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Phantom Shares: Redefining employee incentives

29 August 2023 Gillan & Veldhuizen Incorporated
PJ Veldhuizen

PJ Veldhuizen

Companies across South Africa are exploring methods to incentivise and retain their workforces, with the adoption of Phantom Shares emerging as a promising solution.

This alternative strikes a balance between traditional equity-based compensation and non-equity returns, presenting compelling options for both employers and employees. The recent interest in Phantom Shares comes as businesses focus on employee retention, motivation, and performance, while simultaneously navigating the intricacies linked with actual equity ownership.

Understanding Phantom Shares: A bridge between ownership and incentives

A Phantom Share Scheme is a devised plan where employees are granted the right to receive a cash amount based on the company's performance as distributions (dividends) are declared and when the business is sold. PJ Veldhuizen, commercial law attorney at Gillan & Veldhuizen Inc., notes that, "Phantom Share Schemes provide a means for companies to reward employees based on company performance without the complexities of actual share ownership."

In a Phantom Share Scheme, employees do not receive tangible shares as in traditional shareholding. Instead, they receive shares or units which are linked to the market value or growth of the company value. This ‘shareholding’ is administered by a contractual agreement between the employer and employee. According to Veldhuizen, "This contractual arrangement specifies that the employee will be entitled to a cash payment equivalent to the market value of the actual company shares when distributions (dividends) are declared or at any other event stipulated in the contract."

Because the cash payment received from a Phantom Share Scheme is similar to a cash bonus based on the company’s performance, employees are incentivised to contribute to the company's success. Veldhuizen explains, "As the company's value grows, the Phantom Shares also increase, ensuring that employees are aligned with the company's growth."

The case for Phantom Shares gains strength for several reasons:

1. Flexibility and customisation: Employers can tailor Phantom Share programmes to accommodate individual or team-specific objectives.

2. Mitigates value dilution: Phantom Shares circumvent the dilution of existing shareholder stakes, avoiding potential negative effects on ownership structure.

3. Simplifies contractual and legal processes: Unlike actual equity ownership, Phantom Shares navigate legal complexities with ease, streamlining the paperwork and administration.

4. Empowers employees: The cash pay-out mechanism enables employees to reap the benefits of a business's success.

With these distinct advantages and their potential to enhance employee engagement and loyalty, Phantom Shares are emerging as an attractive tool for businesses aiming to cultivate a motivated and thriving workforce, without the downside of shareholder rights and responsibilities and the carrying of any risk.

Veldhuizen, highlights the scheme's merits saying that, "In some companies, it is simply not feasible to give staff actual shares, and the Phantom Share Scheme can go a long way to incentivising staff and ensuring that they benefit from the upside of trading or sale of the business or its shares. After all, it's about recognition, isn't it?"

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