We often hear companies talk about how they want their executives & managers have “skin in the game” or more of it. The term has come to mean to have a personal stake or vested interest in the outcome.
- The phrase was originally coined by Warren Buffet, the “Oracle of Omaha”, to referring to a situation in which high-ranking insiders use their own money to buy stock in the company they are running
The reason for desiring this is the recognition by CEO and business owners that individuals who have “skin in the game” will:
- Be more motivated to maximize their own performance as well as that of those they oversee
- Act and make decisions more like actual owners
The most common ways be which companies create “skin in the game” include:
- Annual incentive compensation plans
- Long-term incentive compensation plans
- Typically, either as an equity/stock plan or a financial metrics plan
For privately-owned companies, the idea of giving away in a small percentage of ownership is not a consideration. That’s where a “shadow stock plan” can come into the picture.
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A “shadow stock plan” is a form of long-term incentive plan used by to create
financial “skin in the game” without creating any stock dilution.
In effect, it is a type of deferred bonus—the value of which is ultimately determined
by the company.
There is no formal or statutory definition of the term “shadow stock plan”, and therefore the term is used by some companies in a broad context and by other companies in the narrow sense of the term. A “shadow stock plan” may also be known by such terms as a “simulated stock plan” or a “phantom stock plan”.
In its broad use, the term is used to denote any type of plan in which employees must wait until a future date to receive the financial value of a promise given today. When used more narrowly, it indicates a plan that is intended to mirror restricted stock awards or stock option grants.
- In this latter usage, the company creates “shadow shares” that may resemble actual stock shares, but are actually a commitment to pay the employees cash upon fulfillment of certain conditions.
When it comes to a “shadow stock plan”, an organization’s legal structure is of little or no significance. That’s due to the fact that it can be adopted by an S Corporation, a C Corporation, a Limited Liability Company (LLC) and even a Partnership
For more information about a “shadow stock plan” or incentive compensation in general, e mail Trinity at info@TrinityHR.net or visit our website at www.TrinityHR.net.
You have questions…Trinity has answers!