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What Is a Phantom Stock Plan for Employees?


If you’ve been promoted to a senior position in a company, you might find yourself wading through a flood of new perks. While a higher salary and company car has obvious uses, obscure rewards like phantom stock plans can be murkier. However, they have significant financial and tax ramifications that can take you unawares. With phantom stock plans, your company’s stock price affects your future compensation. Here are more details on how they work. You may also benefit from working with a financial advisor who can help you analyze how a phantom stock plan might impact your personal finances.

What Is a Phantom Stock Plan?

A phantom stock plan pays employees through their employer’s stock performance without giving ownership of actual stock. It’s also called a shadow stock plan because its value mirrors a company’s stock. The plan does not consist of genuine shares in the business, but it confers similar financial benefits to employees. Generally, senior-level employees receive phantom stock plans.

How Phantom Stock Plans Work

Phantom stock plans allow senior-level employees to benefit financially from a company’s stock performance. Payouts result from stock price increases or the stock price on a specific date or set of conditions, such as job performance or retirement.

Phantom stock plan payments can help a company lower its income, thereby decreasing its tax burden. However, phantom stock payouts can also put cash-strapped companies in the challenging position of maintaining cash flow and compensating employees.

What Are Phantom Shares?

Phantom shares share similarities with actual company shares. However, instead of granting ownership of the company, phantom shares imitate share performance and provide a payout on a designated date or when share values reach a specific threshold. They don’t confer the holder any ownership in the related company, but they benefit employees when the company’s stock price performs well.

Reasons Companies Offer Phantom Stock Plans

Phantom stock plans benefit companies in numerous ways, including:

  • Incentivize hard work and loyalty by tying senior-level employees’ compensation to company performance.
  • Future phantom share payouts motivate employees to continue working for the company.
  • Grant employees stock-related benefits without diluting the ownership of existing shareholders.
  • Plan payouts can reduce a company’s taxable income.

Types of Phantom Stock Plans

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Phantom stock plans come in two forms: appreciation only and full value. Both reward employees differently using a company’s stock price.

Appreciation Only Plans

Appreciation-only plans pay according to how much the company’s stock price has increased. For example, say you enrolled in a phantom stock plan on January 1 with a payout date of June 1. On June 1, your employer’s stock price is $25 higher than on January 1. As a result, you would receive $25 per phantom share as compensation.

Full Value Plans

Conversely, full-value plans pay employees according to the company’s stock price. Using the previous example, the stock price was $5 on January 1 and $30 on June 1. Instead of receiving the $25 increase, employees with full-value plans would receive $30 per phantom share on June 1.

Pros and Cons of Phantom Stock Plans

Phantom stock plans have financial implications for employees and companies that cut both ways:


  • Sufficient versatility for private and public companies to use.
  • Less expensive than offering employees an employee stock ownership plan (ESOP).
  • Employees pay no taxes until they receive income from the plan.
  • Employees only receive compensation if they stay with the company or hit job performance goals. If they leave the company, there are no concerns about purchasing back stocks.
  • Employees are motivated to see the company succeed but don’t have stock ownership.


  • Employees pay income tax when receiving payouts, drastically increasing their tax bracket. Capital gains taxes don’t apply.
  • Appreciate only plans don’t benefit employees if the stock price doesn’t increase.
  • Employers must have sufficient cash to pay employees when the plan matures.
  • If the stock price drops, the company might be able to cancel the plan.
  • Companies must give details about the plan to shareholders and relevant employees every year.
  • A company might have to pay a third party to verify its stock valuation.

Other Considerations for Phantom Stock Plans

There are more things to understand and consider about phantom stock plans before deciding if it is worth taking part in one. For example, you should always be aware of how any plan you’re participating in is going to be taxed when you receive a benefit. Some plans can even be taxed before you benefit. You should also understand how your new plan relates to something that you already understand. Here are the other things you should be aware of before deciding to participate.

How Phantom Stock Plans Are Taxed

Payments from phantom stock plans are subject to typical income taxes, not capital gains taxes. In turn, companies can deduct phantom plan payouts the year the employee reports the income. Employers must ensure their plans follow federal laws in section 409A of the Internal Revenue Code (IRC). In addition, employers can subtract taxes from payouts on the employees’ behalf, streamlining tax calculations for everyone involved.

Phantom Stock Plan vs. a Stock Option Plan

While phantom stock plans and stock option plans compensate employees based on stock price, they diverge on one primary point. Phantom stock plans pay out in cash, while stock option plans grant stock to employees upon payout. Therefore, the phantom stock provides straightforward financial profits and doesn’t affect shareholder stock ownership.

Stock Appreciation Rights

Stock appreciation rights (SARs) also pay employees at specific times according to stock performance. Like phantom stock plans, they don’t require workers to purchase stock. Instead, they offer cash payment once they vest. SARs usually accompany stock options companies and gain value as stock price increases. Plus, employees can also receive SARs payouts in shares of company stock.

The Bottom Line

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Phantom stock plans are versatile compensation tools companies can use to reward employees without impacting shareholder status. Phantom plans pay employees for helping the company succeed without bestowing stock ownership. These features motivate senior-level staff but require companies to have cash on hand for plan payouts. As a result, phantom stock plans can benefit companies that financially prepare for the potential drawbacks.

Tips for Phantom Stock Plans

  • Phantom stock plans can provide a significant financial boost. However, they also have volatile income tax implications. A financial advisor can help you make the most of your bonus pay and optimize your taxes. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Employee stock options are a similar yet distinct benefit for senior-level employees. For information on how to exercise them at the best time, here’s a guide on how stock options work.

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