UK: Guide To Phantom Share Schemes

Last Updated: 6 March 2013
Article by Amanda Solomon

There are many different schemes and plans which can be used to incentivise employees. Some, such as the Enterprise Management Incentive ("EMI") scheme or Company Share Option Plan, are more tax efficient. Others, such as a nil-paid share scheme or unapproved options, are perhaps less so, but are not limited by as many legislative requirements –meaning that they can be tailored a great deal to suit the needs of the company.

However, one common theme with all of these forms of incentive is that they involve the issue, at some point or another, of shares by a company to its employee. Whilst the issue of shares to employees will often be commercially agreeable, there will be times when doing so is less appealing for the company and its shareholders. One way to solve this problem is through the use of a phantom share scheme.

In essence, a phantom share scheme is a cash bonus scheme. However, rather than simply issuing a 'standard' bonus to employees each year, the company issues an 'option' to the employee in the same way as it would for an EMI scheme our unapproved option scheme. The difference is that, instead of being an option to acquire shares at a certain price, the option is over cash. The value of the cash bonus will be the notional gain on the shares which would have been issued under a share option scheme, and so the gain is the equivalent to the uplifted share value.

As the phantom option is linked to company performance (as would be the case for a share option scheme) the company is able to ensure that bonuses are linked to an actual increase in the value of the company– a central objective for an effective incentive scheme. Bonus awards can also be graduated, so that stronger company performance leads to better returns for the individual employee.

Phantom share schemes are also not regulated by specific legislation, as they are cashbased rather than share-based. This means that phantom schemes can be drafted to maximise the commercial goals of the company, and can be fairly sophisticated, with the inclusion of such things as 'good and bad leaver' provisions, performance conditions and change of control provisions.

Benefits of a Phantom Share Scheme

The fundamental reason for adopting a phantom share scheme is that the company will not wish to grant or issue shares to employees. This could be for a number of reasons, such as:

  • The company may be operating under dilution limits, whereby a certain maximum percentage of shares can be issued by the company at any given time. For example, companies which comply with the guidelines of the Association of British Insurers will have a dilution limit of 10% over a 10 year period, and the issue of shares or options under an incentive scheme may cause the company to breach that limit. A phantom share scheme will not affect the company's dilution limits and is often therefore favoured by companies which are approaching their dilution limits; and
  • There is no risk that employees will acquire small shareholding in the company. Majority shareholders will often be keen to avoid minority shareholdings, as they may affect their ability to run the company effectively (for example if the minority shareholders are active dissenters), and can also increase administrative burden if the company is being sold.

A phantom share scheme also has a number of other benefits, including the following:

  • The amounts paid by the company as a bonus can be offset against the company's profits, therefore reducing the company's corporation tax bill; and
  • As highlighted above, there are no regulatory requirements and schemes can be customised to the commercial needs of the company.

When might a Phantom Share Scheme not be suitable?

  • Whilst phantom share schemes can be tailored to suit the commercial objectives of the company, they are not tax advantaged in the same way as certain other schemes, and the bonus will be subject to income tax and national insurance – this is less favourable than capital treatment, and if the reduction of taxation is an issue for the company, other schemes may be more favourable than a phantom share scheme;
  • Unlike a share scheme or share option scheme, a phantom share scheme will have some cash outlay for the company. As the option is being satisfied in cash, the company will have to satisfy this cash value as and when the option is exercised, and will therefore need the reserves to do so. Also, the option will be exercised by the employee rather than the company, and as such may be exercised at a time which is less convenient for the company (at the employee's discretion). Therefore, the company will need to consider whether it is 'cash-rich' enough to satisfy the options as and when they become exercisable;
  • The phantom share option scheme is more suitable for targeting at certain employees, rather than being adopted for all employees of a company. This is because the option is linked to increases in company share values – if an employee has no direct impact on the value of the company, then it is counter-intuitive to reward them for such increases. As such, phantom share schemes are usually reserved for management and senior employees;
  • The accounting standards of companies generally require that phantom share options, which are recorded as expenses in the company accounts, be reassessed at each balance sheet date. This differs from traditional share option schemes, which will require valuation on a less regular basis (for example on determining market value of the option at the date of grant). For private companies, this may lead to valuation issues, not least the fact that an expert valuation may be costly, perhaps disproportionately so as compared to the value of the option itself. Listed companies (whether listed on the Main Market or the Alternative Investment Market) should hopefully have less problem valuing their shares, as they will be regularly traded; and
  • As the company will have a cash liability at the date of exercise, and as the company will not know how much the value of the option may appreciate before it is exercised by the employee, the company will most likely want to cap the value of the phantom option.

There will be an inherent issue with determining the correct value of the cap – too high and the company will be exposed to a potentially significant cash flow cost, too low and the employees may be insufficiently incentivised. Sometimes companies will find it easier to implement a share option scheme, which will not need such an 'appreciation cap', as there will be no cash flow cost. However, drafting a cap should not in itself deter companies from using a phantom share option scheme, as advisors will be able to work with the company to determine a suitable cap.

The above are just a few examples of the types of issues which should be considered in relation to phantom share schemes – there are many more, and it may even be that another type of incentive scheme is more suitable for your company. Professional advisers can assist with these issues (both highlighting and resolving), and can help effectively link employee performance with financial returns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.