A phantom stock plan is an employee benefit plan that gives selected employees (especially the senior management) many of the benefits of stock ownership without actually giving them any company stock. This is also called phantom shares, simulated stock, or shadow stock.
Rather than getting physical stock, the employee receives mock stock. Even though it's not real, the Phantom stock is worth money, and its value increases and decreases just like a normal stock. Employees get profit gained from a phantom stock plan after the defined time is completed.
Each phantom stock plan has an agreement that includes,
Employee compensation in the form of equity can offer a lot of benefits. Motivating employees to work harder and creating loyal employees by aligning their interests with the companies.
Phantom stock is great for certain situations, such as:
A phantom stock plan is a deferred compensation plan that provides the employee an award measured by the employer’s common.
There are two main types of phantom stock plans.
The Employee will only get the value of any increase in the company’s stock price during the amount of time the Phantom Stocks are held.
Plans pay both the full value of the stock.
The compensation plan provides the employee with an award measured by the employer's common stock value. Companies can be about stock valuable to issue phantom stock to employees; both parties need to agree. Unlike actual stock, the award does not confer equity ownership in the company and also there is no actual stock given to the employee. The employees will receive a payment calculated based on:
The gains are considered as ordinary income and the employer shall be liable to deduct tax on the same as a tax on salary income.
The tax is paid on the total stock price received at the end of the deal.
Phantom stock is that it does not get any special tax treatment or benefit from any deferral of tax beyond the time of payment.
|Highly flexible: Private and public companies are both eligible for phantom stocks||Appreciate-only: the plan may gain only if the share price increases.|
|A phantom stock plan is a lot cheaper and saves the employer a lot of money.||In case of a decrease in share price, the employer either terminates the deal or offers only a small amount of the total valuation.|
|No taxes have to be paid by the employees getting phantom stock until the stock matures.||After the vesting period is over, taxes are levied as ordinary income.|
|Even with no voting rights, the employee stays invested in the company’s revenue and share price||The employer must have cash on hand at the time of payout to pay the employees.|
|The plan is based on cash rather than the actual stock. If an employee retires, the company will have no issue handling half of the vested equity||If the company is publicly traded, employers must declare the status of the phantom stock program to all participants annually.|
|A phantom stock program has fewer complications, as the employees are paid only if they meet all the conditions.||The employer has to pay an extra amount if a third party does the stock valuation.|
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