A phantom stock plan is an incentive scheme employed by some companies for use with selected groups of employees, such as the senior managers of the firm. Essentially, the plan provides a particular group of employees with the benefits of owning company stock, without actually issuing shares to each employee. Sometimes referred to as shadow stock, this approach allows the employees to receive benefits that equal those of the dividends paid on the outstanding stock issued by the company for the period under consideration.
The process employed with a phantom stock plan is relatively straightforward. Each qualified employee is assigned a unit of “pretend” stock, based on various factors. These factors include the position held by the employee, his or her length of service with the business, and any other criteria that the company chooses to include in the formula for determining the proper number of pretend shares. The number of units assigned determines what type of compensation each employee will receive.
To calculate the actual compensation each qualified employee receives from the phantom stock plan, the company will usually count one unit as equaling one share of stock. The performance of the company’s outstanding shares forms the basis for issuing compensation to the employees involved in the plan, with the payments issued to the employees matching the dividend payments made to the investors. In some situations, the compensation received from a phantom stock plan is tied directly to company sales, or a combination of sales and profits for the period under consideration.
It is possible to structure a phantom stock plan as a vested retirement plan that functions somewhat like a 401(k) plan. With this application, the qualified employees would not receive compensation periodically from the plan. Instead, the compensation would accrue over the years that the employee remained with the business. At the end of that time, the employee would be able to roll the amount into some other type of plan, cash it out in full, or receive the balance in a series of structured payments.
The tax liability carried by a phantom stock plan will vary, depending on the country where the business and the employee are based. In most cases, taxation is deferred until the compensation is actually received. This means that unless the funds from a vested plan are rolled over into a qualified tax deferred program, the employee will be subject to paying taxes on each disbursement from the fund made at the time when the employee retires or chooses to leave the employ of the company after becoming fully vested.
