What Is Phantom Stock? Benefits & How They Work

By Lyle Daly – Updated Feb 1, 2025 at 1:10 PM

Key Points

Phantom stock provides employees cash payouts tied to company stock performance.
Companies use phantom stock to retain key staff without diluting shareholder equity.
Payouts from phantom stocks are taxed as ordinary income, not as capital gains.

Phantom stock is a way for businesses to give employees a stake in the company without issuing any new stock. This type of deferred compensation plan is normally used to improve employee retention and profitability. Ideally, it benefits both the employee and the employer, although that depends on the phantom stock plan and the success of the business.

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Woman executive overlooks large city from top of skyscraper — Image source: Getty Images.

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Understanding phantom stock

Phantom stock is also called shadow stock or ghost shares, and the name provides a fairly accurate description of how it works. You don’t receive actual stock, but your phantom stock mimics the performance of the company’s real stock. After a vesting schedule or a predetermined event set out in your contract, you can receive a cash payout for your phantom shares.

Companies can offer phantom stock to any employees that they want. In practice, it’s typically offered to upper management. Because the business isn’t issuing any actual stock, it avoids diluting the equity of its shareholders.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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Lyle Daly has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.