Phantom Share Plans (PSS), also known as shadow equity plans or phantom stock plans, are designed to replicate the benefits of share ownership without granting actual equity to employees.
it is is a way of rewarding and retaining employees without giving them actual shares in the company. Instead, they receive “phantom” or “shadow” shares that track the value of the real shares and pay out cash bonuses based on the company’s performance.
In this article, we will explain what a PSS is, how it works, and what are its advantages and disadvantages.
A PSS is a type of employee benefit plan that gives selected employees (usually senior management) many of the benefits of stock ownership without actually giving them any company stock . Employees do not have voting or ownership rights in the company. However, they can still benefit from the company’s share price or dividends increasing.
A PSS is also known as a synthetic equity plan because it simulates stock ownership without actually providing it. A company can design a PSS in different ways, depending on its objectives and preferences. There are two main types of PSS:
Both types of plans are like regular nonqualified deferred compensation plans. They can be unfair because they might only be offered to some employees. There is a risk that employees could lose their benefits if they leave the company early or don’t meet certain goals. The employees recognize income for tax purposes when they receive the cash bonus, and the employer can deduct the amount as an expense.
A PSS gives eligible employees phantom shares based on criteria like their job, time at the company, performance, or contributions. The plan design can determine whether the number of phantom shares granted is fixed or variable. The phantom shares are usually subject to a vesting schedule, meaning that they become payable only after a certain period of time or upon meeting certain conditions.
Phantom shares are valued based on the company’s actual share price. This price can be found from public sources for listed companies. For unlisted companies, the price is determined through private valuations. Phantom shares’ value can change because of dividends, splits, mergers, or other company actions affecting the real share price.
The payout of the phantom shares is usually affected by events, such as:
The payout options include a lump sum or installments, depending on the plan design. The payout can also be subject to certain limitations or clawbacks, such as:
In Australian law, a share denotes ownership in a company’s equity. The Corporations Act 2001 mandates that proprietary companies have share capital and shareholders. Ordinary shares usually provide voting rights and dividends, while preference shares may offer fixed dividends and liquidation precedence.
Shares are transferable, subject to the company’s constitution and legal stipulations. Shareholders are not liable for company debts beyond unpaid share amounts. They influence company decisions through voting at meetings, with procedures detailed in the Corporations Act.
Here are some of the rights of a Shareholder:
Yes, there are tax implications.
Phantom Share Schemes are taxed similarly to cash bonuses, with payments being considered part of the employee’s income for the pay cycle and taxed accordingly.
The taxation of a Phantom Share Scheme occurs when the benefits are paid out, either annually, upon dividend payments, or upon specific events like the company going public or being acquired.
Employee Share Schemes (ESS) and Phantom Share Schemes (PSS) are two different ways to motivate employees in Australia. Each scheme has its own unique features and tax implications.
An Employee Share Scheme (ESS) gives employees real shares or options in the company. These may become available over time or based on performance. This helps align employee interests with the company’s growth and can offer tax benefits. The shares or options in an ESS can lead to direct ownership in the company, giving employees a stake in its success and possibly resulting in capital gains if the company’s value increases.
A PSS, or Share Appreciation Rights Plan, gives a cash bonus that imitates owning shares without actually giving ownership. Payments under a PSS are typically tied to the company’s share price or value and are taxed as ordinary income when they are made. While PSS can be simpler to administer and provide immediate financial rewards without diluting equity, they do not confer the same sense of ownership or long-term investment in the company as an ESS does.
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