Stock appreciation rights (SARs) are a type of equity compensation that can be a powerful tool for incentivizing and retaining employees. In this blog post, we will explore the ins and outs of stock appreciation rights, including their benefits and drawbacks, how they work, and why they are so popular among companies.
What are stock appreciation rights?
Stock appreciation rights (SARs) are a type of equity compensation that gives employees the right to receive a cash payment equal to the appreciation in the company’s stock price over a certain period of time. SARs are typically granted as part of an employee’s compensation package, and are designed to align the employee’s interests with the company’s overall performance.
Benefits of stock appreciation rights
Stock appreciation rights can provide several benefits to both employers and employees. For employers, SARs can be an effective way to incentivize and retain key employees, as they offer a direct stake in the company’s success. SARs can also be a more flexible form of compensation, as they do not require the employer to issue actual shares of stock.
For employees, SARs can provide a valuable source of long-term wealth, as the value of the SARs is tied to the company’s overall performance. Additionally, SARs can be a useful tool for tax planning, as they are taxed at the time of exercise, rather than when the stock is sold.
How do stock appreciation rights work?
Stock appreciation rights typically come with a vesting schedule, which outlines when the employee will be able to exercise the rights and receive a cash payment. The vesting schedule can be time-based, performance-based, or a combination of both.
Once the vesting period is complete, the employee can exercise the SARs and receive a cash payment equal to the appreciation in the company’s stock price over the vesting period. Depending on the terms of the SARs, the employee may be required to pay taxes on the cash payment at the time of exercise.
Drawbacks of stock appreciation rights
While stock appreciation rights can provide several benefits, there are also some drawbacks to consider. One of the main drawbacks is that the cash payment received by the employee is subject to ordinary income tax rates, which can be higher than capital gains tax rates. Additionally, SARs can be more complex to administer compared to other forms of equity compensation, which can increase the administrative burden on the employer.
Stock appreciation rights are a powerful tool for incentivizing and retaining key employees and can provide a valuable source of long-term wealth for employees. They offer a direct stake in the company’s success, and can be a more flexible form of compensation compared to other equity awards. However, SARs do come with certain restrictions and drawbacks, such as the tax implications and increased administrative burden. Overall, SARs can be an effective way to align the interests of employees with the overall performance of the company.