Phantom Shares – Innovative Employee Benefit Incentive

Introduction

In today’s economy, for large Corporates/ start-ups, to achieve a certain milestone and retain the position in the market has been challenging.  One of the critical aspects of success of any organization is the talent pool of that organization.  In economy that is fast emerging and developing, every Corporate is looking at hiring the best talent pool and retaining its existing trained employees.  In the booming economy in terms of start-ups, e-commerce and with ample of other opportunities in the market, has resulted in higher attrition.  It has become utmost important for every organization to provide incentives, to keep their talent pool intact and motivated to achieve higher success milestone.  

One such innovative incentive devised is the concept of Phantom shares or Shadow shares. 

Concept of Phantom shares

“Phantom shares” or “Shadow shares” can be described as a type of employee benefit plan whereby employees of an Organization get various benefits of stock ownership without actually having real ownership of Stock (i.e. stake in organization in terms of voting rights, etc.), in exchange for their services.

Features of Phantom stock option

Following are features of Phantom Stock option:

  1. It is a performance based incentive
  2. It is conditional incentive – it is paid after a specific period of time or upon fulfillment of specific criteria
  3. The underlying entitlement for an employee at the time of exercise of Phantom Stock Options is a cash payment unlike Stock Plans which entitle an employee to equity stake in the company.

Difference between Employee Stock Option Plan (ESOP) and Phantom Shares

Tax Implications

Employee – At the time of exercise of phantom shares, employee receives income in the form of cash entitlement.  The income is taxed as under the head Salary as perquisites. 

Company – No tax implications in the hands of the company.           

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