Phantom shares—as with many other stock compensation types—are subject to a vesting schedule. Vesting happens when the shares are distributed to an employee—the first batch usually after one year. After this “vesting cliff’’ has been reached, the remaining shares typically vest on a monthly or yearly basis until all of the shares have vested.
How do phantom stock vesting schedules work?
Each phantom stock plan has a plan charter. This charter dictates the vesting schedule. If there are goals or tasks that participants must accomplish in order to vest, the charter outlines what these are and what the participants will receive.
What is phantom stock and how does it work?
A phantom stock plan is a solid employee compensation and a great motivation technique for employees. The best part about this is that if the stock price does not appreciate, both the employee and the company lose nothing. This is a major upside that other plans don’t have. It makes phantom stock one of the best plans to implement in the company.
Can a company issue Phantom stock to employees?
For companies to be able to issue phantom stock to employees, both parties need to enter into an agreement. Adhering to the terms of the plan, the company would offer an amount of phantom stock or shares to the participating employees over a specified period of time.
What is the difference between phantom shares and vested RSUs?
During the vesting period, the shares are usually given on a monthly or yearly basis after the employee has reached a “vesting cliff.” The main difference here with phantom shares is that vested RSUs are actual shares in the company. This also gives the employee—possible—dividends and voting rights that phantom shares lack.
What happens when phantom shares vest?
For employees, phantom stock rewards the time and effort they invest into the company. When phantom stock matures, companies will either pay employees the cash value of the shares or, less often, convert the phantom shares into actual stock. For company owners, phantom stock can help grow their business.
What are vested phantom shares?
A vesting schedule is a table of time periods and percentages. It indicates the percentage of value that a participant in a phantom stock plan would receive upon a separation of service or certain other triggering events.
How does a phantom share plan work?
A. A phantom stock plan is a deferred compensation plan that awards the employee a unit measured by the value of a share of a company's common stock, or, in the case of a limited liability company, by the value of an LLC unit. However, unlike actual stock, the award does not confer equity ownership in the company.
What happens to phantom stock when a company goes public?
The phantom stock becomes a liability that the company must eventually convert to either cash or company stock. In privately held businesses, company stock is rarely an option. employees like these plans as any phantom stock they receive is not taxable until converted into cash by the company.
How are phantom shares paid out?
Phantom stock is a contractual agreement between a corporation and recipients of phantom shares that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the market value of an equivalent number of ...
How do you value phantom shares?
The answer involves two variables: (a) the presumed value of the company, and (b) the number of shares to be used in the plan. Once these two answers are known, the phantom share price is calculated as the former (the value) divided by the latter (the number of shares).
Is phantom stock good for employee?
It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. This can, in turn, result in higher selling prices for a business if a prospective buyer perceives the upper management team as being stable.
What is a phantom stock agreement?
A phantom stock agreement is a contract between an employer and employee where the employee receives many of the benefits of stock ownership without owning company stock. These agreements are typically a part of benefit plan for senior management. Phantom stock is sometimes referred to as shadow stock.
What is phantom ESOP?
The idea of phantom stock plans is to mimic the value of a share to an employee without actually handing over the shares. Phantom stock plans, also known as equity compensation plans, equity pay plans, stock bonus plans, or phantom equity plans, are a form of employee stock option plan (ESOP).
Do phantom shares get dividends?
Because participants in phantom stock plan are not shareholders, they are not entitled to dividends per se. However, the phantom stock plan may call for phantom dividends. Such payments might be included in a plan once a participant is vested in full value shares that have not yet been redeemed (or cashed in).
Is phantom stock considered a security?
To the extent that phantom stock is considered a security, private companies generally rely on the exemption from registration under Rule 701 of the Securities Act of 1933, which allows a company to offer securities to employees under a written compensatory plan if: (1) certain disclosure requirements are met and (2) ...
Can phantom stock be issued to non employees?
Phantom stocks are only given to a small percentage of employees. RSUs are allowed, by law, to be granted to employees and non-employees alike. This means they can be used for contractors and outside directors. From an individual income and tax perspective they are also similar to RSUs given to employees.
Why is phantom stock important?
For company owners, phantom stock can help grow their business. Strong leadership is essential to a company's success, and replacing senior leadership can be expensive. Phantom stock gives top employees a reason to stay and help the company succeed.
What is Phantom Stock?
Phantom stock is an employee benefit where selected employees receive benefits of stock ownership without the company giving them actual stock. It is worth money just like real stock, and its value rises and falls with the company's actual stock (or what the company is valued at, if it's not a publicly traded company).
What are the advantages of phantom stock?
Despite the above challenges, phantom stock definitely has its advantages: Little to no complications. Phantom shares are only paid out if the employee meets certain terms. If an employee leaves the company before those terms are met, the phantom stocks disappear.
Why do people own phantom stock?
If a business is sold, employees that own phantom stock receive money that is equal to the amount they would have received had they owned actual stock in the company. For that reason, it's financially beneficial to employees to own phantom stock, as they don't need to worry about dilution.
What happens to the value of the shares when an employee retires?
The value of those shares increases and decreases as company stock increases and decreases because they are actual shares.
