Allocation of Value and Awarding of Grants

How should a company distinguish among employees in terms of relative value sharing under a phantom stock plan? And how is that value translated into grant sizes?

First the company should consider a basic sharing philosophy. One simple approach is to allocate value according to base salary ratios. Under this method, an employee earning $200,000 would receive twice as large an allocation as an employee earning $100,000.

Some companies allocate equal values for different levels of employees by using a tiering or banding technique. Senior officers might be included in tier 1, with the next level of management in tier 2, and so forth.

Once an allocation philosophy has been determined, a grant schedule should be established. Common approaches include:

Grant as a percentage of salary
Tier one employees might receive grants equivalent to 40% of salary; tier two employees might be awarded at 25% of salary; and so forth
Grant level amounts by tier or position
Tier one employees might be scheduled to receive 10,000 grants per year; tier two employees 6,000 grants per year; and so forth
Grant based on relative value of individual positions
CEO might receive 20,000 grants per year; CFO might receive 10,000 grants per year; COO might receive 8,000 grants per year; and so forth

The total number of grants should be summed and considered within a budget so as to track the potential value to be shared. The grants can be awarded in a one-time block or on a periodic basis. It may be best to consider issuing grants annually as part of the total compensation package for the participants.

It is also possible to structure the plan as a “performance share” program. Under this structure the company sets annual performance targets which, once achieved, trigger the issuance of grants. This method requires employees to achieve certain financial goals in order to become entitled to awards.