A phantom share plan or “shadow shares” is a form of compensation offered to senior management that provides the benefits of owning shares in a company without actually owning or transferring any shares.
By simulating ownership of shares but not actually granting them, management ensures that capital is not diluted to other shareholders.
Large cash payments to employees, however, should be taxed as ordinary income rather than capital gains of the recipient, and in some cases can disrupt the firm’s cash flow.