The Phantom Stock Incentive;

 

How does a private company get key employees to lose sleep over the business without giving up equity? That was the question confronting Weathercham Inc., a $6.5-million maker of plastic caps and closures located in Twinsburg, Ohio. Its solution: "phantom stock," an increasingly common technique by which a company rewards employees for building the business' value, while keeping the stock in the original owner's hands.

As founder and chief executive officer of the family-owned company, Al Weatherhead knew he wanted to institute some kind of long-term reward system to get his half-dozen key managers focused on "profitable growth." Real equity made him nervous, however. Among other things, he didn't know how long the key people would stay around the 65-employee company, and he didn't look forward to endless battles over stock valuation. Under the phantom program, adopted in May 1982, selected managers will receive a share of the amount by which Weatherchem's value appreciates over a five-year period. The value is calculated according to a formula that takes into account the company's return on assets and return on equity, both adjusted for its cost of capital.

The plan has encouraged managers to focus on Weatherchem's long- and short-term objectives, but Weatherhead is dissatisfied with the formula. "It's too damn complicated, and it isn't something you can pound the table over." So the company is formulating a new, simpler plantom plan to take effect when the first one expires next May. The new formula, he says, will probably be based on cumulative profits over a three-year period. Why three years this time, instead of the five years in the original plan? "Five years," Weatherhead offers, "just seemed a bit too long."