Know Why Phantom Stock Can Trump Over Real Stock!
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