HOW DOES IT WORK?
the option, they will receive a cash bonus equivalent to the difference between the market value on that date and the value at the time the option was granted. From the tax perspective, a phantom shares plan is categorised as an unapproved share scheme and broadly treated in the same way as other such schemes. “The employee will have to pay income tax, PRSI, and USC upon receipt of the bonus” while the company may be liable for employer’s PRSI because they are making a cash payment. A key difference, though, is that since no shares are involved, there will be no CGT. A practical consideration for companies to bear in mind when considering a phantom plan is that they will be entering into an open-ended financial commitment, and this could, in theory, prove problematic down the line. The point here is that a company will not necessarily be able to control its share price value and so it is possible that by the time the crystallisation date arrives (the end of the plan), the price may have increased to a point whereby fulfilling the bonus pledges might create a financial strain. That scenario might seem unlikely, but companies need to be aware of all possibilities before entering into an agreement of this nature.
A phantom plan can come in two main types – ‘Appreciation only’ and ‘Full value’. ‘Appreciation only’ plans do not include the actual value of the shares themselves, with any pay-out based exclusively on the increase in the value of the shares during the lifetime of the plan. However, ‘Full value’ plans will factor in both the value of the shares and the increase in value over time. When a company decides to implement a phantom plan, it needs to establish at the outset which employees it wants to take part. In theory, all employees can be included, but companies have flexibility on this point, and so in practice this kind of scheme will be targeted at key personnel. As no real shares are being optioned or changing hands, the scheme itself will be more straightforward to administer. So, once the relevant employees have been targeted, the key considerations will be to set the base price, the amount of notional options being assigned, and the length of the plan. On the latter consideration, the company needs to strike a balance between their own interests and those of their employees. A five-year term might seem attractive to the company, in that it would assist in efforts to retain key personnel over time, but such a long-lasting plan might prove to be a hard sell with the target audience in the first instance. A three-year plan might prove to be more tempting for employees. In practice, participants will be granted an option over a set number of shares at a specified option price with that price most commonly being the market value at the date the option is granted. When an employee ultimately exercises
Powered by FlippingBook