Definition
A Stock Appreciation Right (SAR) is a form of incentive or bonus that a company gives to its employees. It gives the employees the right to profit from the increase in value of a specified number of the company’s stocks over a predefined period of time. The profit, which is equal to the growth in the stock’s value, is usually paid in cash or shares of the company.
Phonetic
Stock Appreciation Right (SAR) would phonetically be pronounced as follows:Stock – /stɒk/Appreciation – /əˌpriːʃiˈeɪʃən/Right – /raɪt/SAR – /sɑːr/
Key Takeaways
<ol><li>Stock Appreciation Rights (SARs) are a type of employee incentive that gives the employees the right to the increase in the value of a specified number of shares of company stock over a predefined period. They are designed to encourage employees to contribute towards improving the company’s performance by providing an incentive aligned with the company’s success.</li><li>SARs can be either Equity-Based or Cash-Based. In the case of Equity-Based SARs, employees receive the appreciation in the form of shares of the company. On the other hand, in Cash-Based SARs, the appreciation is paid in the form of cash. The nature of the SARs could determine the strategy of a company in terms of employee retention or cash management.</li><li>SARs are beneficial for both the employees and the company. For the employees, it’s a form of additional income that carries potential for significant payout, depending upon the company’s success. For the company, it allows retaining valuable employees without diminishing its cash resources immediately as it is not necessary to provide upfront capital or shares.</li></ol>
Importance
Stock Appreciation Right (SAR) is an important term in business and finance because it’s a beneficial incentive given to employees by corporations. It grants employees the right to the increase in the value of a designated number of shares over a specified period of time. This practice aligns the interests of the employees with those of the shareholders as it provides a direct reward for improving the company’s performance, contributing to the growth and success of the company. Instead of paying the award in shares, the business pays the equivalent cash value. This system proves valuable in retaining key employees and motivating them towards the achievement of long-term business goals, hence promoting overall corporate growth.
Explanation
The main purpose of Stock Appreciation Rights (SAR) is to give employees an incentive that is tied directly to the company’s performance, fostering a sense of ownership and commitment to the organization. This form of incentive ensures that the employees are motivated to contribute to the growth and success of the company, as they stand to gain directly from the company’s improved performance and the resulting increase in its stock value. In essence, SARs allow employees to benefit from the appreciation of the company’s stock, without requiring them to invest their own money or take on the risk of ownership.Moreover, SARs can be designed to pay out the increase in stock value over a set period, thus giving employees a long-term incentive. For instance, if an employee is granted SARs when the company stock is valued at $10 and after a few years, the stock price increases to $20, the employee can benefit from this $10 appreciation per SAR. Overall, these rights are used as a part of the employee compensation package to retain talent, incentivize better performance, and align the employees’ interests with those of the company and its shareholders.
Examples
1. Google Inc: One of the well-known companies that extensively uses Stock Appreciation Rights is Google. They use SARs as a means to incentivize their employees. When the company’s stock performs well in the market, employees who hold SARs reap the benefits in terms of increased compensation.2. Twitter Inc: Twitter also offers Stock Appreciation Rights as part of their employee compensation package alongside more traditional options like stock options. This way, if Twitter’s stock appreciates rapidly, employees have opportunity to realize significant financial gains.3. Starbucks Corporation: Starbucks employed SARs in their executive compensation plans. They have used this as part of their strategy to attract and retain top talent in the organization, while aligning the interests of the executives with the overall performance of Starbucks in the stock market.
Frequently Asked Questions(FAQ)
What is a Stock Appreciation Right (SAR)?
A Stock Appreciation Right (SAR) is a form of incentive or bonus that gives an employee the right to receive the appreciation or increase in value of a certain number of shares of the company’s stock over a specified time period.
How does a Stock Appreciation Right (SAR) work?
When a SAR is exercised, the employee receives the difference between the market value of the company’s shares at the time of exercise and the grant price as a cash payment or equivalent shares of the company’s stock.
Is a Stock Appreciation Right (SAR) the same as stock options?
No, they are different. While both give employees the right to benefit from the increase in the company’s stock value, a key difference is that with SARs, employees do not have to pay the exercise price to realize the gain, unlike stock options.
When can I exercise my Stock Appreciation Right (SAR)?
The ability to exercise your SAR typically depends on the vesting schedule outlined in your grant agreement. Generally, SARs can be exercised after a specified period from the grant date or when certain performance conditions are met.
How are Stock Appreciation Rights (SARs) taxed?
In the United States, SARs are generally taxed at the time they are exercised. The difference between the grant and exercise price is considered ordinary income and is subject to income and payroll tax withholding.
Can Stock Appreciation Rights (SARs) be transferred?
Typically, SARs are not transferable and can only be exercised by the employee who was granted the rights. However, this could vary depending on the terms set out by the company’s SAR agreement.
What happens to my Stock Appreciation Rights (SARs) if I leave the company?
Policies differ by company, but typically any unvested SARs are forfeited when you leave the company. Depending on your SAR agreement, you may have a limited time to exercise your vested SARs after termination.
Related Finance Terms
- Equity Compensation
- Vesting Period
- Exercise Price
- Grant Date
- Employee Stock Option (ESO)
Sources for More Information
