Stage 2: Financial Specifications
The company should carefully consider how it will describe and allocate the value to be made available to employees. To do so a financial model will be needed. The company should construct a model (spreadsheet) that will illustrate what amount of value would be shared with employees under certain performance conditions.
This is the stage at which a preliminary value is determined along with the share price and number of phantom shares. The modeler should study various grant levels and consider their impact under the alternative performance possibilities. How much will shares be worth under different sets of growth assumptions? Slow growth, rapid growth, cyclical growth, etc.
Careful testing will assure the owners or directors that they are not over-committing value and that they are creating possible outcomes that will be appealing and motivating to employees.
During this stage, the company leaders will visualize the effect of varying vesting and payment schedules and all other plan provisions.
At the end of stage two, the company has made preliminary decisions on valuation, grant levels, vesting and payment schedules and can visualize potential accumulation values for plan participants.