How to Create a Phantom Stock Program That Works

What does an employee’s two-year anniversary look like at your company? At USA Financial, when a full-time team member passes the two-year mark, they celebrate with more than just a note of appreciation or free dessert — they become a member of Team GAS, the company’s phantom stock program.

Nine years ago, USA Financial’s CEO Mike Walters brought the idea to his leadership team: give employees a stake in the company with a phantom stock program. It didn’t take much to convince them it was the right move. Like other profit sharing programs, phantom stock helps motivate employees and increase productivity — a study from Harvard Business Review found that employee-owned companies grow much faster than they would have without their plans and that opportunities for participation enhance worker productivity.

But phantom stock is just one of many ways to give employees an ownership mindset. How does phantom stock work and which companies should consider it?

Let’s take a closer look at how phantom stock works at USA Financial — and what you should know about starting your own program.

What is a Phantom Stock Program?

You know about traditional stock options, and maybe you’ve considered becoming an ESOP or forming a cooperative. Where do phantom stock programs fit in? A phantom stock program is a deferred compensation plan that grants employees the benefits of stock ownership without actually giving them any company stock. Just like real stock, the shares are worth money and rise and fall with the value of the company. At a predetermined future date, the cash value of the phantom stock is paid out to participating employees.

Phantom stock doesn’t grant employees actual ownership, so what’s the advantage? Mike Walters opted for phantom stock at USA Financial because it was a way to align everyone and get them pulling in the same direction, without the hassle and constraints of opening up new classes of shares. Team GAS (Growth, Accumulation, Shares) has the legal foundation of a phantom stock program, but they modified it to work for their company.

Phantom stock programs have a few main benefits over other value-sharing options:

• They cost less than an ESOP in legal and accounting fees.
• They lessen the burden on employees to invest cash or shoulder taxable income.
• They avoid the risks of having additional shareholders.
• They share value with employees without diluting owner equity.

How Phantom Stock Programs Work

For many businesses, a phantom stock program is the ideal value-sharing program — it aligns the financial interests of your employees with company growth and fosters an ownership mentality. When the company is successful, the value of their shares goes up. Plus, being financially invested in the company encourages valuable employees to stick around. 

At USA Financial, Team GAS is comprised of all full-time employees who have been with the company for at least two years. In order to have a realistic valuation of the company, they run three different variations, find the average, and show the staff that number with a 20 percent reduction and increase on either end. That way, the staff can always have a realistic range of the valuation and calculate against their total shares statement.

When the program started nine years ago, they calculated their valuation at $20 million, and they dedicated 12.5% of company growth to the Team GAS plan. Today, they estimate that the plan is worth $4.3 million. Because of their ‘slice of the pie’ model, as the company gets bigger, the slice increases, too.

Here’s a quick overview of some of the key aspects of their program:

• Participants are issued shares on a quarterly basis
• Participants receive one, tenure share per month
• Participants receive bonus shares as determined by the executive team for going above and beyond the call of duty
• The goal of the program is for phantom stocks to become one of their employees’ most valuable assets over time, even over their home and other assets
• The program has a dividend structure — in a positive growth quarter, they calculate a dividend and divide it out by share
• If USA Financial is purchased, the Team GAS plan will pay out to participants just as it does for the owners. Whatever the formula is for ownership, it’ll be the same for employee shareholders

Culture Benefits of Phantom Stock

The link between profit-sharing and performance is backed by an impressive number of studies. In fact, a study published in the Human Resource Management Journal in 2016 collected data from nearly 57,000 companies and found that employee ownership  —  including profit-sharing programs  —  can boost corporate profits by 4 percent.

USA Financial is just one of many companies that has seen firsthand how true that really is. For example, USA Financial is a 30-year-old company, yet they’ve been on the Inc. 5000 list of the fastest-growing private companies in the U.S. since 2014. Company performance is higher than ever — as Mike puts it, “Before we started Team GAS, we weren’t an Inc. 5000 company.”  

Profit-sharing can empower your employees in exciting ways. Many business owners turn to phantom stock programs to:

• Cultivate loyalty. When employees see how they’re contributing to the value of the company, not only do they feel appreciated — they feel vital to the success of the organization. Plus, phantom stock means they’ll accumulate shares over time, so the longer they’re with the company, the more value is created for them in Team GAS.
• Create an ownership mentality. In order for phantom stock to be successful, you have to be transparent with employees and educate them around how company finances actually work. At USA Financial, that means they open up their finances, from P&L to balance sheets, so that employees truly understand where they stand. Transparency empowers employees to think and act like owners.
• Care for employees in the totality of their lives. At the end of the day, profit sharing is a way to provide meaningful financial security that your employees might not otherwise have. When your company is successful, your employees are, too. Profit sharing can help  boost company performance and, in turn, deliver extraordinary results for your employees.