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OK at Work, hosted by Offit Kurman attorneys Russell Berger and Sarah Sawyer, is a weekly podcast that discusses current events and legal issues impacting business owners. From updates on the ever-changing employment law landscape to the risks and benefits of integrating AI into your workplace, subscribe to stay up-to-date on issues and events that may impact you and your business.
Sarah Sawyer: Welcome to this
week's OK at Work with myself, Sarah
Sawyer, my colleague Russell Berger
both attorneys at Offit Kurman.
And today we are talking about certain
types of incentive compensation.
You know, we're getting towards the end
of the year and often folks are wrapping
up their year and looking at bonuses
and looking at how people performed
and figuring out various things as is
compensation looking ahead to next year.
Trying to figure out how they
wanna incentivize employees based
on their business goals and what
they're looking forward to in 2026.
And one way that companies
often do that is through
something called phantom equity.
And there's other similar concepts
as well, but what is, other than
sounding a little bit mysterious
what is phantom equity Russell?
Russell Berger: Yeah, look
it, it's not real equity.
So that's the starting point.
That's why it's called phantom equity.
And what it really is
designed to do is to function.
I mean it's really, if you think about
it somewhere between actual equity, but
obviously without the actual equity and
kind of normal bonus plans, it's sits
somewhere in between and it provides
an option to businesses to compensate,
usually executive level folks in a
manner as if they were a member of
equity, even though they're not.
And there's a lot of
different variations to it.
There's, as creative as you
can be, you can plug that in.
One of the common uses is to award
phantom equity units to an executive.
Maybe they get awarded,
they have to vest over time.
Maybe they're just awarded upfront.
But then, all they really do is function
as a way to bonus the individual
in the event of a triggering event.
For example, that might be something
like the sale of the business.
It could be, you don't own any actual
equity which is good, less entanglements.
Lot less complicated.
But if the business sells in this
timeframe, then you know, you get a
bonus as if you owned 5% of the company.
And there might be escalators,
deescalation, different
ways of looking at it.
But yeah, you get 5% of the net
proceeds of a sale and that's a good
way to incentivize an executive to hang
around and really drive towards a sale.
And sometimes they can be used for
profit sharing in a similar way as well.
Sarah Sawyer: It's a good way to try
to align both the company's goals
and the individual's goals together.
So part of the reason that people
might have actual equity in a company,
not phantom equity, is to align
those goals and say, all right, you
share in our successes and we wanna
motivate people to share in when
the company does well, you do well.
And it might motivate people to
care a little bit more about what
the business's perspective is.
But with actual equity it
can be much more sticky.
It's a much more often a
more solid relationship.
They might have other types of
control as part of that, they might
have a say in business decisions.
So it's a way of stopping short of
having really that cemented of a
relationship or having all of those
other pieces while still helping
motivate people in a streamlined way.
Russell Berger: Yeah if you don't wanna
deal with the entanglements of ownership,
subject to the same operating agreement,
what have you, and you don't wanna deal
with the tax consequences, and on down the
list of reasons why you might not want to
give someone equity or sell someone equity
but you do want to foster that ownership
thinking among your executive team.
And this is a construct that gives you
more flexibility as the business owner,
but creates the right incentive structure.
And again, whether that's to make profit,
to prepare for a sale, or, anything
in between or combination thereof.
It's a good tool to get alignment
on ownership thinking without
actually dealing with the
burdens of shared ownership.
Sarah Sawyer: Well, thanks, Russell,
and we'll see you next time.
Russell Berger: Thanks, Sarah.