Definition
Stock Appreciation Rights (SARs) are a type of employee compensation linked to the company’s stock performance. They give employees the right to the increase in the value of a designated number of shares over a set period of time. Essentially, SARs offer the potential benefit of stock ownership without the employee needing to purchase any shares upfront or carry any risk of loss.
Key Takeaways
- Stock Appreciation Rights (SARs) are a type of employee compensation linked to the company’s stock performance. They offer the right to the appreciation of a certain number of shares.
- SARs offer the convenience of settling the appreciation either in cash or in company shares, depending on the company’s policy or the employee’s choice, making them flexible for both employers and employees.
- Unlike stock options, SARs don’t require employees to purchase anything or risk their own money. They just provide the staff with the difference in value between when the SAR was granted and when it is exercised.
Importance
Stock Appreciation Rights (SARs) are crucial in finance because they offer employees a bonus in the form of the appreciation of company stock value.
This means that an employee does not necessarily need to own the stocks to benefit from the increase in their value.
They are a form of employee compensation linked to the company’s performance, thus encouraging employees to contribute more efficiently to organizational success.
As a result, SARs can serve as a motivational and retention tool for valuable employees, aligning their interests with those of the company and its shareholders.
Explanation
Stock Appreciation Rights (SARs) are primarily used as a strategy for firms to retain and incentivize key employees through the potential of increased remuneration. Essentially, SARs allow employees to benefit from the rise in a company’s stock price without having to own the actual stock. This allows employees to get a sense of ownership, encouraging them to perform better and work towards increasing the company’s value.
Because employees only benefit if the stock price increases, SARs act as a motivational tool, aligning the employees’ financial interests with those of the company and its shareholders. In addition to employee motivation and retention, SARs are also used as a method of compensation that doesn’t affect a company’s cash flow. Unlike bonus payments, they do not require a cash outlay from the company.
Instead, they provide a future promise of payment, based on the company’s stock performance. Thus, SARs can serve as a cost-effective method of employee compensation for companies that are keen on conserving cash. The potential payout would only occur once the SARs are exercised after they have vested, allowing the company to delay compensation expenses.
Examples of Stock Appreciation Rights
Google’s Employee Benefit: In 2003, Google decided to shift from the traditional methods of granting employee stock options and introduced Stock Appreciation Rights (SARs) in their compensation package. These plans meant that employees no longer had to purchase their stock options, instead, they just had to wait for the stocks to appreciate before cashing in the monetary equivalence of the appreciation.
Starbucks’ Bean Stock Program: One of the notable Starbucks connect benefits, the Bean Stock Program provides employees with restricted stock units and Stock Appreciation Rights (SARs). This is part of their effort to include employees in the company’s success. Employees can choose when to exercise their rights and collect cash equivalent to the stock’s appreciated value.
Microsoft’s Employee Stock Purchase Plan: In 2003, Microsoft replaced its stock option plan with Stock Appreciation Rights (SARs). This plan allowed employees to receive the increase in the value of a certain number of shares, without investing their own money to buy the share at the outset.
Frequently Asked Questions for Stock Appreciation Rights
What are Stock Appreciation Rights?
Stock Appreciation Rights (SARs) are a type of employee compensation that provides the beneficiary the right to profit from the increase in value of a set number of shares of company stock over a defined period of time.
How do Stock Appreciation Rights work?
When employees get SARs as part of their compensation, they don’t actually get any shares in the company. Instead, they get the right to benefit from the increase in the company’s share price. When SARs vest, the employee can exercise them and get the increased value of the shares in cash or equivalent shares.
How are Stock Appreciation Rights different from stock options?
Stock options give you the right to buy stocks at a predetermined price. SARs, on the other hand, give you the right to the appreciation of the share price. This means with stock options, you can benefit from the rise in the share price only if the current market price is above the price at which the option allows you to buy the shares. For SARs, no purchase is required, you get the appreciation in share price directly.
What is the tax implication of Stock Appreciation Rights?
Typically, you don’t pay tax when you receive Stock Appreciation Rights, but you have to pay income tax on the appreciation value when you exercise the SARs. It’s recommended you consult with a tax professional to understand the specific implications based on your context.
Related Entrepreneurship Terms
- Equity Compensation
- Vesting Period
- Strike Price
- Employee Stock Option Plan (ESOP)
- Non-Qualified Stock Option (NSO)
Sources for More Information
- Investopedia: An extensive resource for investing, personal finance, market analysis, and free trading simulators.
- Corporate Finance Institute: Offers an extensive database of free educational content on financial analysis, modeling and more.
- NASDAQ: Offers comprehensive quotes and analysis for stocks, indexes, and ETFs, along with finance news.
- The Balance: Provides expert insights on managing money and investing, with in-depth guides and tips for financial planning.
