What is Phantom Stock? and why do I keep hearing about it? and why do - PowerPoint PPT Presentation

September 23, 2014 What is Phantom Stock? and why do I keep hearing about it? and why do I keep hearing about it?

Today’s Presenter: Tom Miller President (949) 265 ‐ 5700 tmiller@vladvisors.com 7700 Irvine Center Drive, Suite 930  Irvine, CA 92618  949-852-2288 2 www.VLadvisors.com  www.PhantomStockOnline.com

We’re happy to provide a copy of today’s slides. h d f d l d Information will be provided at the close of the presentation. p To open or close the control panel: Click the red arrow For questions during Q: Are the slides available? A: Yes, more info will be provided at the end today’s presentation: today s presentation: Use the question area Webinar on your control panel y p 3

Let’s start with the “why” Let’s start with the “why” Think like an owner as you answer the following 8 questions g q 4

1. Do you believe… y …you’ll be bigger—significantly bigger—in 5 f years?   YES YES NO NO 5

2. Do you believe… y …you can’t grow significantly without the f exceptional commitment and effort of your team?   YES YES NO NO 6

3. Do you believe… 3 y …you have a greater likelihood of growing f significantly if you attract premier talent, not just good talent? d l   YES YES NO NO 7

4. Do you believe… 4 y …that establishing a flourishing ownership f mentality will improve engagement and productivity? d   YES YES NO NO 8

5. Do you believe… 5 y …that if an employee is directly responsible for f f creating economic value, he or she is entitled to a portion of it? f   YES YES NO NO 9

6. Do you believe… y …that if you want to outperform your f f competitors you must pay your employees differently than they do? d ff l h h d   YES YES NO NO 10 10

7. Do you believe… 7 y …you’d rather not dilute shareholder equity (if f possible)?   YES YES NO NO 11 11

8. Do you believe… y …you want to optimize tax benefits for the f f shareholders and your executives?   YES YES NO NO 12 12

If you answered “yes” to most or all of these: y y We need We need We need We need W ill W ill We will We will premier talent! premier talent! be bigger! be bigger! We need an exceptional We need an exceptional commitment and effort commitment and effort commitment and effort commitment and effort from our team! from our team! We share value with We share value with We’re looking for We’re looking for e e oo e e oo g o g o those that help create it! those that help create it! hose that help create it! hose that help create it! an enhanced ownership an enhanced ownership mentality! mentality! We’d prefer not We’d prefer not We want to We want to We want to We want to to dilute equity. to dilute equity. optimize tax optimize tax We want our pay We want our pay benefits for benefits for programs to be a programs to be a programs to be a programs to be a shareholders shareholders h h h ld h ld competitive advantage! competitive advantage! and our executives! and our executives! 13 13

You definitely need a phantom stock plan! You definitely need a phantom stock plan! 14 14

Attracting Premier Talent g Value sharing pay structures Value sharing pay structures They will find non They will find non ‐ traditional traditional will respect their will respect their pay structures alluring and pay structures alluring and pay structures alluring and pay structures alluring and entrepreneurial mindset and entrepreneurial mindset and entrepreneurial mindset and entrepreneurial mindset and meaningful meaningful appeal to their interest in appeal to their interest in wealth accumulation wealth accumulation opps opps They will accept the They will accept the responsibilities and responsibilities and responsibilities and responsibilities and They will particularly value They will particularly value accountability associated accountability associated pay arrangements that defer pay arrangements that defer with true value creation (i.e., with true value creation (i.e., taxes and build wealth taxes and build wealth they won’t “expect” higher they won’t “expect” higher y y p p g g pay without creating results) pay without creating results) 15 15

Partnership Compensation p p  “You share in the economic value you help create” “Y h i h i l h l ”  “Your compensation structures mirror the way owners are paid”  “You have variable pay opportunities that are not ‘capped’” You have variable pay opportunities that are not capped  “You participate in equity or equity like programs that have significant upside”  “If we sell the company, you’ll participate in the value created” f ll h ll h l d  “If we can create tax ‐ savings opportunities for you, we’ll do it”  “Your compensation package won’t be replaceable anywhere Your compensation package won t be replaceable anywhere else” 16 16

