A Phantom Stock Option is one form of stock option plan wherein the underlying value of the shares of the company is provided to the non-employee/employee i.e. the non-employee/employee is provided with a cash entitlement upon the occurrence of certain events and completion of certain timelines.
All employees in a company are eligible for this plan, similar to a 401(k). Even so, having an ESOP in place is like having a second set of owners that need to approve key decisions, such as selling the company. Phantom stocks are only given to a small percentage of employees.
RSUs are allowed, by law, to be granted to employees and non-employees alike. This means they can be used for contractors and outside directors. From an individual income and tax perspective they are also similar to RSUs given to employees.
Consequently, an S corporation may have a phantom stock plan without terminating its S corporation election. To avoid losing the “S election,” the phantom stock plan must be structured carefully. Some of the criteria for an effective phantom stock plan for an S corporation includes: Liquidation rights must be limited.
A phantom stock plan is a deferred compensation plan that provides the employee an award measured by the value of the employer’s common stock. However, unlike actual stock, the award does not confer equity ownership in the company. In other words, there is no actual stock given to the employee.
Reference: Companies Act