What are phantom options and how do you use them?

Contents:

  1. The history of the emergence and development of phantom options
  2. How does the program work?
  3. How do phantom actions work in Russia?
  4. What should employees pay attention to when concluding a phantom share contract?

A phantom option is also called a phantom or virtual share. This is a special tool for increasing employee motivation. Employees are offered virtual shares in the company. With an increase in its value, the price of a phantom option rises. This means that the employee can receive the value of the phantom option belonging to him in cash or an amount equal to the increase in the value of the virtual share.

When the company receives a profit, it is distributed among the shareholders. Depending on the size of the virtual share, employees receive a certain amount of dividends.

As practice shows, phantom options in Russia are more popular than classic option programs, in which employees are offered blocks of shares. This is due to lower corporate risks. Such a tool is convenient both for the company itself and for its employees. 

The history of the emergence and development of phantom options 

The first option programs appeared in the United States in the 70s of the last century. Such a tool was aimed at increasing the efficiency of the business by combining the interests of its owners and hired managers. The state reacted positively to this innovation. If the company wanted to implement an option program, it was provided with additional tax benefits. Over time, the practice of virtual options programs spread in the West and came to our country. 

How does the program work? 

The essence of the program is that for certain merits, key employees of the enterprise receive the right, after a certain number of years, to purchase shares of their company at a fixed cost or receive the exchange rate difference in money. In turn, the company must reserve the required number of shares.

Typically, the time from receipt to exercise of an option is two to seven years. During this period, it is not profitable for the owner of the virtual share to change jobs, since in this case he loses the right to a reward. In fact, the option program is a tool for long-term motivation and retention of hired top managers, in whose services the company is most interested. 

How do phantom stocks work in Russia? 

To provide a virtual share, a civil law contract is concluded with an employee or an appropriate addition is made to an employment contract. The company can also adopt a statutory act on employee bonuses and familiarize all recipients of virtual shares with it.

A phantom option agreement can be concluded between the employee and the founder of the business or the company. Each scheme has its own advantages. In the first case, if the founder pays remuneration to the employee, the employee is obliged to independently calculate and pay income tax. This is beneficial for a company that relieves itself of the obligation to act as a tax agent for the holder of a virtual share.

In the second case, the remuneration is paid by the company. This scheme is beneficial for employees, as payments do not depend on the decisions of the founders. The disadvantages of the scheme include the need for the company to pay insurance premiums. If the founder's remuneration is paid, double taxation occurs. First, the founder pays personal income tax for receiving dividends, and after the remuneration is calculated, the employee will need to pay his own income tax.

What should employees pay attention to when concluding a phantom share agreement? 

This document contains information about events that are the basis for the payment of remuneration. As already noted, first of all, this is the distribution of dividends and the growth of the company's value. Also, the basis for payment is the liquidation of the enterprise with the subsequent sale of its property, the sale of key assets.

Also, the agreement must contain information about changes in the terms of the transaction in the event of a reorganization of the company. There are two options here: renegotiation of the phantom share agreement with a new legal entity or early payment to an employee in connection with the termination of the phantom option.

Many companies tie the payment of remuneration to certain indicators, the achievement of which can be directly influenced by the holders of phantom shares.

As for the obligations on the part of the employee, the contract always includes a clause on the conditions and terms of continuous work, the conditions for unilateral termination of the contract on the initiative of the employee or employer, and the prohibition of competition with the company.

Phantom options, when used correctly, are an effective motivational tool. At the same time, it cannot be said that a clear and stable practice of regulating these issues at the legislative level has developed in our country.

Before implementing a phantom options program, you should calculate and eliminate possible legal risks or consider other options for employee options programs. The team of A4 Law Firm lawyers will cope with this task.

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