Profit sharing and phantom share schemes: What you need to know
Let’s explore the inner workings of two popular employee reward options, profit sharing and phantom share schemes, as well as their pros and cons.

What’s profit sharing?
Profit sharing is a popular employee reward scheme that a company can use to boost employee loyalty and drive performance. It involves awarding employees an ad hoc cash bonus based on a percentage of the company’s profits.
How does it work?
Profits are distributed to employees via cash bonuses, which are paid in addition to their regular salaries. Companies may choose to distribute profit bonuses equally among employees or proportionally—for example, based on each employee's contribution to the company’s profit.
Profit-sharing payments can be made to employees at any cadence a company chooses, and could be annually, quarterly, or monthly.
Companies can choose to award a profit-sharing bonus just to senior leadership and top talent, or they may choose to include all employees.
What’s a phantom share scheme?
Unlike profit sharing, a phantom share scheme (also known as ‘shadow stock’, ‘ghost stock’, or ‘virtual stock’) is a more methodical, structured, and formalised employee reward option.
It involves employees receiving some of the rights of share ownership (such as dividend payments), without receiving any actual company shares.
How does it work?
The company’s performance informs how much is distributed to phantom share scheme participants, with the amount each participant receives based on the number of phantom shares they hold.
A phantom share participant’s dividend increases if the company performs well. This can serve as a powerful performance and engagement incentive to employees.
While participants receive a hypothetical stake in the company, they do enjoy some of the benefits of company ownership. These include dividend payments, and the possibility that their phantom shares convert to actual shares when specific vesting criteria are met (usually when an IPO, merger, or acquisition occurs).
Phantom shares are commonly offered to junior or mid-level employees and often appeal to companies that want to maintain their equity with new shareholders. However, because of the nature of this scheme, they can also be issued to directors and non-employees such as contractors or service providers.
What are the pros and cons of profit sharing?
Profit-sharing can help a company nurture employee loyalty and retain top talent.
They’re an incentive to increase employee productivity, as the better a company financially performs, the higher an employee's bonus payment may be. On the other hand, if a company is less profitable, the percentage of shared profits decreases.
For employees, tax obligations from a profit-sharing scheme are relatively straightforward, and participants are typically subject to income tax when they receive their cash bonus.
A disadvantage of profit sharing for employees is the uncertainty around when and how much profit will be paid to them. Payments may differ widely from one quarter or year to the next due to how the business performs. This can place a financial burden on employees, who cannot forecast a consistent cash flow from the profit-sharing bonus scheme.
What are the pros and cons of a phantom share scheme?
A phantom share scheme has generally straightforward tax obligations for employees. Participants are typically subject to ordinary income tax when they receive their dividends.
Depending on the vesting criteria attached to the scheme, participants may be able to convert their phantom shares to actual shares in the future when a specific vesting event occurs, such as an IPO.
For companies, a phantom share scheme doesn’t initially lead to further equity dilution, as the scheme doesn’t involve creating new shares. This can appeal to companies wanting a consistent cap table and ownership structure.
They can allow a company to issue equity across countries, which is especially beneficial for multi-national organisations. Since phantom shares are not traditional shares, they avoid some of the issues that issuing traditional shares can create in certain countries.
A disadvantage for employee participants is that since they don’t own actual company shares, they may not have voting rights.
Employees also need to be aware that the dividend payment they may receive is based on the number of phantom shares they hold, which may differ from dividend payments made for ordinary company shares.
How to implement a phantom share scheme
The first step is to consult with your board and financial advisors on implementing the phantom share scheme.
Then, we recommend you work with a lawyer on the contractual legal agreements that are shared with employee participants.
This agreement will include details on:
the phantom share scheme
which employees are eligible
a schedule of when dividends will be paid out
events that could trigger a payment or phantom shares converting into actual shares—such as a company milestone or liquidity event.
This agreement needs to be provided to all eligible participants so they know what the scheme entails and their rights.
Sharesies’ equity and shareholder management platform, Sharesies Private, helps companies do that by providing administrators and employee participants online access to a personalised dashboard to track their company shares.
Sharesies Private also allows participants to access the scheme’s documents, any communication about the scheme, and a history of their dividend payments.
Considering an employee reward system for your company?
The range of different options can seem overwhelming, but we’re here to help.
To hear how we can help your company, get in touch for a chat.
Now for the legal bit
This article is for informational purposes only and contains general information only. Sharesies is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.
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