What is Phantom Share Scheme?

Full Definition

A phantom share scheme (also called a phantom stock or shadow share scheme) is a way for a company to reward and incentivise employees by reference to the value of its shares, without actually issuing any real shares, share options, or other equity to the employee. Instead, the employee is granted a notional number of 'phantom' units, each tracking the value of one real share, and at a future vesting or payment date -- often linked to a length of service, performance conditions, or a company sale or exit event -- the employee receives a cash bonus equal to the increase in value of those notional units over the period, taxed as ordinary employment income (and subject to Income Tax and both employee and employer National Insurance) rather than under the more favourable tax rules that can apply to genuine share schemes such as Enterprise Management Incentive options. Phantom schemes are often used by companies that do not want to dilute existing shareholders' ownership, that are structured in a way that makes issuing real shares to employees legally or practically difficult (for example certain overseas subsidiaries, or companies with complex existing share structures), or that simply want the administrative simplicity of a cash-settled arrangement instead of managing a register of small employee shareholders. Because no real shares change hands, phantom scheme participants have no shareholder voting rights, no dividend entitlement, and no capital gains tax exposure on the eventual payout, unlike employees who hold genuine shares or exercised share options.

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