How Does a Phantom Stock Plan Differ from a Formal Stock Plan?
The primary difference between phantom and actual stock is the element of ownership. Phantom stock plan participants do not become, in any way, shareholders in the company (unless the company decides to make payments with actual stock). The plan is a compensation arrangement, not an ownership agreement. As such, the sponsoring company can include or withhold a wide-range of features that can simulate the feelings and results of actual ownership. For example, the plan may or may not pay dividends, allow for redemptions at death, or include a variety of other terms typically associated with stock ownership.If the company were to award actual stock or stock options to employees, the owners would literally be preparing to dilute their ownership percentage and take on new shareholders or members. A phantom stock plan is generally considered less intrusive than a stock plan and it enables the existing company owners to maintain current ownership levels along with greater financial privacy.