Incentivizing Key Management Members is of Paramount Importance

First of all, let’s analyze why incentivizing of key management workers, through ESOP, is crucial for all companies!

Employee Stock Ownership Plan (ESOP) is highly significant in today’s high-tech economy, as cut-throat competition makes it mandatory for companies to provide incentives to retain employees plus keep them motivated to stimulate growth.

It’s not only consequential in retaining them on the payroll but at the same time giving them a strong push to make the company advance, owing to the fact that with the growth of the company, their stocks will reap rich benefits.

Phantom Stocks- Comprehending Its Meaning

Of all the varied options of ESOPs like Employee Stock Option Scheme, Compensation Plan, Employee Stock Purchase Plan, Incentive Plans, etc. the one which has gained the most ground in recent years, is Phantom Stock, also known as Shadow Stock.

It has been so named because of its unique characteristic; it is hypothetical in nature yet, it enjoys the same value as real stocks. Their value goes up and down with the fluctuating shares, similar to real shares.

Know How & Why Phantom Stock Can Trump Over Real Stock

A two-fold benefit is a real reason for its expanding popularity!

Advantages For The Company

• As there is no physical transfer of shares, thus, it means there is less paperwork, formalities involved and also, there is no dilution of shares.
• It renders and ensures great flexibility as the company is free to structure the stock agreement as per its convenience and suitability.
• Neither SEBI’s Employee Benefits Regulations nor the Companies Act, 2013, has any mention of Phantom Stock, thus reducing paper works and legal tangles.
• The employees do not possess any rights that otherwise a shareholder may possess; this means holders of Phantom Stocks are not entitled to crucial voting rights, thus, no threat to the company.
• It’s a win-win situation all the way as due to the motivational factor of monetary gain the employees put in all their efforts towards progress and value creation of the company.
• It ushers in the complete dedication and loyalty of the employees who feel recognized and awarded for their hard work.

Benefits For The Employees

• The convenience attached to Phantom Stock is immense; they are contractual agreements and need minimal documentation.
• A legal entanglement is less as there are no regulations that bind it.
• The monetary gain at the time of maturity is substantial for the employee.
• The yearly tax burden is not there with Phantom Stock, as the tax needs to be paid only during maturity.
• It gives a sense of belonging, a satisfaction of getting a share in the profit and an undeniable penchant to perform to the optimum.

Conclusion: Based On Scrutiny of Facts

The ease of issuing them and the fulfillment of the purpose of reward and compensation has resulted in Phantom Stocks gaining ground over all other ESOPS.

It consequently helps to keep competitors at bay too, as satisfied employees won’t be swayed by them so easily.

Strong and capable leadership is the foundation pillar of progress and this is what Phantom Stocks ensure through its lure.

It takes care of the needs of all the parties involved- the owners, the shareholders, and, most importantly, the valuable employees.

No rigid rules & regulations bind Phantom Stock, but it also means that the onus of being legally accurate lies with the company; and, for this very reason, they should take strong legal counsel to structure the agreement.

“Get in touch with MUDS: a consulting firm of impeccable reputation and pan India presence, has experts with immense experience in the related field.”
– Shweta Gupta , Founder, and CEO, MUDS

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Why Is It Called Phantom Stock?

It is called so because it is a hypothetical stock and not real stock. Keeping up with its ghost-like identity, the Phantom Stock is also called Shadow Stock! And what does it do? Well, it plays a pivotal role in incentivizing senior management employees and ensuring the healthy growth of the company.

What’s The Purpose Of Granting Phantom Stock?

Its purpose is similar to traditional ESOPs in attracting, retaining and motivating key employees and hence, comes out as an alternative to other ESOPs.

How Does Phantom Stock Work In Real Scenario?

It is a contractual agreement between the company and the participant employee in which the terms and conditions are specified. The agreement specifies all details like the number of shares, maturity date, type of Phantom Stock granted, etc.

These stocks hold equal weightage to its real counterpart as far as value is concerned. It works as a deferred bonus, an attractive way of profit sharing which ensures key employees’ retention, loyalty, and dedication.

They are of two types:

Appreciation Only- Wherein only the appreciated value of the specified number of Phantom Stock is given.

Full Value- Here the exact value of the Phantom Stock will be given to the employee.

