Structuring Phantom Incentive Plans for Privately Held Corporations: Mechanics, Tax Obstacles, and Optimization

Description

Private company phantom incentive plans--also referred to as phantom stock or phantom bonus plans--are a type of instrument used to incentivize current employees by committing to make a payout on a later date or a change in control. Unlike typical equity instruments, which may be settled in shares that may vote and may (under some circumstances) be subject to taxation at capital gains rates, phantom plans are compensatory contracts that allow senior managers to share in the value they build in a company.

Structuring these arrangements raises many strategic questions. Should the phantom plan track company stock or another metric? Should the awards participate in any escrow or earnout? Should people be forced to be present at the change in control in order to receive a payout? Should the awards be forfeited under certain conditions? What should happen to the forfeited amounts? How can the plan be amended?

A phantom incentive plan is usually a tense negotiation of competing interests to encourage retention for senior management and maximize value for shareholders. This presentation will highlight the considerations that affect plan design and discuss common trends.

To further complicate matters, phantom plans are subject to a unique and complicated set of tax rules. This discussion will highlight common constraints on phantom plans in the U.S. tax regime, including Section 409A (regulating deferred compensation arrangements) and 280G (regulating golden parachute payments).

Listen as our experienced panel discusses the use of private company phantom plans to incentivize and retain current employees. The panel will outline the mechanics of these plans, discuss strategic considerations and how to reconcile the competing interests of senior management and shareholders, and highlight the tax implications counsel must be aware of when structuring phantom plans.