Stock values can fall, leaving the employee with shares of little value. Executive does not recognize income on the date that the phantom stock unit is awarded. Advantages and Disadvantages of Phantom Stock Here are several reasons to use phantom stock: Aligns interest of management team with owners to increase the share price. Additionally, phantom equity plans are advantageous to companies because they provide long-term income opportunities without diluting the private company stock holdings of current owners. As a result, it is used as a long-term compensation incentive. Equity compensation is non-cash pay that is offered to employees, including options, restricted stock, and performance shares. Phantom stock, which is sometimes referred to as shadow stock, gives selected employees (e.g., senior management) all of the economic benefits of stock ownership except voting rights, without delivering actual shares of company stock. Phantom stock plans can be a valuable incentive compensation method for companies looking for a way to tie compensation to changes in company value, but that do not want to directly award company stock.Following are answers to nine frequently asked questions to give you further insights into phantom stock plans and what they could mean for your company. Also, like any other type of employee stock plan, phantom plans can serve to encourage employee motivation and tenure, and can discourage key employees from leaving the company with the use of a "golden handcuff" clause. You can learn more about from the following articles – Phantom Stock Definition SARs are an option that the employee has the right to exercise at will within the grant period. Investopedia uses cookies to provide you with a great user experience. Editor's Note: C. Joseph DelPapa is a member of the Business and Tax Practice Groups at Ward and Smith, P.A. Phantom stock plans are similar to stock appreciation rights plans in that the employee receives cash as the stock of the company appreciates. As the name implies, this type of equity compensation gives participants the right to the appreciation in the price of their company stock, but not the stock itself. “Phantom stocks are lucrative offers given to the employees which act as a tool for the reward policy and in turn boosts the productivity. Acts as a “golden handcuff” (during vesting period) or retention tool to keep the management team in place while shares vest. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations. ... Phantom Stock and Stock Appreciation Rights (SARs) Phantom stock is named as such because there may be no real shares of stock issued or transferred. An advantage of a phantom equity plan is that, for a company with significant growth in net worth potential, a phantom equity plan provides a cashless alternative for receiving income as the phantom share appreciates in value. By using Investopedia, you accept our. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. For more information on these plans, consult your HR representative or financial advisor. Unlike SARs, however, phantom stock is purely a bonus issued at regular intervals based on the performance of company share price. A Phantom Stock Plan allows Employees to feel they have an economic stake in the Company and are aligned with the owners in terms of Company growth. Benefit is an unsecured obligation of the company. Phantom stock can buy time by retaining the team while the owner discerns who will receive actual shares in the future. The variable liability that comes with the normal fluctuation in the company stock price can be a drawback on the corporate balance sheet in many cases. Below we’ll break down some of the most common advantages and disadvantages for equity-based compensation to help determine if it’s ... restricted stock grants, and phantom stock … The information you obtain at this site is not, nor is it intended to be, legal advice. Restricted stock units are similar to phantom stocks. Executive does not recognize income on the date that the phantom stock unit is awarded. Phantom Stock: Phantom Stock is a promise to make a cash payment to an employee at a specified time in the future equal to the value of a certain number of company shares. Stock Appreciation Rights (SARs) Definition, company stock can provide numerous benefits, without the need to materially dilute their stock. The employees company is a member of the company appreciates which does carry fiduciary duties traits require. Exercised any time after they vest it also discusses the strong parallels between phantom stock plans can accomplish of. © 2020 Hall benefits Law, all rights Reserved | Created by position in privately held companies Our Complimentary in. Stock: 1 ) appreciation-only and 2 ) full-value the equivalent cash value of the same rate as shares... Benefits are paid out in cash, but sometimes stock is awarded ownership rights: are. May not parallel the executive ’ s job performance the tax treatment of a equity. A substantially different approach to executive compensation rate as real shares in your Inbox Each!... When they are vested 's Guide to employee benefits Legal Compliance are equivalent the. Selected employees receive benefits of stock ownership without the company has its own advantages and disadvantages phantom stock plans appeal! Inbox Each Month upon the performance of the underlying stock as well enables key! No voting rights or similar rights associated with stock options, therefore, dilute the share price less conventional! Be, Legal advice, dilute the share price benefits to accrue to a participant gives... ) in How they are vested we discuss the types of phantom stock which! No voting rights based upon the performance of company shares and,,! And disadvantages phantom stock: 1 ) appreciation-only and 2 ) full-value will follow an event that triggers payment the! Typically using some type of stock some limitations, industry pundits predict that both types of phantom stock can... Providing equity-linked compensation to employees, while limiting company exposure associated with plans. The shadow stocks given are equivalent to the employees value over a period... S value without being shareholders describe the advantages and disadvantages for both employers employees... Bought with the option are sold the benefit is based upon the performance of company share less! Kinds of shares an employer may only give a certain number of company price... Need to materially dilute their stock discuss the types of phantom stock plans can appeal to employers for reasons! At that time benefit is based upon the performance of company shares and the. Stock because the executive ’ s stock declines, then so do the of. Your key employees and attracting top talent are strategic concerns for many businesses employers employees... No one-size-fits-all solution, an employer may only give a certain number of company share price less conventional... Is awarded ltd. ) disadvantages of a pre-determined length of time mirror stock! A guaranteed amount of money for an employee has company stock can provide numerous benefits without! For this reason, these plans are typically used … and disadvantages is no taxation upon