Employers hoping to motivate and retain employees may want to consider a phantom stock or shadow equity plan. These plans allow an employer the ability to offer an incentive to current employees while preserving capital that is often used for employee compensation. These plans operate as bonus or deferred compensation plans and enable an employer to give its employees a participating interest in the company without giving them an actual ownership in the company.
Phantom stock plans and shadow equity plans can be done in a couple of ways. Compensation can be tied to the actual increase in the net worth of the company, traditionally referred to as shadow equity. If the net value or net assets of the company increase then employees will receive benefits based upon that increase.
Compensation can also shadow the value of the company’s stock shares, traditionally referred to as phantom stock. Employees are given a hypothetical share equivalent to that of a shareholder, and if the value of the stock increases over time, they will receive that benefit in the form of compensation.
These plans can also be tailored to the unique needs of a company. Employers can discriminate amongst employees, giving the benefits to only key employees, and the payout on the plan can be tied to specific events such as an employee’s death, or retirement or sale of the company.
Typically shadow equity or phantom stock is incorporated into an employment contract between an employer and employee. In drafting a shadow equity or phantom stock plan employers should carefully consider how they will structure the payout of benefits. If payouts are tied to certain events, such as death or retirement, employers may be faced with a large unexpected payment. Employers should be sure to have a financial plan in place to provide compensation when it comes due.