Phantom Stock and Share Appreciation Rights

Phantom Stock and Share Appreciation Rights (SARs) in brief terms are incentive plans that tie added compensation to the share value of a company’s stock without the actual issuance of shares to plan participants.  In FTSI’s opinion, these plans, which are certainly not new, are not given sufficient consideration by many of the current high tech start-up and developing companies.  Although these plans are not substitutes for stock option plans for the company’s executives and highly compensated staff, they do constitute a similar incentive as option plans:  a reward for increasing overall company value.  Whether or not Phantom Stock or Share Appreciation Rights might be feasible depends in large degree to the composition of the staff.  Due to the wide spread notoriety of stock option plans and the sizeable rewards realized on IPO shares, there is a great premium placed on stock option plan availability by a broad cross section of the employee population in most companies.   However, many of the employees at the lower end of the compensation scale might find Phantom Stock and Share Appreciation Rights highly attractive since actual cash outlays to purchase shares are not required and the reward is in the form of direct cash compensation either current or deferred.  

The benefit to the company in maximizing this alternative to stock option issuance is the reduction in share price dilution associated with option stock.  Earnings per share is calculated on a fully diluted basis.  Although financial accounting rules require the accrual of charges against earnings for liabilities under Phantom Stock and Share Appreciation Rights, these accruals and the underlying liabilities decline in periods of share value decreases unlike the number of outstanding option shares.   Another consideration is the fact that employees in the lower compensation levels will have a greater perception of economic loss in the event of a per share market value decrease on shares they acquire through prior stock option exercise.  Here, as elsewhere, placing these programs within an enterprise-wide context will aid in the evaluation of their feasibility and potential value.

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