If your company is privately-owned, there is a mechanism by which the owners can make its executives and other key employees act as though they own the company—without the owners giving away any company stock.
- The mechanism is a phantom stock plan, which sometimes is also referred to as a shadow stock plan or a simulated stock plan.
A phantom stock plan (“PSP”) is a form of long-term incentive plan used by businesses to recruit and motivate individuals financially without creating any stock dilution. In effect, it is a type of deferred bonus—the value of which is ultimately determined by the company.
There is no formal or statutory definition of the term “phantom stock plan”, and therefore the term is used by some companies in a narrow context and by other companies in a broad sense of the term.
- When used narrowly, it indicates a plan that is intended to mirror restricted stock awards or stock option grants. In this usage, the company creates “phantom shares” that may resemble actual stock shares, but are actually a commitment to pay the employees cash upon fulfillment of certain conditions.
- In its broader use, the term is used to denote any type of plan in which employees must wait until a future date to receive the financial value of a promise given today.
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When it comes to PSPs, an organization’s legal structure is of little or no significance. That’s due to the fact that PSPs can be adopted by an S Corporation, a C Corporation, a Limited Liability Company (LLC) and even a Partnership.
A PSP may be used by publically traded companies as well as by private companies. However, it is particularly attractive to privately held companies for two primary reasons. This vehicle:
- Does not create any dilution of stock
- Enables a privately held company to structure the plan in a way so as to preclude having to disclose confidential financial information.
HOW TRINITY CAN HELP?
If your organization is interested in learning more about how a Phantom or Shadow Stock Plan may be advantageous, e mail Trinity at info@TrinityHR.net.