Main Concepts #
What is a Stock Appreciation Right? #
A Stock Appreciation Right (SAR) is a type of equity grant made at some companies which provides the holder with the ability to profit from the appreciation in value of a set number of shares of company stock over a set period of time.
How do Stock Appreciation Rights Work? #
Stock appreciation rights operate exactly like stock options, in that the employee benefits from increases in the stock price that exceed the award price. Unlike an option, employees do not have to pay an exercise price to exercise them, but instead receive either cash or company stock shares depending on how the plan is structured.
Vesting #
Typically, a SAR will vest upon the completion of a time-based service requirement (e.g. 4-year graded service-based vesting). However, the right to exercise a vested SAR may be subject to satisfaction of a performance condition (e.g., revenue growth and/or EPS growth) or market condition such as total shareholder return vs. peers.
Exercise #
Depending on your plan documents, you may be able to decide how you wish to receive your proceeds (cash, shares, or a combination of cash and shares). Be sure to review the details in your plan. A vested SAR may be exercised, in whole or in part, at any time during the period commencing on the date of vesting and ending on the SAR’s expiration date.
Settlement #
Upon exercise, a SAR may be paid in cash (e.g., cash-settled SAR) or stock (e.g., stock-settled SAR) or a combination of the two. Value of cash or stock settlement based upon appreciation of underlying stock over base price.
Review the plan documents. Check the vesting period, type of settlement, and the term of the SAR.
Tax Summary #
| Events | Stock Appreciation Rights |
|---|---|
| Tax at Grant | No Tax |
| Tax at Vesting | No Tax |
| Tax at Exercise | Cash or FMV of stock delivered is ordinary compensation income to the employee and deductive expense to the company. Tax withholding is required. |
| Tax at Sale | Capital Gain = (Excess sale – FMV at exercise). Long-term if held over 1 year, otherwise short-term capital gain or loss. |
Benefits #
One of the benefits of SARs is that there is no money required to exercise them for cash. An employee automatically receives the proceeds from an exercise without having to pay for the cost of the shares.
