At Reins, we’ve often explained MARE Profit (profit sharing) as a short-term employee incentive and MARE Stock (phantom stock) as a long-term employee incentive. However, there is an additional deferred compensation benefit in the mix: the long-term cash award.
Comparison to Phantom Stock and Profit Sharing
A long-term cash award is another creative way to encourage key members of your staff to stick around for the long haul. While this may sound like phantom stock on the surface, the two have significant differences:
Phantom stock
- A promise for future cash that is most often linked to the value of the company’s actual or hypothetical stock.
- The value of the cash payout is variable, as the value of the company can increase or decrease at the time of payout.
- Helpful in cultivating an owner-like mentality in employees, since the value of their individual stock award is tied to the company’s success, similar to that of a shareholder.
Long-term cash award
- A promise for future cash that has nothing to do with the value of the company and is instead tied to a certain time period, performance goal, or percentage of salary.
- The value of the cash payout is defined upfront.
- Helpful in incentivizing an employee to stick around for a defined period of time; for example, until a project is completed or until a certain number of years have passed after a company has been sold.
Profit sharing, on the other hand, is easier to differentiate since it is simply a short-term bonus plan that is most frequently paid out quarterly or annually.
What Does A Long-Term Cash Award Look Like In The Modern Agreement For Rewards And Equity?
For any given employee, a small business owner can choose to grant either phantom equity or a long-term cash award, but not both. For the latter, owners can choose from the following options:
- Setting aside a predefined dollar amount per year while the employee remains with the company.
- A percentage of the employee’s base salary to be awarded annually.
- A percentage of the employee’s salary multiplied by the ratio between the company’s annual net profit to its budgeted net profit.
- A custom input.
Owners can choose from a variety of payment triggers (similar to phantom stock) or choose a fixed payment schedule.
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