James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
Last month I shared a guide to equity compensation for high-level executives and it was one of the most popular posts for the month.
So this month, let's take a deeper dive into one particular form of equity compensation that can often cause a bit of confusion – a phantom stock plan, or shadow stock.
Here’s what you need to know.
How Does Phantom Stock Work?
Phantom stock plans essentially give employees the financial benefits of owning shares of stock without actually having any ownership in the company.
The number of shares an employee receives could be based on the perceived value of the employee, meaning different employees are granted different amounts of shares.
Shadow stock may be granted to them upfront or over a certain period of time. The value of the phantom stock mirrors the value of a company’s stocks, meaning the value will fluctuate based on how the company is doing.
Once a phantom stock plan is set in place, the employee must wait a certain amount of time before they see a financial payout. This will be determined by your company, but common lengths of time include two-year and five-year periods.
Types of Phantom Stock
There are two main types of phantom stock, appreciation only and full value.
Phantom stock that is “appreciation only” does not include the value of the underlying shares. Rather, it includes the increase in stock over the amount of time that the shares are held. If a company’s phantom stock appreciates over time, employees will receive a cash payment that will equal the difference between the original price and the appreciated price.
If a stock is “full value,” it includes the underlying value plus the amount of stock that increased while it was held. This essentially serves as a deferred cash bonus program. At some point, active employees will receive a cash payment that equals the value of the original shares plus the appreciation of the stock.
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Like everything, there are pros and cons to consider regarding this stock option.
Pros of Phantom Stock
Phantom stock can be seen as a motivational tool to keep important executives on board for the vesting period. By giving executives more long-term incentive to drive the well-being of the company, it can also be effective in boosting the overall productivity of a business or firm.
Employees want the stock to appreciate, because when it does, they will benefit, as well.
Cons of Phantom Stock
For the company itself, implementing phantom stock options can require third-party assistance, which may incur additional costs. For executives offered this option, it’s important to consider that a termination of employment may mean forgoing any potential payouts.
What to Do Before You Offer or Accept Phantom Stock
Whether you’re a business owner looking to update your benefits package or you’re a high-level executive weighing your options, keep the above considerations in mind. Before making a decision, speak with your trusted financial professional first to determine if this could work for you.
Don't have a strategic-minded financial advisor? We can help. At WHZ, we partner with business executives to maximize compensation package benefits within a comprehensive and strategic financial process designed to help you Plan Well, Invest Well, and Live Well, now and in the future. Get in touch to see how we can partner to tailor a plan just for you.
Presented by Principal/Managing Partner James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.