Definition

• Phantom stock options are a specific type of benefit that is offered to employees in place of regular stock options. They are also known as "shadow" or "mirror" stock options. They function much like regular stock options, but are not actual equity and do not affect the company's finances in the same way. They function according to formulas that carefully measure the market value of the company and pay employees cash based on the results of the calculations, as if they owned real stock.
  
  

Benefits to Employers

• Phantom stock is useful to an employer who does not have public stock or does not wish to spread ownership of the company too far. By using phantom stocks, an employer can offer benefits to attract talented employees but not give away actual equity.
  
  While the calculations used to estimate fluctuations in the price of phantom stock need to be extremely accurate, the company does not need to pay stock-related taxes on the money employees receive from phantom stock. Like regular stock, if the company suffers or stock prices are lowered, the payments that employees receive from phantom stock will also be affected.
  
  

Benefits to Employees

• Employees receive the payments from phantom stock in much the same way as regular stock payments that come from the company's cash supply and are granted as bonuses. Employees do not need to pay stock-related taxes on the money they receive; it is treated instead as normal income and subject solely to income taxes. Some companies may offer "phantom" options to reinvest the money and receive more phantom stock in return.
  
  

Uses

• Many larger companies use phantom stock to pay their executives. This method allows executives to earn money based on the success of the company without unbalancing ownership of the stock. At a specific date, a strict company evaluation is begun, usually by a third party, and the executive is paid a bonus based on the positive changes in the company's market value. Smaller companies use phantom stock to attract strong employees.
  
  

SAR

• SARs, or Stock Appreciation Rights, give payments based on how well the company's stock is doing without actually involving the stock itself. The two differ in that SARs generally pay over time, while phantom stock options usually pay at the end of a specific period. SARs are seen as more flexible options, and employees may have more options concerning the payments they receive from them.