Final answer:
A phantom stock plan awards executives bonuses that reflect the share value or its growth, aligning executives' and shareholders' interests. Successful firms issuing stock navigate decisions around dividends and reinvestment, under the regulatory eye of the SEC.
Step-by-step explanation:
A phantom stock plan is an arrangement whereby executives receive a bonus that is equivalent to either the value of company shares or the increase in that value over time. This type of plan is beneficial for companies as it aligns the interests of the executives with those of the shareholders without issuing actual stock. Executives gain a vested interest in the performance of the company, which can motivate them to contribute to its growth and profitability.
A company that decides to issue stock offers financial investors a potential rate of return, which could come from dividends or capital gains. If the firm is successful and profitable, the directors have to decide how to manage the profits for the benefit of the shareholders, a process that involves careful consideration of paying dividends or reinvesting in the company's growth. The Securities and Exchange Commission (SEC) regulates the issuance of stocks, and compliance with its reporting requirements is necessary. This process can be costly and requires professional support from investment bankers and attorneys.