Phantom Stock

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What is simply a Phantom Stock?

A phantom banal plan, besides called a protector banal plan, is simply a measurement for companies to motivate and reward labor without giving them ownership. Instead, labor get virtual shares known arsenic phantom banal units (PSUs).

These PSUs mimic nan worth of existent institution shares and spell up aliases down based connected really good nan institution does. When these virtual shares summation complete time, labor get rate bonuses matching nan PSUs’ worthy increase.

This banal plans are besides flexible, offering taxation benefits, liquidity options, and nan expertise to customize nan scheme to suit nan company’s unsocial goals, making them a lucrative opportunity for employees.

Phantom Stock

Table of Contents
  • Definition
    • How it works?
    • Types
    • Examples
    • Agreement
    • Phantom Stock Vs ESOP
    • Benefits
    • Disadvantages
    • Taxation

Key Highlights

  • In phantom stocks, labor person rate aliases cash-equivalent payouts based connected nan worth of virtual shares
  • Types of these stocks are appreciation-only, full-value, and performance-based.
  • Employees pinch phantom shares align their goals and interests for nan company’s maturation and profitability.

How it Works?

The phantom banal scheme usually useful successful nan pursuing manner:

Step #1: Allocation of PSU
Companies assistance selected labor virtual shares called phantom banal units (PSUs). These PSUs replicate nan worth and capacity of existent institution shares.

Step #2: Performance tied valuation
The worth of these virtual shares goes up and down depending connected nan company’s financial capacity aliases circumstantial metrics, specified arsenic gross maturation aliases an summation successful banal price.

Step #3: Waiting during vesting play
Employees do not person these virtual shares immediately. They must hold a definite magnitude of time, known arsenic nan “vesting period”, to person it. The virtual stock worth whitethorn up and down during this play depending connected nan chosen capacity criteria.

Step #4: Employees person payouts
When nan vesting play ends, labor will person rate payments aliases cash-equivalent payouts based connected nan worth of virtual shares during nan vesting period. If nan institution does well, past labor person much money.

3. Performance-Based
Some companies incorporated capacity metrics successful their phantom banal plan. Employees person payouts based connected gathering circumstantial capacity goals aliases milestones mentioned successful nan plan. It encourages labor to execute cardinal objectives that use nan company.

4. Hybrid
This scheme combines elements of different types of phantom stock, tailoring compensation to nan company’s circumstantial goals and circumstances.


The pursuing are immoderate examples of nan supra types.

Example #1: Full-Value
Suppose a institution wants to reward a elder manager, John Kelvin, by creating a full-value phantom banal plan. So, they delegate 1,000 phantom shares to him astatine $5 each, truthful nan first worth is $5,000 (1000 x $5).

Over nan 3 years, nan company’s banal worth aliases capacity increases, and nan worth of nan phantom shares besides increases. Now, each phantom stock is worthy $10. So, John receives a full rate costs of $10,000 (1000 x $10) arsenic a portion of nan full-value stock plan.

Example #2: Appreciation-Only
Emily, who useful successful an MNC, was granted 400 phantom shares from her institution connected June 5, 2018, worthy $40 each. But, she had to support moving successful nan institution for nan adjacent 5 years to reap nan benefits of these shares.

On June 5, 2023, these shares were $52.30 each owed to accrued institution value. The quality betwixt nan first and existent stock worth is $12.30 per share. Since Emily had 500 shares, she sewage a prize of $4,920 (400 x 12.30) arsenic a portion of an appreciation-only plan.

Example #3: Performance-Based
Michael’s institution motivates him to waste much products by giving him 200 phantom stocks astatine $10 each. These stocks are linked to income revenue, meaning if he manages to summation nan income gross by 15% wrong a year, nan worth of each banal will summation by 10%.

Michael consistently exceeded nan income target for 2 years, which raised nan banal worth to 20%. As a result, each stock is now worthy $12.10, and he will person a full rate costs of $2,420 owed to his exceptional income performance.


1st Year : $10 (initial value) + ($10 * 10%) = $10 + $1 = $11
2nd Year: $11 (Year 1 value) + ($11 * 10%) = $11 + $1.10 = $12.10


The phantom banal statement is simply a general written statement that outlines each nan position and conditions of nan plan, ensuring clarity and ineligible enforceability.

The pursuing are immoderate cardinal components typically recovered successful nan agreement:

1. Grant of Phantom Shares
Companies mention nan number of phantom banal units granted to employees. Here,  labor do not ain nan existent company’s banal aliases equity.

2. Valuation
It defines nan worth of phantom shares. The company’s banal price, a predetermined formula, aliases different performance-based metrics find nan value.

3. Vesting Period
Phantom banal plans often person a vesting schedule, specifying erstwhile labor go eligible for nan benefits. Vesting whitethorn beryllium time-based aliases performance-based.

4. Payout Terms
The statement outlines erstwhile and really labor tin rate retired aliases person nan worth of their phantom shares. Payouts tin hap upon retirement, termination, aliases different triggering events.

