the bank loan for an ESOP are clear:

• The company will get a bank loan more easily in comparison to employees because of the guarantees that the company can give.
• The loan can be paid back by future earnings (for example: dividends).
• All employees are able to participate no matter what their financial background is.
• Employee participation in general provides more employee motivation and allows for a sustainable business succession.

Though, to prevent differences between employees that join at different points in time, holding periods and other rules need to be made.

An interesting article for further reading on employee motivation by the use of ESOPs can be found under: lifehealthpro.com

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