Phantom Stock Bonuses

12 07 2010

What is phantom stock? It is a new form of employee compensation that is essentially boils down to a promise to pay an employee a bonus that is directly tied to the value of a company’s stock; it does not include the issuing of shares.

Issuing phantom stock is gaining popularity in terms of employee compensation. At some companies, the phantom stock will convert to actual shares over a certain number of years.

Why are companies using this? To retain top performers, and to further develop talent.

This is also an attractive option, because companies will not have to issue new shares, diluting the value for existing shareholders.

Rewarding phantom stock is still not the norm because it is more difficult to understand what the true compensation is. It may not sound so appealing to explain to an employee that they will not own a piece of the company but rather receiving the equivalent value.

Due to the fact that many financial service companies issued a large amount of new stock in order to raise capital after the financial crisis took a turn for the worse, in order to prevent the further dilution of value, phantom stocks may be an attractive alternative to stock options.