Many organizations offer their senior-level representatives with additional company benefits alongside their salaries. These advantages typically include employee compensation for the type of company stock. There are a ton of employee equity plans that are used such as ESOPs, phantom stock, and stock options. Among these plans, phantom stock is viewed as an extraordinary method for remunerating senior-level workers. With phantom stock plan offerings, employees get the benefits of owning shares without the genuine responsibility for stock. This is a great method for keeping away from the extra managerial costs that can happen for an organization on account of stock ownership on paper. Before you go ahead, let’s understand more about phantom stock and its works.
As mentioned above, a phantom stock plan employee compensation that gives selected senior employees stock ownership benefits. They are given this benefit of stock ownership without actually giving them the company stock. In simple words, it is a bonus for employees in regard to staying in the company for a long time and employee hard work that they have put in all these years.
The number of shares given to a worker is usually based on how senior they are in the organization and their performance. Despite the fact that they are guaranteed money today, their benefits are long-term. According to the phantom stock plan, the organization would pay out the benefits in two, three, or even five years, with some being subject to specific milestones as well.
Phantom stock is exceptionally adaptable and it can be used by both private and public organizations. Setting up a phantom stock arrangement is much less expensive than setting up ESOPs, allowing the company to save money. When getting the phantom stock the employees have to pay no taxes until the stock matures. The complications in the phantom stock plan are less where the workers are paid when they meet the set terms and conditions. Even though voting rights are not offered, the workers are as yet invested to build the share price of the organization.
To record phantom stock, one of the most important facts that have to be kept in mind is that phantom stock exists only in the company’s books and is not issued shares. Therefore, it is important to have an organized company cap table. If you wish to issue phantom stocks for your company, Eqvista can help. One can issue phantom stocks easily after creating a cap table.
Phantom stock plans are of two types that are given as employee compensation. These consist of either “appreciation only” phantom stock or “full value” phantom stock.
Appreciation Only Phantom Stock
The beneficiaries of “appreciation only” phantom stock would not get the ongoing worth of the stock. Rather, they procure the stock price appreciation as profit where the value of the stock increases with time.
For example, let’s say a worker will get 2,000 shares of phantom stock and each stock is valued at $20. This would imply that the ongoing worth of the organization’s stock would be $40,000. Furthermore, in this model according to the arrangement terms, the worker needs to remain with the firm for something like four years before they can “sell” their portions. This necessity with a time span is known as the “vesting” period.
Presently, let’s say that the vesting period has finished, and the organization’s stock worth is $50 per share. The worker would get the contrast between the $20 per share esteem when the arrangement was made and the $50 per share when it is finished to vest. This implies that the appreciation is $30 per share, which would provide the phantom stock investor with a benefit of $60,000.
Full Value Phantom Stock
According to a “full value” phantom stock arrangement, the member gets both the ongoing worth and any stock appreciation whenever they have satisfied the necessities of the phantom stock plan. Accepting a similar model as in the past, we realize that the worker would get the $30 per share cost increment following four years.
Regardless, they would likewise get the ongoing worth on the offers from the date the arrangement began. Along these lines, this implies that the representative would get an aggregate of $100,000 after the four-year vesting period is finished.
How does a Phantom Stock Plan work?
For organizations to have the option to give phantom stock to employees, the two players need to go into an understanding. Sticking to the conditions of the arrangement, the organization would offer a measure of phantom stock or shares to the participating employees over a predetermined time frame. The understanding would have every minute detail such as the payment events, vesting schedule, and some other possibilities. Given below is an example of Phantom Stocks in a cap table.
Now you might have an idea that a phantom stock plan is strong employee compensation and an incredible motivation technique for employees.
Yet, while you do this, assure that you monitor every one of the shares in your organization. The most ideal way to do this is by utilizing a cap table application like Eqvista. It can assist you with monitoring all the phantom stock in your organization. Check it out and start utilizing it today!