Phantom Stock Plans vs. SARs?

searcher profile

February 25, 2023

by a searcher from University of Illinois at Chicago in Chicago, IL, USA

Any thoughts on deciding between issuing Phantom Stock or SARs to employees w/o issuing actual shares? Leaning towards the Phantom Stock route, but I'm interested in anyone's experience with rolling out either.

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commentor profile
Reply by a professional
from Villanova University in West Chester, PA, USA
Hi ^redacted‌ - they all have pros and cons! Sometimes SAR's are utilized generally as a non-cash compensation option for employees to keep cash in the business. Phantom equity can be used for investors or employees. I really like phantom equity for employees as it can be easier to reserve the cap table for long term key persons, whereas an employee may leave at any time. Phantom equity tracks the value of actual equity and you can build in vesting rights and loss of those rights in an event of termination for cause (much like SAR's but without having to give up an interest in the company). I also like profits interest plans which are more like bonuses where certain employees receive a percentage of profits. I'd be happy to discuss this further.
commentor profile
Reply by an investor
from Harvard University in Denver, CO, USA
We have both and use them for different tiers of employees. For more senior employees with more sophistication and desire for true equity ownership, we've used SARs and options with good results. For middle management, phantom equity ("equity-linked cash bonuses") have been effective at giving evidence of alignment without being unnecessarily complicated. That said, we often wonder if we wouldn't be better off with KPI-linked performance bonuses rather than phantom stock for the middle management crowd. Lots of context will determine which approach works for the group you're trying to motivate.
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