Phantom Stock Plan - Explained
What is a Phantom Stock Plan?
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Table of ContentsWhat is a Phantom Stock Plan?How does a Phantom Stock Plan Work? Using Phantom Stock as an Organizational BenefitStock Appreciation RightsPhantom Stock and the IRSAcademic Research on Phantom Stock Plans
What is a Phantom Stock Plan?
There are a number of ways corporations and employers reward their employees, a phantom stock plan is being widely used by employers for employee compensation. Through a phantom stock plan, an employer gives some selected employees of a company stock ownership but these employees do not receive the stock ownership.
Instead of the employees receiving the actual stock, they are not given actual stock but pretend stock. Stocks given to employees through a phantom stock plan are otherwise called shadow stocks. Despite that phantom stock is unreal, it pays profits to employees by following the price movement of the actual stock of the company.
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How does a Phantom Stock Plan Work?
Phantom stocks are not real, they are not actual stock but employers and corporate organizations use the phantom stock to compensate certain employees. Just like the actual stock of a company, a phantom stock follows the price movement and realize profits which is paid to the beneficiaries (employees) as dividends. All factors that affect the actual stock of a company also affect the phantom stock. Another name given to phantom stock is synthetic equity which can be used by the company but pays out cash values or dividends to employees at a specific time.
Using Phantom Stock as an Organizational Benefit
Despite that phantom stock are hypothetical stock that are unreal in nature they have certain benefits they offer to organizations. For instance, phantom stock can be used when an organization wants to change its leadership. Stock of this nature can also be used in any direction that the organization wants. Usually, organizations use the phantom stock plan to compensate certain employees who have contributed significantly to the growth of the company. In some cases, an organization can provide phantom stock to every employee but in varying numbers based on their performance and contributions to the organization.
Stock Appreciation Rights
A Stock appreciation right is usually given to a member of the upper management of an organization or an executive in a higher hierarchy. Stock appreciation rights are part of the phantom stock-based program but a bit different from ordinary phantom stock because they most serve retirement benefit purpose. Ultimately, organizations use stock appreciation rights as an employee-retention strategy as this strategy helps them keep employees even during turbulent times or when the organization has a high level of vulnerability. Employees and top management team of an organization become stable through the use of stock appreciation rights.
Phantom Stock and the IRS
In the United States, the Internal Revenue Service (IRS), treat phantom stock as deferred compensation plans which means such stock must pass all the requirements outlined by the IRS. Code 409 (a) contains all requirements that phantom stock plan must meet before being classified as a deferred compensation plan, which includes being authorized by an attorney in the state the organization operates.
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