Dividends are periodic payments made to shareholders from profits. Because participants in phantom stock plan are not shareholders, they are not entitled to dividends per se.
However, the phantom stock plan may call for phantom dividends. Such payments might be included in a plan once a participant is vested in full value shares that have not yet been redeemed (or cashed in). In this case, the plan may define the dividend opportunity in any way it wishes. For example, it may award a payment (representing a dividend) whenever actual shareholders receive dividends. Alternatively, the holder of phantom stock units might be promised a representative portion of company profits at the end of the year. In reality, such a payment would constitute a bonus arrangement and would be treated accordingly within the company’s payroll system and, for tax purposes, as compensation paid by the company and received by the employee.
Most plans do not include phantom dividends. This is particularly true for phantom stock option or appreciation only programs.