Using a phantom equity plan design to attract top talent 

Over the past five years, there’s been an unrelenting turnover of top talent within organizations that has increased the cost of the replacement and resulted in a loss of new revenue and attrition in existing client/customer relationships. Extended and more expensive recruitment times only complicate this problem further. Some refer to this current dilemma as “negative unemployment,” where the demand for top talent exceeds supply, and many don’t expect this issue to subside any time soon. Quantifying the risk and cost to replace, identifying root causes, and developing more tailored retention plans are all healthy steps to help reduce the risk. 

A company-sponsored nonqualified deferred compensation arrangement is a helpful retention tool. It can be made available to a select group of employees within an organization and is quite flexible from a design perspective. This type of plan allows the employee to have "skin in the game." 

Alternative to actual ownership 

• Avoids diluting existing ownership and the complexities of adding a new owner 
• Retains a greater level of company privacy for decision-making and financial disclosure 
• More tax-efficient for the participant than traditional ownership 
• Creative retention elements, such as vesting schedules and non-compete agreements, can be more easily added 
• Benefits can be customized and layered between participants, depending on the company’s ever-changing needs 

Sources of contribution to the plan 

• Employer discretionary or formulaic: The most common of the three available sources, customizable and vesting/retention is available 
• Employee deferral: Employees’ compensation can be deferred into the plan via personal election (100% vested) 
• Employer match: Incentivizes employee deferral participation, and vesting/retention is available 

Positioning for the future

Aligning top talent to the organization has been a strategy used for many years on Wall Street and is beginning to make its way more quickly to Main Street. This extends beyond commonly used performance-based incentive bonuses and graduates into the world of nonqualified benefits. One potential solution is using a non-qualified profit-sharing plan or stock appreciation rights to provide custom-tailored solutions to meet goals and objectives while also providing “golden handcuffs” for those who would be the costliest to lose and replace.