Why do companies use phantom shares?
Most often, phantom shares are used to encourage senior leadership to produce better results.
What is appreciation only stock?
Appreciation Only. When companies use appreciation-only phantom stock, recipients don't receive the current value of real stock when they cash out their phantom stock. Instead, they receive anything above and beyond what the phantom stock was worth when it was granted.
How does phantom stock work?
Usually, the number of phantom shares given to an employee or manager depends on that person’s perceived value to the company. The more that employee is valued, the greater the number of shares of phantom stocks they are likely to receive.
Why do companies use phantom stocks?
Companies use phantom stocks both as a motivational tool to reward employees and to give those employees “skin in the game” to increase workplace productivity and earn the company more profits.
What is Phantom stock?
Phantom stocks are becoming increasingly prevalent in the employee compensation sector as part of a total compensation package and are not restricted to tech companies. Some companies tie the award to specific performance goals. 1 . Alternate name: Shadow stock.
What is appreciation stock?
An appreciation stock will bar recipients from garnering the current value of the phantom stock. Instead, recipients earn any profit—such as stock price appreciation—that the phantom stock might earn over a specific period.
Why are phantom shares beneficial?
That’s a big benefit to employees, who share in the stock's profits without having to pay for it. Company control of phantom stocks is advantageous to employers, as well.
Can a company control the level of equity participation in the form of dividends paid out to employees?
For example, the company can control the level of equity participation in the form of dividends paid out to employees . Also, companies can include provisions in a phantom stock agreement that “forfeits” any phantom stock benefits if the employee in question departs the company before the agreed vesting completion date.
Is Phantom stock available to senior employees?
Updated September 28, 2020. Phantom stock is offered by some companies to senior employees, giving them some financial benefits of owning shares without having actual ownership of company stock.
How does a phantom stock plan work?
There are two main types of phantom stock plans. "Appreciation only" plans do not include the value of the actual underlying shares themselves, and may only pay out the value of any increase in the company stock price over a certain period of time that begins on the date the plan is granted.
Why do companies use phantom stock?
Some organizations may use phantom stock as an incentive to upper management. Phantom stock ties a financial gain directly to a company performance metric. It can also be used selectively as a reward or a bonus to employees who meet certain criteria. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors.
What is phantom stock?
A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This type of plan is sometimes referred to as shadow stock. Rather than getting physical stock, the employee receives mock stock.
What is SAR in stock options?
Similar to employee stock options (ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay the exercise price, but receive the sum of the increase in stock or cash. Most commonly made available to upper management, SARs can function as part of a retirement plan.
Does phantom stock pay dividends?
Phantom stock may be hypothetical, however, it still can pay out dividends and it experiences price changes just like its real counterpart. After a period of time, the cash value of the phantom stock is distributed to the participating employees.
What Is Phantom Stock?
The idea of phantom stock plans is to mimic the value of a share to an employee without actually handing over the shares. Phantom stock plans, also known as equity compensation plans, equity pay plans, stock bonus plans, or phantom equity plans, are a form of employee stock option plan (ESOP).
How Does A Phantom Stock Work?
As per the phantom stock agreement, an employer grants selected employees units or "phantom" shares.
Pros And Cons Of Phantom Stock
Now, as we have a fair idea, let’s look at the advantages and disadvantages of phantom stock programs.
What To Consider When Designing A Phantom Stock Plan?
Here are the top 5 things to consider while designing a phantom stock program:
Some Frequently Asked Questions About Phantom Stocks
Phantom stock units are set equal to the unit value of the real shares. The company uses the same formula to calculate the actual stock price as well as the phantom stock.
Finally
When in doubt, phantom stock options are the most secure form of ESOPs. Risk is minimal, and the terms and conditions are flexible as per the employer at any time. If the value of your share price does not go up after the vesting period, there will be no payout.
How Phantom Stock Works
Although the name sounds a bit spooky, the only scary thing about phantom stock is paying the taxes—unless you’re the IRS, of course. So, let’s go ahead and shine a light on the shadow stocks—those are all the word jokes, we promise.
Why Do Employers Choose Phantom Stock?
Given the fact that there are many different types of stock-based compensation, you might be asking yourself why an employer would choose phantom shares—as opposed to any of the other stock compensation options.
The Evaluation of Phantom Shares
So, how much is a phantom share worth? The simple answer is that the value of a phantom share is tied to the value of an underlying company share. Phantom shares go up and down in value together with the company’s “real” shares.
When Do Phantom Shares Become Taxable?
If you think non-existent shares sound like a good way to avoid paying taxes, think again.
Different Types of Phantom Stock Plans
There are two types of phantom stock plans that employers normally use to compensate employees—the “appreciation only” and “full value” variants. Conveniently, these plans are exactly what the names would have you assume.
Advantages of Phantom Shares
Phantom shares are seen by many as having more upside than downside—sometimes they’re even considered to be better than “normal” shares. Having said that, phantom shares are not all sunshine and rainbows.
What Are Some Phantom Stock Alternatives?
The sheer number of stock-based compensation options can make it a tough job for employers to choose the right one. In this section, we’ll describe a few of the most popular phantom stock alternatives.
