Why Phantom Stock Can Be Better Than Real Stock?

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.

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– Shweta Gupta , Founder, and CEO, MUDS