Phantom Stock
A cash bonus tied to stock value that mimics equity without granting actual shares.
Definition
Phantom stock is a compensation arrangement that gives employees cash payouts tied to the value of company stock, without actually issuing shares. The employee receives no real equity, voting rights, or ownership. Phantom stock is used when companies want to provide equity-like incentives without diluting actual shareholders, or in situations where granting real equity is legally complex (e.g., LLCs, international employees).
Why it matters
If you receive phantom stock instead of real equity, you do not actually own any shares. Your payout is a cash bonus tied to stock performance. The tax treatment is typically ordinary income, and you have no actual shareholder rights.
Example
An employee receives 10,000 phantom stock units when the company is valued at $10/share. If the company sells for $30/share, the employee gets a $200K cash payout ($20 spread x 10K units), taxed as ordinary income.