One of the most frequently asked questions we get here at Reins is: how do I know how much MARE phantom equity to allocate to each employee? The truth is that there is no rulebook or formula to follow when it comes to this question. However, there are a few steps you can take to ensure that you’re thinking through ghost stock percentages per employee in the right way.
1. Understand your business goals
Why are you choosing to implement a phantom stock plan? Maybe you’re looking for an ownership-like perk for your employees. Or maybe you have a key employee or two in mind who you’re worried about retaining. Some owners are simply looking for an easy yet unique way to align employee interests with company growth.
Whether it’s a retention-focused goal on a single staff member, performance of the whole team, or a specific growth target, being precise about your business goals is important in phantom stock allocation. For example, a key employee you’re hoping will stick around might be worth double the shares than the rest of your team. Or maybe you feel that your whole sales team needs to be equally incentivized to hit their targets. If you evaluate and decide that the main indicator of company growth is linked to happy customers who recommend your business via word of mouth, then maybe your customer service team deserves more equity consideration.
2. Evaluate employee contributions today and tomorrow
When you’re granting employees a stake in your company, you’ll of course consider how they’re currently contributing to the business. This might look like tenure, title, seniority, and impact on revenue.
However, you’ll also want to project into the future: what might a specific employee’s role look like in five years? What about ten years? Have they expressed interest in a long-term commitment to the company? Are they fast to learn and eager to grow? Depending on the answers to these questions, you may override things like seniority and instead focus on potential impact. Evaluating employees in the context of succession might be another helpful context to consider phantom stock allocation.
3. Benchmark against competitors
While the Modern Agreement for Rewards and Equity’s (MARE) ghost shares component is a unique benefit, many Reins customers have heard of phantom stock more generally from local small businesses, mentorship and mastermind groups, or from local lawyers and accountants. Whenever possible, it’s a good idea to benchmark your business and potential phantom stock allocation to that of similar companies in your industry.
4. Define the pool and finalize allocations
Start researching phantom stock equity pools so that you can determine the total percentage of the company’s valuation that you want to allocate to employees. You’ll want to take dilution into account, and ensure that the pool is large enough to accommodate future equity grants. You should also be sure to carefully track allocations so that you can understand current and future liabilities.
Finally, as you’re calculating individual allocations, consider creating your own custom formula that factors in some of the considerations outlined above, including employee level, years of service, and impact, so you can be sure to maintain transparency, operational rigor, and fairness as you’re awarding stock.
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