This deferred compensation program serves as golden handcuffs to retain key executives.

Phantom stock can contribute to a personal objective that is aimed at getting your executive team to think and act like equity partners. It creates a feeling of obligation toward success because owning phantom stock means they now have “skin in the game.” Having skin in the game can make all the difference in the world. WinWholesale has built a tremendous organization on that concept alone. Every local president has skin in the game as an equity partner. Although WinWholesale doesn’t use phantom stock, the concept of being an equity partner by owning phantom stock can create the same feeling of obligation and ownership.

A phantom stock program is actually a deferred compensation program. It acts like golden handcuffs in retaining key executives. It is often used by privately held companies that are going through an acquisition transition. Senior executives are generally the recipients of phantom stock programs but they can be applied to almost anyone.

How it works

Basically, an annual contribution is made based on a predetermined formula to some type of money management account. This account is not managed by the company, but the company owns it. Generally the phantom stock agreement spells out specific details, including:

Vesting period

Non-compete agreements

Termination stipulations

Disability

Sale of the company

Annual contributions

Phantom stock programs are usually very simplistic. However, each one must be designed to meet the specific needs and objectives of the company’s shareholders in protecting the company’s tribal knowledge and skill base that is represented by key employees that are to become part of the phantom stock program. These programs are generally considered non-qualified deferred compensation programs that provide the opportunity for growth in accumulated capital. Phantom stock is simply a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time.

A number of situations might call for a phantom stock plan:

The company’s owners want to share the economic value of equity, but not equity itself.

The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule.

The company’s leadership has considered other plans but found their rules too restrictive or implementation costs too high.

The company is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there is no actual stock.

Phantom stock is a benefit plan for company employees that gives them benefits that would come from holding company stock, without actually awarding any stock. The employees would receive benefits if the stock performed well over a certain amount of time. This is a way for companies to provide a bonus and incentive for employees, without granting them any of the specific benefits that shareholders have.