Why Phantom Share Plans don’t work

Phantom Share Plans and replicator plans are designed to try to “replicate” the ownership of shares without actually granting ownership to employees – but they don’t make sense, and they often don’t work.

There are a large number of these plans – sometimes called shadow equity plans or phantom stock plans or the even more confusing, replicator plans. The simple idea is to create some of the benefits of a traditional Employee Share Ownership Plan (ESOP) without using shares or allowing employees to hold equity (pretend plans).

This is often done based on –

• fear of losing control – this can easily be managed within the plan rules
• fear of employees “knowing too much” – the research is overwhelming that too much info is far better than not enough for employees
• fear of giving away too much – “losing” equity without understanding the wisdom of a smaller piece of a larger pie

These plans seek to deliver an amount, often a monetary bonus, equal to the increase in the value of shares. This creates a cash issue for the company if the shares increase in value rapidly, a tax problem for employees who are taxed at full marginal rates, and an admin nightmare trying to make the whole scheme fair and equitable. Some plans, typically replicator plans, even go to the lengths of trying to replicate changes in share value in a private company through purchasing other assets, listed shares or a managed fund for example, which requires a level of financial genius which is highly rare!

I have never seen this work.

There is a far better way. Instead of resorting to phantom stock plans, use a traditional Employee Share Ownership Plan (ESOP); a well-designed plan with appropriate rules can manage any risks or concerns, provide a win-win-win outcome – for employees, founders and the business – and get your employees to think and act like business owners (not pretend to)!