A phantom stock plan, also known as a shadow or unit stock plan, is a type of stock- based incentive compensation, used primarily for executives, that has many of the same characteristics and tax deferral advantages of stock option plans.

Although many variations exist, the typical plan creates deferred compensation units and tax deferral advantages that are assigned a base value equivalent to the value of a company’s common stock. As the company’s stock value increases, so does the executive’s phantom stock.

A key advantage of this type of arrangement is that it aligns the interests of the company and the executive without diluting shareholder ownership of the company.