Stage 1: Plan Concept and Budget

A company considering a phantom stock plan should begin by identifying the results it is trying to achieve. Is this plan a “golden handcuff” that’s intended to keep key employees in place? Is it a plan that is designed to share value with employees who help create it? Is it intended to focus employees on maximizing company value in preparation for a potential event such as the sale of the company? Have the company owners made a commitment to a key employee that needs to be fulfilled? It may be a combination of these and more.

Discussing the desired end-results should help the company consider how much value may be created before the phantom stock plan will pay out. Forecasting the future company is an important part of this process as it will enable the company owners to determine a “plan budget,” i.e., the amount of potential value that may be shared with the employees. This tool can help in this process.

During this step the company decision makers should make a preliminary determination of potential plan participants. Knowing the number of initial and future participants can help analyze the relative value that may become available under the plan for the average employee.

Finally, the company should consider the right plan type. Should the company use actual stock or options? If phantom stock, which type? Or would an alternative long-term plan be the best option? Here’s another tool that may help.

By the conclusion of stage one the company has a purpose, forecast, budget, list of potential participants and a basic plan structure.