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

The post Why Phantom Stock Can Be Better Than Real Stock? appeared first on MUDS.

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

The post What Is Phantom Stocks and How Does It Work? appeared first on MUDS.