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SAP’s Phantom Stock Plan—Did It Hurt or Help Shareholders?


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Here’s a headline that states unequivocally that SAP (the huge business software company located in Germany) saw a drop in profits for 2012 because of its Phantom Stock plan. The article points out that sales rose by 14% but the Plan resulted in a charge to profits of 512 million Euros (combined with other executive pay). The implication of the article is that shareholders were damaged and profits were hurt because of the Phantom Stock plan.

Here’s my take: a good example of a writer failing to dig deeper to see what may have really happened. Note that I don’t have all the details on the Plan. And I’m also not an expert on German accounting rules. Neither of these is going to stop me from guessing about what is not being said.

Guess #1: SAP broke one my cardinal rules about grants: Don’t issue large blocks of grants in the first year of a plan. Spread the grants out over a number of years. Not only will this reduce the accounting charge but it will improve retention and promote better value sharing.

Phantom stock plans are intended to help with the attraction and retention of premier industry talent. Note this quote from one of SAP’s co-CEO’s: “This is an industry with war for talent, and talent is the biggest differentiator.” My second guess is that if they had a sales increase of 14% they’ve got some pretty good talent. How much would sales have gone up if they did not install the Plan? Smart shareholders recognize that good compensation plans are one of the keys to attracting good talent. Note that the company’s share price rose by nearly 50% in the last year!

Time will tell if the Plan positively impacts long-term results. But that’s its purpose. So even though I don’t know the details (and I suspect, IMHO, we could have improved them), I commend SAP for creative efforts to use its compensation plan to enhance its value offering to shareholders by linking pay to stock results.

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