It is granted to the participating employee based on the fulfillment of the terms and conditions of the agreement.

How To Calculate The Value Of Phantom Stocks?

It is quite simple to keep a tap on the value of Phantom Stock as it is measured by the actual market value of the company’s share and witnesses fluctuations in the value accordingly.

How Can A Shadow Stock Overshadow The Real Stock?

There are numerous reasons because of which Phantom Stock has gained remarkable popularity.

• Phantom Stock works well for privately-owned companies who intend value sharing with those who propel its growth, but without diluting their equity.
• A formal equity sharing not only dilutes the ownership but also involves lots of legalities, formalities, paperwork, and high costs.
• The legal obligations tied to Phantom Stock is negligible and the companies, as well as the employees, love it for this feature.
• There is no specific reference to Phantom Stock in the Companies Act, 2013.
• Unlike other ESOPS, Phantom Stock is not regulated by SEBI ‘Employee Benefits Regulations’ thus making it universally appealing.
• There is a lot of flexibility in structuring the agreement and the entities can frame it as to their needs.
• No real Stock transfer gives a sense of security and stability to the company as owners of Phantom Stocks cannot shoot down key decisions for the reason that they possess no voting rights.
• Phantom Stock ushers in a sense of partnership in the participating Employees and this results in a substantial enhancement in the productivity level.
• Phantom Stock leads to great value creation by the participating employees as they meaningfully contribute to its growth.
• Tax liability on the employees falls only in the year when the Phantom Stock is paid, and this works as an added benefit.

The critical analysis of Phantom Stock undoubtedly places it as one of the best ways of compensating loyal and talented employees. All growth-oriented companies are adopting it to concentrate on retaining worthwhile individuals in their fold.

A well-structured Phantom Stock has the ability to keep the competitors at bay as the employees will not be swayed away. A fair and equitable profit sharing through Phantom Stock will surely ensure employee participation in creating value for the company in the future.

“Having no legal structure can be a blessing only when a company works towards achieving a perfect balance of all factors! Contact legal experts at MUDS and execute an agreement for Phantom Stock that will serve you the best!”
– Shweta Gupta, Founder, and CEO, MUDS

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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

The post Why Is Phantom Stock Option Touted as the Most Effective Way to Incentivize Employees? appeared first on MUDS.

In today’s cutthroat competition prevailing in corporate sectors like e-commerce or start-ups, etc., employees have plenty of job opportunities and they are lured not only by high pay packages but also by the various perks and incentives.

Under such circumstances, the companies have to work towards incentivizing their senior managerial employees in a way that they are not tempted to join their rivals.

There are several types of incentives that are provided to key employees in order not only retain them but also to keep them motivated and committed. Employee Stock Option Scheme ESOPS), Stock Appreciation Right, Employee Purchase Plans, Phantom Stocks, are some of the common benefits offered by the companies.

Phantom Stocks- What Is It?

In recent times, for many companies and its employees, Phantom Stocks are a very attractive supplement to other benefits of employee ownership. The reasons for this are manifold. An employee plan of formal ownership may involve high costs, certain mandatory regulations, corporate restrictions, restrictive rules, but Phantom Stocks are not bound by these.

Commonly known as Shadow Stock or Simulated Stock, Phantom Stocks are hypothetical stocks generally given to senior management employees. They may be shadow stocks but they are treated as physical or real stocks, and hence, follow the price of actual stocks of the company.

Types of Phantom Stocks

There are two types of Phantom Stocks-

• Type #1- Appreciation Only: As the name suggests the employee who has been offered this kind of Phantom Stock, they will receive cash benefit only on the appreciated value and not the current value. For example, if the value of the stock was Rs. 75 when it was granted and its current value is Rs. 100, then Rs. 25 will be given to the employee.
• Type #2- Full Value: When a Phantom Stock is offered for full value then at the time of settlement the employee will get the exact value of the stock. If the initial value was Rs. 75 and the current value is Rs. 100, then the employee will get Rs. 100.

Phantom Stocks- How Do They Work?

The company enters into an agreement with the said employee; the terms and conditions are mentioned in it. Based on the agreement, the number of units is granted to the employee for a specified period. All details like value, payments schedule, etc. are mentioned in it.

