By Founder & CEO Scott Savage.
Today more than ever, business owners are looking for compelling ways to attract and retain talent in a highly competitive labor market. One approach to achieve this goal used by some business owners is through implementing a phantom stock plan. This type of plan affords business owners a way to reward key employees for past service and to align their interest with that of the company going forward.[1]
What Is A Phantom Stock Plan?
A phantom stock plan qualifies as a type of deferred compensation plan, contractually tying monetary compensation directly to the value of the business if certain conditions are met.
The idea of phantom stock is that it simulates ownership, providing the means for an employer to offer employees the potential benefit of company growth while avoiding the complications of transferring actual ownership. In practice, when the phantom shares are earned by the employee, a valuation date is set. Then, a formula is used to imitate the actual stock value, and the payout is based on the value of those shares.[2]
Note: Working with tax and legal professionals to set up this type of plan is important for proper execution.
Why Choose A Phantom Stock Plan?
A phantom stock plan can potentially succeed because it provides mutual benefits and protections for both the employer and employee.
For the employer, along with avoiding ownership dilution, it affords flexibility in selecting who is eligible for participation. Compared with employer-sponsored (ERISA) plans, which require benefits to be available to each employee, a phantom stock plan allows for the employer to offer participation to key employees and adjust values on an individual basis.[1] Additionally, this type of plan can help lead to less employee turnover, through both vesting period requirements and, in some cases, non-compete agreements.[3]
For the employee, participating in this plan is a bonus for their dedication to the company, and can endure into the future. Specifically, it can provide a predictable stream of cash flow after leaving the company or into retirement. In addition, if the company is sold, the plan typically vests immediately, offering protection in case ownership changes.
Final Thoughts
As you, a business owner, consider options to motivate your employees, a phantom stock plan is a valuable tool to build a mutually beneficial agreement with key employees within your organization. We believe this type of plan is a great way to potentially help propel the growth of your business, while giving you the ability to reward the people who help make it possible.
Important Disclosure Information & Sources:
[1] “Phantom Stock Plan“. Adam Hayes, 22-May-2022, investopedia.com.
[2] “An Introduction To Phantom Stock And Stock Appreciation Rights“. Gary Pattengale, 22-Feb-2022, bdfllc.com.
[3] “Phantom Stock Plan“. Corporate Finance Institute, 10-Mar-2021, corporatefinanceinstitute.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
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