Phantom Stock

Here is an interesting article on "phantom stock," which is used to compensate top executives at private companies.

At the CEO level, large private companies simply have to pay whatever it takes to get quality people. "We need to align ourselves with our peers and we don't care as much whether our peers are public or private," says Jeff Lundberg, director of compensation at Carlson. "We're looking at what the market is. We're competing for customers and for talent. The compensation strategies need to be aligned with the business strategies."

One of those strategies—the one that got Grasso in hot water—is deferred compensation. Many companies, private and public, allow executives to defer some percentage of their compensation for tax purposes. One question is how much interest the company should pay on the deferred compensation. Grasso's guaranteed 8 percent interest helped fuel the outcry, even though it was contractually agreed upon and apparently legal. Deferral plans carry an element of risk: If the company goes bankrupt, for instance, the executive might get nothing at all and 8 percent of nothing is still nothing.

Another unique private company wrinkle is "phantom stock," a grant of the right to profit from appreciation of the company's profits or sales, with a fixed exercise date and a formula for calculation. It's the private owners' answer to stock options. In many family businesses, all the real stock is held by family members. But for outside-the-family CEOs, many private companies have a form of what Carlson offers top executives: a "legacy plan." "At a point in time there's a value determined for the plan and that value is divided by the number of shares outstanding to come up with a per-unit value. We publish that quarterly," says Lundberg. The phantom stock has a six-year life and a three-year vesting lag. Over the next three years the executives can exercise the "option" to sell in any quarter. The vesting provisions are designed to retain key people, the company says.

I wasn't aware such bonus plans existed. There is not nearly as much information on privately held companies as there is on publicly traded firms. And I don't just mean financial information, but news articles and stuff like that as well. I wonder if there is a market for a business magazine that is all about/for privately held companies.

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