Phantom stock plans are a deferred compensation tool companies
can use to attract, motivate, and retain talented employees. These
plans (also known by many other names, i.e., shadow stock plans,
phantom equity plans, synthetic equity programs, etc.) offer
employees some of the benefits of stock ownership without
transferring company equity. While phantom stock plans bring many
advantages, employers must avoid pitfalls and ensure smooth
administration, especially when considering future
change-of-ownership transactions.
While phantom stock plans offer a unique compensation approach,
understanding their inner workings is crucial for employers and
employees. As a form of equity-based compensation, phantom stock
plans use stock price (or, in the case of partnerships and LLCs,
unit price) as an underlying asset to compensate employees based on
company performance. Plan participants receive "virtual"
shares of company stock; just like ordinary stock, these phantom
shares
