Phantom Stock Option Plans transitioning to Real Plans

Dear Anjana,

My first question is why you would change to a real ESOP? This may cause heavy tax impact for both the company as well as the employees.

Depending on your it system you may be faced with high implementation costs and time consuming implementation scenario's.

My advice would be to design a plan that leaves space for both Phantom as well as ESOP. However, do not change the caracter of the already granted Phantom Shares/Stock Options

Hoping this is helpfull to you

Good luck

Wolfgang

An ESOP is a broad based (most employees) qualified plan.  Phantom shares are typically offered only to executives.  What might be possible is offering employees the option to exchange phantom shares for real stock at that time. 

Anjana,

By "Real ESOP" do you mean Employee Stock Ownership Plan, or Employee Stock Option Plan?  In the US these are two very different vehicles.

Thank you all. Appreciate the responses. For more detail,  we are looking at designing a Phantom plan which would probably be offered to two-levels down in the organization. The current thought process, as we began the program with an ESOP in mind, is vesting over 3 years. In between, we may want to switch over to an Employee Stock Option Program...and my challenge is how to make this an elegant, simplistic model - as some of the Phantom may have vested before we make the switchover - so do we do the payouts for those, at what price do we grant the options (as the FMV would) have moved some distance..

Also, in your experience are employees willing to do the switchover from a "Cash Based Phantom Stock option Plan" to a "Market" movement based equity plan, where they may have to wait before getting the gains..

Please advise. This is the first one that I am designing and am racking my brains over it. Is there any material I can read up from on the web for this.

Regards

The simplest approach is to just let the phantom units vest and then start issuing options thereafter. It makes a lot more sense, in general, to give out equity on a periodic basis based on corporate or group performance (for instance, giving out part of the increment above target for a year in equity to those currently eligible), rather than set aside some artificial percentage of the company (often 10%) to give out, mostly up-front. That is very inflexible, limits what you can do with future emploeyes, is usually based on an arbitrary rather than performance-based measure, and has a lot of luck-of-the draw contingency in it (did you happen to get your grant when the price was high or low?).

In our book, The Dedision Makers Guide to Equity Compenastion, we explore these design issues in detail, as well as the pros and cons of varioius equity veghicles (http://www.nceo.org/pubs/equity-compensation.html).

Anjana:

I'm happy to personally address your questions on the subject.

Best regards,

Frank Glassner

fglassner@cdgworldwide.com