Companies are always looking at different incentives to motivate their employees better. Examples include year-end bonuses, profit sharing, restricted stock or stock options. These perks can increase productivity, improve the company’s overall success and retain high-performing employees. Grants of equity can help attract and retain key employees but sharing that equity may not be desirable. In these situations, a phantom stock plan may be a viable option.
Why not use equity-based incentives?
Ownership of closely held companies resides with a few shareholders with significant influence or complete control. They may not want to dilute their impact by giving away equity or reducing the size of their distributions. They may also not want to give others access to financial records or have fiduciary obligations to minority owners.
How phantom stock works
Phantom stock is not stock in a corporation or a membership interest in a limited liability company. Instead, it can be a contractual obligation to pay bonuses to employees if:
- The company is sold.
- Dividends are issued to existing shareholders.
- There is termination without cause.
- Some other triggering event takes place.
While not officially stock, phantom stock dividends are tied to actual stock values to determine employee bonuses.
Similar to other incentive plans
As with typical equity incentive plans, companies can customize phantom stock plans to reflect the business and the employee’s role. Vesting periods, forfeiture events and stock valuation are some common characteristics. These traits enable businesses to meet their needs and stretch the incentives to address long-term success while creating desirable employee incentives.
A viable alternative
Owners considering granting equity to employees should consider phantom stocks a viable alternative. Business law attorneys representing commercial LLCs and closely held companies can help clients structure these contracts as stand-alone agreements or as part of a sale or purchase.