Phantom Stock Plan

What Is a Phantom Stock Plan?

A phantom stock plan is an employee benefit plan that gives chosen employees (senior management) a large number of the benefits of stock ownership without really giving them any company stock. This type of plan is sometimes alluded to as shadow stock.

Instead of getting physical stock, the employee receives mock stock. Even however it's not real, the phantom stock follows the price movement of the company's genuine stock, paying out any subsequent profits.

How Phantom Stock Plans Work

There are two primary types of phantom stock plans. "Appreciation as it were" plans do exclude the value of the real underlying shares themselves, and may just pay out the value of any increase in the company stock price over a certain period of time that starts on the date the plan is conceded. "Full value" plans pay both the value of the underlying stock as well as any appreciation.

The two types of plans look like traditional nonqualified plans in many regards, as they can be biased in nature and are likewise regularly subject to a substantial risk of forfeiture that closes when the benefit is really paid to the employee, when the employee perceives income for the amount paid and the employer can take a deduction.

Phantom stock might be theoretical, nonetheless, it actually can pay out dividends and it encounters 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.

Phantom stock, otherwise called synthetic equity, has no inherent requirements or limitations with respect to its utilization, permitting the organization to utilize it anyway it picks. Phantom stock can likewise be changed at the authority's circumspection.

Phantom stock qualifies as a deferred compensation plan. A phantom stock program must meet the requirements set forward by the Internal Revenue Service (IRS) code 409(a). The plan must be appropriately checked by an attorney, with each of the relevant subtleties determined recorded as a hard copy.

Phantom stock plans share a great deal practically speaking with traditional nonqualified stock plans.

Involving Phantom Stock as an Organizational Benefit

A few organizations might involve phantom stock as an incentive to upper management. Phantom stock ties a financial gain straightforwardly to a company performance metric. It can likewise be utilized specifically as a reward or a bonus to employees who meet certain criteria. Phantom stock can be given to each employee, either across the board or distributed fluidly relying upon performance, seniority, or different factors.

Phantom stock likewise furnishes organizations with certain limitations in place to give incentives tied to stock value. This can apply to a limited liability corporation (LLC), a sole owner or S-organizations restricted by the 100-proprietor rule.

The two types of phantom stock plans are "appreciation just," which does exclude the value of the underlying shares, just the increase in stock throughout the amount of time the shares are held; and "full value," which pays the underlying value and the amount the stock increased while it was held.

Stock Appreciation Rights

Stock appreciation rights (SARs) are like a phantom stock-based program. SARs are a form of bonus compensation given to employees that is equivalent to the appreciation of company stock throughout a laid out time span. Like employee stock options (ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees don't need to pay the exercise price, yet receive the sum of the increase in stock or cash.

Generally commonly made accessible to upper management, SARs can function as part of a retirement plan. It gives increased incentives as the value of the company increases. This can likewise assist with guaranteeing employee retention, particularly in times of internal volatility, for example, an ownership change or a personal emergency.

It gives a level of consolation to employees since phantom stock programs are generally backed in cash. This can, thus, bring about higher selling prices for a business on the off chance that a prospective purchaser sees the upper management team as being stable.

Features

• A phantom stock plan, or 'shadow stock' is a form of compensation offered to upper management that gives the benefits of claiming company stock without the genuine ownership or transfer of any shares.
• By recreating stock ownership, without really giving it, management guarantees that equity doesn't become diluted for different shareholders.
• Large cash payments to employees, notwithstanding, must be burdened as ordinary income as opposed to capital gains to the beneficiary and may upset the company's cash flow at times.