Phantom Stock Plan
A phantom stock plan is a type of incentive compensation plan used by companies to reward and motivate key employees. It is a non-cash benefit that provides employees with the economic benefits of owning company stock without actually receiving physical shares of stock.
Under a phantom stock plan, the company grants the employee a notional or phantom share of stock that represents the value of a real share of stock. The value of the phantom stock is tied to the performance of the company's stock, so as the company's stock price increases, the value of the phantom stock also increases.
At a predetermined time, such as retirement or termination, the employee is paid the cash value of the phantom stock, which is usually based on the current market value of the company's stock. Some phantom stock plans also offer dividend equivalents, which allow employees to earn a payout based on the dividends paid to shareholders.
Phantom stock plans are typically used by privately held companies that are not publicly traded and do not have a readily available market for their stock. They are also used by publicly traded companies to provide additional incentives to key employees who may not be eligible for traditional stock options or other equity-based compensation plans.
One advantage of a phantom stock plan is that it can provide employees with a sense of ownership and a stake in the company's success, without diluting the ownership of existing shareholders. However, like any incentive compensation plan, there are also potential drawbacks and risks, such as the possibility that the value of the phantom stock may not increase as expected, or that employees may leave the company before the payout date.