Equity-based incentive plans are designed to reward employees by allowing them to share in the value of the company. Here are some of the most common equity-based incentive plans for privately owned businesses, along with a brief description for each:
Phantom Stock
Phantom stock is a type of equity-based incentive plan where employees are granted virtual shares in the company, but they do not actually own any company stock. These shares grow in value as the company value increases. As an option, the shares can “participate” in company profitability through bonus agreements.
Benefits
- Pride – participants have a sense of ownership in the company.
- Aligned the interests of employees with the company’s shareholders.
- Motivation to work towards achieving company goals and growing value.
- Tax efficiency – when paid out are tax deductible to the company.
- Retention – the benefit can be subject to a vesting schedule.
Stock Appreciation Rights (SARs):
SARs are a type of equity-based incentive plan where employees are granted the right to receive a payment in cash or company stock equal to the difference between the fair market value of the company’s stock at the time the SARs are granted and the fair market value of the company’s stock at the time the SARs are exercised.
Benefits
- Align the interests of employees with the long-term success of the company.
- Motivation to work towards increasing the company’s value.
- Flexible as they can be structured to pay out in cash or stock.
- Tax efficiency: when paid out SAR’s are tax deductible to the company.
- Retention – SARS’s can be subject to a vesting schedule.
Performance units
Performance units can be used in a division of a private company as a form of equity-based incentive plan to reward employees for achieving specific performance goals. The performance goals can be tailored to the division’s specific needs and can include financial metrics such as revenue growth, profit margin, or return on investment, as well as other metrics such as customer satisfaction or employee retention.
Benefits
- Alignment: Performance units align the interests of employees with the division’s goals, ensuring that everyone is working towards the same objectives.
- Motivation: By providing a financial incentive for achieving specific goals,
- Retention: employees will be more likely to stay if they feel their efforts are being recognized and rewarded.
- Flexibility: units can be structured to pay out in cash or company stock
- Tax efficiency: benefits are tax deductible to the company when paid.
