Home » Money Matters » Manage Money » Investing » Phantom Equity Plan: What You Need to Know in 2023
Phantom Equity Plan Stock Investment

Phantom Equity Plan: What You Need to Know in 2023

When you think of equity incentives, your first thought might be of stock options plans—but phantom equity plans are also becoming increasingly common. A Phantom equity plan is an excellent tool for motivating and communicating with workers without the complexity and costs of other forms of equity compensation.

But what exactly is a phantom equity plan? Read on for all the essential facts about phantom equity plans you need to know for 2023. We’ll look at how these plans work, the pros and cons to consider when setting up your own plan, and some strategies for getting the most benefit from your program.

By the end of this article, you can decide whether a phantom equity plan is right for your company and its employees.

What Is a Phantom Equity Plan?

So what exactly is a Phantom Equity Plan? It’s a financial incentive for executives and employees in the form of phantom equity – which means it has an economic value but does not have to be issued as cash or company stock. It might also be called “phantom stock” or “shadow stock.”

Under this plan, employees can receive vested shares of the company that they can use to receive rewards at predetermined milestones. The number of shares an employee would receive depends on the company’s performance, and while they won’t receive actual stocks or cash, they can sell their rewards to other investors.

Like any other financial agreement, there will be certain terms and conditions associated with the plan. It could include factors such as vesting schedules, dividend rights, and even a buy-out option if you needed liquidity for your reward. Knowing these terms before signing up is critical to getting the best from your Phantom Equity Plan.

How Do Phantom Equity Plans Work?

Employers are always looking for ways to incentivize their staff, and one increasingly popular way of doing so is through a Phantom Equity Plan. It’s a form of compensation that provides long-term incentives without being tied to a dramatic change in ownership or structure.

In a nutshell, Phantom Equity Plans give vested employees the right to future payouts much like shareholders—usually a set salary or bonus—but without making them shareholders. This typically happens at the end of a predetermined period, though it can also happen upon reaching certain events or milestones.

By offering such rewards, employers can retain and reward their most valuable employees over time—without worrying about unrealistic expectations from someone actively owning shares in their business. The rewards are based on performance metrics tailored to the specific business objectives of the employer, ensuring that employees are incentivized to reach specific goals rather than taking risky positions for personal gain.

Phantom Equity Plan vs. Phantom Stock Plan

A phantom equity plan and a phantom stock plan are actually two different things. While they both provide employees with incentives to think and act like an owner of the company, they work differently.

Here’s how:

Phantom Equity Plan

The Phantom Equity Plan is a type of long-term incentive plan that offers employees rewards for their contributions to the company, such as profits, revenue, or other financial goals. Employees can receive these rewards on a specific date when the company meets certain goals. This incentivizes them to focus on long-term growth by aligning their goals with the companies.

Phantom Stock Plan

The Phantom Stock Plan rewards employees with shares in the form of stock or cash equivalents equaling their actual value. The value of these shares can be based on an individual’s performance metrics, or it could be based on the performance of the entire stock market. This gives employees more immediate feedback regarding their performance, as they can see how their efforts pay off immediately.

So if you’re looking for an employee incentive plan that focuses on immediate results, a phantom stock plan is probably your best bet — but if your team is more focused on long-term growth, then you might want to look into a phantom equity plan.

Types of Phantom Equity Plans

You may have heard of a “phantom equity plan,” but do you know what it actually is? Let’s go over the different types of phantom equity plans so you can understand the distinctions between them.

Stock Appreciation Rights Plan

A stock appreciation rights (SAR) plan offers employees rewards based on the company’s stock price appreciation. The employee receives the difference between the stock’s strike price (the price of the company’s stock at the time of grant) and its current value. This type of plan does not involve any actual stock issued, called “phantom equity.”

Performance-Vested Restricted Stock Plan

A performance-vested restricted stock plan rewards employees with “restricted stock units” instead of cash when they achieve set benchmarks related to performance or service metrics. The employee can then cash in those restricted units over a set period of time. Usually, once they hit certain years of service or other goals related to performance or personal development targets.

Overview Plan

An overview plan allows employees to receive phantom equity without hitting performance-related benchmarks. Instead, they normally receive a predetermined number of phantom shares in exchange for their continued employment at the company over several years. It is important to note that this plan does not award any voting rights or dividends, and the phantom shares cannot be converted into actual shares later.

No matter which types you choose for your business, consider all key aspects when structuring your employee incentive program – from taxation and vesting structures to budgeting.

Advantages and Disadvantages of a PEP

When it comes to a Phantom Equity Plan (PEP), it’s important to understand the advantages and disadvantages before committing. To make that easier, here’s a quick overview of what you need to know regarding PEPs.


