Understanding Stock Appreciation Rights (SARs)
Stock appreciation rights or SARs are a type of employee compensation linked to the company's stock price during a predetermined period. The benefit of stock appreciation rights is that employees can receive proceeds from stock price increases without having to buy stock. Employees do not have to pay the exercise price with SARs, but they receive the sum of the increase in stock or cash.
SARs are transferable and are often subject to clawback provisions such as other forms of stock compensation. Clawback provisions specify conditions under which the company may take back some or all of the income received by employees under the plan. For example, they might allow the firm to withdraw SARs if an employee goes to work for a competitor before a specified date. SARs are also frequently awarded according to a vesting schedule that ties them to performance goals set by the company. Also, employers will also withhold taxes on SARs in the form of shares.
SARs can be taxed like non-qualified stock options (NSOs): There are no tax consequences on the grant or vested date. It is also similar to phantom stock, because this one is a promise that an employee will receive either the value of the company's shares or the amount that the stock price increases during a specified period. The employee receives is taxed as ordinary income at the time it is received the phantom stock bonus an.
Advantages and Disadvantages of SARs
SARs is flexibility and companies can structure SARs in a variety of ways that work best for different cases. Although this flexibility requires making numerous choices, companies offering SARs must decide which employees receive them, the value of these bonuses, the liquidity of the SARs, and which vesting rules to adopt.
The disadvantages is because SARs are a high-risk form of employee compensation. If the company's stock does not appreciate, SARs often expire worthless.
Subtitle #3
