Building Unified Financial Visions

Twenty years ago very few people were familiar with the concept of ‘phantom stock.’ Today, most business owners are familiar with the term—and many have strong opinions about whether they work or not. Do they?

 For a plan to  ‘work’ it should: (a) provide a meaningful reward for employees if the value of the company goes up over time, and (b) serve as an effective retention tool for key employees.

 I’ve designed a lot of phantom stock plans over the years. And I’ve seen many more that were put into place by others. I’ll offer up, first, some of the biggest mistakes I’ve seen in phantom stock plans. And in my next blog I’ll offer up the most innovative and effective practices that can make a plan, possibly, the most effective compensation plan you’ve ever utilized.

 Here are the top 5 mistakes to make when designing a phantom stock plan (if you really want to do it wrong):

• Require that the plan valuation be determined by a formal appraisal. Result: significant, unnecessary, periodic expenses for the company.
• Be sure to use the actual number of company shares for the number of shares in the phantom stock plan. Result: the plan will be very confusing and complicated whenever you try to conduct routine corporate shareholder transactions (redeem shares, issue new shares, etc.).
• Issue “shares” in a block grant up front. Results: certain regrets later on when you realize you gave too much to some people and you have too few new shares to award to others; also, people will probably vest in all their shares before you really want them to.
• Pay annual dividends to the “phantom shareholders.” Results: a completely unnecessary drain on company cash.; plus, no alignment or retention purposes whatsoever.
• Have an attorney help you design the plan. Result: (with apologies to my attorney friends) this results in an overly technical plan without ‘real world’ practical and compelling provisions. (Tip–let the attorney document after the creative discussions have been conducted.)

These 5 steps will insure you years of headaches, regrets and costs. Any you’ll be sure to lower productivity, worsen retention and diminish shareholder value. In my book, that doesn’t ‘work.

 Next blog—best practices tips for plans that really work.