‘Phantom stock’ can be an effective way to keep key employees or senior management with a corporation. Rather than receiving actual stock in the corporation, the employee receives ‘phantom stock’ that follows the price movement of the corporation’s actual stock and pays out the resulting profits of the corporation to the recipient.
The benefit of phantom stock to the existing shareholders is that their equity is not diluted and the key employee’s pay out is tied to the profit or performance of the corporation. The existing shareholders also continue to receive the resulting performance benefits to the corporation of keeping the key employee with the corporation through this additional incentive.
The benefit of phantom stock to the key employee is the additional compensation tied to the profit or performance of the corporation without the burden of stock ownership (i.e. being called on to infuse capital if the corporation is low on funds).
Phantom stock can be an attractive way to keep key employees with the corporation and motivated. The devil, as it often is, is in the details of the phantom stock plan and the expectations related thereto.
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