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

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.

Dr Craig West

Founder & Chairman | Succession Plus

Dr Craig West is a strategic accountant who has over 20 years of experience advising business owners.

With a background as an accountant in practice and two master’s degrees, Craig formed a strong view that the majority of business owners (and often their advisers) were unprepared and unaware of the steps required to prepare for exit. He then designed and documented a unique 21-Step Business Succession and Exit Planning process to assist owners and their advisers in navigating this process.

Craig now acts as a strategic business and financial mentor for mid-market business owners. Craig has written four critically acclaimed books educating business owners on employee incentives, succession planning, asset protection, and exit strategies. Additionally, he has completed doctoral research on Employee Share Ownership Plans (ESOPs) for succession.

Craig is a Member of the Forbes Business Council where he leverages his extensive experience to contribute valuable insights on helping business leaders navigate the complexities of growing and exiting their businesses.

In April 2024, the Exit Planning Institute admitted Craig to the International Exit Planning Circle of Excellence.