An incentive plan that awards executives a bonus based on the market appreciation of the company’s stock over a certain period of time, usually a year. The plan awards key employees for increasing the value of a company’s stock without giving out actual stock; instead, a cash payment is used. A phantom stock plan works, for example, by giving an executive 1,000 shares of phantom stock at $20 a share. The phantom stock is not actual shares but is tied to the value of the company’s stock. A formula is developed to determine the phantom stock’s value. If the valuation formula shows that the company’s stock has risen by $20 a share, the executive would receive a $40,000 check. The company would deduct the $40,000 and the employee would pay taxes on the $40,000, which would be considered wages. The payout isn’t made immediately, however. Participants usually must remain employed by the company for a certain number of years or until retirement to receive the payout. They also may have to agree not to compete with the employer.
In the case of private companies, a measure other than stock appreciation would be used. Phantom stock plans are popular with family-owned companies or closely-held companies that don’t want to give up equity in the company. The amount of payment is related to the person’s salary. A phantom stock plan also may be called a shadow stock plan or unit stock plan.