Here’s a great story at Bloomberg.com. The former chairman of 24 Hour Fitness has sued the company for failure to pay what she claims was owed under a phantom stock award. We’re only talking $23 million here! Seems like reasonable fees for serving six years on the board, don’t you think?
Apparently the company alleges that the payment “is not a valid obligation of the company.”
I don’t know the details of the complaint or the actual plan (if there was in fact a plan). But I know what makes a phantom stock plan fall apart. I’m guessing all four failures happened here.
First—failure to properly document the plan. The document should be clear, specific and compliant with all appropriate laws.
Second—failure to properly value the shares. Many plans use unhelpful or vague formulas to set the value. Be clear and precise.
Third—failure to properly grant the shares. I can’t remember how many times an employer has told me they’ve “verbally promised” shares but haven’t executed the proper paperwork.
Fourth—failure to regularly report the value to the participant. The employees should be informed annually (at least) of the share value and terms. This helps avoid the “he said/she said” problem.
I’m sure there are two interesting sides to the 24 Hour Fitness story and I look forward to learning the details. But one thing’s for sure: They know more about fitness than they do about compensation plans.
One last thing: I’m surprised she didn’t go for $24 million. You know, a million for each hour.