A well funded and privately owned e-learning business was expanding, primarily through acquisition. It needed some type of equity based long-term incentive to both attract senior talent and to tie executives to the long term success and growth of the company. The incentive would also provide a unifying theme for the several smaller companies that were being combined together as one organization. Also, the owners preferred not to give up any real equity ownership

Finding the solution required some financial modeling. We needed to project the future of the company to see how it would create value over time and how much of that value could be shared with employees. There is always a balancing act between sharing value with employees and providing a lucrative return to the owners and providers of capital.

The solution was a phantom equity plan, where phantom shares were created and granted to executives. The value of the shares is determined by a formula, based on a multiple of EBIT (averaged over three years). Executives can hold the shared indefinitely, so they can build value over an extended period of time. They can also choose to cash out their shares periodically at whatever the value is at the time. The plan is simple enough that people understand it, and it provides incentives to do the right things for the long term health of the company.