Garner All Information About Phantom Stocks & How They Work!
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