Employee Equity The Easy Way
Numerous studies have found less staff turnover and more productive and innovative employees at firms where employees share a financial stake in the company’s success. But, granting employees shares of stock can also be tricky and implicate tax issues and shareholder conflicts. So what’s the solution? Well, a phantom stock plan may give you the benefits without the baggage, read this article to learn about phantom stock plans and whether or not they are right for your company.
Company owners can align their incentives with their plan-participant employees when they implement a well-designed formula that rewards employee behavior for the corporations’ increased profitability and overall equity value.
- Incentivizes and motivates employees by giving them an increased stake in the company’s growth and success, while allowing owners to retain 100% of control and ownership of the business.
- Provides a flexible structure to accommodate a company’s specific needs or criteria.
- Exempts a properly structured plan from Section 409 of the Internal Revenue Code, which usually regulates non-qualified benefit plans such as deferred compensation. (Consult a qualified CPA for all tax considerations.)
- Allows start-up companies low on cash, but high on expectations and growth opportunities a way to reward employees’ success and encourage them to continue their career with the company.
- Eliminates conflicts associated with minority interested shareholders since the participant does not hold any shares—he or she cannot elect directors, receive dividends or demand the fair market value for stock.
- The plan’s benefits constitute cash benefits and thus will not qualify for capital gains treatment. (Consult a qualified CPA for all tax considerations.)
- An employer cannot deduct contributions until it actually pays the benefit to the employee.
Overall, phantom stock plans can provide employees unique benefits and also serve as a mechanism for companies to retain and reward talented and dedicated individuals.
Disclaimer: The information in this article is presented for informational purposes only, and should not be taken as legal advice. Before acting on any information presented in this article, you should consult an attorney regarding the facts of your specific situation. We would love to hear from you, so please feel free to contact us for a consultation.
FROM THE EDITOR
At Conscious, we feature powerful stories about global initiatives, innovation, community development, social impact and more. You can read more stories like this and connect with a growing community of global leaders when you join.