In today\u2019s entrepreneurial scenario, companies understand the importance of human resources. Rightly so, they\u2019re rewarding employees with share-based incentives like employee stock option plans<\/b> (ESOPs) and a relatively new way of allocating shares – phantom stocks<\/b> and stock appreciation rights<\/b> (SARs).
\nOf these attractive employee benefit plans, phantom shares are becoming increasingly popular compensation, offering more flexibility and customization.
\nThis article will probe ESOPs vs. Phantom Shares, and discuss what is better suited for the needs of your company and employees.<\/p>\nWhat are ESOPs?\u00a0<\/b><\/h2>\n
An employee stock option plan<\/b> (ESOP) is one of the various incentives offered to employees via stock options. The participating employees exercise the eligibility to buy shares of their company for a predetermined price and date, as mentioned in the grant letter. The critical issues for companies, especially start-ups, sponsoring an ESOP to revolve around the number of employees, net income, and annual revenue. By assessing each factor, companies can decide whether to go for ESOPs. Furthermore, the cost of setting up and managing ESOPs is substantial and might not be favorable for all. Phantom shares are part of an employee benefit plan<\/b> that gives participating senior-level employees the perks of stock ownership without receiving any stock. Also known as shadow stock, synthetic stock, or simulated stock, phantom shares are stock-appreciation rights<\/b><\/a>. Many start-ups and organizations realize the ramifications of various plans of providing stock to employees. Phantom shares are a perfect fit for them, especially non-profit organizations or closely-held businesses<\/b>, where the need of tangible equity is not feasible or practicable.
\nESOPs can lead to significant financial gains for employees with the rise in the company\u2019s valuation. In addition, during a liquidity event, they can cash out their shares at the selling price.
\nSome popular ESOP plans are:<\/p>\n\n
Are ESOPs right for your company?<\/b><\/h3>\n
\nESOPs are great for companies who want to have a cadre of owners involved in the value sharing and ownership as part of the company growth.
\nSome start-ups in the initial days can also prefer employee stock options in case of uncertainty of sustained growth to retain employees.
\nRead more: <\/b>Best Practices for Giving Out ESOPs<\/b><\/a><\/p>\nBenefits of ESOPs<\/b><\/h3>\n
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What are Phantom Shares?\u00a0<\/b><\/h2>\n
\nThe plan confers the right to receive cash payments in the future and is typically tied to a valuation formula. The value of the cash settlement could be:<\/p>\n\n
Are Phantom Shares right for your Company?\u00a0<\/b><\/h3>\n
\nWhen an employee is given phantom stock, a “delay mechanism”<\/b> kicks in, causing the actual financial distribution to be delayed for a long time.
\nStart-ups or companies expected to experience an increase in value in the near future can also benefit from phantom shares. For neither the participating employees nor the management will have to bear costs until the time of execution.
\nEmployers who want to minimize minority stakeholders and stimulate employee ownership can find phantom shares to align with company goals and retain talent.<\/p>\nBenefits of Phantom Shares<\/b><\/h3>\n