Tannenbaum Helpern Syracuse & Hirschtritt, LLP
About Us Careers Contact Us Search
Home Practice Areas Industries Case Results Attorneys Publications Events Press Room

Phantom Equity Plans: A Flexible Alternative to Retain and Motivate Key Employees

Findings from a recent Gallup Workforce Panel show that a little over half of U.S. employees are currently watching the job market or actively looking for a job. (http://www.gallup.com/ businessjournal/186602/job-hopping-employees-looking.aspx) For employers these findings could represent a major challenge in the near future because employee attrition or loss creates considerable expense, which is magnified when high level or “key employees” resign. Key employee attrition can have a significant impact on both the short and long term success of a company. As such, in order protect against key employee attrition, employers must find ways to retain and motivate these employees to perform.

Fortunately, employers have a variety of options available to achieve the goals of motivating and retaining key employees. For example, companies can issue stock options to employees, provide employees with company shares, or provide other variable compensation awards. However, the specifics of the plan or package selected by the employer can have significant implications for the company, such as diluting the equity of the current owners, complicating the corporate governance of the enterprise, or even creating onerous tax burdens for both the employer and employee. As a result, an increasingly popular option for companies, in this situation, is to design plans that provide employees with phantom equity.

At its core, a phantom equity plan simply involves a company promising to pay an employee a bonus, at a particular time or upon the employee achieving a specified goal. The payment by the company can be either a cash payment or through the conversion of the phantom equity “shares” into actual stock. Phantom equity plans are not subject to many of the restrictions or risks that are inherent to the actual transfer of a company’s shares. As such, phantom equity plans provide a flexible alternative to equity ownership plans for employers. For instance, phantom equity plans eliminate the possibility of disputes over control in a company between the existing ownership and the new equity holders, which can result under traditional equity ownership compensation plans because in phantom equity plans the employees are not actually given any company shares and do not have any voting or consent rights. Similarly, phantom equity plans mitigate potential concerns among existing ownership about immediate dilution of their equity. Further, the legal and accounting costs of phantom equity plans are less than those associated with traditional equity ownership compensation plans. Finally, by implementing a phantom equity plan, an employer can avoid the need for employees to invest cash or experience immediate taxable income as a result of shares being issued.

Accordingly, a phantom equity plan can be used to mimic the benefits of providing real equity to key employees by contractually guaranteeing the employee a payout, either in cash or in shares, based on certain benchmarks being met or a certain amount of time passing, while minimizing the risks and costs associated with transfers of actual equity. The value of the payment is determined based on what type of plan the employer designs. Two common types are the “appreciation only” plan, which only pays the employee based on the increase in the business’s equity value over a period of time, or the “full value” plan, which pays the employee based upon the total value of a business’s shares at the time of pay out. Due to the nature of the payout for phantom equity plans, these plans can provide employers with a powerful retention tool because prior to vesting or to the employee meeting a specified benchmark, the phantom “shares” have no actual value and the employee will get nothing if he or she leaves the employer. In addition, the plans can provide a significant source of motivation for key employees to invest time and energy in order to benefit monetarily from any gain in the company’s value.

As can be seen, phantom equity plans provide a way for employers to motivate and retain key employees without having to immediately hand over either equity or cash. When designed correctly, these plans can meet the employer’s needs and simultaneously provide the incentives necessary to keep key employees from switching jobs or not investing time and energy into improving the company. However, if these plans are not designed correctly an employer can unintentionally create liability for the company or cause the employees to suffer significant tax repercussions. For example, phantom equity plans are generally not covered by the requirements of Employee Retirement Income and Security Act of 1974 (“ERISA”), but if the plan is designed incorrectly, then it could subject the company to considerable liabilities under ERISA. Similarly, if a plan is not properly structured to ensure it is not subject to the rules of Section 409A of the Internal Revenue Code, then an employer’s non-compliance with Section 409A can impose significant tax penalties on the employee (e.g., an additional 20% tax).

Based on the potential benefits, employers should consider phantom equity plans as a potential flexible alternative to traditional equity plans or other variable compensation awards to retain and motivate key employees. It is important for any employer considering implementing a phantom equity plan to consult with an attorney to ensure that the plan is properly designed to meet the employer’s goals and objectives while avoiding potential pitfalls.

For more information on the topic discussed, contact:

Joel A Klarreich | 212-508-6747 | JAK@thsh.com |: @staffing_lawyer

Andrew W. Singer | 212-508-6723 | singer@thsh.com |: @employer_lawyer

Stacey A. Usiak | 212-702-3158 | usiak@thsh.com |: @law4employers

David R. Lallouz | 212-702-3142 | lallouz@thsh.com |: @DavidRLallouz

Jason B. Klimpl | 212-508-7529 | klimpl@thsh.com |: @HR_Attorney

James Rieger | 212-508-6728 | rieger@thsh.com

*A special thanks to Joseph Lockinger for his contributions to this article.

