This type of plan can be used as an incentive to attract and retain key employees.
Phantom stock enables your key employees to share in the increase in company value over a time period. Unlike "real" stock, phantom stock does not convey any actual ownership in the business. A phantom share is a credit in an employee account for an amount equal to the value of your company's "real" shares. Over time, the account is credited with changes in share value, along with dividends and other distributions. There is no taxable income for the holders of phantom stock until the employee redeems it. On the other hand, there is no tax deduction for the company until it becomes obligated to pay the employee.