Which is Better ESOP or Phantom Stock?
ESOP and Phantom Stock, both are ways and means of incentivizing employees who hold strategic positions in a company, as they realize that the most precious asset of a company is human resources.
But answering this crucial question needs a critical analysis of both the options, furthermore, comprehending the pros and cons associated with them.
What Is ESOP? Why Is It Given?
Employee Stock Ownership Plans or ESOPs have been the most productive and powerful tool used by private companies for a long time to incentivize the employees who hold key positions.
It is an extensive employee benefit that brings about employee satisfaction, induces motivation and evokes devotion, providing them a strong reason to stay long term.
There are varied options of ESOPs that have long been used by companies to provide economic and social security and also a sense of belonging among those employees who get it.
In addition, it also does cultivate a strong sense of commitment and responsibility towards the establishment.
Some of The Popular Modes Of ESOPs:
- Employee Stock Option Plan
- Employee Stock Purchase Plan
- Restricted Stock Units
- Stock Appreciation Rights
What Is Phantom Stock? Why Is It Given?
Phantom Stock is a fairly new way devised by firms and companies to incentivize and retain senior employees. It also is used by the entity for the fulfillment of the same ends that the ESOPs do and they are in many ways similar to them but technically they differ from ESOP.
Also known as Shadow Stock, these are hypothetical in nature and are granted to an employee through contract, with a definitive maturity plan.
Phantom Stock has gained immense ground in recent years mainly due to the flexibility it enjoys. The company has complete freedom to structure it as per its convenience.
As the stock is actually not transferred therefore, very less paperwork is involved plus the shareholders are not threatened or lose their sense of security and stability.
The participating employees find it luring and rewarding as there are no legal hassles, the return is good and tax has to be paid only once.
The value of these stocks rise and fall as the real stocks but they come with minimal regulatory clauses.
Major Factors Differentiating ESOP and Phantom stock:
- Ownership of the company gets diluted.
- Employees as shareholders get a say in the management.
- Price of the shares is borne by the employees.
- Rigid in the frame as it is regulated by SEBI and Companies Act, 2013.
- Double point taxation.
2. Phantom Stock
- No dilution of the company’s ownership.
- No participation in the management of the company.
- Employees do not pay for the stocks, it’s borne by the company.
- Great flexibility as no legal obligations is attached to it.
- One point taxation.
The Best Option!
By comparing the two vehicles of incentivizing employees it is evident why Phantom Stock has gradually taken over ESOPs.
But this does not mean that Phantom Stock will always come out as a winner! It is so because there are no set rules and regulations, and it means that lots of care need to be taken when formulating the draft.
Its success will be based on a well thought of agreement that completely fulfills the aspirations of both the parties. Any adverse factor will lead to the abandonment of the company by the employees.
Take MUDS Advantage!
MUDS, a highly reputed consulting firm, with pan India presence, has a wide range of experienced professionals to help you out.
“Phantom Stock has an unquestionable mileage over other ways of providing incentives to the most competent employees.”
– Shweta Gupta, Founder, and CEO, MUDS