What are Phantom Stocks ?
In today’s competitive world retaining a talent is important for business. As an incentive for a senior or well performing employee and to minimize attrition of such employees who are important for the company, they are offered financial incentives such as stock options. Stock appreciation rights (‘SARs’) are one such kind of stock options that create a right to the increment in value of the corporation’s stock over a specified period of time.
As per SECURITIES AND EXCHANGE BOARD OF INDIA (SHARE BASED EMPLOYEE
BENEFITS) REGULATIONS, 2014
Appreciation is defined as “…the difference between the market price of the share of a company
on the date of exercise of stock appreciation right (SAR) or vesting of SAR, as the case
may be, and the SAR price;”
The typical feature of a SAR is that there is no payment of price for the shares by the employee, and the appreciation of a hypothetical share is calculated to determine the dividends from the stock option.
Why it is preferred ?
SARs are preferred by allottees who do not wish to bear the risk of share price volatility.
SARs calculate the increase in the value of a unit of the stock, and this cumulative value can be paid to the employee either through an equity-settled or a cash-settled basis.
Types of SAR’s
- Payment of the value of appreciation through shares would be equity-settled SARs; and
- Payment of the value of appreciation through cash would be cash-settled SARs or ‘phantom stock options’.
Advantage of Phantom Stocks for the Company
Phantom Stock option enables the company to incentivize employees based on the share price, yet they do not have to actually share any equity with them.