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Phantom Stock Idea

Wednesday, September 7th, 2016
Posted in Uncategorized by Joel Gross

I am thinking about this idea for my team members:

Available only for critical employees

Based on annual revenue – if the company earns $1m a year today and $10m a year in 5 years, that is a 10x increase to the bonus
If employee leaves (resignation or termination) prior to vesting date, no bonus will be paid out
Once the bonus is vested, the employee can cash out when they please. If employee leaves the company after vesting, payout will be immediate subject to other clauses.
Company has the right to delay payouts if we don’t have enough cash on hand to safely make the payout. We will pay out as soon as we reasonably can. Payouts can be made in segments.

Bonus multipliers
Stay for 5 years, get 50% increase over base bonus value
Each monthly overall Outstanding results in an added 1% to the bonus value

2 thoughts on “Phantom Stock Idea

  1. Based on my previous life in the corporate world I can give the following input: The phantom stock option does work in context, so it depends what you want to achieve from it. If you want to motivate people to build and drive business with a focus on quarterly/annual figures then the only try link is the STI (Short term incentive) path. So basically a quarterly or annual bonus. Personally I would avoid quarterly bonuses as you can have a great two first quarters which you payout and then have a void in business or revenue for the second two quarters, thus hitting your profits for the full year. I would personally opt for annual bonuses that are reported out on a monthly or quarterly basis and paid out on an annual basis. This keeps people motivated and driven and they focus on a nice chunk at the end of the year. For the LTI (Long Term Incentive), this does not really drive performance or focus on a monthly/quarterly basis. On average most companies have a vesting period of 3-5 years, so people do consider it as a plus and keep it in the back of their minds but they don’t engage with it a tangible until payout day. Usually the LTI’s are for Executives only and it is a nice add on that they appreciate. However, beware of these two pitfalls. 1. You need to put a cap on potential earnings, trust me on this one. 10 years down the line you may need to make a 5 million dollar payout when you really need to invest that money in capex so the timing is always a factor. Plus the bigger th payout when someone cashes in their phantom stock the less driven they are that year by the annual bonus. 2. Most Exec’s who leave a highly successful company do so on the grounds where the company initiate ending of the relationship, the most common reason is that they become complacent and show less drive or initiative the longer they are with the company and the more success and financial comfort they have, thus it is a big payout and most people want their money up front, so any delays can stir bad media. Again, great idea and just wanted to share my experiences on it.

    1. I really appreciate the insight provided in your comment on my blog post. I currently do a monthly Key Performance Indicator (KPI) that determines a profit share bonus that is paid out within 90 days, but I think that your recommendation of having it feed into a big end of year bonus is a better ideas as it encourages retention throughout the year. People generally have had less turnover at the end of the year than summertime, so this could be a great option. My hope with the LTI / phantom stock bonus plan would be to both encourage long term retention and for people to feel ownership day to day over our work and our growth. My biggest concern with the plan is exactly what you described – what happens if I need to pay out a giant bonus that might take 2-3 months to pay out and make people feel less confident in the program and also slow down growth because we can’t use that cash for new hires (salaries are our biggest expense typically). Thank you again for sharing your experiences!

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