A discretionary scheme
This is typically known as the Share Appreciation Rights Scheme. The scheme carries all the features of the real share option scheme with the exception that the employees do not actually take title to the shares. However, they have a right to benefit from the increase in the share value. The amount paid on the exercise of the phantom option comes out of company funds and is subject to PAYE and NICs. It is calculated by reference to the growth in the share price over the period of the option multiplied by a notional number of shares that has been agreed at the outset of the arrangement.