Top talent expects top compensation. And in today’s hyper-competitive job market, that means CEOs have to offer more than just BIGGER numbers on a paycheck. Millennial employees in particular want to feel like the work they’re doing, their company’s progress, and the way everyone makes money are all reinforcing each other and building towards a common good. The best CEOs are finding more creative and motivating ways to attract the best talent, encourage high performance, and leverage those assets for BIG results.
Tom Miller, founder and president of VisionLink Advisory Group, is an expert at helping CEOs set up long-term incentive plans that create that crucial alignment between employee and employer goals. He shared with me a five-step plan for creating a phantom stock program that will incentivize top employee performance without sacrificing control of your company.
1. Understand what you are – and aren’t – offering.
Phantom stock is essentially a contract in which you promise to pay cash to an employee once certain conditions are met. Usually, those conditions are tied to specific business growth metrics, such as a higher EBITDA or hitting a new net income goal. This agreement creates an ownership mentality in employees who are participating in the program: “If I do my job well it helps the company succeed, and when the company succeeds, I get paid more.”
What phantom stock does not create is a path for employee ownership of your company. You and any partners you have retain 100% of your existing shares of the company. Phantom stock owners aren’t entitled to see your company’s books or have a voice in major decisions (like, say, your salary) the way owners of actual stock would be. And from the employee’s perspective, it’s usually less expensive and less of a tax burden to accrue and cash in on phantom stock.
Ultimately, setting up a phantom stock program should align with the kind of culture you’re trying to create. If you want to provide key employees with an extra motivation to commit to your vision over time and execute at a high level, phantom stock is an excellent option.
2. Set a proper valuation.
Another advantage of phantom stock is that you have more control over how your company is valued and what you ultimately pay out to employees. A tsunami on the other side of the world might send a public company’s stock prices into a tizzy. But your phantom stock price and the conditions on which owners get paid aren’t subject to market swings.
Instead, you can either pay for a formal appraisal of your company or use your own formula to set a value. Most companies choose to use a formula, such as a multiple of EBITDA or another key metric. Just make sure your formula keeps the value of your phantom stock below the company’s actual market value. That way, if you decide to sell the company someday, the price of employee phantom stock won’t be higher than the value of your ownership stock.
3. Create your shares.
A common misconception is that your number of phantom shares should be equal to the number of company shares. Remember, phantom stock is an incentive program tied to the valuation and long-term goals you want stockholders to help you accomplish. It’s not meant to shadow your company’s actual value, even if your company is publicly traded. You just need enough shares to cover the kind of plan you want to create and the number of employees you want to compensate.
As an example, let’s say your company’s current EBITDA is $10,000,000, and you decide to value your company at 5X that number. Based on that multiple, you could create 5,000,000 phantom shares at $10 per share, for a total valuation of $50,000,000.
4. Decide how to award stock.
There are three different ways to award phantom stock:
1) Full value grant. Give employees shares valued in full at the price you established in your valuation. In the example above, an employee given 5,000 shares would be entitled to cash in those shares for $50,000 at a future date you determine. If EBITDA is higher at that date, the value of the phantom stock would be proportionally higher as well.
2) Sell phantom stock. Give employees the opportunity to defer some of their income into phantom stock. Under this arrangement, an employee earning $200,000 annually who wanted $50,000 worth of phantom stock would defer 25% of his or her salary.
3) Phantom stock options. Give employees the right to buy phantom stock when it’s reached a higher valuation of your choosing. An employee with phantom stock options at $10 would receive $40,000 once EBITDA value rises high enough to bring the phantom stock price up to $18.
When in doubt, phantom stock options are usually the best way to award stock. There’s no risk to options, and if the metric that’s driving the value of your phantom stock doesn’t go up, there’s no payout to stockholders.
5. Set a reward schedule.
Your goals for the company will go a long way towards determining how many shares you want to grant employees and when you want to pay them for those shares. It’s usually best to create a schedule with annual rewards over a predetermined course of years. But if you want to reward a trustworthy, longtime employee who’s integral to your future plans, an upfront one-time grant might be appropriate.
Whether you’re weighing health care options or exploring revenue sharing, your employee compensation requires careful consideration and professional planning. Get in touch with experts like Tom’s team at VisionLink to make sure your comp package will attract, retain, and inspire the people you need to make BIG happen.
To learn more about setting up a phantom stock plan or other long-term incentive plan, visit Tom Miller’s firm VisionLink here or call them at 888-703-0080.
About Mark Moses
Mark Moses is the Founding Partner of CEO Coaching International and the Amazon Bestselling author of Make Big Happen. His firm coaches over 200 of the world’s top high-growth entrepreneurs and CEO’s on how to dramatically grow their revenues and profits, implement the most effective strategies, become better leaders, grow their people, build accountability systems, and elevate their own performance. Mark has won Ernst & Young’s Entrepreneur of the Year award and the Blue Chip Enterprise award for overcoming adversity. His last company ranked #1 Fastest-Growing Company in Los Angeles as well as #10 on the Inc. 500 of fastest growing private companies in the U.S. He has completed 12 full distance Ironman Triathlons including the Hawaii Ironman World Championship 5 times.
About CEO Coaching International
CEO Coaching International works with the world’s top entrepreneurs, CEOs, and companies to dramatically grow their business, develop their people, and elevate their overall performance. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 350 CEOs and entrepreneurs in more than 25 countries. Every coach at CEO Coaching International is a former CEO or President that has made big happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $1 billion, and many are founders that have led their companies through successful eight and nine figure exits. CEOs and entrepreneurs working with CEO Coaching International for three years or more have experienced an average EBITDA CAGR of 66.4% during their time as a client, more than five times the national average. For more information, please visit: https://www.