Motivating Key Employees
Providing stock ownership to key employees can provide a powerful incentive for them to help grow your company. When your company’s interests are in line with your employee’s interests, incredible things can happen.
However, simply giving employees ownership in your company generally causes more problems than it solves. “Gifts” of stock to employees can have negative tax consequences. In addition, employee shareholders suddenly become entitled to complete financial disclosure and the right to sue you on behalf of the company. That generally doesn’t make sense.
In these situations it’s often a better choice to use “phantom” stock plans. Under such a plan, the key employee is rewarded financially as the company increases in value. However, taxes are generally deferred and complete access to sensitive financial information isn’t required.
How Epiphany Law Can Help
Since its inception, Epiphany Law has been assisting companies design common sense executive compensation plans. We understand both the benefits and the potential disadvantages of numerous types of plans, including phantom stock plans.
Phantom stock plans often are a perfect solution to growing companies. They can be a powerful tool to motivate key employees, while limiting company exposure. Contact Epiphany Law today and we can show you how.
Questions & Answers about Employee Ownership
Q: Why are they called “phantom” stock?
A: These types of plans are called phantom stock because the key employee doesn’t really own stock in the company. Rather, they have a contractual right to share in the benefits of stock ownership, namely, the financial growth of the company. However, because a phantom stock plan is a contract, rather than actual stock ownership, other negative implications of true stock ownership can be avoided.
Q: Do these operate as “golden handcuffs?”
A: They can. The term “golden handcuffs” simply refers to a plan that somehow penalizes an employee who leaves the company abruptly or is terminated for cause. Phantom stock plans often only provide benefits to employees that follow the rules and, thus, serve as handcuffs to employees not advancing the company’s interests. Many times phantom stock plans also contain non-compete provisions which may penalize the employee for going to a competitor.
Q: Can you have phantom “stock” in an LLC?
A: Generally, yes. These plans earned the name phantom “stock” long before the LLC came into existence. As you have probably figured out by now, the law is often slow to change and many times makes little sense. Thus, while the accepted name has remained “phantom stock” you can have phantom “membership interests” and phantom “units”.