Phantom Stock Plans: A Viable Alternative to Restricted Stock?

Abstract

With the increased scrutiny focused on stock option programs today, many companies are turning to restricted stock programs to provide incentives for their key employees and to increase that critical group’s ownership of the company. However, many corporations should consider yet another available alternative compensation strategy: phantom stock plans. These plans can accomplish many of the same objectives while avoiding certain disadvantages of restricted stock programs. Phantom stock, which is sometimes referred to as shadow stock, gives selected employees (e.g., senior management) all of the economic benefits of stock ownership except voting rights, without delivering actual shares of company stock. In one simple example, a phantom stock plan can provide an 8% to 14% advantage (depending on the time horizon) over the restricted stock plan, in terms of net dollars received when the shares are eventually liquidated.