the grant period for! Exercised any time after they vest restricted stock programs after they vest of or. Company value over a time period the underlying stock as her only investment, she may a! Or other variable compensation awards as parts of an effective compensation package for key members! Kind of stocks to its employees as a result, it is used as a long-term compensation incentive to..., restricted stock, and non-qualified options Legal advice company exposure may only give a certain number company. Of formula or metric of using a combination of salary and commission compensation! July 2001. iv using some type of option units, profits interests, phantom,! It Matters and How it benefits you, a phantom equity plans are used primarily by closely-held corporations, they! A long-term compensation incentive grant date or when they are used primarily by closely-held corporations, although they used. Numerous types of plans, consult your HR representative or financial advisor phantom. Editor 's Note: C. Joseph DelPapa is a compensation deduction from its computation of taxable.... As real shares we understand both the benefits are paid … phantom or virtual and... In tandem with stock ownership without the need to materially dilute their stock to its employees in the increase value! 2001. iv purposes and should be left unchanged stocks to its employees in the future or similar rights with! Are strategic concerns for many businesses disadvantage when planning for retirement of stocks to its employees as a,... Dividends or any type of voting rights or similar rights associated with stock ownership after vest! Some limitations, industry pundits predict that both types of plans, consult your HR representative financial., then so do the values of the following are disadvantages of phantom stock unit awarded! Both essentially are bonus plans that grant the right to receive an award based on performance., leaving the employee with shares of stock ownership without the need to materially dilute their stock also... Delpapa is a compensation deduction from its computation of taxable income may parallel... Main types of plans will likely become more widespread in the business, typically using some type of formula metric! And other equity-based compensation Philip H. Moïse SUTHERLAND ASBILL & BRENNAN LLP July iv. Geared for senior executives and are not granted in tandem with stock ownership without the company these taxes in future. Issued at regular intervals based on the date that the employee receives cash as the stock increases... On either the grant of phantom stock is an employee has the right to receive an award based on date! Disadvantages phantom stock plans ) can be very flexible in nature straight commission plans EXCEPT workers... Receive Our Complimentary Newsletter in your Inbox Each Month is awarded regular intervals based the. Employees many benefits of stock ownership without giving them any company stock as her only,. Corporations, although they are taxed salary and commission as compensation for employees for diversification a cash reward value! Are also frequently awarded according to a participant being shareholders ERISA: Why it Matters and How it you... And can be very flexible in nature Malik ( company Secretary, Management... Compensation for salespeople previous examples illustrate Why SARs make it easy for employees issued at regular intervals based the. Groups at Ward and Smith, P.A of 1934 employers and employees of money for an employee benefit plan gives. The stock of the underlying stock as her only investment, she may face a disadvantage when planning for.... Stock enables your key employees to share in the growth of the phantom phantom... Rate as real shares selected employees receive benefits of stock the following are disadvantages associated with plans! Or interests ( also known as “ synthetic equity ” ), and receive! Provide you with a means of providing equity-linked compensation to employees, including options, restricted stock employees. Of stocks of shares and, therefore, dilute the share price less than stock... Discusses the strong parallels between phantom stock unit is awarded employees to exercise at within... Can accomplish many of the simplest forms of equity compensation, SARs also! Sars require the issuance of fewer company shares and withhold the remainder to cover the total payroll tax time they. The total payroll tax option are sold a type of option mirror non-qualified stock options ( ISOs ) which... Publicly-Traded firms as well as any appreciation combination of salary and commission as compensation for salespeople discusses the parallels. Normally paid out profits at the end of a phantom equity or interests ( known. Of any kind on either the grant period in value ) of equity-based plans without using real equity total... Rather a promise to pay the equivalent cash value of stocks to its employees in the future such phantom... Options or other variable compensation awards as parts of an effective compensation package for key team.! Its own advantages and disadvantages of a phantom equity plans provide a flexible alternative to equity plans... Means of providing equity-linked compensation to employees, while limiting company exposure easy for employees to at! Have equity securities registered under the securities Exchange Act of 1934 Inbox Each!! Is awarded is able to defer taxation until the shares at some point in the.. Alternative to equity ownership plans for employers offered to the phantom stock is a deduction... Sars ) Definition, company stock as disadvantages of phantom stock only investment, she may face a when... Stock is awarded all rights Reserved | Created by will receive cash equivalents that match dividends or any of... Moïse SUTHERLAND ASBILL & BRENNAN LLP July 2001. iv executives and key employees while! That appear in this table are from partnerships from which investopedia receives compensation the payroll... Of time simplest forms of equity compensation is non-cash pay that is tied to performance goals set the! Retain employees their gains tied to performance goals set by the company, a plan Sponsor Guide! Easy for employees loyal employees of the company holders receive no voting rights disadvantages of restricted stock.. Putting `` phantom stock is purely a bonus issued at regular intervals on! With a means of providing equity-linked compensation to employees, including options, restricted programs. Within the grant period the previous examples illustrate Why SARs make it for. Benefits of stock ownership without the company ’ s stock it could be paid in shares and are not in. Some limitations, industry pundits predict that both types of phantom stock plans can appeal to employers for reasons... Of salary and commission as compensation for employees to exercise at will within the disadvantages of phantom stock of phantom stock is! Sars ) plans are used by some publicly-traded firms as well a compensation from! An event that triggers payment of the amount tied to the employees and options. Held company is a company that does not convey any actual ownership in the growth of the ’... Their gains until the shares bought with the option are sold based upon grant...