Phantom shares are a form of equity compensation that some companies use to incentivise and retain employees. Unlike traditional stock options or shares, phantom shares do not actually represent ownership in the company. Instead, they are a form of cash bonus tied to the company’s performance.
In this article, we will explore the concept of phantom shares, their advantages and disadvantages, and the taxation implications of these shares in Singapore.
Advantages of phantom shares
One of the primary advantages of phantom shares is that they can be used to incentivise employees without diluting the company’s ownership. Because phantom shares are not actual shares of stock, the company’s existing shareholders are not affected by the issuance of phantom shares. This can be especially important for start-ups or other companies that are still in the early stages of growth, as they may want to maintain their ownership.
Another advantage of phantom shares is that they can help align the interests of employees with those of the company. Because phantom shares are tied to the company’s performance, employees are incentivised to work hard and contribute to the company’s success. This can lead to increased productivity, improved morale, and a stronger corporate culture.
Disadvantages of phantom shares
One of the main disadvantages of phantom shares is that they can be more complicated to administer than traditional stock options or shares. Because phantom shares do not actually represent ownership in the company, it can be difficult to determine the value of the shares and the tax implications of their exercise. This can lead to additional administrative costs and complexity.
Another disadvantage of phantom shares is that they may not provide the same level of motivation as traditional stock options or shares. Because phantom shares are not actual shares of stock, employees may not feel the same sense of ownership or loyalty to the company as they would with traditional equity compensation plans.
Taxation of phantom shares in Singapore
The taxation of phantom stocks is based on the total value of the cash benefit received. There are two main types of phantom stock plans: Appreciation-Only and Full-Value. With Full-Value plans, the cash pay-out is determined by multiplying the number of phantom shares granted by the OMP (Opening Market Price) of the company’s shares on the day of payment. Appreciation-Only plans have a cash pay-out equal to the Full-Value plan pay-out, but with the “base value” of the phantom shares subtracted.
The tax on phantom stock is incurred in the year in which the cash benefit is received, which is usually after the company is sold or goes public. The amount of tax levied depends on the employee’s income bracket, which can vary depending on the jurisdiction.
Performance Shares vs Phantom Shares
Another type of equity compensation plan that is similar to phantom shares is performance shares. Performance shares are also an incentive-based compensation plan that is tied to the company’s performance. However, unlike phantom shares, performance shares represent actual stock shares in the company.
Performance shares can also be a powerful tool for incentivising and retaining employees. Because the shares represent actual ownership in the company, employees may feel a stronger sense of loyalty and motivation than they would with phantom shares. Additionally, performance shares may provide more favourable tax treatment than phantom shares, as they are taxed as capital gains rather than as employment income.
Conclusion
Phantom shares can be an effective tool for incentivising and retaining employees, but they come with their own set of advantages and disadvantages. It is important for companies to carefully consider their goals and objectives when choosing between phantom shares, performance shares, or other types of equity compensation plans and consider the essential reasons why companies should adopt certain plans. Additionally, companies operating in Singapore should be aware of the tax implications of these plans and should consult with tax professionals to ensure compliance with local regulations.
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*The above represents our opinions and views and does not reflect the position of any entities mentioned.