Legal Considerations for Phantom Share Schemes

Phantom Share Schemes are a way of issuing employees of a company with a regular (usually annual) cash bonus. It is issued in a way to treat the employees as if they were shareholders being issued with dividends in the company.  As the bonus is generally calculated based on the performance of the company, the aim of the Phantom Share Scheme is to incentivise employees without having to issue them with shares in the company.  The employees are motivated to work hard and help the company perform well (so that they receive a higher cash bonus), and to stay with the company (to receive the bonus).

How is the bonus calculated?

An employee’s bonus for a particular year is generally calculated based on a fixed percentage of the annual net profit of the company for that year.  For example, an employee might be entitled to 0.1% of the company’s net profit for a particular year.  If the company’s net profit for that year is $100,000, then the employee will receive $100.

The Phantom Share Scheme should set out clearly how net profit is to be calculated; what percentage share the employee will receive; and when each year starts and finishes for the purposes of calculating net profit (for example are we using calendar years or financial years).  There may also be other milestones that the company must meet for the bonus to be issued.  If this is the case, then these should be clearly detailed in the Phantom Share Scheme.

The Phantom Share Scheme should also make it clear when the bonus is to be paid.  Generally, it is paid at the end of the calendar or financial year to which it relates.

What happens if an employee leaves the company before the bonus is paid?

Generally, if an employee ceases to work for the company or resigns, is fired or is made redundant before the payment date in respect of a bonus, it will forfeit the bonus.  Again, this is to encourage employees to stay with the company for as long as possible.  Some employees may be unhappy with this provision as they may be concerned that the company will fire them or make them redundant just before a bonus is payable.  Accordingly, it is helpful to include a provision in the Phantom Share Scheme stating that the company cannot fire the employee or make them redundant just to circumvent the company’s obligation to pay a bonus under the Phantom Share Scheme.

How is a Phantom Share Scheme documented?

A Phantom Share Scheme is usually documented either as a standalone agreement between the company and the employee or as an addendum to the employee’s employment agreement. The employment agreement should also be amended to refer to the Phantom Share Scheme as additional remuneration being received by the employee.

Conclusion

Phantom Share Schemes are a popular way of incentivising employees of a company by apportioning a set amount of the company’s net profits to them.  They are particularly beneficial for companies who do not need to re-invest all of their profits back into the company for working capital and for companies who do not want to issues shares to employees.  For companies who do not want to give cash to employees and would rather issue shares, Employee Share Option Plans are now a good alternative.

If you would like further information about Phantom Share Schemes or Employee Share Option Plans or require a Phantom Share Scheme or Employee Share Option Plan to be drafted or reviewed, please do not hesitate to contact LegalVision today.  One of our expert lawyers would be delighted to assist you!