A Stock Appreciation Right (SAR) is an award which provides the holder with the ability to profit from the appreciation in value of a set number of shares of company stock over a set period of time. The valuation of a stock appreciation right operates exactly like a stock option in that the employee benefits from any increases in stock price above the price set in the award. However, unlike an option, the employee is not required to pay an exercise price to exercise them, but simply receives the net amount of the increase in the stock price in either cash or shares of company stock, depending on plan rules.
How Do Stock Appreciation Rights Work?
Stock Appreciation Rights are similar to Stock Options in that they are granted at a set price, and they generally have a vesting period and an expiration date. Once a SAR vests, an employee can exercise it at any time prior to its expiration. The proceeds will be paid either in cash, shares, or a combination of cash and shares depending on the rules of an employee’s plan. If proceeds are received in shares, they can be treated as any other shares of stock in a brokerage account.
Types of Stock Appreciation Rights
There are two different types of Stock Appreciation Rights:
- Stand-alone SARs are granted as independent instruments and are not issued in conjunction with any stock options.
- Tandem SARs are granted in conjunction with a Non-Qualified Stock Option or an Incentive Stock Option, which entitles the holder to exercise it as an option or as a SAR. The election of one type of exercise prevents it from being exercised as another.
What Are the Advantages of Stock Appreciation Rights?
One of the benefits of SARs is that there is no money required to exercise them for cash. An employee automatically receives the proceeds from an exercise without having to pay for the cost of the shares.