The employee can exchange his units after fulfillment of all terms and conditions and it will depend on-

• the number of units,
• the value of units at present, and
• if he is eligible for appreciation value or full value.

Legal Requirements of Phantom Stocks

Unlike ESOPs and other incentives, Phantom Stocks are not entangled in any legalities. The Companies Act, 2013, has no mention of Phantom Stocks and even SEBI’s ‘Employee Benefit Regulations does not cover it; thus, the companies enjoy the flexibility of formulating schemes that suits them.

Accounting and Taxation of Phantom Stocks

The company needs to keep a record of the compensation on its income statement. Whereas the employee is taxed for the income and the employer will make deductions at source.

Benefits All the Way with Phantom Stocks

The Phantom Stocks are gaining humongous popularity as an incentive or compensation for the employees. It surely is a wonderful motivational tool for employees who will put in much more effort to ensure better performance of the company, thus making it a win-win situation for the employers too.

It also keeps the stockholders happy as the shares are not diluted. In addition, the companies are not bound by any legalities and the employers are free to structure the contract or agreement as per their wish.

“It is true that there are no laws regulating Phantom Stocks but the companies still need to consult a legal expert to structure the charter well.”
– Shweta Gupta , Founder, and CEO, MUDS

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Phantom stocks are actually a type of compensation that provides access to the employees to the stock without actually owning them. Just as other stocks, these too show transitions (i.e. rise and fall) in value.

“In sink with the underlying organization’s stock, the employees are repaid with the surplus (i.e. the profit) earned from the company stock appreciation.”
-Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd.)

The number of Phantom shares given to a person is directly proportional to his perceived value to the company. Thus, the higher the value if the employee, the higher the number of Phantom shares he/she is likely to receive. Once the Phantom stocks are allocated, a slight delay is observed as the actual financial payout is delayed for over three to five years.

How Does Phantom Stock Operate?

1. Appreciation Stock

The stock price appreciation helps the stock recipient earn the profit that the Phantom stock would earn over its stipulated time period. For instance, an employee receives 100 shares of Phantom stock worth $20 each. Here, the employee must have served the organization for a minimum of 5 years (also known as the vesting period) as per the agreement in order to receive the benefits of the deal.

Now, if during this time, the stock price has risen to $40 per share, then after the five-year tenure is over, such an employee would receive the difference (i.e. 40-20=20$ per share) current value on the date when the deal was closed. He/She would also get $40 per share when they become entitled to gains from the stock. This would. in turn. yield a profit of $2000 to the Phantom stockholder.

2. Full Value

Under this case, the beneficiary receives both the stock price appreciation along with the current value on maturity. Continuing with the same example, the employee would not only get the increased 20$ per share but would also receive the current price appreciation whenever the deal commences.

Why Opt for Phantom Stocks?

• Phantom stocks act as a tool of motivation for the employees. It gives a two-way benefit (i.e. both to the employee as well as the organization) by maintaining the employee retention and increasing productivity.
• Because the shadow stocks are not similar to the regular stocks of the company, opting for Phantom stocks does not dilute their shares.
• The employees do not actually have to purchase the Phantom Stocks like regular stockholders do in the open market. The intent behind offering Phantom Stocks to employees is no money changing hands. Thus, it is a win-win situation for the employees who only share in the stocks without paying to them.
• As Phantom stocks are controlled by the company, it is beneficial for the employer as well. The company dictates the structure of the agreement. The organization even controls the level of equity participation in the form of dividends paid out to the employees.

“Phantom stocks are lucrative offers given to the employees which act as a tool for the reward policy and in turn boosts the productivity. It’s the secret that pushes the stock price higher.”
-Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)

Disadvantages of Phantom Stock

Organizations that enforce Phantom Stock plans tend to bring upon themselves an additional cost. This typically happens in case any stock valuation overview needs to be achieved by an outside accounting firm.

As the Phantom stockholders possess no voting rights and are even not eligible for dividends, they are usually considered at par for the regular company stockholders.

“Phantom stocks act as a key to employee retention and are beneficial when the stock market shows a general upward trend. In case the events are not favorable and even the stock prices do not show any upwards trends, neither of the parties (i.e. the employer and the employee) loses any money.”
– Shweta Gupta, Founder, and CEO, MUDS

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