A phantom stock program is a form of long-term incentive plan used by businesses to award employees with potential value without stock dilution. In effect, it is a type of deferred bonus—the value of which will ultimately be tied to appreciation in the equity or market value of the sponsoring company.
The term “phantom stock” may be used broadly or narrowly since there is no formal or statutory definition of the term. Some companies may use the expression to denote any type of plan in which employees must wait until a future date to receive the financial value of a promise given today. More narrowly it indicates a plan that is intended to mirror restricted stock awards or stock option grants. In this usage, the sponsoring company creates certain units or “phantom shares” that may resemble actual stock, but are actually a commitment to pay the employees cash upon fulfillment of certain conditions such as time of employment or growth in the value of actual company stock.
Phantom stock may also be known by such terms as phantom shares, simulated stock, shadow stock or synthetic equity. Stock Appreciation Rights (SARs) are a form of phantom stock and are sometimes referred to as phantom stock options.