How does an employee redeem his shares? In reality, the term “redemption” applies best to actual stock plans, i.e., the event that occurs when an employee sells his shares back to the corporation. When the term is used with respect to a phantom stock plan it is figurative. This is due to the fact that phantom shares cannot literally be sold or redeemed.

It’s better to refer to this transaction as simply a payment or distribution. It occurs when a date or event occurs that the plan document specifies calls for a payment. For example, the plan agreement may have indicated that a payment would be due five years after the date of grant. Once that date arrived the sponsoring company would calculate the amount due and make a payment to the employee. The payment would be processed as any other bonus compensation.

Customarily, a plan will call for payments under a variety of circumstances. Before the plan document can be completed the sponsor may address all the following events and possibly more:

  • In-service events (for active employees)
  • Separation of service (voluntary)
  • Separation of service (involuntary)
  • Termination for cause
  • Retirement
  • Disability
  • Leave of absence
  • Change-in-control

Some plans structure payments in a form other than lump-sum. They may make payments over two or three years or even longer. When doing so they need to determine whether such installment payments would include interest or perhaps even whether the employee payments would remain subject to fluctuations in value (under the plan formula).