Which of the following best defines phantom stock?

Phantom stock is best defined as a program where employees receive compensation based on the performance of the company's stock without actually receiving any actual shares. This form of employee benefit aims to provide employees with a vested interest in the company's success, mirroring the value that they would receive if they owned real stock. By tying an employee's potential payout to the stock’s performance, companies incentivize workers to contribute to the company's growth and profitability, aligning their interests with those of shareholders.

This approach allows companies to reward employees in a way that can be beneficial for tax or cash flow purposes, as no actual shares are issued until certain conditions are met, such as the employee's departure or retirement. Employees may receive a cash payout equivalent to the value of the shares, thus motivating them without diluting ownership for existing shareholders.

The other options describe mechanisms involving stock options or actual stock grants, which do not reflect the unique structure of phantom stock. Employees in those scenarios either do not receive compensation directly tied to stock performance without actual shares or are limited by trade restrictions that are not applicable to phantom stock arrangements.