Phantom Stock Option Plan

Objective: Increase focus on value creation, attract stronger talent, reduce turnover

Company Profile: Software Engineering Firm; $28 million in revenue; 85 employees

Growth Goals: Double revenue in 5 years via rapid geographic expansion

Growth Barriers: High cost of turnover in software industry; urgent need to retain key talent without diluting shareholder equity

Compensation Issues: Salaries and bonuses strong but some competitors offered stock options and the company didn't have a long-term value proposition that competed

Solution: Phantom Stock Option Plan. The Plan offered annual grants of stock appreciation rights to selected key employees. Awards were offered annually based on company and individual performance. Vesting was instituted over three years for each block of grants and cash redemptions were scheduled to begin in year four.

The company achieved 50% growth in the first year following plan adoption due to the attraction of three large contracts. Participants saw significant growth in their share value but vesting schedule delayed redemption. Plan was integrated as a significant part of the company recruiting pitch. Employees were given online access to track their share values.

Owners report:

  • Turnover problem was eliminated
  • Inner-office discussions about value creation increased significantly
  • Attraction capability for key producers was strengthened allowing them to compete for talent

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