Employment Notes, a newsletter produced by Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Employment Law Department, provides insights on recent employment caselaw, legislation and other legal developments impacting employer policies, human resource strategies and related best practices. To subscribe to the newsletter, email marketing@thsh.com.

About Tannenbaum Helpern Syracuse & Hirschtritt LLP

Since 1978, Tannenbaum Helpern Syracuse & Hirschtritt LLP has combined a powerful mix of insight, creativity, industry knowledge, senior talent and transaction expertise to successfully guide clients through periods of challenge and opportunity. Our mission is to deliver the highest quality legal services in a practical and efficient manner, bringing to bear the judgment, common sense and expertise of well trained, business minded lawyers. Through our commitment to service and successful results, Tannenbaum Helpern continues to earn the loyalty of our clients and a reputation for excellence. For more information, visit www.thsh.com. Follow us on LinkedIn and Twitter: @THSHLAW.

Business Litigation Bulletin
Employment Notes
Healthcare Reform Alert: Obama Administration Suspends Deadline for Distribution of Insurance Exchange Notices to Employees
Healthcare Reform Alert: Obama Administration Sets October 1 Deadline for Employers to Distribute Insurance Exchange Notices
New York City Earned Sick Leave: Practical Steps for Employers
Changes to New York’s Minimum Wage Now Effective
New York City Paid Sick Leave – What Employers Need to Know
NY Rings in the New Year with an Increase in the Minimum Wage
Don’t Flake Out on Inclement Weather Practices
NYC Passes Ban-the-Box Legislation
NLRB Decision on Standard for Joint Employers Impacts the Staffing Industry and its Clients
New York Hospitality Employers Face Host of Wage Payment Changes
Required Annual Distribution of New Jersey Notices
Three Legal Trends Affecting Staffing Firms
Federal Appeals Court Affirms the Importance of Implementing Proper Timekeeping Policies to Guard against Overtime Claims
U.S. Department of Labor Publishes Final FLSA Overtime Rule Affecting the “Exempt” Status
Phantom Equity Plans: A Flexible Alternative to Retain and Motivate Key Employees
New York Employers Brace for New Restrictions on Electronic Wage Payment Methods
Pay Equity Legislation: Compensation Based on Applicants’ Previous Salary a Thing of the Past
Companies Must Account for New Law Protecting Confidential Information
New Overtime Rule Blocked
Cybersecurity and Staffing: Guarding Clients' and Job Candidates’ Information
New USCIS Form I-9 Now Effective
New York State Direct Deposit and Paycard Regulations Invalidated
Complying with the 2017 New York State Minimum Wage and Exempt Salary Thresholds
New York State Workers’ Compensation Board Proposes Rules for New York Paid Family Leave
NYC Bans Salary History Inquiries During the Hiring Process
New Requirements for Engaging Freelance Workers in NYC
Workers’ Compensation Board Releases Revised Rules for NY State Paid Family Leave
Data Security Issues for Staffing Firms After the Equifax Breach
City Expands Sick Time Act to Cover “Safe Time”
Facing the Wave of Recent Sexual Harassment Complaints – Proactive Steps for Employers to Mitigate Risk
Reminder: 2018 New York State Minimum Wage and Exempt Salary Thresholds Increased
New York State and City Anti-Sexual Harassment Legislation Impose Significant New Obligations on Employers
NYC Employers Must Comply With New Laws on Accommodations and Schedule Changes
Update: Employer Obligations under Recently Enacted NYS and NYC Sexual Harassment Prevention Laws
Update: New York State Issues Final Guidance and Materials on Sexual Harassment Prevention Laws
Holiday Party Liability: Keep Your Employees Off The Naughty List
New York Minimum Wage and Exempt Employee Salary Thresholds Set to Increase in 2019
Note from the Real Estate Group
THSH E-Alert
Other Publications
Articles By Topic
Cyber & Privacy Alert
New York Law Journal
Attorney Professionalism Forum
Join Our Mailing List
Like us on FaceBook Follow us on Twitter Get LinkedIn with us Pin It! Email Us Print this Page

Sitemap |Terms of Use | Privacy | Attorney Advertising

Tannenbaum Helpern Syracuse & Hirschtritt LLP provides legal advice only to individuals or entities with which it has established an attorney-client relationship and such advice is based on the particular facts and circumstances of each matter. Contacting us through this site, or otherwise, will not establish an attorney-client relationship with us. Any e-mail or other communication sent to THSH or its lawyers through this site will not be treated as subject to the attorney-client privilege or as otherwise confidential and you should not include any confidential information in any such communication.