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Our team can assist you across all areas of employee incentive arrangements, including:
Shadow or phantom shares refer to the payment of a cash bonus on the achievement of set targets; but no actual shares are awarded. Phantom share schemes may be “phantom options”, which entitle employees to payments equal to the share price at the date of exercise less a notional exercise price or “phantom shares” which entitle employees to payment equal to the whole share value as at a date of vesting. Phantom rights can also be structured over any asset, e.g. fund or partnership units.
Our employee incentives solicitors can advise on which of the various employee share schemes might be best for your business.
With a phantom share option plan, we can advise on:
Phantom schemes normally work in very similar ways to more traditional share incentive schemes, but the payout is in the form of cash, rather than shares. The cash bonus awarded under phantom share schemes is typically based on the uplift in company share value. They can be granted on a discretionary basis to employees and non-employee directors and consultants and have no maximum award value, unless the company chooses to cap them for cash-flow reasons.
Employers benefit because staff who are awarded phantom share rights are motivated to increase the value of the company but without shareholders giving up a shareholding in the business. Instead, the employee obtains a right to receive cash upon set conditions, as opposed (for example) to an EMI, which provides an option to receive shares.
Phantom share rights may be offered (as opposed to share-based incentive schemes) to avoid exceeding shareholding dilution limits or to avoid minority shareholdings which may impact the active running of the company.
Such arrangements do, however, require the ready availability of liquid cash in order to pay employees what they are owed when the rights pay out.
For more information, don’t forget to read our FAQ: Phantom share schemes article.
For the employer, cash paid in the form of a bonus should be deductible for corporation tax purposes and can reduce the corporation tax owed for the year.
For the employee, on granting of the phantom share option, no tax is payable. However, the scheme is less tax advantageous than HMRC tax advantaged arrangement or non-tax advantaged share acquisition arrangements such as growth/hurdle shares as tax and national insurance must be paid on the cash bonus being received.
For a general introduction to employee share schemes, don’t forget to read our advice, What are employee share schemes and how do they work?
We specialise in start-ups and high-growth companies, so we have a wealth of experience advising on and administering a variety of share acquisition arrangements.
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