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Phantom Share Schemes – can you have your cake and eat it too?

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Phantom Share Schemes – can you have your cake and eat it too?

By , November 4, 2019
Phantom

Business owners often work to have their cake and eat it as well – Phantom Share Schemes are a great example – employees receive an equity share in the business – but not really.

Phantom share plans work one of two ways:

  1. We either enter into an agreement to give our employee/s a reward (normally cash) based on the increase in share value of our business (this is a traditional phantom plan). We might agree to pay the employee the equivalent of 5% of the value of the company when we sell or list in 5 years’ time. We then pay out that amount in cash (which is taxed a marginal rate) at that future date (assuming we do sell and the employee is still there).
  2. Replicator plans are slightly different (and far more complex). Here we agree to invest an amount of money in an asset or assets that will replicate the value of our business over time. This is incredibly challenging to get right as valuations of SME’s are notoriously difficult and the changes are volatile, not to mention, finding an asset to replicate/match these changes is impossible. In 20 years, I have never seen a replicator plan actually replicate the underlying business.

But it can be far simpler. The best way to replicate or match the underlying asset is to give the employees equity in the underlying asset = 100% match, 100% of the time. An Employee Share Ownership Plan (ESOP) does exactly that and can solve the tax problems at the same time.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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