Why Most Phantom Equity Plans Miss the Mark (and How to Get It Right)

Too often, companies treat phantom plans as HR tools—just another layer of compensation—leading to misaligned incentives, missed planning opportunities and a false sense of security.

WealthPoint takes a different approach. We design phantom equity strategies that mimic true ownership and connect to the real drivers of value. In this article, we’ll unpack where most phantom plans fall short and what it looks like to get it right.

Mistake #1: Focusing Only on Compensation, Not Ownership Behavior

The most common design flaw? Plans that are dressed-up cash bonuses.

They’re often structured as short-term rewards tied to vague metrics. Executives might be granted a percentage of company value or a “phantom stake,” but they have no real sense of how value is created or what they’re building toward.

That kind of plan doesn’t feel like equity. It feels like another line item on a pay stub.

WealthPoint builds plans that simulate real ownership. That means:

• Modeling award value alongside business performance
• Defining clear payout mechanics tied to company growth
• Creating performance periods and vesting schedules that reward strategic commitment, not just tenure

In our WP90X webinar on phantom stock, we explored a real scenario involving a core executive (who we’ll call “Sam”). Rather than starting with an arbitrary equity percentage, Sam’s plan was built by modeling backward from a $25 million value target. Our team structured the plan to reflect enterprise value growth, rather than treating it like a static bonus program. This modeling ensured Sam’s potential payout was directly tied to the company’s long-term success.

When executives understand how their participation grows with enterprise value—and what they stand to gain if the business hits its goals—retention improves and decision-making sharpens.

Mistake #2: Ignoring the Difference Between Plan Value and Deal Value

Here’s another way phantom plans miss the mark: they calculate payouts based on internal formulas, not on what the business is actually worth in a transaction.

This becomes a serious issue during a sale. Imagine a plan that places value at 3x EBITDA, while the company sells for 8x. That gap doesn’t just create disappointment. If it hasn’t been clearly defined and understood by key leaders beforehand, it breaks trust.

When a plan isn’t tied to real market value, it undermines its core purpose. Executives expect to participate in the full upside of the company’s success, especially if they’ve helped create it. If the payout formula doesn’t reflect the transaction value, it can create frustration, last-minute renegotiations or even resistance during a deal.

WealthPoint helps clients design plans that account for this. Instead of locking in static formulas, we model scenarios that flex with enterprise value. If a transaction occurs, participants share in the outcome based on how the business is actually valued. This keeps expectations clear and alignment intact at exactly the moment it matters most.

Plans should never create a mismatch between perceived value and real outcomes—they should build loyalty.

Mistake #3: Creating Conflict with Estate Planning Valuations

Poorly designed phantom equity plans can throw a wrench into estate planning.

When phantom units are valued aggressively, they inflate the executive’s net worth on paper. That can disrupt gifting strategies, jeopardize valuation discounts and invite scrutiny during IRS audits.

WealthPoint designs phantom equity with defensible, conservative valuation methods that integrate smoothly with estate plans. This isn’t just about compliance; it’s about ensuring your incentive plan doesn’t sabotage the rest of your planning strategy.

In many cases, we collaborate directly with estate attorneys and tax counsel to model how phantom equity will interact with wealth transfer strategies. We track grant timing, valuation approach and the structure of the payout so that everything works together.

If your phantom plan lives in one silo and your estate plan lives in another, you’re missing an opportunity to coordinate.

Mistake #4: Disregarding the Real Economics of Equity

Owners take distributions. They participate in value growth. They understand how cash moves through the business.

Too many phantom plans are structured in a way that keeps executives on the outside looking in.

WealthPoint designs plans to replicate what it feels like to be an owner without giving up stock, that includes features like:

• Phantom dividends that mirror real distributions
• Grossed-up tax bonuses for S-corp shareholders who receive above-the-line distributions
• Layered awards that combine SARs and Full Value Units (FVUs) for short-, mid- and long-term alignment

In Sam’s case, the redesigned plan included phantom dividends that helped match real-world distributions. That made him feel like an insider, and it eliminated the friction that often comes when executives see owners take cash out while their phantom value remains illiquid.

It also created a retirement-aligned path to value realization—one that didn’t require a sale to trigger liquidity.

Mistake #5: Failing to Properly Implement

It might sound obvious, but a phantom plan that isn’t rolled out, explained or monitored isn’t really a plan.

Many companies spend time and money designing plans that end up sitting in a binder. Participants don’t understand how the awards work. Valuations don’t get updated. Communication goes silent.

This undermines everything the plan was supposed to do.

WealthPoint doesn’t stop at design. We support plan rollout, education and annual communication—hosting kickoff meetings, building individual participant models, even engaging spouses in the conversation so families understand what the plan means for them.

In one case, a $600M-revenue construction company hosted an annual celebration dinner where executives received their payouts along with recognition of their tremendous efforts in driving strategic growth. The result? Clarity, engagement and real retention.

Plans that are understood are plans that work.

How to Get Phantom Equity Right

Fixing a broken phantom plan doesn’t mean starting from scratch. It means getting clear on what matters, then designing around it.

Here are a few foundational principles WealthPoint uses to build plans that actually work:

1. Start with strategy, not structure: Don’t begin with SARs or FVUs. Begin with your long-term business goals, leadership dynamics and succession timeline. The right structure will follow.
2. Model real outcomes: Show participants what they stand to gain. Build projections that tie value to performance, so no one is left guessing.
3. Align with deal value: If your plan isn’t tied to how the company will eventually be valued, you risk disconnect and disappointment. Build to reflect real-world economics.
4. Integrate with estate and tax planning: Collaborate with tax and estate professionals so your phantom equity supports, rather than complicates, broader planning.
5. Commit to communication: A phantom plan is only as strong as its rollout. Make sure every participant knows how it works, what it means and why it matters.

Don’t Build the Wrong Plan Well: Work With WealthPoint

The problem isn’t phantom equity. The problem is treating phantom equity like another form of compensation. At WealthPoint, we build strategies that act like equity, simulate real ownership, reward key leaders and drive enterprise value.

If you’re not sure whether your current plan is doing what it should, it’s probably time for a closer look.

Ready to stress-test your incentive plan—or just discuss your goals in more depth with a WealthPoint expert? Get in touch with our team, and we’ll strike up a productive conversation tied to your goals.