Phantom shares as an employee incentive tool

Corporate Clients, Employee Incentives, Fund-raising

Bulgaria has recently emerged as a thriving hub for the IT, fintech and outsourcing industries, driven by a strong talent pool and favorable business climate. The country boasts a rapidly growing ecosystem of startups, established tech firms, and international investors drawn by its competitive costs and high-skilled workforce.

With increasing digital adoption, a supportive regulatory environment, and a culture of entrepreneurship, Bulgaria continues to position itself as a key player in Europe’s technology and financial innovation sectors. In this competitive business landscape, companies are constantly seeking innovative ways to attract and retain top talent. 

An increasingly popular incentivisation method is the use of phantom shares. Unlike traditional stock options, phantom shares offer employees the financial benefits of stock ownership without conferring actual equity. This article explores the concept of phantom shares, their advantages to employers, and considerations for implementation.

What are phantom shares?

Phantom shares, also known as shadow stock, are a form of deferred compensation that mirrors the value of company stock. Employees granted phantom shares receive a financial payout equivalent to the appreciation in stock value over time, without actually owning shares in the company. Phantom share arrangements can be structured in various ways, such as cash bonuses or stock appreciation rights (SARs), which pay out based on stock performance.

Benefits of phantom shares

• Equity-like rewards without dilution of existing shareholders – since phantom shares do not represent actual company equity, they allow businesses to reward employees without diluting ownership or control.
• Alignment with company performance – employees benefit financially from company growth, aligning their interests with those of shareholders and management.
• Retention and motivation – by tying rewards to long-term performance, phantom shares encourage employees to stay with the company and contribute to its success.
• Flexible structuring – companies can customise phantom share agreements to align with specific business objectives, such as performance milestones or vesting schedules.
• Simplified administration – compared to traditional stock options, phantom shares involve fewer regulatory and tax complexities, making them easier to manage.

Key considerations for implementing phantom shares

While phantom shares offer many advantages, employers should carefully design their programs to ensure effectiveness and regulatory compliance. Here are some key considerations:

• Clear vesting and payout terms – define the conditions under which employees receive payouts, such as tenure-based vesting or achievement of financial targets.
• Tax implications – phantom share payouts are typically treated as ordinary income for employees, and employers must consider their tax liabilities when structuring agreements.
• Legal and compliance aspects – ensure that phantom share plans comply with local laws to avoid potential disputes.
• Communication and transparency – clearly communicate the benefits and mechanics of the phantom share program to employees to maximise its motivational impact.

Challenges to the use of phantom shares schemes

While phantom shares offer significant benefits, their implementation by Bulgarian employers comes with specific challenges, including:

• Regulatory uncertainty – Bulgarian labour, company and tax laws do not expressly address phantom share agreements, creating potential legal ambiguities for parties to such transactions.
• Tax burden – the taxation of phantom share payouts as regular income may reduce their attractiveness compared to other incentive schemes, such as stock options with favorable tax treatment.
• Limited market awareness – many Bulgarian companies, particularly SMEs, are unfamiliar with phantom shares and may hesitate to implement them due to their perceived complexity.
• Employee skepticism – without clear legal backing and historical precedent, employees may be hesitant to accept phantom shares as a reliable long-term incentive.
• Cross-border considerations: Multinational companies operating in Bulgaria may face challenges in aligning phantom share programs with broader corporate policies and local legal requirements.

Our support

Phantom shares are an effective way to reward and retain employees while maintaining control over the company. They offer a flexible, performance-based incentive structure that aligns employee interests with business success. By carefully designing and implementing a phantom share program, companies can enhance employee engagement and drive long-term growth without the complexities of traditional stock ownership.

However, businesses operating in Bulgaria must navigate regulatory uncertainties, tax implications, and market awareness challenges to ensure the successful application of phantom share schemes. Whether you are a startup looking to attract top talent or an established company aiming to boost retention, phantom shares could be the strategic incentive solution your business needs—provided these hurdles are carefully managed.

NBLO has considerable experience in advising companies on the structuring and implementation of phantom share plans in Bulgaria and abroad. We have worked with businesses across various industries to design compliant and effective incentive programs that align with local regulations and corporate objectives. Our expertise includes:

• Regulatory guidance – we help businesses navigate the complexities of local legislation to ensure their phantom share plans are legally sound.
• Customised plan structuring – we tailor phantom share agreements to meet the specific needs of companies, considering factors such as vesting schedules, payout mechanisms, and performance-based criteria.
• Tax optimisation strategies – we provide insights on minimising tax liabilities for both employers and employees while maintaining compliance with tax authorities.
• Dispute resolution – in case of conflicts or uncertainties, we assist in resolving legal issues related to phantom share agreements to protect our clients’ interests.
• Employee communication support – we help businesses draft clear and transparent documentation to ensure employees fully understand the benefits and conditions of their phantom share plans.

With our knowledge and practical experience, we would be happy to assist employers and employees on leveraging phantom shares as a powerful incentive tool while mitigating potential risks and challenges.