In my view, nine times out of ten, phantom stock is better for employees than actual stock. This applies particularly for stock options as well. Therefore, explained correctly, employees should value phantom stock more than actual stock. This is a complex subject so allow me to highlight the main factors.
Formal stock ownership requires relatively complicated documentation and planning. How will shares be bought back? Can they be sold or encumbered? What will be the dilution effect? How will employees exercise the options? And much more.
Employees are no more interested in dealing with these issues than are employers. And a minority shareholder in a private company has very limited rights. He or she may be the last one to ever realize full market value for their shares.
A phantom stock plan, however, clearly lays out the terms and conditions for payment to the employees. Although the shares can’t be fully secured, they represent a formal commitment to pay compensation under contract and compensation law. Employees are in a much stronger position to expect to receive fulfillment of the commitment.
The reason some employees fail to appreciate the value of phantom stock is because the employer usually does a poor job of communicating the potential value of the plan. Employees should receive annual (or more frequent) information about the value of the shares. Even more importantly, the employer should present views of the possible future value of the shares under different scenarios. If you don’t help employees visualize what the plan may mean to them, the investment in phantom stock (or actual stock, for that matter) will be wasted.
The lesson? Plan a strong, long-term communication program around your long-term incentive plan that demonstrates meaningful value for the participants.