Introduction

Looking to share the rewards you offer your employees without giving away actual shares? A phantom stock plan may then be an option for your company. These plans allow you to share the value of your company's growth with specific team members, aligning their personal goals with the company's goals, while keeping ownership in your control.

Let's explore phantom stock, its advantages and types, and how it works for Indian companies like yours.

What Is Phantom Stock?

A phantom stock plan is a method of compensation in which the company provides the employee with a benefit of ownership in the company without transferring stock or part ownership. Essentially, it is virtual ownership. Employees who are granted phantom stock receive the benefit of increases in stock price, just like they own actual stock; however, the overall ownership of your company's structure does not change. The definition of phantom stock describes a way to attract Indian companies looking to incentivise employees without the risk of equitydilution.

How Do Phantom Stock Plans Work?

Let's say you reward an employee with 1,000 phantom stock units when the price of your company stock stands at ₹500. After three years, the stock price rises to ₹750; you will pay the difference in cash₹2,50,000 cash after appreciation for an appreciation-only plan. The plans generally have plans where rewards are paid over time and may have milestones, such as continued employment with the firm or performance-based triggering events; this incentivises your team to continue to be motivated and committed.

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Types of Phantom Stock Plans

There are two primary ways to structure phantom shares:

Appreciation-Only Plans: These plans increase the employee's stock price value. For example, if the stock price goes from ₹500 to ₹750, the employee will receive a payment of ₹250 per share.

Full-Value Plans: The full-value plan compensates employees for the current stock value in addition to any stock price appreciation; in this case, the full payment at the stock price of ₹750 would provide the full stock value as of that date, and there is more potential payout.

Both plans would allow you to create distinct incentives for employees based on what you want them to experience regarding their performance, whether growth or retention in a business.

Benefits of Phantom Stock Plans

Phantom stock plans provide several advantages for Indian companies:

Alignment of Interests: When an employee's incentive is based on the company's performance, they will be more likely to work toward successful growth, as they share in the success.

No Dilution of Equity: Owners can maintain full ownership and control. This is particularly important for Indian companies, especially family or closely held companies.

Customisability: Phantom stock plans can be designed or customised for employees, such as C-suite executives or in-demand talent whom management wants to retain.

Easier taxation: The payouts will be treated as salary income, simplifying compliance, and they will not have to worry about capital gains calculations.

With these benefits, phantom stock plans might represent an innovative and flexible benefit program for Indian companies.

Important Considerations for Indian Companies

One key component of implementing a phantom stock in India is planning. In India, payouts are considered salary income (not capital gains) and are subject to taxation when paid under Indian tax law. Also, solely for the motivation of employees, companies must clearly communicate the plan's terms, what it means for that employee, the corresponding vesting schedule, and the applicable payouts that trigger the grant into an actual payment. Organisations must ensure that the plan is commensurate with their financial resources and aware of the cash-flow impacts of large payments, especially when multiple employees become eligible simultaneously due to taking the same rights in the contracts.

Conclusion

Before implementing a phantom stock plan, check that it complies with Indian tax laws, which state that payments are subject to taxation as income from the employee's viewpoint. It is essential to consult a legal or tax expert to help structure the plan properly. Always set up the plan correctly and communicate the terms of the plan with your team so that the motivational impact of the plan is maximised.

Now, are you ready to inspire your team with phantom stock options? A phantom stock option plan can motivate employees, enhance loyalty and performance, and drive the business without giving equity.

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