When it comes to compensating employees, many companies turn to stock options as a way to incentivize and retain top talent.
However, not all stock options are created equal. There are two main types of stock options plans: traditional stock options plans and phantom stock schemes. Understanding the differences between the two is crucial for employees and employers alike.
🎯 Traditional Stock Options Plans
- These plans allow employees to purchase company stock at a discounted price, known as the strike price.
- Employees can exercise the option to purchase the stock when it reaches a certain price, called the vesting price.
- If the stock price rises above the vesting price, the employee can sell the stock and profit from the difference. The employee only profits if the stock price rises above the vesting price, so there is some level of risk involved.
- Traditional stock options plans are subject to various tax regulations, that diverge from country to country.
Traditional stock options plans can be a valuable tool for companies to attract and retain employees, but they also come with some limitations, such as restrictions on transferability, and the potential for dilution if too many options are issued. They also have tax implications that should be carefully considered before granting options to employees.
🎯 Phantom Stock Schemes
- Phantom stock schemes are a form of equity compensation that do not involve the actual transfer of company stock.
- Instead, employees receive a payout based on the value of the company’s stock, without actually owning any shares.
- In a phantom stock plan, the company sets aside a specified number of “phantom shares” that are used to calculate the payouts to employees.
- The value of the phantom stock is determined by the company’s stock price, and employees receive a payout if the stock price increases.
- The phantom stock pays out to employees based on the growth of the company’s stock value, just as with traditional stock options.
Phantom stock schemes are not subject to the same regulations as traditional stock options plans, making them a simpler and more flexible option for employers. However, employees do not have the same level of control or ownership as they would with traditional stock options.
So, which option is best option for your employees?
It ultimately depends on the individual needs and circumstances. If they are looking for a way to profit from the growth of the company, traditional stock options may be the way to go.
But if they are more interested in a simple and flexible equity compensation plan, a phantom stock scheme may be the better choice.
In conclusion, both traditional stock options plans and phantom stock schemes can be valuable ways of equity compensation for employees and employers. It is important to understand the differences between the two and to carefully consider your needs before deciding.