What are phantom share options?

What are phantom share options?

Phantom share schemes (also referred to as shadow share schemes) are a type of employee share scheme that allows companies to offer incentives to employees to help the company achieve share price growth in return for a cash bonus instead of becoming shareholders.

What are phantom shares UK?

What is a Phantom Share Scheme? A Phantom Share Scheme is cash bonus arrangement whereby the amount of cash bonus paid is measured by reference to the value (or increase in value of real shares). No actual shares or share options are awarded.

How does a phantom share scheme work?

With a phantom share scheme, no actual shares are issued to an employee in the way that they are issued to a shareholder of a company. The value of the units is however linked to the value and growth of the actual shares of the company. So as the value of the company grows, the units grow simultaneously.

Is phantom stock a good idea?

Phantom stock is not a good idea if the company is planning on issuing them to most or all employees, especially if the shares will be paid out when the employee leaves the company or retires. In that case, phantom shares may be ruled illegal because of the Employee Retirement Income and Security Act (ERISA).

Are phantom shares real?

A. A phantom stock plan is a deferred compensation plan that provides the employee an award measured by the value of the employer’s common stock. However, unlike actual stock, the award does not confer equity ownership in the company. In other words, there is no actual stock given to the employee.

How are phantom shares taxed?

Phantom stock can, but usually does not, pay dividends. When the grant is initially made, there is no tax impact. When the payout is made, however, it is taxed as ordinary income to the grantee and is deductible to the employer.

Is phantom stock equity?

A phantom stock plan is a deferred compensation plan that provides the employee an award measured by the value of the employer’s common stock. However, unlike actual stock, the award does not confer equity ownership in the company. In other words, there is no actual stock given to the employee.

How do you value phantom shares?

The answer involves two variables: (a) the presumed value of the company, and (b) the number of shares to be used in the plan. Once these two answers are known, the phantom share price is calculated as the former (the value) divided by the latter (the number of shares).

How is phantom stock taxed?

What are the payroll tax consequences of phantom stock? As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA and Medicare taxes. This is the case even though the amounts are not subject to income tax until actually paid to the employee.

What does it mean to have phantom share option?

Phantom share schemes may be “phantom options”, which entitle employees to payments equal to the share price at the date of exercise less a notional exercise price or “phantom shares” which entitle employees to payment equal to the whole share value as at a date of vesting.

What are the tax implications of Phantom options?

The employer will also incur an employer’s NIC liability at 13.8% of the amount paid out on the shares but with the benefit of corporation tax relief on the payment and employer’s NIC it incurs. As a cash-based arrangement which pays out on exercise, phantom options confer less of a feeling of ownership than an actual share or share option plan.

How does a phantom share incentive plan work?

Phantom schemes normally work in very similar ways to more traditional share incentive schemes, but the payout is in the form of cash, rather than shares. The cash bonus awarded under phantom share schemes is typically based on the uplift in company share value.

How does an executive get a share option?

The executive is granted an option over a number of shares at an option price which is usually (but not necessarily so) equal to the market value of a share at the date of grant of the option.