A few months ago I noticed an article in a Washington state newspaper describing a situation wherein employees were terminated from a bank and apparently did not receive payments owed under their phantom stock plan. The reporter states that the employer simply told the employees the bank “didn’t have the funds.”
So how safe is phantom stock?
First of all these plans are forms of deferred compensation and, as such, are subject to creditors of the corporation. If a plan sponsor goes bankrupt, chances of payment are very small. But this bank apparently did not go bankrupt. They simply terminated the services of the employees without making payment on the plan obligation. Assuming we’ve been told the whole story (perhaps a big assumption) this would appear to be a clear violation of the terms of a typical phantom stock agreement. The employees are suing and may have a pretty good case.
Nonetheless, any employee invited to participate in a phantom stock plan needs to be aware that they are not in a secured position. The plan promise is only as strong as the company behind it.
That said, careful companies play it smart. They “fund” their phantom stock plans. This means they set aside designated funds on the company’s books to be “earmarked” for payment of plan liabilities. These funds cannot be secured from creditors. And they can even be used for other company purposes. But they watch the funds carefully and manage them to assure (within reason) adequate liquidity for the plan.
If you have or consider a phantom stock plan (or any form of deferred compensation) informal funding is the wise choice. It’s prudent, cost effective and practical. And it may save you from a future lawsuit and bad press.