Phantom Equity Plans As An Option for Associate Incentives

The success of a dental practice hinges on many factors. But when all is said and done, it isn’t the attractiveness of an office, ample parking, or free dental floss that keeps patients in the fold – it’s the quality and skills of the dentists that treat them.

That’s why attracting and retaining top-notch dental associates is a high priority for any practice owner. Superstar dentists are an invaluable commodity; losing – and replacing – dental talent is disruptive and costly. No one wants to see a promising associate leave for greener pastures after a few short years. One way to encourage loyalty and reduce turnover is by offering a robust and competitive compensation package that makes the associate personally and financially invested in the practice's success. And one way to accomplish that is by granting the associate a type of equity interest called “phantom stock.”

In addition to base salary, many dental associates receive incentives such as commissions based on the individual dentist’s production and revenue. But many practice owners have turned to equity sharing and equity bonus plans. Equity sharing has consistently been shown to have the potential to improve not only the performance of the individual dentist but the culture and collegiality of the practice as a whole. 

A phantom stock plan, sometimes called a shadow stock or simulated stock plan, is a type of deferred compensation plan that provides an associate dentist with many of the benefits of stock ownership without actually giving them any stock in the practice. Instead, the associate receives the right to cash payments equal to the value of the shares at a specified later date or distribution event. That value can be established through an appraisal or an agreed-upon formula. The specified events that give an associate a right to a payout can include such things as achieving performance goals, termination, or retirement. 

There are two types of phantom stock plans. In an "appreciation only” plan, the cash payout upon vesting does not include the value of the underlying shares, only the increase in value of that stock since it was granted. In a “full value” plan, the practice pays both the underlying value of the stock as well as the amount the stock appreciated while held by the associate. 

Like actual stock, phantom stock has a defined value and tracks the practice’s performance, but an associate holding phantom stock typically does not have either minority shareholder rights or voting rights in the practice. This makes phantom stock plans attractive for owners who want to provide associates with a sense of equity ownership without giving up any actual control. The practice has broad discretion and flexibility in designing the plan, including valuation formulas and vesting conditions, and the administrative burdens are less than for traditional stock option plans. 

Additionally, in a properly structured phantom stock plan (i.e., one that satisfies the requirements for deferred compensation plans set forth in Internal Revenue Code 409(a)), the practice receives a tax deduction when distributed amounts are included in the associate’s income. 

As attractive as a phantom stock plan can be for dental practice owners and associate dentists alike, it needs to be structured and documented properly in order for both sides to reap its benefits. You should consult with an attorney who has experience with dental practice compensation packages before embarking on a phantom equity plan. 

At Grogan Hesse & Uditsky, P.C., we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.

Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation.

Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.  

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