First, the positives. A PEP motivates key employees by providing them with long-term incentive awards that appreciate value over time-based on the company’s performance. The “phantom” part of this comes from employees not receiving any shares when they start, but if their performance goals are met, they will receive vesting stock rewards after a certain period. The phantom stock program has all the benefits of stock ownership without the company paying out in the short term.

Another advantage of a PEP is that it acts as an attractive tool when recruiting new employees and retaining old ones. And because these plans use phantom stock as incentives instead of actual stock, companies can save on taxes and operating costs associated with issuing more shares.


On the other hand, there are some drawbacks to using a PEP plan. Not all states recognize PEPs, so if your company operates in one of those states, you won’t be able to use this incentive plan. Additionally, because these plans don’t require actual stock issuance, there is a risk of dilution—if by accepting a PEP plan, too many key employees are incentivized, it could lead to decreased overall earnings for everyone involved in the long run.

Negotiating a Phantom Equity Plan

When negotiating a Phantom Equity Plan, it’s key to understand that you can get creative in what the structure looks like. It’s important to look at agreements from different angles and ask yourself how the equity terms could benefit both parties in the long term.

For example, there are a few ways you can go about structuring a Phantom Equity Plan:

  1. Deferred Compensation: This plan gives employees access to cash at a later date—which is great for companies that don’t have money now but can commit to cash payments in the future.
  2. Profit-based Equity: This plan offers employees an equity stake based on the company’s performance—which can be attractive if the company has the potential to grow rapidly.
  3. Stock Options: This plan allows employees to purchase stock options at low prices and reap the benefits if/when they exercise them—which is great for businesses with high-growth potential.

It’s worth noting that no two Phantom Equity Plans are alike since they’re tailored specifically to each business and its goals. When negotiating your plan, remember these three structure types and consider which makes the most sense for your company and its future progress.

Tax Implications of Phantom Equity Plans

If you’re considering a phantom equity plan for your business in 2023, the tax implications are another important factor to weigh. Depending on the type of plan you choose, there are different tax implications to be aware of.

Grants and Awards

When a grant or award is given to an employee, it is considered taxable income and must be reported. The amount is reported as W-2 income so that the employee will owe taxes. It’s important to note that the IRS will scrutinize the validation of the grant or award—employees should have a reasonable expectation they’ll receive something of value if they meet certain criteria and goals.

Restricted Stock Options (RSUs)

Restricted stock options are a popular way to reward employees with equity or stock instead of cash grants or awards. Depending on when the RSUs vest—when an employee has earned the right to exercise their option possibly—will determine how much, if any, taxes are owed on these restricted stock awards.

Phantom Equity Options (ESOPs)

An employee stock ownership plan (ESOP) involves phantom shares held in trust solely for company employees that grant options based on performance milestones or vesting schedules. Employees do not pay for their options nor receive any cash when their options vest; instead, employees have ultimate control over what stocks they trade and when they trade them—but again, there can be tax implications depending on when these phantom equity options vests and when an employee exercises them.

A phantom equity plan must comply with section 409a to avoid taxes until the employee is paid.

Understanding the tax implications of a phantom equity plan is essential before rolling one out for your business in 2023. Make sure you understand what type of plan you

Financial Considerations

So, what are the financial considerations of a phantom equity plan? Well, like most things in life, it comes down to taxes.

Typically, phantom equity plans are subject to ordinary income tax, so you must know your tax liability when making decisions. Even though the funds from phantom equity plans may not be immediately accessible in a bank account like other investment options, the IRS classifies these payments as taxable income the same as any other type of earnings.

In addition, employee stock options and similar incentive plans are subject to additional regulations under the Internal Revenue Code (IRC). It’s important to consult with a financial advisor when considering any phantom equity plan—you’ll need to understand how the plan works and its associated taxes before making any decisions.

Recent Changes in Taxation and Implications in 2023

It’s important to be aware of recent changes in taxation when considering a phantom equity plan. The 2017 Tax Cuts and Jobs Act introduced several new rules that may affect your decisions regarding phantom equity.

Lower Tax Rates

The top corporate tax rate dropped from 35% to 21%. This means that your potential gains from phantom equity are taxed at a lower rate, but the potential value of the phantom equity is lower.

International Profits

Previously, profits earned by a corporation outside the U.S. were subject to tax at the rate the company paid in its home country, minus any foreign taxes already paid. However, under the new legislation, companies must pay two taxes on foreign earnings: a 21% federal income tax and an additional tax on global intangible low-taxed income (GILT). This could further reduce the value of any phantom equity payouts you might receive.

It’s important to fully understand how taxation applies to your situation before deciding whether or not to enter into a phantom equity plan. Consulting with an experienced financial or legal adviser can help you navigate these changing rules and implications for 2023 so that you make an informed decision about your financial future.

What is a Phantom Stock Plan?

