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Structuring your business and finding ways to incentivise your employees can be a challenging process. One option to consider for a robust incentivisation scheme is a Phantom Share Scheme. If you’re looking for ways to motivate and retain your talent without diluting your company’s equity, this option might be the perfect fit for you.
Keep reading to find out:
- What is a Phantom Share Scheme?
- When are they offered?
- What are the different types?
- How are they different from an Employee Share Scheme?
- How are they taxed?
- How are they implemented?
What Is A Phantom Share?
A Phantom Share Scheme is an employee incentive plan where no actual company shares are exchanged. Instead, employees receive “phantom” or virtual shares that reflect the performance of your company’s real shares. This arrangement enables your team to share in the financial success of the business without affecting your equity structure.
Under this scheme, employees are credited with a number of phantom shares whose value tracks the actual market performance of your company’s stock. As the real shares appreciate or pay dividends, employees receive cash payments based on that performance. These payouts can be scheduled periodically or triggered by specific events, such as a change in control or a public listing.
The primary purpose of phantom shares is to reward and retain your best employees by aligning their interests with the success of the business—without the complexities of transferring real equity. For more insights into structuring contractual agreements, our guide on what makes a contract legally binding can be a useful resource.
When Are Phantom Share Schemes Offered?
Phantom Share Schemes are typically offered as a strategic incentive to encourage long-term commitment from key employees. They are especially useful when you want to provide a financial reward linked to company performance without the dilution challenges of issuing real shares.
Firstly, implementing a Phantom Share Scheme necessitates maintaining a strong cash reserve. The payouts under the scheme are generally made in cash—similar to an annual bonus—so you must ensure that funds are available when it’s time to compensate your employees. It’s a good idea to consult with experts in financial and legal planning, such as our Contract Drafting team, to ensure the arrangement is sustainable.
Secondly, because of its cash-heavy nature, Phantom Share Schemes are often reserved for senior executives or top-performing staff. In today’s competitive market, retaining your key talent is essential, and many companies are now bundling phantom share schemes with other benefits to create an attractive overall remuneration package.
Thirdly, since phantom shares do not involve the transfer of actual equity, they are generally cheaper and simpler to administer than traditional Employee Share Schemes. This simplicity makes them an appealing option for growing businesses concerned about managing ownership dilution.
What Are The Different Types Of Phantom Share Schemes?
There are primarily two types of Phantom Share Plans: the ‘Appreciation Only’ plan and the ‘Full Value’ plan. Both plans tie their payouts to the performance of your company’s real share price, yet they differ in their calculation of profits.
While both options reflect the market value of your company’s stock, they vary in how gains or dividends are rewarded, giving you the flexibility to choose a structure that aligns best with your business objectives.
Appreciation Plan
An Appreciation Plan rewards employees solely for the increase in the share price above a predetermined base value. Under this structure, employees receive a payout equivalent to the appreciation in value only, rather than the total share value. This targeted approach ties the bonus closely to performance improvement.
Full Value
A Full Value Phantom Share Scheme provides employees with a payout based on the entire value of the phantom shares, which includes both the original base value and any appreciation that occurs. Although this option is more costly for employers, it offers a stronger incentive by fully aligning employee rewards with overall company success.
Phantom Share Schemes vs Employee Share Schemes
Employee Share Schemes are a widely used approach to incentivise employees by granting actual shares. Both phantom and employee share schemes are designed to reward employees, yet the choice between them has significant implications for company equity and administrative complexity.
The key difference is that Employee Share Schemes involve awarding real shares, potentially conferring voting rights and diluting existing equity. In contrast, a Phantom Share Scheme offers a contractual cash benefit based on share performance, preserving company control while still rewarding staff.
Even though recent updates in 2025 continue to provide tax concessions with some Employee Share Schemes – allowing tax deferral benefits for up to 15 years in certain scenarios – they also demand extensive legal and financial structuring. To further explore these nuances, check out our article on contract law essentials.
Ultimately, the decision between a Phantom Share Scheme and an Employee Share Scheme depends on your company’s strategic goals, cash flow, and desired level of complexity. For bespoke advice tailored to your situation, our expert team is ready to help.
How Are Phantom Share Schemes Taxed?
In Australia, Phantom Share Schemes are generally treated as ordinary income—much like receiving a cash bonus. As of 2025, any cash payment under the scheme is added to the employee’s taxable income for the relevant pay period.
The timing of taxation can vary depending on when the payout occurs—whether it’s a regular annual distribution, aligned with dividend payments, or triggered by a major corporate event such as a sale or public listing. Structuring the scheme to integrate efficiently with your tax strategy is critical; our legal and tax advisory services are available to assist with this.
How Are Phantom Share Schemes Implemented?
Phantom Share Schemes are implemented through a contractual agreement between the employer and the eligible employees. This straightforward approach is one of the scheme’s key advantages over other incentive methods. The scheme can be embedded in the initial employment contract or introduced later through a standalone agreement. For guidance on drafting these agreements accurately, our Contract Drafting service is an excellent resource.
It is also wise to periodically review the terms of your Phantom Share Scheme to ensure it remains competitive and compliant with any changes in corporate or tax legislation. Aligning the scheme with your overall business strategy can further enhance employee morale and retention. For more comprehensive legal insights, our article on Legal Requirements for Starting a Business is a useful reference.
Still Unsure?
Structuring your business to effectively incentivise and retain top talent is complex and ever-evolving. The lawyers at Sprintlaw have extensive experience in crafting Phantom Share Schemes and other innovative employee incentive strategies. Get in contact with us today for an obligation-free chat. You can reach us at team@sprintlaw.com.au or call us on 1800 730 617. For additional expert advice to help you navigate your legal challenges in 2025, explore our range of legal guides tailored for modern Australian businesses.
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