In my last blog I described the 5 biggest mistakes made by companies that adopt phantom stock plans. Today—the 5 best innovations that can make your plan a driver of performance and value.
- Determine how much value you want to share with employees before you begin to design the plan. To do this, you need to model company growth under reasonable scenarios and see how much new value would be created for shareholders. Then, and only then, can you begin to consider how much of that new added value should go to your key employees. For most companies this would range between 5% and 20%.
- Now that you have a “budget” for the plan you can back into annual awards. But first you’ll have to set a phantom value. Do this by creating a Formula Value (FV) for the company. The FV might be a reasonable multiple of earnings (or EBITDA, whatever you prefer). You’ll probably want to subtract long-term debt. Then pick a hypothetical number of phantom shares, e.g., 1,000,000. Divide your shares into your FV and, voila, you’ve got a share price.
- Now pick your participants (and allow for some future ones). Begin to place some number of phantom shares into their account annually (we’re still doing this in a model spreadsheet—not for real yet). There are a number of good techniques for doing this—but not enough space to discuss here). Work the numbers until the values seem right—and you’re within your budget.
- As you see how the shares grow in value you’ll realize that you need to determine when they’ll be redeemed (paid in cash to the participants). We typically recommend payouts starting 5-7 years from the year of grant. Don’t wait until “retirement” as employees will learn the only way they can get cash is to quit.
- When you complete and document your plan you’re ready for a roll-out. Make that meeting meaningful. Help the employees see that you’re trusting them with the creation of your future company and that you plan to reward them well for making it happen.
Don’t be stingy. If your key management team creates millions for you, the least you can do is make them feel like shareholders—at least financially. Every company that expects to be bigger in the future than they are today needs some type of long-term incentive plan. A phantom stock plan just might be the key to tying your leadership team to the creation of that future company.
Of course there are a number of other things to do to make a phantom stock plan work. But these five will get you off to a good start.