Using a phantom equity plan design to attract top talent
Unlike actual stock, a phantom equity award does not convey actual ownership in the company. In other words, no actual shares/units are ever awarded to the employee under a phantom equity non-qualified profit sharing plan. This is considered a company-sponsored nonqualified deferred compensation arrangement, available to a select group of employees within an organization and quite flexible from a design perspective. While a helpful retention tool, this also more closely aligns the employee to the company’s growth and creates a vested interest in its future success. In other words, the employee has “skin in the game.”
Alternative to actual ownership
- Avoids diluting existing ownership and 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 everchanging 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
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 phantom equity 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.