5. Dividends and Distributions
Employees whitethorn person dividend equivalents aliases different distributions akin to existent shareholders, depending connected nan plan’s terms.

6. Tax Considerations
The statement should reside taxation implications for nan institution and its employees.

7. Forfeiture Provisions
It whitethorn see provisions for forfeiture of phantom shares if labor time off nan institution earlier vesting aliases different conditions.

Phantom Stock Vs ESOP

Phantom Stock Vs ESOP

Here are immoderate differences betwixt phantom banal and worker banal ownership scheme (ESOP)

Aspect Phantom Stock Employee Stock Ownership Plan (ESOP)
Value Employees person a rate balanced of nan company’s banal value. Employees person a information of nan company’s share. The worth is straight tied to nan company’s capacity and banal value.
Ownership They do not clasp existent shares. They are existent shareholders.
Voting Rights They do not person voting authorities successful institution decisions. They person voting authorities based connected their ownership stake.
Risk It involves little risk, arsenic it doesn’t impact existent ownership of shares. It involves consequence tied to nan capacity of nan company’s banal successful nan banal market.
Cashing Out Shareholders cannot determine erstwhile they will person their payout Shareholders tin take erstwhile to waste their stock.
Taxation Taxed arsenic mean result connected payouts astatine a higher rate Tax advantages for some nan institution and labor and besides person nan action to defer taxes connected gains.


The benefits are arsenic follows:

1. Retention and Motivation
Phantom shares supply a powerful instrumentality for retaining cardinal employees. Since nan worth of these shares ties to nan company’s performance, labor are motivated to activity towards nan company’s success.

2. Alignment of Interests
Employees pinch phantom shares align their goals and interests for nan company’s maturation and profitability. Because if nan institution does good successful nan vested period, nan labor will besides benefit.

3. Cash-Based Rewards
Phantom shares are settled successful cash, meaning labor person monetary rewards without investing their money.

4. Flexible Compensation
Companies tin alteration phantom stock plans to suit their objectives and needs. The shares tin beryllium fixed to circumstantial labor aliases utilized to motivate them to execute amended to avail those benefits.

5. No Equity Dilution
Unlike accepted banal options, phantom shares do not dilute nan ownership of existing shareholders.

6. Long-Term Perspective
Phantom shares often travel pinch vesting periods, encouraging labor to enactment pinch nan institution for nan agelong term.

7. Simplicity
Phantom stock plans are typically easier to negociate than accepted equity-based compensation plans.


The disadvantages of Phantom Stock are arsenic follows.

1. Taxation
Phantom banal is mostly taxed arsenic mean income, and companies besides deduct nan disbursal associated pinch payouts. So, labor will person nan payout magnitude aft each deductions, which tin disagree from nan original amount.

2. Cash Flow Requirements
Implementing and administering tin beryllium costly and time-consuming for companies. Employers must person capable rate to money phantom banal benefits erstwhile they go payable.

3. Outstanding Liabilities
It whitethorn create outstanding liabilities connected a company’s equilibrium sheet. These liabilities tin impact nan company’s perceived worth and expertise to pull investors aliases buyers.

4. Lack of Voting Rights
It does not assistance labor immoderate voting authorities successful nan company, dissimilar existent equity ownership.


Phantom banal plans are typically taxed erstwhile paid to nan employee. It’s important for labor participating successful these plans to understand their circumstantial position and taxation implications.

However, nan taxation is akin to regular income tax. The worker needs to study nan income from these stocks successful nan twelvemonth they person it. The taxation implications alteration based connected nan country’s taxation laws, and nan costs is typically taxable to federal, state, and section income taxes.

Sometimes, companies return immoderate money from phantom banal payouts for taxes, truthful labor don’t look taxation burdens. The institution sends this money to nan taxation authorities connected behalf of nan employee. The withheld magnitude is credited against nan employee’s taxation liability erstwhile they record their taxation return.

Additionally, taxation laws regarding phantom stocks alteration complete time, truthful staying updated pinch nan latest regulations and seeking master taxation proposal is essential.

Frequently Asked Questions(FAQs)

Q1. Are each labor eligible for Phantom Stock?
Answer: No, not each labor are eligible for phantom stock. Companies take to springiness to circumstantial employees, for illustration managers, executives, and top-level representatives.

Q2. Is phantom banal a bully idea?
Answer: It depends connected nan goals of nan institution and its employees. It mightiness beryllium useful for a institution to promote labor to align their interests and capacity pinch its objectives. However, this scheme whitethorn beryllium analyzable and person taxation consequences.

Q3. What are nan risks of phantom stock?
Answer: The risks associated pinch phantom banal plans include:

  • Establishing and managing banal plans for galore labor tin beryllium complicated.
  • The alteration successful marketplace trends affects banal value.
  • Employees are not shareholders, which affects their committedness and capacity toward nan company’s success.
  • The payout is taxable to precocious taxation liabilities compared to different stocks.

Recommended Articles

This article is simply a complete guideline to phantom banal and really it works. It besides explains its types, taxation, agreements, and benefits. You tin besides mention to nan pursuing articles to study more.

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