Are Phantom Stocks Worth Cash?

by Will Gish

Employers use a myriad of benefit plans. From bonuses to stock options and phantom stocks, these plans provide a direct financial incentive for employee performance and longevity. Answering the question of whether phantom stocks hold cash value requires an examination of the stocks themselves, and the manner in which employers use phantom stocks in benefit plans. According to CNN Money, phantom stocks stand to proliferate as a benefits plan in the early 21st Century.

Phantom Stocks

Phantom stocks constitute a deferred, long-time benefit. Basically, an employer promises to pay an employee a cash bonus at a pre-determined future date and bases the value of the bonus on the value of company stock. For instance, an employer may promise to pay employees the value of a certain number of shares, or the value of capital gains on a certain number of shares, at a future date. This type of bonus derives its name from the fact that it bases the amount of compensation on a set of theoretical, or phantom, stocks.

Phantom Stock Value

Technically speaking, phantom stocks hold no value at all because they don't exist. However, when a company promises to provide employees compensation via a phantom stock scheme, it creates a document stating the specifics of the phantom stock deal, investing the phantom stocks with a future value. Thus, while phantom stocks technically hold no value, a phantom stock scheme holds future value for employees. You cannot cash phantom stocks as you can standard stock options, but you do eventually earn cash from them.

Phantom Stock Stipulations

The ultimate cash value and method of payment for a phantom stock scheme depends upon the stipulations of an individual deal. In most cases, when the pre-determined payment date of a phantom stock deal arrives, an employer pays you the value of the phantom stocks or phantom capital gain at that time and the phantom shares simply vanish. In some isolated incidents, companies may convert the phantom stocks into real shares, at which point they gain cash value but cease to be phantom shares.

Phantom Stocks and Accounting

For accounting purposes, phantom stocks hold cash value on paper. Company accountants put phantom stocks on the book when a company makes a phantom stock deal and track the value of these stocks regularly until the employer pays out their value. However, the written value of a phantom stock does not equate a real value until the company pays a phantom stock bonus to an employee. Such a payment constitutes the only means of extracting cash value from a phantom stock.

The Benefits of Phantom Stocks

Phantom stocks provide benefits to employees and employers. Employers benefit from phantom stocks because they allow companies to pay employees a bonus based on the value of company stock without surrendering any ownership of the business to employees, as happens when a company provides actual stock options. Employees benefit from phantom stocks because they provide a similar benefit to cashing employee stock options without the cost associated with exercising, or purchasing, stock options in order to sell them.

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