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News & Knowledge

The importance of Phantom Stock

11th June 2019
Jugal Gala (DVS Advisors LLP)

The recent developments in the e-commerce industry and startup revolutions have created immense competition among the employers to recruit and retain talented employees. Moreover there are array of job opportunities among the talented employees to choose from. Hence, it has become essential for companies not only to offer high remuneration packages but also attractive incentives to employees, primarily key managerial personnel and senior management to retain them and not lose them to their competitors in the long run.

Such incentives include employee stock option schemes and employee purchase plans, stock appreciation rights, general employee benefit schemes and retirement benefit schemes. These incentives enable the organization to improve the performance capabilities of employees and transform them to growing partners. One such incentive granted to employees and other people in the organization is Phantom Stock. MSI's Chennai accounting member DVS Advisors LLP explains more.

What is Phantom Stock

Phantom stock also known as shadow stock, simulated stock or Phantom Shares is a contractual agreement between a corporation and recipients of phantom stocks, that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which is to be an amount tied to the market value of an equivalent number of shares of the corporation’s stock.

Like other forms of stock-based compensation plans, phantom stock broadly serves to align the interests of recipients and shareholders, incent contribution to share value, and encourage the retention or continued participation of contributors. Phantom stocks’ rise and fall in value is in line with the underlying company stock, and persons owning the stocks are compensated with company’s stock appreciation at a specific date.

Companies use phantom stocks both as a motivational tool to reward employees and to give those employees “skin in the game” to increase workplace productivity and earn the company more profits – a formula that drives the company’s stock price higher, as well.

Importance of Phantom Stock

Wealth maximization shall be one of the important objectives of every business. In that process, employees are the crucial part as they form the back bone of any business. By distribution of phantom stocks, both employees and employer would involve in the process of long term wealth creation. It benefits the employees and employer in the following ways.

Employees:

Phantom stocks reward the time and effort employees invest into the company. When the phantom stocks mature, company shall pay cash equivalent of the shares; this shall act as a source of motivation for the employees to work harder and put relentless efforts in their course of employment.

Employers:

For company owners, phantom stock can help grow their business. Strong leadership is essential to a company’s success, and replacing senior leadership can be expensive. Phantom stock gives top employees a reason to stay and help the company succeed.

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About DVS Advisors LLP - Chennai

DVS Advisors LLP is a contemporary tax, legal and financial solutions provider with a specific focus on Direct, International and Indirect Taxation.

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