Motivating the employees who are essential to your business success may require incentives that go beyond the usual benefits like pensions and health insurance. However, you may not be ready to offer a share in the business with any partial loss of control this may bring.

But what if you could have the upside of employee ownership without the downsides? One solution is to grant phantom stock, which offers benefits for both you as the employer, and your employee.

• Easy to set up and monitor – phantom stock avoids much of the paperwork, restrictive rules and reporting requirements of conventional share ownership schemes.
• Complete control of the plan terms – you have total flexibility over the plan: which employees participate, when, and how many, shares are granted, terms of vesting, payout schedules and other details.
• Protects ownership control – since phantom shares carry no voting rights, there is no impact on the control of the business.
• Stimulates employee motivation and productivity – high-value workers now have more than just a job and a salary to keep them interested. They are in it for the long haul, especially if you link the rewards to long-term company performance.

A sense of ownership with little downside risk

Phantom stock is an effective compensation tool that allows key employees to enjoy a sense of ownership in the company. It enables them to share in the company’s future success without necessarily enjoying the voting control, profits, dividends or distributions that normally come with conventional share ownership schemes.

For the employee, the potential financial reward of participating in a well-designed phantom stock plan can closely mimic actual equity or options. This is why these schemes are sometimes known as mirror stock or shadow stock. However, phantom stock avoids many of the risks and liabilities that normally go with real equity ownership. For instance, the employee doesn’t put cash into the business, isn’t exposed to corporate governance issues, and doesn’t personally guarantee company debt.

A unique benefit at a comparatively modest cost

Although a phantom stock plan carries some administrative costs, such as legal fees and accounting fees, they compare favourably with the costs of a conventional share ownership scheme.

But the costs look small if you compare them with the cost to the business of losing a key employee. In fact, some experts estimate the cost of turnover at the senior level to be between 100% and 150% of the employee’s annual salary.

Rather than face this situation, wouldn’t you agree it’s better to retain your top people with a well-thought-out reward package? One that benefits them, and keeps them engaged, productive and happy.

For both the company and the key employee, the phantom stock option can be a win-win solution.