A Phantom Stock Plan is a unique nonqualified deferred compensation plan designed to provide a mid to long-term incentive for key executives. The term “phantom stock” means that although potential value (similar to equity) may be transferred to employees, there is no actual transfer of shares. However, the participating employees are granted a benefit that reflects an organization’s value. A well-designed and properly-administered Phantom Stock Plan creates an “ownership mentality” for key contributors to an organization’s value creation.

Phantom Stock Plans may be designed with a high degree of flexibility and customization. The following are a few of the more common plan design features:

• Plan participants may be allotted a certain number of hypothetical shares over a stated period of time.
• The number of shares an individual receives may be based on his or her individual contribution to the organization and can vary from one person to the next.
• The value of the shares may be based on a formula that tracks the organization’s value from the time of the plan’s inception and at subsequent dates (including the end of the plan term).
• The value can be established informally using a hypothetical share count.
• The number of shares to be allocated simply becomes a portion of the available hypothetical shares.
• A plan term typically runs for five years or longer. The duration is based on the specific goals of the organization.
• Typically, a participant will not receive a payment from the plan unless he or she remains with the organization for the entire term (e.g., five years). However, flexible vesting schedules may be included.
• Participation is limited to a select group of highly-compensated employees as defined by regulations and is not necessarily exclusive to executives.

A Phantom Stock Plan is a simple, flexible way to offer a meaningful financial incentive to key individuals. The plan encourages a focus on growth by aligning compensation with organizational goals.

Structure

An employer enters into an agreement with selected key employees. Pursuant to the terms of the plan, the employer grants the employees a number of units or phantom shares. The plan document informs the employees of the starting value of the shares and other conditions of the plan, such as the vesting schedule, the payment events, etc.

Upon fulfillment of the plan terms, the participants are eligible to receive a payment in exchange for their units. Typically, the amount of the payment will depend upon the following:

• the number of vested units held by participants
• the value of the units at the time of payment
• whether the plan was for the full value of the units or strictly the appreciation in the value from the date of grant

A Phantom Stock Plan requires a formal document that describes the arrangement and includes specific plan design features and benefits. The document serves to confirm the plan operation and satisfies regulatory requirements.

Non-Profit Organizations

Non-profit organizations compete for top talent at all positions and are uniquely challenged by regulatory limitations on compensation and benefits. This is due in part to the specific nonqualified retirement plan rules under Section 457 and the Tax Cuts and Jobs Act of 2017. These rules add complexity to creating value for key employees. However, those who have experience with this type of non-qualified deferred compensation plan are able to work within these rules to achieve similar results as for-profit facilities. Phantom Stock Plans can be built to support an organization’s goals and used to attract, retain, and reward top talent.