Definition of Stock Appreciation Rights

Stock appreciation rights are a form of employee bonus or incentive. Companies use this type of incentive to align the employee's financial incentives with the corporation's. Stock appreciation rights can be offered to employees instead of a stock option plan or used in conjunction with a stock option program.

Function

Stock appreciation rights (SAR) are granted to employees as incentive that participate in the company's share price increase. The value of granted SARs is the amount the awarded number of shares is above a set price. Unlike stock options, SARs are only redeemable for cash whereas stock options can be exchanged for shares of company stock.

Features

Stock appreciation rights usually have a vesting period and an expiration date. Once the rights have vested they can be exercised any time up until the expiration date. SARs can be awarded to employees in addition to other incentive plans like stock option plans and employee stock purchase plans.

Types

Stock appreciation rights can be one of two types. Regular SARs are stand alone instruments and are not linked to any other conditions. Tandem SARs can be exercised for cash like regular SARs or exchanged for equivalent stock options or stock shares. An employee holding tandem SARs must elect one form of payout or the other.

Significance

Companies offer SARs for several reasons. They offer employees the chance to profit if the company's stock increases without requiring the company to issue more stock. SARs can have less burdensome paperwork and legal requirements than many employee incentive programs. Employees who are granted stock appreciation rights should be aware of the vesting and expiration requirements as well as the stock price where the SARs obtain value.

Considerations

When exercised, the proceeds from a SAR are subject to income tax as regular income. SARs are sometimes offered in conjunction with stock options to help pay the taxes when regular stock options are exercised.

References

• Fidelity Investments on SARs
• National Center for Employee Ownership