Some corporations issue what is known as "phantom stock" to key employees, as a form of deferred compensation. This "equity" spiritually ties an employee into working toward the success of the company by pegging reward to the value of the company's actual stock. The executive is given units of such shares in a phantom stock account. If the company declares dividends, it may also pay the employee additional quarterly compensation in such amounts.

Once granted, the stock position is normally not forfeitable once vesting requirements have been met. Typically, the company eventually cashes out the employee on termination or retirement in actual monetary payment according to the current value of the underlying stock. Even if the company's stock has declined, the employee will get at least some additional income. Unlike a qualified ISO, the executive does not have to sell the "shares," and the company may take a compensation-tax deduction. For the recipient, there is no tax advantage; the payment is treated as ordinary income.