Why to Issue Phantom Stock in spite of ESOP

It isn’t just the plain ESOPS (Employee Stock Options) that Corporates are opting for India’s staff. There are multiple attractive goodies in their compensation basket that now include a heady mix of alternative choices. In the initial ‘embryonic stage’, alternative stock option plans, like the phantom stock option, are gaining much popularity and has become the most suitable choice for corporates these days.

Phantom equity is slowly and gradually gaining its share of popularity. In today’s time there is greater need for rewarding the deserving employees who are directly linked to the organisational functioning, even when there are multiple constraints that lead to dilution of equity.

The phantom stock option which is also known as the phantom equity plan, is a solution to this problem. This is a purely performance-based plan which provides an employee with a ‘ghost’ or simulated ownership of the stock options. The employee is given notional shares at a benchmark price with the exclusive right to exit at a future price, which could either be the market or traded price, or even a price that is determined on the basis of a pre-decided valuation criteria. Hence, the organisation does not have to dilute its equity.

The economists stated that linking rewards to an organisation’s performance acts as a powerful motivator in today’s dynamic and competitive business environment. Organisations that opt for these alternative options are either those that are unlisted (i.e. the ones that avoid share value-based plans for example the Employee Stock Options), listed companies that have the strain on equity dilution, or even the various promoter-driven organisations that are unwilling to sharing equity. As per the various industry sources, a few organisations that offer phantom stock options are Bajaj Allianz, Birla Sunlife and DLF. An official from DLF, on the condition of anonymity, conceded that the organisation did offer phantom stock options to all its employees, but the value solely depended on the position( i.e. the level of seniority).

In organisations such as Cairn India, phantom stock options are allocated to a certain section of employees and not all. As the company stated in its 2009 annual report: “It also has a cash awards option plan (phantom stock options) for expatriate employees of the organisation as well as its subsidiaries.” It also highlights that the employees received $5,37,198 options under the Cairn Indian ESOP (CIESOP) section and 1,88,339 under CIPOP (i.e. another plan).

As the companies, too, are spoilt for choice on the employees’ rewards front, they are progressively looking for a balanced spread. For Hewitt Associates, their clients’ demands include a nice blend of incentive plans that simply address the concerns of the top management retention, attraction, ownership and performance.

In spite of various alternative forms of rewards gaining authorization, Employee Stock Options continue to be the most preferred as well as prevalent form of LTI. The India business leader Padmaja Alaganandan,human capital business for consulting firm Mercer, alerts: “Phantom options, nonetheless, have circumscribed popularity.” She also told that this is because the market is mainly governed by Esops that almost 70% of organisations offer as part of their rewards. The other 20%, who chose for things other than Esops have an option to choose between four or five available alternatives, depending on their objectives and constraints.”