Phantom Stock Option Plans

What are the Objectives of a PSOP?  Managers that will act like owners  Managers that are loyal  Head start on an MBO?

PSOPs are not “Qualified Plans”  Qualified Plans are governed under ERISA  Qualified Plans are tax advantaged  Qualified Plans require formal valuations  Qualified Plans require annual filings  Qualified Plans prohibit discrimination  Qualified Plans are funded

Phantom Stock Ownership Plan  Binding Agreement  In setting up a PSOP you execute a formal and binding agreement with employees.  Required to convince employees you are serious  Thinking through terms and conditions is critical  PSOP Existence and effect must be disclosed whenever your financial statements are shared with outside parties, particularly when the purpose of sharing the information is reliance.

PSOPs provide legal rights  Equity  Appreciation in equity [SARs]  Income  Most common:  Equity with a share of income provided through incentive compensation programs.

Who participates?  Small number of key executives and managers.  How are participants awarded their shares?  Past Service Credits  Position  Performance  How are participants vested in their shares?  Immediate  Passage of time  Phased

Valuation depends on circumstances!  Termination with cause - forfeiture  Termination - forfeiture, net book value  Resignation - forfeiture, net book value, market-based formula  Retirement - market-based formula  Plan Termination - market-based formula  Sale of the company – market value

Pay-out  Payments generally made over several years.  PSOPs are subject to the desires of the Board of Directors  Modification  Termination  New plans