A CREATIVE EXECUTIVE RETENTION & COMPENSATION STRATEGY: A QUICK LOOK AT PHANTOM EQUITY
Many C12 members’ businesses are growing at an annual rate exceeding 15%; a pace that doubles their revenue every five years. Steady growth and a healthy economy can create the challenge of attracting and keeping talented, experienced and committed employees. As a Christian CEO planning for the company’s future, one element to consider in your overall approach to long-term compensation and executive development is phantom stock.
Phantom stock is a program that has successfully worked for many companies to allow their key players to feel like they have ownership of the company without having to actually give up a piece of the company. When employees perform well and contribute to the company’s success, they can reap the financial rewards.
How Phantom Stocks Work
Phantom stock is typically offered to key employees as an incentive/benefit to share in the company’s success (similar to giving an employee actual stock, if the company does well their stock value will increase and the employee benefits). However, phantom stock is a contractual agreement between the company and employee, and the phantom stock mimics the features of actual stock ownership. At the issue date a phantom stock will typically have the equivalent value of an outstanding share of the employer’s stock. These plans are flexible and can also allow phantom stock holders to receive dividends/distributions like an actual shareholder depending on the structure.
Advantages for Owners & Employees
Phantom stocks offer the advantage for the employee in that they share/benefit in the increase in value of the company over time (typically cashed out at termination/retirement of employment or sale of company). The employee only pays income tax at the time proceeds are converted to cash or real stock.
Phantom stocks are also a win for owners in that the employees are incentivized and reap the financial rewards of the increased value of the company (as if they were an actual shareholder). The opportunity to make more money will energize and improve the commitment of key staff. Plus, the owner is not giving up any ownership or diluting the existing ownership (by issuing actual shares) of company stock.
When It’s Best Left To the Experts
If you are considering implementing any phantom equity program, C12 Group advises you to consult with your CPA, tax advisor and/or legal counsel for an understanding of prevailing state and federal tax laws. Phantom equity is not a magic formula for the ongoing challenge many business owners face to motivate and compensate key employees. However, it could be a powerful tool in the many ways you drive value and share the rewards of “building a great business for a greater purpose.”
For those interested in learning more about implementing phantom equity, there are abundant resources available online to begin the process. Here are a few sites:
