Private business owners are often looking for ways to reward key employees without giving them actual equity in their company. One of the most popular of these ideas is a phantom stock plan.
When I talk about tax cost I mean the amount of money that must be earned before principal can be paid. For example, if you are in the 40% tax bracket you will have to earn $1,800,000 – pay $800,000 in taxes to be left with the $1,000,000 to pay someone for their stock.
One of the questions I’m asked on a regular basis is whether our Clients should give stock to their key people. Many private business owners believe that if they give their managers stock, those key managers will take a more active “ownership” interest in the company.
For the most part I’ve found that this belief is false. Managers who are given stock don’t often take an ownership interest. In my experience whether a manager owns stock or not has little to do with how they act towards the company.