What is a phantom stock plan? Phantom stock is a type of incentive plan developed to help align the goals of a company’s shareholders and employees. The “phantom” element comes from the fact that no real stock exchange takes place. Instead, units of shares are distributed among employees as rewards based on their performance and contributions to the company’s success.

Phantom stock plans motivate employees to perform at their best, as they have direct financial incentives tied to the company’s success. This means that when the company does well, everyone reaps the rewards.

Here’s an example of how a phantom equity plan works:

  • A company might grant each employee 10 phantom shares with a set price value (e.g., $100 per share) and vesting schedule (e.g., 25% vested annually).
  • At the end of each year, each employee can choose whether they want to “cash out” their phantom shares and receive a cash payout in exchange for them (e.g., $1000 if they have 10 fully vested shares).
  • The payout amount would be determined by how well the company performed during that period — usually based on profits or share price appreciation from its initial value.
  • The key difference between phantom equity plans and traditional equity compensation is that no real transfer of ownership or voting rights is associated with it — hence why it’s called “phantom” equity.

Phantom equity plans offer companies a way to reward their employees for outstanding performance without transferring any ownership stake.

Stock Appreciation

What is a Phantom Equity Plan? It’s a way to reward key employees with a bonus based on the appreciation of the company’s stock. This type of bonus is known as equity, but it doesn’t involve actually owning a piece of the company.

So how do phantom equity plans work? They act as incentive-based compensation, with bonuses paid out when certain goals are achieved or the company’s stock appreciates above a certain value.

This can be a great way to motivate performance because employees are rewarded for contributing to the business’s success. It can also give employees a further sense of ownership in the business without giving them physical shares.

For companies looking to implement these plans in 2023, several considerations must be considered before choosing a model that works for your business. You’ll need to decide on vesting periods and keep up with IRS regulations on deferred compensation. In addition, you’ll need to ensure you have proper documentation outlining the terms and conditions associated with your plan.

At its core, phantom equity plans can effectively reward employees responsible for driving growth and profitability while minimizing costs associated with traditional stock options and other forms of equity-based compensation.

How to Use Phantom Stock Program to Your Advantage

A phantom stock program is a type of deferred compensation plan that offers selected employees a way to share in the value of a company’s performance without actually receiving shares of company stock. The value of the phantom stock is based on the full value of the company’s stock, and when the phantom stock is paid out, the employee receives a cash payment equal to the value of the phantom stock at that time.

One of the advantages of a phantom stock program is that it allows employees to benefit from the company’s capital gains without actually owning shares of company stock. This can be especially beneficial for privately held businesses, where shares of company stock may not be readily available. In addition, the payout from the phantom stock program is not subject to Medicare tax, which can help increase the employee’s take-home pay.

The value of a phantom stock program can also be tied to the company performance, which can motivate employees to work harder and contribute to the company’s success. However, it is important to note that the terms of the plan design should be carefully considered to ensure that it aligns with the company’s goals and objectives. For example, a change in control of the company could significantly impact the value of the phantom stock and should be considered when designing the plan.

A phantom stock program can be a valuable employee compensation and retention tool, especially for privately held businesses. By offering employees a way to share in the company’s value without actually owning shares of company stock, a phantom stock program can provide employees with a valuable retirement plan option and motivate them to contribute to the company’s success.


You might be curious about a Phantom Equity Plan and what it might mean for your business in 2023. Here are some of the most frequently asked questions about phantom compensation plans to help you get started.

What is a Phantom Equity Plan?

Simply put, a Phantom Equity Plan (or PEP) is an agreement in which employees are offered financial incentives based on the future performance of their company. These incentives can be cash or stocks and reward employees for their hard work and loyalty.

How does it work?

The basic concept of a PEP is that employees will receive payments when certain milestones are achieved or when there is an event such as an IPO or sale of the company. The payments may be set at predetermined amounts or based on factors such as how well the company performs over time. This means employees can earn more if their company performs better than expected.

What are the benefits?

PEPs can effectively reward and motivate employees while helping companies attract and retain top talent. PEPs also help bridge the gap between salaries that may not reflect all of an employee’s contributions to a company’s success. In addition, PEPs can incentivize employees to work harder since they have more skin in the game regarding their own financial rewards.


In sum, Phantom Equity Plans are an increasingly popular way to attract and retain talent while providing a source of cash to a business without significant upfront capital costs. From tax implications to the structure of the plan, it’s important to take the time to really understand the intricacies of Phantom Equity Plans so you can ensure you make the right decision for your business and employees.

As the world continues to move towards a more global and digitized economy, the Phantom Equity Plan will likely continue to increase in popularity. It’s a great way to help businesses to remain competitive in the job market while also providing a potential source of revenue down the line.

Now is the time to familiarize yourself with Phantom Equity Plans and evaluate whether it fits your business.

Learn more about investing with our helpful guides.