Structuring your business and finding ways to incentivise your employees can be a difficult process. One of your options for an incentivisation scheme is imposing a Phantom Share Scheme. If you are looking for ways to incentivise and keep your employees but do not want to give up equity, this option might be for you. 

Keep reading to find out:

  1. What is a Phantom Share Scheme?
  2. When are they offered? 
  3. What are the different types? 
  4. How are they different from an Employee Share Scheme?
  5. How are they taxed? 
  6. How are they implemented?

What Is A Phantom Share? 

A Phantom Share Scheme is offered by an employer to their employees. It is one of the types of schemes that offer shares to employees as an incentive to work hard and stay at the company. With a Phantom Share Scheme, no actual shares in the company are offered. 

Instead, the company offering the scheme gives ‘fake’ shares. These shares are tied to the value of the actual company shares. Depending on the type of phantom share scheme, your employees will be paid when the real shares of the company increase or pay a dividend. 

It helps to think about the purpose of phantom shares. When an employer wants to offer incentives to their employees in shares, but does not want to lose equity in the company, what can they do? Employers in the United States answered this question by creating the phantom share. It still incentivises working hard by linking employee benefits to the success of the company. At the same time, no equity is lost whilst creating this incentive. It is a neat solution to a complex problem! 

When Are Phantom Share Schemes Offered? 

As was mentioned above Phantom Share Schemes are a way to incentivise employees without losing equity. However, there are certain situations for which Phantom Share Schemes are a better option than others.

First of all, Phantom Share Schemes require quite a bit of cash. This is because the payout for a Phantom Share Scheme is similar to a yearly bonus. You have to pay the employee the equivalent dividend or agreed rewards that are owed to them in cash. If your company jumps in value or you have lots of employees on the scheme you will obviously need a solid cash reserve to honour your end of the deal. 

Second, maybe because they are such a cash heavy venture, Phantom Share Schemes are usually offered only to senior or top performing employees. This is because of the highly competitive market for good employees. If you have lots of direct competition for your business and need to incentivise your employees to stay, this could be a great reason to offer a Phantom Share Scheme.  

Third, Phantom Share Schemes do not involve real shares. This means they are cheaper to implement, simpler to implement and limit concerns over company equity that you may have with an alternate incentive program. 

What Are The Different Types Of Phantom Share Schemes? 

There are two types of Phantom Share Plans. One is called an ‘Appreciation Only’ plan and one is called a ‘Full Value’ plan.  These plans are both still tied to the shares of the company. 

However, they differ in how the behaviour of the stock determines the employees payout. 

Appreciation Plan 

An appreciation plan is a more limited version of the Phantom Share Scheme. It still assigns ‘fake stock’ that is tied to real stocks to the individual. However, it only pays the individual when the stock increases in value. Additionally, it only pays the value of the amount the stock increased from its base level. It does not include the value of the actual stock, only the amount it appreciates. The base price of the stock is usually determined from the date the plan is operational. 

Full Value 

As the name suggests a full value Phantom Share Schemes pay the employees the value of the stock. The employee is also paid the value of any appreciation which occurs during the time the Phantom Share Scheme is active. This option will cost more than an Appreciation Plan but it would also serve as a better incentive for employees. 

Phantom Share Schemes vs Employee Share Schemes 

Employee Share Schemes are a much more widely used employee incentivisation scheme. Indeed, Phantom Share Schemes and Employee Share Schemes have a lot of similarities. 

There is however one massive difference: Employee Share Schemes offer employees real shares and a Phantom Share Scheme is a contractual agreement tied to shares. 

With Employee Share Schemes, the employer needs to determine the value of these shares and determine if the employees get shareholder voting rights in the company. This requires a lot more legal and financial leg work, which in turn incurs significant costs in time or money or both.

Additionally, as will be explained below these schemes are taxed differently. How a Phantom Share Scheme is taxed is discussed below. However, changes to tax laws in 2015 saw shares granted under an Employee Share Schemes granted significant tax concessions. This benefit was mostly that the employees could defer their tax liability for up to 15 years. 

Employee Share Schemes, like Phantom Share Schemes, have their pros and cons. But it’s important to know the difference in how they operate when choosing how to structure your business. 

How Are Phantom Share Schemes Taxed? 

In Australia, a Phantom Share Scheme is similar to a bonus an employee would receive at the end of the year. At least, the Australian Taxation Office seems to think so! There are no tricks or concessions for a Phantom Share Scheme and the Australian Taxation Office has not issued any guidance on how they will deal with them. 

Therefore, Phantom Share Schemes are taxed like any cash bonus. Payments from the Phantom Share Scheme form part of the employee’s income for that paycycle and are taxed accordingly. 

However, a Phantom Share Scheme will obviously only be taxed when it is paid out. This can be annually, very similar to a bonus, when dividend payments are given to regular shareholders or at a later date according to the contract. However, if the company goes public (i.e. is listed on the stock exchange) or is bought by someone else the benefit from the Scheme will be paid out then and taxed accordingly. 

How Are Phantom Share Schemes Implemented?

Phantom Share Schemes are a contractual agreement. This is one of the factors that make them so much simpler than other employee incentivisation schemes. The agreement is between you and your employees, no one else has to be involved. Implementing your Phantom Share Scheme can be done at the beginning of the employees time at your business, by including the scheme in the original contract. Alternatively, if you want to introduce the scheme at some point after the signing of the employee a standalone contract between the employee and the employee can be established. 

Still Unsure? 

Structuring your business to properly incentivise and retain good employees is a stressful and complex task! The lawyers at Sprintlaw have experience in this space and can guide you through the process. Get in contact now for an obligation-free chat. You can reach out to us at or contact us on 1800 730 617.

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