Employee Motivation through Phantom Shares

One of the possibilities to motivate employees through financial incentives is employee shares. However, they have their drawbacks. On the one hand, the issue of shares changes the capital structure of the company and on the other hand, it is possible that existing shareholders are against employee share ownership and may therefore vote against the issue of new shares.

Profit participation certificates or participation certificates are also often not an ideal solution, as either a resolution of the GA or an amendment of the bylaws is required. However, the so-called phantom shares are possible a solution.

What are phantom shares?

Phantom shares, also known as phantom stock, are a type of employee stock ownership plan that is frequently used abroad, especially in the USA. In Switzerland, this purely contractual construct is relatively new.

In the case of phantom shares, employees do not receive shares but fictitious equity securities. Employees therefore only receive imaginary shares in a company and have no shareholder status. However, the valuation of phantom shares is based on the value of the actual shares. They are also called shadow shares because they reflect the real shares in terms of value.

The holder of a phantom share receives the same dividends in value as a shareholder, but has no membership rights due to the lack of participation in equity. The participation is purely contractual.

How can phantom shares be created?

Phantom shares are created by concluding agreements with the employees concerned (so-called phantom stock plans or phantom stock agreements). There is therefore a contractual relationship between the company and the employee, whereby various aspects of the phantom shares need to be regulated.

What are the advantages of phantom shares?

A major advantage of phantom shares is that the existing shareholders are not diluted due to the contractual nature of such employee participations. Their shares continue to have the same value.

In addition, the issue of phantom shares can also have tax advantages. This must be clarified on a case-by-case basis.

What are the disadvantages of phantom shares?

The major disadvantage of phantom shares is that phantom shares are not shares. The owner therefore acquires no claims under company law against the company. The participation is limited to the contractual property rights. No voting rights are granted to the holder of phantom shares.

Phantom shares can therefore represent an interesting alternative within the usual employee stock options. Phantom shares can be a good alternative, especially in situations in which existing shareholders have a rather negative attitude towards a dilution of their participation.

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