Businesses across the world are changing how they approach employee incentives. This includes New Zealand, where phantom share schemes have emerged as an alternative and innovative way to attract and retain talent to businesses. The value of this scheme arrangement is connected to the specific performance goals and success of the business. They allow employees to benefit from an uplift in the value of the business as if they held shares in the company. These schemes offer a unique incentive structure without the added complexity of traditional equity ownership. This article will take you through five key things to know about phantom share schemes for New Zealand startups.
1. Understanding Phantom Share Schemes
The first key concept to understand is what phantom share schemes are. They are a distinct concept that sets them apart from traditional employee share schemes and other equity-based incentives. Phantom shares are “issued” to participants. These shares are not a “true security”. However, the employee holding the phantom shares will receive the same benefits as if they held an equivalent number of shares on issue in the company (subject to some limited exceptions). If you introduce any phantom share incentive arrangement, this will tie directly to your business’s performance. As such, this scheme offers a unique incentive structure for employees in your business. At the same time, you do not have to deal with the complexities posed by traditional equity ownership structures.
2. Key Features of Phantom Share Schemes
Next, it is essential to understand the critical features of phantom share schemes. Some of these key features are outlined in the table below:
| Feature | Explanation |
| Performance | The value of phantom shares is directly tied to the performance of the company. Additionally, eligibility to participate in a phantom share scheme, and/or the ability to benefit in full from the phantom shares held, can be tied to individual, team or business-wide predefined performance metrics. |
| Reward | Phantom shares typically result in cash benefits rather than share ownership. This simplifies the implementation of incentive structures for the company, while giving employees tangible incentives directly tied to the company’s performance. |
| Vesting Periods | Phantom shares usually have vesting periods attached during which employees must remain with the company to be eligible for the rewards. This encourages long-term employee retention. |
| No Ownership Dilution | Phantom share schemes typically do not dilute existing shareholder equity. This is a unique feature of these schemes compared to other equity incentive schemes. |
3. Implementing Phantom Share Schemes
New Zealand startups must understand the legal and regulatory landscape when looking to implement any employee incentive scheme, including phantom share schemes. The nature of such schemes can be highly complex, making it essential to seek advice from both legal and financial experts to protect your business and your employees.
In particular, understanding the tax implications is crucial for both the company and employees participating in any employee incentive scheme. A key advantage of implementing this scheme instead of a more traditional equity arrangement is that, typically, they are more advantageous (and straightforward) from a tax implementation and legal compliance perspective.
Implementing this scheme begins with developing a robust set of rules for the scheme. These rules need to be structured and drafted in a way that takes into account the various legal and income tax aspects that your experts will have provided you advice about before implementing such a scheme.
Finally, communication plays a vital role in successfully implementing these schemes. Conveying the nature of the incentive (what the phantom shares are and represent, and how they benefit the participating employees) is essential for both fostering trust and ensuring they have the intended incentive. This includes accurately conveying:
- the performance metrics involved;
- events that trigger payout; and
- the impact on tax and compensation (although you should always recommend your participating employees seek independent tax advice rather than relying on any high level guidance that may be given by the company).
4. Advantages of Phantom Share Schemes
Phantom share schemes can be powerful tools for both talent retention and motivation. These schemes offer an alternative where traditional equity ownership schemes might not be feasible, or when the business wants to benefit from a truly flexible structure from a commercial, legal and tax perspective.
In terms of retention and motivation, participants in the scheme are highly motivated to contribute to the company’s success, given they understand their efforts directly impact their financial rewards.
Understanding the benefits of these schemes is essential for startup founders to market their advantages to potential recruits accurately. The scheme should be a key selling point for talent to join the business.
5. Evaluating Phantom Share Schemes for Your Business
The success of these schemes lies in its alignment with the specific needs and goals of the business. As such, you should customise such a scheme to ensure that it will seamlessly integrate with your objectives.
Another critical component of a successful phantom share scheme is the participation and understanding of employees. You must educate your workforce about this scheme, including its benefits. You may want to consider collecting employee feedback to assess whether a phantom share scheme is appropriate in the context of your business.
Understand how an Employee Share Scheme will help your NZ startup attract and retain great talent.
Key Takeaways
Phantom share schemes have emerged as an alternative and innovative way to attract and retain talent. They are excellent tools that benefit both employee management and employee incentives. Some fundamental principles to understand about phantom share schemes include:
- what they are;
- their key features;
- how to implement such a scheme in a New Zealand business;
- advantages of these schemes; and
- how to know if a phantom share scheme is appropriate for your business.
If you need assistance determining if a phantom share scheme is appropriate for your New Zealand startup, contact our experienced startup lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
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