Types of Long-Term Incentive Vehicles Using Simulated Equity:

§        Phantom Stock:  Rights that though not related to stock options granted to executives, entitle them to receive payment for stock price appreciation measured by market value over a period of time.

o       Key Elements

§       Phantom stock plans are designed to provided executives with payments equivalent to amounts they could receive under an actual stock option or similar plans.

§       Phantom stock plans are based on “hypothetical” shares or units.  These units may be equivalent  in value to actual stock, book values, or formula value such as a multiple of earnings.

§       Phantom plans can be set up to do almost anything actual stock plans can do (except that all payments will be chargeable to earnings and will be ordinary income to the employee.  Plans are usually structured to include:

·    Appreciation only

·    Full value, similar to restricted stock, or

·    Dividends

o       Plan Requirements

           §       A Company is required to charge earnings for entire anticipated payment, but no tax deduction is available until payments are made.

§      Certain organizations may be unwilling or unable to grant actual stock to employees.  Phantom plans provide them a way to match competitive equity plans.  Phantom plans are often found in: 

·   Privately-held companies

·   Mutual savings and loan associations, life insurance companies, and non-profit organizations.

§        Performance Shares:  Executives are contingently granted hypothetical stock at the beginning of a performance period; shares vest based on goal attainment, and executives receive cash equal in value to the common share price.

o       Key Elements:    

§      A “paper” unit of value

§      Value tied to stock price

§      Shares “earned-out” over a cycle

§      Eventual award in cash/stock

§      Company/business unit performance dictates number of share earned, but market sets its value.

§        Performance Units:  These plans are substantially the same as Performance Share Plans, except that the value of each unit is tied to an internal measure other than the market price of the company’s stock.

o  Key Elements:

§     A “paper” unit of value.

§     Value set at award date, start of cycle.

§     Value grows based on non-market factors.

§     Eventual conversion to cash/stock.