There are several issues unique to public company use of phantom stock.
The company’s stock option and stock appreciation right (“SAR”) plans will need to carefully define performance based pay in order to qualify phantom stock payments for the full tax deduction. IRC Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration in excess of $1 million paid to its top officers. The limit does not apply, however, to performance-based compensation. Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation.
The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC.
As described in the Accounting section, phantom stock plans require variable accounting. Stock option plans produce a more favorable fixed accounting result. Public companies should consider this potentially higher cost for phantom stock when designing their plans.