What is a 'Phantom Stock Plan'

A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This is sometimes referred to as shadow stock.

Rather than getting physical stock, the employee receives pretend stock. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits.

BREAKING DOWN 'Phantom Stock Plan'

Even though the stock is hypothetical, phantom stock pays dividends and experiences 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, also known as synthetic equity, has no inherent requirements or restrictions regarding its use, allowing the organization to use it however it chooses. Phantom stock can also be changed at the leadership's discretion.

Using Phantom Stock as an Organizational Benefit

Some organizations may use phantom stock as an incentive to upper management. Phantom stock ties a financial gain directly to a company performance metric. It can also be used selectively as a reward or a bonus to employees who meet certain criteria. Phantom stock can be provided to every employee, either in as an across-the-board benefit or varied depending on performance, seniority or other factors.

Phantom stock also provides organizations with certain restrictions in place to provide incentive tied to stock value. This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule.

Stock Appreciation Rights

Stock appreciation rights are a form of phantom stock-based program, most commonly made available to upper management, and it can function as part of a retirement plan. It provides increased incentives as the value of the company increases. This can also help ensure employee retention, especially in times of internal volatility, such as an ownership change or a personal emergency.

It provides a level of reassurance to employees, since phantom stock programs are generally backed in cash. This can, in turn, result in higher selling prices for a business if a perspective buyer sees the upper management team as stable.

Phantom Stock and the IRS

Phantom stock qualifies as a deferred compensation plan. A phantom stock program must meet the requirements set forth by Internal Revenue Service (IRS) code 409(a). The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing.

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