Phantom Equity Compensation

Personnel Systems Associates Inc.
Mae Lon Ding,
714-281-8337 

What is Phantom Equity?

Provides long term cash rewards to employees based on increasing the market value of the company between the date of the phantom equity grant and the vesting date.

Reasons Why Companies Use Phantom Equity

1. Because the owner wants to be more competitive in total compensation package
2. Because the company is not publicly traded and there is no ready market for private stock
3. Because the owner wants a long term incentive to make the employees think more likeowners. This enables the employee to make more appropriate choices between short term and long term alternative investments and results. It enables rationalization of investing in the future of the company, not just maximizing today’s profitability or sales.
4. Because the owner wants an employee retention vehicle.
5. Because the owner does not want to give stockholder rights to employees.
6. Sometimes as a substitute for annual bonus plans that are not expected to pay competitive rewards due to business conditions.

Typical Participants in Plan:
Key executives and sometimes all employees.

3 CASE STUDIES

#1: Juanita’s Foods, Privately Owned Food Manufacturing Company

Objective: Attract, retain, and motivate first professional outside CEO in preparation for possible sale of company in 5 years.

Outcome: Attract excellent CEO, Large increase in sales and profitability

#2: TLC Services Group, Privately Owned Staffing Agency

Objective: Motivate key management and all employees to grow the company rapidly and profitably in preparation for sale of company in 5-10 years.

Outcome: Key executives and employees feel they have a bigger stake in the future of the company, they have a vested interest in maximizing the sale price and preparing the company for sale; and have the possibility of significant additional financial rewards.

#3: Shepard Brothers, Privately Owned Chemical Company

Objective: Motivate, retain, and reward key executives in preparation for sale of company within 10 yrs

Outcome: Key executives and employees feel they have a bigger stake in the future of the company, they have a vested interest in maximizing the sale price and preparing the company for sale; and have the possibility of significant additional financial rewards.

Proposed Equity Compensation Design Project Steps:

NEEDS ANALYSIS & DATA COLLECTION

Meeting with the CEO and CFO to review organization mission, business strategy, business objectives, project objectives, HR management philosophy, desired competitive pay position, executive duties, and performance objectives.

Client to send the following documents and data to consultant prior to starting additional work on the project

1. Accurate and complete job descriptions along with minimum education and experience requirements. Job descriptions to be approved by CEO.
2. Executive resumes
3. Accurate organizational chart
4. Current and next year budget
5. Last year financial statement
6. Business plan current year, next year, 3 or 5 years in future
7. Historical pay & benefit records for executives base salary, bonus, benefits, perquisites, and other compensation.

The following items are optional, but helpful in developing pay strategy.

8. Business valuation report or data
9. Current financial ratios for the industry –growth, administrative expense ratio, staffing ratio, return on sales, etc.
10. Historical organization performance on above ratios for last 3 years

If client cannot provide items 8, 9, and 10, then consultant may assist in researching and obtaining data at additional cost.

Week 2

ADDITIONAL EXECUTIVE INTERVIEWS
Interview other key executives to obtain information about job responsibilities, job satisfaction, performance objectives, compensation desires, and long-term career objectives.

Management participation in the needs analysis process will help us to assure that you will provide an attractive and rewarding environment to executives and managers. These interviews can provide important information about management needs, concerns, and contributions that may not be considered otherwise and significantly enhances acceptance and “buy-in” to the final recommendations and plan design. These interviews frequently provide great value beyond the assistance in designing the best compensation program.

TOTAL COMPENSATION COMPETITIVE PAY ANALYSIS
Consultant will provide long term incentive compensation data.

Week 3

RECOMMENDATIONS ON COMPENSATION STRATEGY
Consultant will make recommendations on competitive pay practice, and recommended strategy. The strategy will take into consideration business objectives, financial health, business plan, human resources management philosophy, executive responsibilities, executive attraction and retention objectives, and competitive practice. The strategy will include the following recommendations:

• The recommended target salary, annual bonus, and long-term incentive levels for COO and CFO.
• The key performance criteria to which long term incentives should be tied

Week 4

PRESENTATION OF FINDINGS AND RECOMMENDATIONS
Consultant can meet with owner(s) to present results and recommendations and to answer questions.

Week 5-7

DESIGN LONG TERM INCENTIVE PLAN
We will work with closely with Owner(s) to design the mechanics of a long term incentive plan which links incentives to company profitability and other possible key measures of performance if desired. You will receive spreadsheets to assist in calculation of incentive plan payouts. We anticipate this design process will require two to three meetings of the design team lasting 2 to 3 hours per meeting.

We will prepare sample calculations modeling plan resulting payments under various scenarios.

We will provide outline of plan design and sample calculations to your attorney who will write an incentive plan document that describes how the plan is supposed to work along with sample calculations. The plan document that your attorney prepares assists in clarifying to plan participants how the plan is supposed to work and includes sections on:

• Incentive plan objectives
• Eligibility for participation
• Participant vesting formula(s) – taking into account possible special vesting for long-term employees, impact of partial or complete sale of company, etc.
• Plan funding formula (including issues of stock valuation if phantom stock or stock appreciation rights are used, possible accrual for future payout, addition of more participants into the plan, possible additional grants for participants beyond the first year, minimum threshold performance, minimum funding, etc.)
• Individual payout criteria and formula
• Payout schedule (including triggering events)
• Sample calculations
• Payout under special circumstances such as partial or complete sale of company, retirement, executive termination – voluntary and involuntary, death of participant, poor individual performance, insufficient corporate funds, business hardship, closure of company, etc.
• Plan modifications
• Plan termination
• Participant signature line

Your attorney and CPA should review and approve the plan design and plan documents prior to implementation.

PRESENTATION OF PLAN TO PLAN PARTICIPANTS

Optional: Consultant can develop PowerPoint slide presentation and assist in presenting the program to plan participants.

TYPICAL COST: $15,000

ABREVIATED LOW COST PROJECT CAN ALSO BE COMPLETED FOR ABOUT 50% LESS (No non-owner interviews, abbreviated strategy work, no presentation assistance, one or two plan participants).