Phantom Stock

Phantom stock (sometimes also known as phantom equity or phantom stock units) is partially defined by what it’s not: it’s not stock or shares in a company, but it has some similar characteristics. It’s a type of an incentive award given to key company employees without giving away actual shares in the company while allowing those employees to share in some of the economic upside of the company. For example, the award may allow key employees to receive one or more payments based on the company’s profitability, the employee’s performance, or even an eventual sale of the company. Payments made to employees are taxed as ordinary income, so the employees don’t get the benefit of capital gains treatment, which they would likely receive on the sale of company shares. One of the main purposes of phantom stock is to replicate actual company stock without having to actually give away that stock. Phantom stock can be useful in situations where a company has limited options in the types of incentives it can offer its employees. S Corps are a good example, as they can only have one class of stock (with the caveat that that the one class of stock can either be voting or non-voting stock, and still be treated as one class).