Phantom Stocks and Employee Retention

group of businesspeople at a table with laptops and coffee cups

As a business owner, you understand the importance of employee retention, especially when it comes to the Rock Stars of your company, like:

  • Your assistant who keeps you on task and anticipates your needs before you know you need stuff;
  • Your rainmaker salespeople who bring in critical accounts and craft strategic partnerships that grow your bottom line;
  • Your operations gurus and expert problem solvers who tackle minor problems before they morph into a crisis.

Yet when I ask my clients what strategies they use to retain rock star employees, the most common answer I hear is, “Well, I pay them well!”

Folks, compensation in and of itself is not a retention tool. Employees expect that you’ll pay them well for the value they bring your business, and frankly, you should pay key team players a competitive salary.

“But we offer great benefits – health insurance, a 401(k) with company matching, generous vacation time – plus, they get a great bonus each year!” they say.

Again, all of these elements are standard offerings, and they apply across the board to employees, from average to exceptional. But when it comes to rewarding consistently outstanding performance, you have to think outside the box.

One way to reward your rock stars is by offering them phantom stock.

What is Phantom Stock?

Don’t be fooled by the name. Phantom stock is a genuine way to reward past exceptional performance and provide an incentive for future high-level job performance that impacts your company’s bottom line.

Unlike traditional stock, which represents actual ownership in a company, phantom stockholders receive mock stock, which follows the price movement of the company’s actual stock, and pays out resulting profits in the same way physical stock would.

The key difference with phantom stock is that employees only own phantom stock for the duration of their employment with the firm.

How Phantom Stock Provides Incentive to Rock Star Employees

Phantom stock ties a financial gain directly to a company performance metric and is best used as a reward or a bonus for employees who meet specific criteria – in other words, the employees whose performance is key to your company’s success.

Say you want to retain your rainmaker senior salesperson and offer them a 10% phantom stock position that’s tied to quarterly profits. If your company profits by $100,000 in a quarter, that employee stands to earn a $10,000 profit share bonus for that quarter.

Pretty sweet, huh?

Phantom stock provides additional incentive if you’re positioning your company for a sale because it offers your rock star employees a piece of the sale price.

For example, you sell your company for $10 million, and an employee’s phantom stock includes an incentive or right to 1% of the sales price. They’re looking at a $100,000 bonus as their reward for successfully helping you grow the business to its $10 million sale value.

Phantom Stock Plan Benefits for Employers

Phantom stock plans stand to benefit you as a business owner as well.

From an administration standpoint, phantom stock plans solve a slew of logistical issues for you as a business owner.

Compared to traditional stock plans, phantom stock plans have fewer requirements and restrictions, allowing flexibility in how they’re structured. Phantom stock can also be changed at the leadership’s discretion to increase or decrease vesting periods, options, and payouts.

Whereas traditional stockholders can sell stocks to third parties, phantom stocks are not transferable, which means you won’t find yourself with third-party stockholders whose interests may not align with yours.

Finally, if an employee resigns or you need to terminate them, their phantom stock is discontinued, which leaves you without the risk exposure and gives you the chance to provide the phantom stock incentive to a future rock star hire.

Creating a Phantom Stock Plan

While all phantom stock programs must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a), one thing is certain: no two phantom stock plans are alike.

Sparks Law has worked alongside hundreds of business owners to phantom stock plans from conception to execution, including structuring the program itself and addressing the tax considerations of both employers and employees.

If you’re seeking a unique way to reward exceptional performance, a phantom stock plan is worth considering. Give us a call and we’ll set you up for success.