A Stock Appreciation Rights (SAR) Plan is a deferred cash bonus program that creates a similar result as a stock option plan. The sponsoring company determines a SAR price through an internal or external valuation of the company. Employees are awarded a number of SARs that carry specific terms and conditions. Should the SARs appreciate over time, employees will be eligible to receive a cash payment equaling the difference between the original price and the appreciated price.
Under certain conditions, the employee may control the timing of the redemption (or exercise) of the SARs. In this approach, the employee, once vested can inform the company of his intent to receive the net value of the SARs. This is the common approach for SARs programs in public companies or in private companies able to comply with the guidelines outlined under Section 409A of the Internal Revenue Code.
In other conditions, the company will control the redemption of the SARS. In this design, assume an employee receives 100 SARs with a starting price of $10. At a pre-determined future date or defined event the company will calculate the value of the SAR price and pay the employee any positive difference. Assume, for this example, the share price grows to $18. The company will pay the employee $800.
Stock Appreciation Rights plans do not result in equity dilution because actual shares are not being transferred to the employee. Participants do not become owners. Instead, they are potential cash beneficiaries in the appreciation of the underlying company value. SARs result in ordinary income taxation to the employees when they turn into an actual cash payment.