Who Should Consider a Plan?

Phantom stock plans are used in public as well as private companies. Organizational structure is rarely an impediment. C Corporations, S Corporations, Limited Liability Companies (LLC) and even Partnerships can utilize phantom stock, although the plan name and terminology would change accordingly. Non-profit organizations can adopt some, but not all, of the common features of a plan.

Any size company can adopt a phantom stock plan. The key element to consider is whether the company expects to grow. Providing employees with shares in a phantom stock program rarely satisfies the business purposes unless the company owners anticipate their future company will be greater in value than their present company.

A simple exercise is to quantify the potential growth in value over a specified number of years. Then, one can consider sharing a fraction (5-15%) of that increased value with employees. Will that dollar amount, once shared, represent a compelling and meaningful value to the employees? This tool may help determine whether a company is of the right size to consider a plan. This exercise may persuade some smaller companies that the effort is not worth it. Other types of long-term plans may be more appropriate.

Other questions employers might ask include:

  • Do we have key employees whose contributions will be essential to the successful growth of our company?

  • Are we seeking greater alignment between our owners and our management team?

  • Are the owners willing to commit to a compensation strategy that will result in variable, long-term obligations?

The tool “Are We Ready for a PSP?” can help further explore this issue.