It's a perennial quandary among family-business owners: how do you fairly compensate and motivate key nonfamily managers and still retain voting control for your current shareholders? That was John Lucey's challenge until his lawyer helped him devise a "mirror" or "phantom" stock plan. "I have one key employee who brings a lot of value to the company," says Lucey, president of Wakefield Distributions Systems, in Danvers, Mass. "I wanted to give her a long-term incentive to stay with us."

Here's how Lucey's plan, implemented last year, works:

Each year for 10 years, chief financial officer Gabrielle Fecteau, an employee whom Lucey considers essential to his business, will earn "stock" equal to 1% of the company's assessed value. At the end of that time she may cash out over a 10-year period, collecting not more than 10% of her accumulated value each year. And if Lucey, who owns 100% of the company, declares a dividend (read: gives himself a bonus), Fecteau is entitled to a percentage equivalent to the amount of "stock" she has earned up to that point. Of course, Fecteau could leave the company tomorrow, but she'd still have to wait 9 years to begin cashing out the 1% she earned last year, worth approximately $24,000. Wakefield's accounting firm does an annual business valuation, and over the past 2 years the company's value has grown 30%.

"It's been a great motivator for me," says Fecteau. "It gives me a vested interest in the company." That's what Lucey was counting on, since Fecteau's continued presence is critical to his succession plan. His three children, ages 28, 27, and 22, are all in the business. "My son, Kevin, is in management training," says Lucey, "and I want to give him some time to mature and to learn the business from Gaby as well as me. She has more time to teach and train than I do, plus my son gets a different perspective from her." Lucey expects to be actively involved in the business for another eight years and hopes that after that, his son and Fecteau will run it together.

Phantom-stock plans are frequently used as motivational tools in closely held businesses, and they are infinitely variable. Some companies, for example, might award "stock" to key employees on a more subjective basis, tying the amount to performance or peer reviews. And unlike Lucey, many CEOs require a vesting period of several years and allow their phantom-stock holders to cash out only after they've left the company. "You're giving someone an incentive to grow the business," says Richard Yanofsky of Sherburne, Powers & Needham, a Boston law firm. "How you allow them to cash out is up to you." Yanofsky says he's seen a marked increase in phantom-stock plans. "I think they're very effective," he says. "People view the stock as an asset they can help grow; psychologically, they feel part of the business."