Phantom stock plans are increasingly used by companies to provide value to their employees without the need to award them actual shares. They are an unusually cost-effective way of giving senior executives incentive stock awards without having to make an additional capital expenditure.

The plan starts by the company setting up a phantom stock pool with a predetermined value. This value is often based on a multiple of the company's net assets, past profits, or projected profits, but can be any amount the company wants. The stock is then “virtually” distributed to senior staff, who can watch its value grow and decline over time just as if they had received real stock.

When the predetermined end date arrives, the employees will be paid out in the form of cash or actual stock, depending on the terms of the plan. The amount of money they receive will correspond to the actual market value of the phantom stock at that time.

The primary benefit of a phantom stock plan is allowing senior personnel to gain the same rewards as shareholders, without actually having to purchase shares. This is useful as most senior staff are already overburdened by debt and other responsibilities, and may not have the funding or risk tolerance to make a significant investment.

In addition, phantom stock plans give executives an incentive to stay with the company in the long-term, and ensure that their interests remain aligned with collective company goals.

Despite the advantages, phantom stock plans do come with some drawbacks. Most significantly, the employee must pay tax on the value of the phantom stock, and the company must pay a small administration fee for setting up, maintaining and administering the pool.

Furthermore, phantom stock plans cannot be used to bypass corporate securities laws. If the company intends to use the plan on a large scale, then it may be necessary to register it with the relevant authorities, a process that can be expensive and time consuming.

In conclusion, a phantom stock plan is an excellent way of allowing senior staff to participate in their company’s success, without having to take financial risks or face heavy taxation. That said, companies must consider the drawbacks and legal implications of such plans before implementing them, or they could end up costing more than they are worth.