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Phantom Stock.
By Dr. Rick Johnson
Monday, 21st January 2008
 
Phantom stock can contribute to a personal objective that is aimed at getting your executive team to think and act like equity partners.

It creates a feeling of obligation toward success because owning phantom stock means they now have "skin in the game".†

Having skin in the game can make all the difference in the world. WinWholesale has built a tremendous organization on that concept alone. Every local president has skin in the game as an equity partner. Although Win doesn't use phantom stock, the concept of being an equity partner by owning phantom stock can create the same feeling of obligation and ownership

A Phantom stock program is actually a deferred compensation program. They act like golden handcuffs in retaining key executives. They are often used by privately held companies that are going through an acquisition transition. Senior executives are generally the recipients of Phantom Stock programs but they can be applied to almost anyone.

How it works

Basically, an annual contribution is made based on a predetermined formula to some type of money management account.† This account is not managed by the company but the company does own it. Generally the Phantom Stock agreement spells out specific details. Details that include:

  • Vesting period
  • Non compete agreements
  • Termination stipulations
  • Disability
  • The sale of the company
  • Annual contributions
Phantom stock programs are generally very simplistic. However, each one must be designed to meet the specific needs and objectives of the company's shareholders in protecting the company's tribal knowledge and skill base that is represented by key employees that are to become part of the Phantom Stock program.

These programs are generally considered non qualified deferred compensation programs that provide the opportunity for growth in accumulated capital. Phantom stock is simply a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time.

There are a number of situations that might call for a Phantom Stock Plan:

  • The company's owners want to share the economic value of equity, but not equity itself.
  • The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule.
  • The company's leadership has considered other plans but found their rules too restrictive or implementation costs too high.
  • The company is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there is no actual stock.
Phantom Stock is a benefit plan for company employees that give 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 shareholders have.

Rick Johnson, expert speaker, wholesale distribution's "Leadership Strategist", founder of CEO Strategist, LLC a firm that helps clients create and maintain competitive advantage. Need a speaker for your next event, E-mail rick@ceostrategist.com.† Don't forget to check out the Lead Wolf Series that can help you put more profit into your business.

www.ceostrategist.com
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