Companies and corporates have offered various Employee Stock Ownership Plan (ESOP) for a long time, to their upper-level executives for the sole purpose of motivation and retention.

There are several stock-based compensation plans that do not actually use the stock itself but substitute it with hypothetical units or cash benefits. The reasons for this shift are manifold.

• The owners do not actually want to share the equity, they would rather be happy by sharing the value of it.
• The corporate restrictions pertaining to the ownership plans of the company acts as a constraint.
• The rules and regulations of stock plans are too rigid, lack desired flexibility.
• The implementation cost is immense and paperwork extensive.
• It cannot be structured as per the requirement of the company.

Phantom Stocks and Stock Appreciation Rights (SARs) are two such stock-based compensation plans that do not actually use the stock itself but nevertheless, fulfill the desired outcome completely.

Phantom Stock And It’s Chief Attributes

Phantom Stock or Shadow Stock is a fairly new vehicle of incentivizing higher-level management employees without diluting the shares of a company.

Phantom Stocks are gaining immense ground with companies and corporates in recent times due to some of its unique features.

1. It is hypothetical in nature and no physical transfer of stocks takes place.
2. No dilution of shares, no actual rights transferred, hence, no threat to the owners.
3. It provides complete freedom to the company to structure and implement the agreement as desired by it.
4. Not bound by rigid rules and regulations, therefore, fewer hassles.
5. Less paperwork and formalities are involved.
6. Employees do not pay for the stocks; thus, the motivational factor is multiplied.
7. One-time taxation during maturity is another factor that makes it a favorable incentive tool with the recipients.

Also Read: Why Phantom Stock Can Be Better Than Real Stock?

Types of Phantom Stocks

There are two types of Phantom Stocks-

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 full value.

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.

Stock Appreciation Rights (SARs) And Its Attributes

SARs is an alternate tool of equity compensation for employees, a simplified version of the conventional stock option plan.

1. It gives recipients the right to the appreciation in the value of the company stock over a specified period of time, without awarding the real stock.
2. The shares are not diluted and hence, no threat to owners.
3. SARs have a lock-in period of one year as specified in Section 24(1) of SEBI (Share-Based Employee Benefits) Regulations, 2014.
4. Like Phantom Stock, it enjoys great flexibility and gives ample structural space to the company.
5. Participants do not pay for SARs, and the appreciation amount is just like a bonus.
6. It attracts one-time taxation, i.e. when the right to benefit is exercised.

The Final Word!

Both, Phantom Stocks and Stock Appreciation Rights, are equally popular tools for incentivizing the employees. They are almost similar in nature and are favored greatly as the real stocks are not transferred, therefore, fewer rules, regulations, paperwork and expensive. At the same time, both help in fulfilling the purpose of working as an effective tool to motivate and retain the participating employees.

“Both vehicles of incentivizing give immense flexibility, but, this also results in a great challenge as they can be designed in various ways! To be effectively successful, all factors should be kept in mind while drafting the agreement!”
– Shweta Gupta, Founder, and CEO, MUDS

The post Phantom Stock and Stock Appreciation Rights (SARs) appeared first on MUDS.

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

The post Know Why Phantom Stock Can Trump Over Real Stock! appeared first on MUDS.

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

The post Garner All Information About Phantom Stocks & How They Work! appeared first on MUDS.