Employee Ownership
Why Phantom Share Plans don’t work
Phantom Share Plans and replicator plans are designed to try to “replicate” the ownership of shares without actually granting ownership to employees – but they don’t make sense and they often don’t work.
There are a large number of these plans – sometimes called shadow equity plans or phantom stock plans or the even more confusing, replicator plans. The simple idea is to create some of the benefits of a traditional Employee Share Ownership Plan (ESOP) without using shares or allowing employees to hold equity (pretend plans).
This is often done based on –
- fear of losing control – this can easily be managed within the plan rules
- fear of employees “knowing too much” – the research is overwhelming that too much info is far better than not enough for employees
- fear of giving away too much – “losing” equity without understanding the wisdom of a smaller piece of a larger pie
These plans seek to deliver an amount, often a monetary bonus, equal to the increase in the value of shares. This creates a cash issue for the company if the shares increase in value rapidly, a tax problem for employees who are taxed at full marginal rates, and an admin nightmare trying to make the whole scheme fair and equitable. Some plans, typically replicator plans, even go to the lengths of trying to replicate changes in share value in a private company through purchasing other assets, listed shares or a managed fund for example, which requires a level of financial genius which is highly rare!
I have never seen this work.
There is a far better way. Instead of resorting to phantom stock plans, use a traditional Employee Share Ownership Plan (ESOP); a well-designed plan with appropriate rules can manage any risks or concerns, provide a win-win-win outcome – for employees, founders and the business – and get your employees to think and act like business owners (not pretend to)!
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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