Phantom Stock: Definition, Benefits & How It Works

Phantom stock is a type of incentive that is sometimes provided by a company to their employees. Phantom stock provides businesses with a method of rewarding certain employees if the company performs well. However, instead of providing them with actual ownership in the company as they would by giving them real stock, they give them phantom stock.

Phantom stock is like virtual stock that can grow in value in proportion to the real stock price of the company. The difference is that it provides no ownership rights in the company to the phantom stockholder. It also does not come with any voting rights, and it does not accumulate dividends as other stock would. 

Employees that receive phantom stock have to pay taxes on it as if it were regular income. This means that instead of paying the capital gains tax rates that you would with stock, you actually pay the marginal tax rates, as you would with regular income. 

For employees, this type of stock can be a good incentive to perform their jobs well. Ideally, if they do well, the company will do well. When that happens, the value of their phantom stock will rise, and they will make money.