When the choice of the manner of settlement rests with the employee, it implies that the employee has the option to receive cash instead of equity shares, which indicates that the settlement may involve both a debt and equity component. According to IFRS 2, Share-based Payment, when an award can be settled in either cash or equity, the instrument is considered a compound financial instrument with both debt and equity features. Therefore:

C. The instrument is treated as a compound financial instrument with debt and equity components

This means that the fair value of both the debt and equity components needs to be determined, and the instrument must be accounted for accordingly.