Senior Professional in Human Resources (SPHR) Certification Practice Exam 2026 - Free SPHR Practice Questions and Study Guide

Phantom stock is best defined as a compensation arrangement that allows employees to receive benefits based on the company's stock price without actually granting them any actual stock. This type of compensation is designed to motivate employees by linking their rewards to the performance of the company's stock.

In this arrangement, employees are awarded units that mimic the value of actual shares. While they do not receive shares or have voting rights, the value of these phantom shares increases as the company's stock performs well, aligning the interests of the employees with those of the shareholders. Employees receive a payout in cash or stock equivalent to the appreciation in value when the phantom stock vests, typically at a future date.

Other provided definitions do not accurately describe phantom stock. For instance, offering stock options that require vesting addresses a different type of incentive where options might be exercised for actual shares but do not reflect the nature of phantom stock. The mention of strike price and trading abilities focuses on mechanisms of stock options or actual equity, rather than the phantom stock’s non-equity structure and performance basis.