Ghost Shares, also known as “Phantom Shares,” allow employers to reward their employees through pseudo stock ownership. Essentially, Ghost Shares act similarly to actual shares, but do not give their owners actual equity in the company or many subsequent benefits such as voting rights. Ghost Shares hold equivalent value to actual shares and follow the movement of the companies’ actual stock.
What are the Types of Ghost Shares?
There are two kinds of Ghost Shares: appreciation only and full value.
Appreciation only shares award recipients the difference between the value of the shares when they were awarded and the increased value after a specified amount of time. For example, if an employee is awarded 500 shares valued at $60 a share and must wait five years for pay out at the end of which the shares are valued at $80 a share, the employee will collect $10,000. In contrast, full value shares award their recipients the exact value of the share at the time of pay out. For example, if an employee is awarded 500 shares valued at $60 a share and must wait five years for pay out at the end of which the shares are valued at $80 a share, the employee will collect $40,000.
Why Do Companies Use Ghost Shares?
There are many reasons why a company may elect to award their employees Ghost Shares. The most common reason employers utilize Ghost Shares is to incentivize employees to stay with the company and to motivate employees to continue high level performance. Because Ghost Shares follow the price movement of a companies’ actual stock, allocation of Ghost Shares encourages recipients to increase the value of the company.
Additionally, Ghost Shares provide employers with a way to reward employees through allocation of value without diluting the actual stock of the company. However, a downside of Ghost Shares is that they do not benefit from capital gains treatment, meaning employees must pay regular income tax on them. Even more, if too many employees are awarded Ghost Shares there may be compliance issues with The Employee Retirement Income Security Act. It is recommended that employers seeking to utilize Ghost Shares as a form of employee compensation speak with an experienced business attorney who will be able to assist in creating a plan that is in compliance with federal laws and regulations.
