Why Is Phantom Stock Option Touted as the Most Effective Way to Incentivize Employees?
Understanding the Concept of Phantom Stock
It is an open secret that every business needs highly motivated and dedicated employees to achieve its optimum growth. Along with it they also need to retain their key employees so that they are not lured by their rivals. Incentives and perks of varied nature is a common method through which the companies make sure that their employees don’t abandon them.
Phantom Stock is a wonderful way to provide stock ownership benefits to key employees of a company as an incentive. It is also known as shadow stock or simulated stock due to its unique characteristic wherein real stocks are not physically transferred to the owner, yet its value is equivalent to the actual stocks. It is a contractual understanding between the company and its employee.
Reasons for Phantom Stock Gaining Immense Ground
The popularity of Phantom Stocks has gained ground in recent years due to its double fold benefits to the company as well as the owner, i.e. the benefiting employee.
Benefits for The Company-
Flexibility
The foremost advantage of using Phantom Stocks for the Company is that it is a contractual understanding between the company and its employee and thus, gives the entity the liberty to structure the agreement as per its suitability.
No Dilution of Shares
It is highly utilized by private companies as it caters perfectly to its unique organizational traits; it can be given without diluting the company’s shares.
No Legal Hassles
There is no mention of any provisions of Phantom Stocks in Companies Act, 2013, nor in SEBI’s Employee Benefit Regulations, thus not much paperwork and legalities mean no strings attached.
Crucial Voting Rights Not Given
The key decisions of the company will not be under threat by such employees as they don’t get the voting rights which the shareholders possess.
Employees Get a Sense of Belonging
The key employees who are given Phantom Stocks as rewards get the same motivational kick out of it if they would have owned the actual shares. The employees work with more dedication to see the company does well so as its shares appreciate and give more returns.
Benefits For The Employee-
Great reward
In terms of money Phantom Stocks means getting a substantial amount at the time of maturity.
No Strings Attached
As the legalities tied to Phantom Stocks is zero, employees have to do no extensive paperwork.
Less Tax Liability
As the tax to be paid on income from Phantom Stocks only at maturity, it’s not a yearly burden on the employees.
Thus, there are many advantages attached to Phantom Stocks for both the giver as well as the receiver yet, there are some negative elements attached to it as well.
Disadvantages Associated With Phantom Stocks-
Limited Circulation: The company cannot award it to a large number of employees as it would become a non-qualified plan, hence, illegal.
Employee May Feel Dejected
Most of the times people at key positions, who are the driving force behind a company, want actual shares as it empowers them.
Loss if the Company Does not Perform Well
A fixed term of its maturity means getting the money at a specified time which may not be very lucrative if the company is not doing well at that time.
The Final Word
Comparing the pros and cons of Phantom Stocks with other vehicles of incentives, it is a better option than most others.
“There is no fit-all concept with Phantom Stock therefore, the company will have to find out its feasibility, and if yes, work on drafting and implementation. Consult and seek guidance from MUDS so as not to falter with compliance of all necessary legalities.”
– Shweta Gupta , Founder, and CEO, MUDS