The Phantom of the Stock Opera
By Mark Stancato, CFP®, EA, CRPS
What do you get when you take French author Gaston Leroux’s 20th-century novel “The Phantom of the Opera” and cross-pollinate it with the synthetic equity award “Phantom Stock”? Drum roll please… the creative foundation to weave a topical narrative to help explain and understand a modern-day employee benefit plan: Phantom Stock! {insert dramatic music here}.
Act I:
Much like Leroux’s antagonist character ‘The Phantom’, Phantom Stock is also ghost-like. It’s a stock award issued by a company to an employee in the form of stock units and not actual common stock. Essentially, it’s just a digital book-entry granting an underlying stock award to a grantee without the actual issuance of stock. Even though it’s not real, phantom stock shadows the price movement of the real-life stock. Hence, phantom stock plans are also known as ‘Shadow Plans’. Spooky! Companies that issue phantom stock are typically private (not publicly traded) and do not expect to go public. Or companies that would like to reward certain employees with a stock-based benefit, however, don’t want to dilute actual ownership by issuing real stock. Unlike Andrew Lloyd Webber’s musical adaptation, our fictitious stock award cannot sing a haunting melody. However, it can metaphorically sing a beautiful tune to its recipient due to the fact that our Phantom Stock can turn into a sizable sum of real-life money. How does this happen? Read on friend….
Act II:
Let’s say your company issues you 20,000 units of Phantom stock. According to the documents of your Grant, 10,000 units will vest (become yours) after one year elapses from the date of grant. The vesting schedule, as it’s known, can either be time or performance-based just like a traditional stock option award. In our example, the vesting is Time based. After the first year, the value has increased from $25 to $30 or $5 per share. If the phantom stock plan was an ‘Appreciation only’ plan, it would pay out the value of any increase in the company stock price over the one-year period from the date of Grant. In this case you would get $50,000 (10,000 x $5). Not too shabby.
Now to really heighten the drama. Let’s say the phantom stock plan was a ‘Full Value’ plan. A Full Value plan would pay both the value of the underlying stock AS WELL AS any appreciation. So, using the above example…the numbers would shake out like this: ($30 per share x 10,000 units = $300,000). That’s a 500% increase over the Appreciation only plan or an additional $250,000. At an average ticket price of $242.85 to see a live performance of The Phantom Of The Opera; that would equate to an extra 1,029 tickets. You could either go see the show an additional 1,029 times thus breaking the Guinness Book of World Records, TAKE 1,029 of your closest Facebook friends OR invest it in a diversified portfolio for long-term growth. My thoughts…door C. Oh btw, The Phantom of the Opera did make its way into the Guinness World Records 2013 Edition as the longest-running show in the history of Broadway (musical or play) having performed over 10,000 performances at the Majestic Theatre in NYC.
Act III
Phantom stock plans including both ‘appreciation only’ and ‘full value’ resemble traditional deferred compensation plans as they can be discriminatory and award just C-Suite executives, senior staff, upper management, or selected individuals. The plans should be designed to be compliant with IRS code 409(A) and well documented. The payment of benefits is typically deferred until a predetermined future date, hence the vesting schedule or the relationship is terminated due to retirement, death, or disability.
You can be sure about one thing. The taxes you have to pay upon the payout of your Phantom Stock award is not an apparition. The tax bill is very real. As the Phantom Stock units become vested, the value of the stock units is includible as wages subject to FICA and Medicare Taxes. Key point: Even though you don’t have to pay “income” taxes until the actual payout, the vesting will create a taxable event regarding payroll taxes. However, if your normal wage base exceeds the FICA wage base of $147,000 (2022), no additional FICA tax would be assessed. Medicare taxes would still be applicable as there is no wage-based limit.
Act IV
The Epilogue:
Love vs Jealousy, The Natural vs The Supernatural, Revenge & Redemption, and Beauty vs Ugliness are considered the main themes from the original story. So, how do they tie back into our story?
Love vs Jealousy: No doubt about it. If you are awarded Phantom Stock you are sure to LOVE the potential windfall that could be coming your way. Who doesn’t LOVE cold, hard, cash? Perhaps, your co-worker Phil who wasn’t granted an award. There may be some JEALOUSLY there! My advice…treat them to some fancy French cuisine and a ticket to the show.
The Natural vs. the Supernatural: Although Phantom stock is not real stock, the benefit it provides the grantee crosses over to the NATURAL world. It offers this uncanny ability to meld both dimensions and increase your adjustable gross income (AGI). Got to love it!
Revenge and Redemption: This is a hard one. Pass. If you’re still reading this article click here and send me an e-mail with your creative mojo.
Beauty vs Ugliness: Ah, the best for last. Phantom stock is BEAUTIFUL. Full stop. It’s this weirdly manifested employee benefit award that’s bonus money for a job well done. Kudos. And like a cash bonus, the payout will come through your paystub. Yes, taxes will be withheld. Taxes/UGLY - yea, that’s a wrap.
Encore:
You’ve worked hard and deserve a modern-day equity award that can honestly be quite UGLY to understand. Hopefully, you feel a bit more informed. And we bow.