Stock Appreciation Rights
SARs share many of the advantages of stock options, but with one key – and attractive – difference for employees – you can benefit from share price increases without having to actually buy stock.
There is no upfront cost associated with exercising your SARs, if you choose to exercise you receive a payout based on the difference between the grant price and the Fair market value of the shares on the date of exercise.
This payout can be in the form of cash or Stock.
Who it works
Whereas stock options give employees the right to purchase shares at a set price, SARs entitle employees to receive the benefit from an increase in company share price over time, with that paid either in cash or shares.
More specifically, employees don’t receive shares in the first instance or options to purchase shares down the line. Instead, an employee is granted SARs for a specified number of shares, with the value of the grant linked to the market value of company shares on the grant date. In the future, if the share price increases and the employee chooses to exercise their SARs, they will be due the value of the difference between the share price at the outset and at the point of exercise.
So, if an employee is granted SARs for 5,000 shares when the share price is X, and then a few years down the line that price has increased to Y, the employee will be entitled to the difference between X and Y x 5000. In practice, this amount is most commonly paid in cash, but as stated above, can also be converted into shares.