What is Stock Appreciation Right ?
339 reads · Last updated: December 5, 2024
Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. SARs are profitable for employees when the company's stock price rises, which makes them similar to employee stock options (ESOs). However, employees do not have to pay the exercise price with SARs. Instead, they receive the sum of the increase in stock or cash.The primary benefit of stock appreciation rights is that employees can receive proceeds from stock price increases without having to buy stock.
Definition
Stock Appreciation Rights (SAR) are a type of employee compensation linked to the company's stock price over a predetermined period. When the company's stock price rises, SARs become profitable for employees, making them similar to Employee Stock Options (ESO). However, employees do not need to pay an exercise price with SARs. Instead, they receive the amount of the increase in stock or cash. The main benefit of SARs is that employees can gain from the stock price increase without purchasing the stock.
Origin
Stock Appreciation Rights originated in the late 20th century as a tool to incentivize employees. They were designed to provide similar incentives to stock options without diluting company equity. As companies increasingly focused on employee incentive mechanisms, SARs gained popularity worldwide.
Categories and Features
SARs are primarily divided into cash-settled and stock-settled types. Cash-settled SARs allow employees to receive cash upon exercise, while stock-settled SARs are paid in stock. Both types share the feature of not requiring employees to pay an exercise price. The advantage of cash-settled SARs is the immediate cash benefit, while stock-settled SARs allow further participation in the company's future stock price growth.
Case Studies
Case 1: Suppose a tech company granted employees 1,000 SARs in 2018 with an exercise price of $50 per share. By 2023, the company's stock price rose to $80 per share. Employees can choose to exercise and gain (80-50)*1,000 = $30,000 without paying any exercise price.
Case 2: A manufacturing company granted employees 500 SARs in 2019 with an exercise price of $20 per share. By 2024, the company's stock price rose to $35 per share. Upon exercise, employees can choose to receive (35-20)*500 = $7,500 in cash or the equivalent value in stock.
Common Issues
Common questions include: Do employees need to pay an exercise price? The answer is no; SARs do not require an exercise price. Another question is whether SARs dilute company equity. Typically, SARs do not directly dilute equity, especially in the case of cash settlements.
