{"id":3722,"date":"2021-08-06T05:59:46","date_gmt":"2021-08-06T00:29:46","guid":{"rendered":"https:\/\/staging.trica.co\/equity\/blog\/?p=3722"},"modified":"2022-07-01T04:29:16","modified_gmt":"2022-07-01T04:29:16","slug":"phantom-stocks-pros-and-cons","status":"publish","type":"post","link":"https:\/\/trica.co\/equity\/blog\/us\/phantom-stocks-pros-and-cons\/","title":{"rendered":"Phantom Stocks: All Pros and Cons Analyzed"},"content":{"rendered":"

Employees are the pillars of every company. And offering benefits to employees like company stocks is a great way to retain talent.\u00a0Such compensation is mainly beneficial for startups that cannot offer competitive salaries to compensate for the employee\u2019s experience and skill. This comes under the employee equity plans, which also include other schemes like ESOPs<\/a>.
\nSo if you want to retain some senior-level employees and stop them from eyeing other opportunities, it\u2019s time to understand how you can steer away from the usual salary increment route and opt for phantom stocks.
\nPhantom stocks could be the bridge to establish a profitable arrangement both for your employee and your company.<\/p>\n

What is a Phantom Stock Options Plan?<\/b><\/h2>\n

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\nPhantom stocks are types of compensation that are primarily meant for senior-level employees. Under this plan, employees enjoy the benefits of stock ownership<\/a>. However, these stocks are hypothetical.
\nMeaning, phantom stock options have the characteristics of regular stock. It\u2019s worth money, and the price keeps fluctuating according to the market. But employees gain from the profits of the stock price change only after a fixed and agreed-upon tenure. These stocks, also known as \u2018shadow stocks,\u2019 do not give the employees voting rights or even a say in the decisions taken for and by the company. They only reap financial benefits.
\nEach phantom stock plan contains an agreement that outlines the plan’s vesting timeline. Each rule would be outlined in the agreement, including the goals or tasks that a participant must complete before the shares can vest.
\nIt also describes these goals and what is delivered to participants once they have met their objectives.<\/p>\n

What are the Different Types of Phantom Stock Options?<\/b><\/h2>\n

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\nThere are two types of Phantom stocks: Appreciation Only<\/b> and Full Value.<\/b><\/p>\n

1. Appreciation Only<\/b><\/h3>\n

Under this type of phantom stock, the employees only get compensated with the stock\u2019s appreciated value. This means that at the time of cash settlement, they will receive the difference between the current value and the value of the stock when it was granted.
\nAlso read: <\/b>Experts Discuss: 5 Must-Knows on Incorporating in the United States<\/b><\/a><\/p>\n

2. Full Value<\/b><\/h3>\n

As the name suggests, employees who are given full value phantom stocks get the entire value of the stock as compensation when the cash settlement is released.
\nIt must be noted that both types of plans are similar to traditional non-qualified plans in many ways. Vesting schedules in phantom stock plans are usually dependent on tenure or the achievement of specific goals or tasks outlined in the plan charter.
\nThis document also specifies whether participants will receive monetary equivalents in the form of dividends or voting rights.
\nSo far, we’ve discussed the nature and types of phantom stock options. Now, let’s dive into the pros and cons of employee stock options.<\/p>\n

What are the Pros of Using Phantom Stocks?<\/b><\/h2>\n

There are several benefits of using phantom stocks. They are:<\/p>\n

1. Financial Gain at Zero Debt<\/b><\/h3>\n

By transferring the value of stocks of the company, employers save a lot on their employee wages. This means they get to retain quality talent without having to drain their financial resources.
\nAt the same time, phantom stocks do not mess with existing shareholders\u2019 control over the company.
\nAlso, under the phantom stock scheme, employees receive the value of the stock as compensation and not the stock itself. Hence, there are no chances of equity dilution.<\/p>\n

2. Increased Employee Productivity<\/b><\/h3>\n

Implementing phantom stock pros the company in terms of its human resource in two ways:<\/p>\n