CFP

By Investopedia AAA

Stock Plans - Restricted and Phantom Stock Plans


Restricted Stock
A corporation's issue of shares to its employees at little or no cost to them in exchange for their services to the company with access restricted pending the fulfillment or realization of certain conditions that the employer would specify.

Examples include an employee achieving a certain number of years of service (akin to vesting in a qualified plan but without the strictures of ERISA) or the company meeting specified earnings targets. Should the conditions set by the employer fail to materialize, then any rights to the shares would be forfeited. The corporation would hold the share certificates issued in the participants' names, releasing them to the employees once the employer-mandated contingencies (time- or performance-based) are met. At this point, the employees would own the shares outright. Holders of restricted stock are entitled to the receipt of dividends as well as the right to vote the shares. Shares become taxable to the employee to the extent that fair market value exceeds basis once they are no longer forfeitable.

Phantom Stock
This type of arrangement is a right to a bonus of faux shares of a company's common stock over a period of time based upon the performance of that company's actual shares. The bonus or gain is a function of the difference between the value of the stock at a later date minus its value at the time that it is granted to an employee.

As with both restricted stock and stock appreciation rights, time- or performance-based vesting often govern the employee's eventual receipt of these phantom units. Advantages and disadvantages are mixed, with participants not having to choose an exercise date, holders not having the right to receive the equivalent of a share dividend, yet having the right to vote. Once the stock is no longer at substantial risk of forfeiture, its value at exercise is includible in ordinary income.

Description

You May Also Like

Related Articles
  1. Several things factor into the salary of a financial advisor. Here's a look.
    Investing Basics

    How Much Does A Financial Advisor Earn?

  2. With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
    Economics

    Top 5 Forex Risks Traders Should Consider

  3. ISAs are financial instruments that allow students to raise funds to pay for their degrees by selling shares in their future earnings.
    Investing Basics

    Funding Higher Education With An ISA

  4. Top Ways to protect your purchases from credit card hackers or security breaches.
    Credit & Loans

    7 Ways To Protect Against Credit Card ...

  5. The Internal Revenue Service's new 2015 contribution limits for tax-deferred savings plans are higher; here's what you and your clients should know.
    Investing Basics

    New 2015 Contribution Limits: Advisors ...

Trading Center