A Phantom Share Plan – Employees Can Share In Future Growth of Company
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Houser Henry & Syron LLP
Toronto, Canada
Savvy business owners go to great effort to hire the right staff. The inevitable scenario can then arise as to how to retain and motivate those exceptional employees who rise to the top.
Key employees can lose focus and ultimately leave because they have no ‘skin in the game’. At a certain point, a star employee(s) may see more opportunity elsewhere or think that ownership is crucial to being a part of the company’s long-term future. Further bonuses or salary increases may not make sense for the company and/or fail to properly motivate the employee.
From an owner’s perspective, relinquishing control of the company comes with its own set of problems. Adding shareholders can: (i) add complexity to the ownership structure; (ii) make the company less attractive to prospective purchasers; (iii) make it more difficult to run the company; and iv) expose the financial details of the company, which may be sensitive.
Fortunately, there is an alternate option: A Phantom Share Plan (a “PSP”) allows an employee to share in the company’s future growth without the principals giving up ownership in the company.
What is a PSP?
A PSP is a contractual arrangement between an employer and an employee, whereby the employee is granted so-called units (also known as phantom shares), the value of which are closely linked to the value of the company. The employer has the ability to draft the terms in the PSP to suit its own commercial needs and goals.
PSP’s are not regulated by specific legislation and are basically a contractual bonus scheme. However, unlike stock options, it pays cash instead of shares.
Generally, PSPs have the following characteristics:
For example, assume a company implements a PSP and grants an employee ten (10) units. The PSP states that units must be redeemed by the company if the company is sold. On the date the units are issued, the company’s shares have a FMV of $5.00 each. Three years later, the company is sold to an unrelated buyer for $12.00 a share. This is a so-called “triggering event”, and the employee would be entitled to receive $7.00 per unit; the difference between the phantom shares’ grant value and the value of the share at the date of the triggering event.
Why implement a PSP?
Employees who receive units under a PSP participate in the future growth of the company. Their goals can now be aligned with the company’s long-term goals in a manner that normal salary and bonuses cannot achieve.
Benefits for the employer include:
Indicators that a PSP is right for your Company
PSPs can be a powerful source of employee motivation and retention. However, not every company is ideally suited to implement a PSP. Consider these factors to determine whether a PSP is right for your company:
How to implement a PSP
When designing and implementing a PSP, consider the following:
A PSP represents a win-win opportunity for both employers and employees. It is a cost-effective method to motivate and retain great employees and can be customized to suit an employer’s specific requirements.
A properly constructed plan will help you achieve your business goals and ensure compliance with the Income Tax Act (Canada). Please speak with a lawyer at our Firm if you are interested in learning more or plan to implement a share plan for your company.
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