Phantom Stock

Axiom Valuation provides expert and cost-effective custom valuation services for phantom stock plans.

About Phantom Stock

Phantom stock is a deferred compensation tool that can be used by companies to motivate and incentivize key employees to help build the value of the business without diluting the owner’s equity position. For private companies, a phantom stock plan, also referred to as mirror, shadow, or unit stock, provides a value-based compensation approach that functions in a similar way to public company stock option plans. There are also similar plans described as stock appreciation rights or SAR plans.

Although many variations exist, the typical plan creates deferred compensation units and tax deferral advantages that are assigned a base value equivalent to the value of a company's common stock. The participant does not "purchase" underlying phantom shares; rather the individual is granted phantom shares with a vesting schedule and receives the upside increase in value over the original value at grant. Triggering events for the payout of the change in value from the issuing value include an employee’s retirement or a change in controlling ownership of the company.

Valuing Phantom Stock

Phantom share value is calculated based on changes in the equity value of the company determined by an independent valuation. Value can increase or decrease based on actual financial performance. The participant is not taxed until there is an actual receipt of benefit payments. Similarly, the corporation will receive a deduction for the payment in the year the payment is actually made.

The value of phantom stock is established on the books at the time it is credited and should be adjusted annually to reflect the change in its value. To determine the value of phantom stock units, the equity of the company must be valued.

Business valuation is an essential element to the proper management of a phantom stock arrangement. Most private companies with phantom stock plans have in the past relied upon their accounting firm for these annual valuations. However, with the restrictions contained in Sarbanes-Oxley barring accounting firms from valuing public companies for which they perform audit and attest work, many accounting firms are turning this work over to independent valuation firms.

For a description of a real case study of a phantom stock plan in action, please click on the link below to see an article at the website.