Phantom stock explained

A good starting point is to understand exactly what phantom stock is and how it works.

To put it simply, phantom stock is a way to provide employees with many of the advantages of ownership, without actually parting with ownership shares in the company.

Phantom stock shares can be issued to HVAC employees who achieve certain performance goals or attain certain levels of tenure. Those shares can be redeemed at any time for a value that corresponds to the company’s overall financial status or valuation.

By receiving phantom stock, HVAC employees do not actually receive controlling stakes in the company—but they do get a sense of “skin in the game,” as their monetary compensation is directly linked to the financial health of the business. This can be a powerful incentive for employees to remain engaged in their work, and to invest in the company over the long haul.

Assessing phantom stock readiness

For HVAC contractors who love the idea of phantom stock, the next step is ensuring they are well-positioned to leverage phantom stock successfully. To ensure readiness, HVAC contractors should consider several financial and operational benchmarks.

• Clear and consistent valuation methods. The payout of phantom stock is typically based on the valuation of the business, or some other objective, big-picture financial metric. This doesn’t mean the company actually needs to be publicly traded, but it does mean there should be a precise and regular method employed to determine the company’s value.
• Baseline financial stability. HVAC contractors must also be ready to support any payouts associated with their phantom stock, which means verifying that the business is profitable and maintains a consistent cash flow.
• Legal preparation. There are legal ramifications for a phantom stock offering—including potential implications regarding taxes and labor laws. HVAC contractors will naturally want to be aware of these implications; working with a proven platform like Reins can help steer you in the right direction.     

One additional point to consider: phantom stock works best as a way to drive organizational goals. As such, before implementing a phantom stock offering, it’s important for HVAC contractors to have clarity about what their goals actually are. 

This means creating specific goals about business growth—after all, phantom stock      is      only attractive if it      gains value over time. Contractors should have measurable growth milestones in mind.

Additionally, contractors may wish to set specific goals for employee retention, whether that’s keeping top talent on board or simply ensuring greater team alignment around performance targets. Having precise objectives is the best way to evaluate the efficacy of a phantom stock program.

Smart implementation of phantom stock offerings

To leverage phantom stock effectively, HVAC contractors should bear in mind a few additional best practices.

For example, beyond setting clear objectives, business owners must also create transparent guidelines for their employees—providing clarity about how phantom stock is allocated, vested, and paid out. Phantom stock offerings require some trust, and trust comes from being up-front about how the process works.

Specifically, it’s important to create an agreement for employees who opt into the phantom stock program, detailing terms and conditions while mentioning any potential risks. It’s wise to have this agreement assessed and approved by an attorney.

Again, make sure there is a consistent rhythm to checking the company’s valuation—and convey to employees that the worth of their phantom stock is being assessed fairly.

Depending on the employee retention goals of the business, it may be helpful to create a vesting schedule, providing clarity about when phantom stocks can be redeemed for monetary compensation—a particularly helpful approach when the goal of the program is to increase employee longevity.

Finally, remember that a phantom stock program can be reviewed and reassessed periodically, and that doing so is an important way to ensure the program remains aligned with broader business goals.

Preparing for phantom stock—and for rising retention among top techs

Good help is hard to find, and for HVAC companies that have found qualified technicians, it’s worth making a substantive investment in retention, engagement, and morale. A good first step is assessing readiness for phantom stock offerings—laying a foundation for effective employee incentives.