Phantom stock is a form of employee compensation that gives employees access to stock ownership without actually owning the stock. Like any genuine stock, phantom stock's value rises and falls in line with the underlying company stock. Staffers are compensated with profits incurred from any company stock appreciation on specific dates.
How to create a phantom stock program that works?
Many business owners turn to phantom stock programs to:
- Cultivate loyalty. When employees see how they’re contributing to the value of the company, not only do they feel appreciated — they feel vital to the success of the organization. ...
- Create an ownership mentality. ...
- Care for employees in the totality of their lives. ...
Is phantom stock taxable?
When company stocks are given to an employees, even if they have to hold onto them for a specific term, it's considered taxable income. Phantom stock doesn't have this issue and is not considered income until the bonus is paid out.
What are the legal requirements for a phantom stock plan?
- SARs are for the amount of money equal to the increase in value of a specific number of shares over time.
- They may or may not have a specific date when they pay out.
- If they don't, employees can choose when they want to cash out once the shares vest.
- SARs don't offer dividend-equivalent payments.
How are phantom shares taxed?
- When there are legal concerns.
- When the company is unwilling to issue additional shares.
- To prevent diluting stock by giving it to many employees, which may influence voting control.
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 does a phantom share scheme work?
What is a Phantom Share Scheme? A Phantom Share Scheme is cash bonus arrangement whereby the amount of cash bonus paid is measured by reference to the value (or increase in value of real shares). No actual shares or share options are awarded.
What is the purpose of 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.
How is phantom stock taxed?
As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. This is the case even though the amounts are not subject to income tax until actually paid to the employee.
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.
What is a phantom share option?
What are phantom share options? A phantom share scheme allows the employer to achieve some of the benefits of employee share ownership without actually giving any shares to employees. In essence, it is a cash bonus scheme.
Should I accept phantom stock?
Phantom stock is not a good idea if the company is planning on issuing them to most or all employees, especially if the shares will be paid out when the employee leaves the company or retires. In that case, phantom shares may be ruled illegal because of the Employee Retirement Income and Security Act (ERISA).
How do you set up a phantom stock plan?
Take a look at five tips for creating a phantom stock plan below:Understand what you are — and aren't — offering. ... Set a proper valuation. ... Create your shares. ... Decide how to award stock. ... Set a reward schedule.
Is phantom stock 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 shares be diluted?
Dilution can influence voting control and other important elements that can impact the value of shares. Phantom stock and its variations typically avoid stock dilution because the participating employees receive potential compensation as opposed to actual stock.
What is the difference between phantom stock and stock appreciation rights?
A stock appreciation right (SAR) is much like phantom stock, except it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. As with phantom stock, this is normally paid out in cash, but it could be paid in shares.
Can an LLC issue phantom stock?
LLCs do not issue stock. Rather, they issue membership “units” as equity. If an LLC has “checked the box” to be taxed as a corporation for Federal tax purposes, it generally can sponsor the equivalent of an employee stock ownership plan, and can issue the equivalent of incentive stock options.
What happens to phantom stock plans?
There are less complications in a phantom stock plan, where the employees are paid only if they meet the set terms. And since the plan uses cash and not actual stock, if an employee leaves, the company would not have trouble in handling half the vested stock.
What is phantom stock?
A phantom stock plan is employee compensation that gives selected employees, mostly in senior management, benefits of stock ownership without actually giving them company stock. This is sometimes referred to as phantom shares, simulated stock, or shadow stock. It is basically offered as a bonus for staying with the company for a long time and ...
What is appreciation only phantom stock?
The recipients of “appreciation only” phantom stock would not get the current value of the stock. Instead, they earn the stock price appreciation as profit where the stock value increases over time. For instance, let us say an employee is going to get 2,000 shares of phantom stock and each stock is worth $20.
Why is phantom stock good?
Nonetheless with such incentives, phantom stock is great for certain situations, such as: When the organization is reluctant to issue additional shares.
How to keep track of phantom stock?
But while you do this, ensure that you keep track of all the shares in your company. The best way to do this is by using a cap table app such as Eqvista. It can help you keep track of all the phantom stock in your company.
Do employers have to report phantom stock plans?
For the SEC and all the true shareholders, if the company is publicly traded, employers would have to report the status of the phantom stock plan at least annually to all participants.
Is phantom stock taxed?
Regardless of how payments for a phantom stock plan is made, the gains are considered as ordinary income and taxed as such. And the tax rate is on the stock price received at the end of the deal. When this happens, the employer has the option to get a deduction in the year the employee reports income, equal to the amount of bonus given out to the employee.
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?
SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period.
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 a phantom stock plan?
Phantom stock plans and stock appreciation rights (SARs) are two types of stock plans that don't actually use stock at all but still reward employees with compensation that is tied to the company's performance. A phantom stock plan pays a cash award to an employee that equals a set number or fraction of company shares times the current share price.
What is shadow stock?
Also known as "shadow" stock, this type of stock plan pays a cash award to an employee that equals a set number or fraction of company shares times the current share price. The amount of the award is usually tracked in the form of hypothetical units (known as "phantom" shares) that mimic the price of the stock. These plans are typically geared for senior executives and key employees and can be very flexible in nature.
Do phantom stock plans have exercise?
Unlike other types of stock plans, phantom stock plans do not have an exercise feature, per se; they only grant the participant into the plan according to its terms and then confer either the cash or an equivalent amount into actual stock when vesting is complete.
What is phantom stock?
In essence, phantom stock is a deferred compensation plan that gives an employee a stake in a company’s success without conferring an actual ownership interest in the company. Phantom stock provides an employee a benefit measured by, and tied to, ...
When is a phantom stock valuation triggered?
More often than not, it is common for a valuation to be triggered upon the termination of an employee. However, it is also possible for a valuation to be determined upon a certain number of years or even a fixed date in time.
Can phantom stock vest?
Additionally, phantom stock shares can either vest immediately or in accordance with a vesting schedule as determined by the company.
Is phantom stock taxed?
It is important to note that the value of the phantom stock paid to the employee is taxed as ordinary income and does not implicate any type of capital gains taxation. Compliance with IRC Section 409A is key, and any violation could potentially cause penalties relating to the income prior to the employee’s receipt.
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.
