Phantom stock is a contract between an employer and an employee that grants the employee the right to receive a payment based on the value of the employer’s stock. When granting phantom stock, the employer does not grant the employee any shares of the employer’s stock. Instead, the employer grants the employee a right that tracks the value of a specified number of shares of the stock.
The employee will have a right to receive a payout equivalent to the value of these tracked shares. Depending on the terms of the employer’s phantom stock plan regarding the vesting of phantom stock, the payout may occur on a specified date or upon the occurrence of a certain event, such as retirement, disability, or death. If the employee’s employment is terminated before the phantom stock vests, the employee normally forfeits the phantom stock.
The plan may provide for a single payment, or it may provide for installment payments over a period of time after the phantom stock vests. In some cases, the employer may let the employee elect to receive the payout in the form of an equivalent amount of stock. In addition to the final payout, under some phantom stock plans, the employee may receive payments equivalent to any dividends that the employer pays to stockholders.
It may help to understand some of the key similarities and differences between phantom stock and other types of financial interests in an employer. Phantom stock differs from an employer’s stock in that phantom stock does not give the employee an ownership interest in the employer. Unlike stock, phantom stock also might not convey a right to payments based on dividends. Phantom stock differs from a stock appreciation right in that its payout is based on the full value of the stock, while the payout of a stock appreciation right is based only on any increase in the value of the stock over a specified period of time. Phantom stock differs from a stock option because the employee does not need to purchase anything.