Phantom share plans or cash-settled share plans generally grant an employee a right to receive a certain amount in cash at a certain time. This right usually depends on the employee’s continued employment, which could include performance criteria.
The phantom share plan is best described as a hybrid between a performance bonus and profit share linked to equity. This is important to SMEs who often run their businesses in small teams of key individuals, where staff retention is directly linked to the bottom line.
In many ways, this is similar to a bonus. However, a key general difference is that the employee’s performance is measured strategic outcomes envisioned for the business.
These differences would typically be associated with shareholders. It is, therefore, a much more powerful accountability tool than a bonus.
Increased popularity among business owners
The phantom plan has become increasingly popular because of its:
- No shareholder and related administrative issues
- No securities regulatory compliance requirements
- Employees’ receipt of cash as opposed to an equity holdings
- An overall tax treatment that is potentially more favourable than the traditional option or purchase plan.
These reasons may have historically been most popular in the listed space, but in the last few months phantom plans have gained popularity with SMEs in Broad-Based Black Economic Empowerment (BBBEE) transactions and key staff retention strategies.
How to get started and tax implications
Awards can be granted on a discretionary basis and don’t need to be offered to all employees on the same terms, provided this does not amount to unfair discrimination.
The provisions usually relate to shares and options, which postpones the tax event until the shares or option become unrestricted also includes Phantom Share Schemes. This has caused various complexities, and therefore the tax implications of each scheme must, therefore, be carefully considered.
In principle, employees are subject to income tax on the cash amount received under the award, on the date on which they become unconditionally entitled. The employer must withhold the employee’s tax liability from the employee’s salary and pay it to SARS. The award may also be subject to SDL and UIF contributions.
The bottom line benefit
In many ways, these alternatives are much more cost effective than traditional share or equity options. There are also less administration and regulatory compliance involved. This means that SMEs can use tools such as this to reward and retain key staff. We recommend however that professional advice is sought if this is pursued.