Best Outcomes from an LTIP (phantom stock) ( h t t k) Attraction Attraction Attraction Attraction Retention Retention Retention Retention Attraction Att Att Attraction ti ti Retention Retention Alignment Alignment Alignment Alignment Focus Focus Focus Focus Focus Focus Alignment Alignment Alignment Alignment Value Sharing Value Sharing Ownership Mentality Ownership Mentality Ownership Mentality Ownership Mentality Motivation Motivation Ownership Mentality Ownership Mentality Value Sharing Value Sharing Value Sharing Value Sharing Value Sharing Value Sharing Value Sharing Value Sharing Motivation Motivation Motivation Motivation Motivation Motivation Motivation Motivation 17 17

Emotional Connection (Ownership Mentality) Improved Competitive P Performance f Ed Edge (Focus/Execution) (Attract/Retain) Unified Vision for Growing the Business “The Partnership Model” 18 18

Phantom Stock  What’s the goal? h h l  What is it?  How does it work?  What are the key decisions to make?  What’s the best way to build a great plan?  Final observations and suggestions gg 19 19 19

What’s the goal? g “How do I compensate employees for contributing to the b h creation of my future “Can I reward company?” p y employees like owners without giving away stock?” g g y “What compensation techniques do I use to techniques do I use to attract and retain top talent?” 20 20

Three Ultimate Results O nership O nership Ownership Ownership Talent Talent Mentality Mentality Wars Wars Value Value Value Value Creation Creation 21 21

What is Phantom Stock?  A deferred bonus f  Awards made in “units” (like stock)  Unit price is tied to a formula (or appraisal) that reflects company value p y  Settled in cash (almost always) 22 22

C C O O M M P P A A A A N N Y Y 23 23

$85 mm $100 mm Increase in Increase in Enterprise Value $15 mm Employee Value Base Value $30 mm Today Future Date (5 – 15 yrs) 24 24

So, you’re hiring John… , y g  New president  What do you offer him?  Significant salary  Meaningful target bonus  Meaningful target bonus 25 25

John’s comp package p p g 2014 Annual Salary $ 325,000 Bonus $ 85,000 26 26

John’s traditional comp package p p g Employee Value Statement ‐ Typical John Ferry @ Target Cash Needs 2014 2015 2016 2017 2018 2019 Annual Salary $ 325,000 $ 334,750 $ 344,793 $ 355,136 $ 365,790 $ 376,764 Bonus $ 85,000 $ 87,550 $ 90,177 $ 92,882 $ 95,668 $ 98,538 Total Cash Received $ 410,000 $ 422,300 $ 434,970 $ 448,018 $ 461,458 $ 475,302 Security Needs Core Benefits $ 21,000 $ 22,260 $ 23,596 $ 25,011 $ 26,512 $ 28,103 Executive Benefits $ - $ - $ - $ - $ - $ - $ 21,000 $ 22,260 $ 23,596 $ 25,011 $ 26,512 $ 28,103 Total Value Wealth Accumulation Wealth Accumulation Long-Term Incentive Plan (SAR) Annual Distribution $ - $ - $ - $ - $ - $ - Increase in Vested Value $ - $ - $ - $ - $ - $ - Remaining Unvested Value $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Total Annual Value (Paid, Vested & Unvested) Retirement Plans 401(k) Company Match $ 16,500 $ 16,995 $ 17,505 $ 18,030 $ 18,571 $ 19,128 Deferred Comp Match $ - $ - $ - $ - $ - $ - Total Value Projection $ 410,000 $ 422,300 $ 434,970 $ 448,018 $ 461,458 $ 475,302 Total Cash Received Total Benefits Annual Value Total Benefits Annual Value $ $ 21,000 21,000 $ $ 22,260 22,260 $ $ 23,596 23,596 $ $ 25,011 25,011 $ $ 26,512 26,512 $ $ 28,103 28,103 Annual Value of LTIP $ - $ - $ - $ - $ - $ - Annual Value of Ret Plan Contributions $ 16,500 $ 16,995 $ 17,505 $ 18,030 $ 18,571 $ 19,128 Total Annual Value $ 447,500 $ 461,555 $ 476,071 $ 491,059 $ 506,541 $ 522,533 27 27 Total Wealth Projection $ 447,500 $ 909,055 $ 1,385,124 $ 1,876,184 $ 2,382,725 $ 2,905,259

John’s expected contribution p 1. Deliver on annual budget goals 2. Deliver on 6 ‐ year growth plan Revenue from $17mm to $39mm a) Net Income from $5mm to $13.5mm 5 3 5 b) Book value from $19mm to $51mm c) Market value (conservative) from $25mm to $67mm Market value (conservative) from $25mm to $67mm d) d) 28 28