A phantom stock unit plan (PSUP) is a creative way to lock in key and high-performing employees without giving them an equity stake in the firm.

That was the message from Marty Kuehne, chief administrative officer for Seacap Partners, a New York firm specializing in compensation and incentive structuring. Kuehne ran the session driving firm performance through incentive compensation plans at the Charles Schwab Impact 2010 conference in Boston on Wednesday.

His affinity for this creative deferred compensation incentive scheme, which has a number of variants, was born of experience. A decade or so ago, he gave an equity stake to partner in a firm and it came back to haunt him due to restrictive stock holders rights in his home state of Minnesota (Seacap has a Minneapolis office).

The partner decided he wanted to work part-time when the firm was growing fast. Kuehne felt all hands were needed on deck full-time.

“He stopped coming to work two days a week. I ended up writing a $300,000 check to remove him from the firm,” explained Kuehne. “I did not contemplate being sued under [a shareholder] minority equity rights.” 

A PSUP avoids that by issuing company units with a cash value that rises as company prospers. As high performing employees vest in the program, they are paid in the cash value of the units.

“A PSUP does not have ownership rights. When it’s paid out, it’s ordinary income,” he explained.

An additional advantage of the PSUP is that company principals are not subject to same level of disclosure that they might be offering an equity stake (each state has its own minority equity ownership laws).  

Kuehne presented a detailed case study of a plan designed for an unspecified client. “As revenue goes up based initially on company projected growth, the number of units in each grant goes down as their value rises, locking the employees up for the value they create,” he said.

Kuehne said the PSUP is a creative incentive program and not for every firm. Given they are based projection five- to 10 years into future, “you want to make sure you can afford them.”