Chandana
In simple terms “phantom stock” are the virtual stocks which are held by the employees of the company with an agreement to pay them the value of shares at a specified time on a later date. For the value employees generate in the company they are granted such stock ownership without actually owning any of the stock. They are a form of Stock Appreciation Rights (SAR).
The company instead of awarding them with real equity shares, they grant the employees with cash that is equal to the number of shares at a later date. They are given as part of employee compensation. The value of the stock depends on the market price, as there is a rise in the market for the stock the value of the stock increases, and as there is a fall in the market for the stock the value of the stock falls.
PROS AND CONS OF ISSUE OF PHANTOM EQUITY
PROS OF ISSUE OF PHANTOM EQUITY
● It helps the employees in contributing to the success and net worth of the company.
● By offering such equity to prospective employees it will prohibit the employees from looking at other employment opportunities.
● There is great flexibility in the phantom equity plan.
CONS OF ISSUE OF PHANTOM EQUITY
● Issuing phantom equity is a costly affair for the company as it forms the basis of long term incentives.
● Employees of the company do not have voting rights and participate in decision making.
● They also form a charge against the company's income statement.
● When the company terminates the employees from the company the employees cannot ask for the phantom equity, as it becomes extinguished with the termination.
● Whenever the structure is formed by an incapable person it becomes difficult to get good results as results there is a possibility that would arise in permanent dilution of existing shareholders.
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