Phantom shares, also known as phantom stock, is a program whereby key employees receive ownership of a company’s stock without owning it. In other words, phantom stock is where key employees receive the financial benefits of owning shadow shares of the company, but not actual shares.
What are Phantom stocks?
Jan 23, 2021 · A phantom stock plan, or 'shadow stock' is a form of compensation offered to upper management that confers the benefits of owning company stock without the actual ownership or transfer of any...
How is phantom stock taxed?
Jul 08, 2020 · 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).
Is phantom stock a security?
Mar 09, 2022 · 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.
What is phantom stock option plan?
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 the hard work that …
How does a phantom share plan work?
What is the meaning of phantom shares?
How is phantom stock paid out?
How do you value phantom stock?
Are phantom stock good?
How is phantom stock taxed?
How do you set up phantom stock?
- Understand what you are — and aren't — offering. ...
- Set a proper valuation. ...
- Create your shares. ...
- Decide how to award stock. ...
- Set a reward schedule.
What happens to phantom stock when a company goes public?
Does phantom stock pay dividends?
Do phantom shares dilute?
Can phantom stock be diluted?
Is phantom stock considered a security?
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).
Why do companies use phantom shares?
Most often, phantom shares are used to encourage senior leadership to produce better results.
Is Phantom stock taxable?
No taxes are owed till the stocks mature. 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 is an ESOP?
An ESOP is a qualified retirement program, similar to a pension plan. Though stocks are involved, the employee doesn't usually gain ownership of the shares. Instead, a specific number of shares is awarded to each employee, and when it's time for that employee to retire, the shares are cashed out.
Is a 401(k) a qualified plan?
However, ERISA prevents non-qualified plans to act like qualified plans, and phantom stock, if given to a large percentage of employees, may be seen as a non-qualified plan.
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.
Is a Phantom stock plan good for employees?
Phantom stock plans can be both a good employee motivation tool for employers and a solid cash incentive plan for employees. If events go sour and the stock price doesn’t appreciate, neither the employer nor employee loses any money directly in the deal. Phantom stock plans provide more upside than downside.
Who is Brian O'Connell?
Brian O'Connell was a Wall Street trader and currently is an expert on investing in stocks, business trends, fintech, and career management. Besides The Balance, he's written for U.S. News & World Report, TheStreet.com, and more. With over 20 years of experience, he's also the author of the book "The 401 (k) Millionaire.”.
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 ...
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.
What are the advantages of phantom stock?
The phantom stock plan has many advantages for a company. They include: 1 Phantom stock is highly flexible and they can be used by both private and public companies. 2 Setting a phantom stock plan is a lot cheaper than setting up ESOPs. It saves the employer a lot of money. 3 There are no taxes that have to be paid by the employee s getting phantom stock until the stock mature. 4 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. 5 Even though voting rights are not offered, the employees are still invested to increase the share price of the company.
What are phantom shares options?
Now that you understand the definition. You might be thinking about what phantom shares options mean to a business owner.
Why might a company want to use phantom equity instead of actual equity?
The most common reason a company might go for phantom equity compared to actual equity is that phantom equity has fewer disadvantages.
How does the worker gain phantom shares?
One can own the actual shares, but how does the employee own phantom shares? Employee ownership of phantom shares is slightly different.
How is the phantom stock plan structured?
Every phantom stock program should have a phantom plan in place before rewarding its key employees. The phantom stock plan should indicate the specific percentage of interest and number of phantom stock units to be issued to key employees.
How is phantom stock treated for income tax purposes?
Although phantom stock bears the name “equity,” it does not imply that phantom stock should be paid in securities only. Instead, various means are used to pay phantom stocks, as long as they are legal.
What percentage of equity should be dedicated or reserved for this plan?
Before a company settles on which percentage to use on the phantom stock plan, several factors should be considered when issuing equity awards —for example, the salary and the service length of the employers.
Do vesting rules apply in the case of death disability or attainment of specified normal retirement age?
Life is full of uncertainties, and one of the uncertain things that can happen to an employee is death.
What is a phantom stock plan?
A phantom stock plan, also called a shadow stock plan, is a type of deferred employee compensation plan where the type of shares issued to plan participants are phantom shares instead of company shares. Phantom shares provide benefits similar to stock ownership but without actually issuing company shares.
What is a full value phantom stock plan?
In a “full value” phantom stock plan, the plan participant receives a cash payment equal to the value of the underlying asset (common stock) of the phantom stock at redemption. For example, assume the issuing price of the phantom stock is $10. At redemption, the company’s common share price was $30. The cash payment per phantom stock would be $30.
What is an ESO?
Employee Stock Option (ESO) An employee stock option (ESO) is a form of financial equity compensation that is offered to employees and executives by their organization. both award employees from the share appreciation of the company’s stock price. However, there is one key difference between the two plans.
Is a phantom stock plan a deferred compensation plan?
A phantom stock plan constitutes a deferred compensation plan.
What is common stock?
Retirement plans and employee. Common Stock. Common Stock Common stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock.
What is an ESO plan?
Employee Stock Option (ESO) An employee stock option (ESO) is a form of financial equity compensation that is offered to employees and executives by their organization. both award employees from the share appreciation of the company’s stock price. However, there is one key difference between the two plans.
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.
Is variable liability a drawback?
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. Companies must also disclose the status of the plan to all participants on an annual basis and may need to hire an independent appraiser to periodically value the plan.
Do SARs pay dividends?
SARs do not pay dividends, however, and holders receive no voting rights. Key information to be aware of regarding SARs includes the grant date, the exercise price, the vesting date, and the expiration date.
Who is Mark Cussen?
Mark Cussen, CFP and CMFC, has 13+ years of experience as a writer and provides financial education to military service members and the public. Mark is an expert in investing, economics, and market news.
