Business, Legal & Accounting Glossary
A benefit plan for company employees that gives the employees benefits that would come from holding company stock, without actually giving any stock to these employees. The employees would receive benefits if the stock performed well over a certain amount of time. This is a way for companies to provide a bonus and incentive for employees, without granting them any of the specific benefits that would come from actually being a shareholder. The rules and payout arrangements are similar to that of a deferred compensation plan.
Phantom Stock Plans are employee benefit plans that give selected employees many of the benefits of stock ownership without actually giving them any company stock. Instead of giving key employees stock or stock options, the company adopts a phantom stock plan and credits each key employee with a number of units of “phantom” stock. Each unit increases in value as the company’s shares of common stock do and as dividends are declared but no unit entitles any holder to any stockholder rights.
When a plan participant retires or his rights in the plan otherwise vest, he receives for each vested unit an amount equal to the appreciation in the value of a share of the company’s common stock plus the amount of any declared dividends. For example, if the company’s common stock is worth $5 a share when the units are distributed and worth $10 a share when the employee’s right to draw against the plan vests, the employee will receive $5 per unit. He will also receive an amount equal to any dividends declared on the common stock while he held the unit. The total amount the employee receives will be taxable at ordinary income tax rates.
Phantom stock plans have certain advantages over actual stock plans. For one thing, they permit company employees to participate directly in the increased value of the company stock without giving them any voting rights. Also, they do not dilute the ownership percentages of the company’s stockholders. For cosmetic purposes, management can design phantom stock certificates that closely approximate actual stock certificates in appearance so that the units the employees receive look very much like company share certificates.
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This glossary post was last updated: 30th December, 2021 | 0 Views.