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Equity Incentive Arrangements Types Intro--05 Phantom Stocks

Put it simply, Phantom Stocks are promises to pay bonuses in the amount of the (increased) value of stocks.

Phantom Stocks (also known as “shadow stocks”) offer the grantee a contractual right to receive the value of stocks without the actual ownership or transfer of any shares.

Such value can be “appreciation only” or “full value”. "Appreciation only" plans do not include the value of the underlying stock itself and may only pay out the increase of stock value over time. "Full value" plans pay both the value of the underlying stock as well as any appreciation.

Phantom stocks and Stock Appreciation Rights (SARs) are very similar concepts, but with a few key differences, including:

  • SARs have no specific settlement date; grantees have the flexibility to choose when to exercise.

  • Phantom stocks can offer Dividend Equivalent Rights; SARs could not.

  • SARs may be structured to avoid section 409A regulation, Phantom Stocks are deferred compensations and subject to section 409A.

  • 83 (b) election applies to SARs, but not to Phantom Stocks. Hence Phantom Stocks grantees cannot elect to accelerate the timing of recognition of income from the date of vest to the date of grant.

Dividend Equivalent Rights

A Dividend Equivalent Right is an Award entitling the grantee to receive credits based on cash dividends that would have been paid on the underlying stocks if such shares had been issued to the grantee. A Dividend Equivalent Right may be granted to any grantee as a component of Phantom Stocks or RSUs or as a freestanding award.

** This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.

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