{"id":131560,"date":"2022-07-14T00:00:00","date_gmt":"2022-07-13T23:00:00","guid":{"rendered":"https:\/\/gs:8890\/academy\/stock-appreciation-rights-sars-vs-stock-options-what-you-need-to-know\/"},"modified":"2022-07-14T00:00:00","modified_gmt":"2022-07-14T00:00:00","slug":"stock-appreciation-rights-sars-vs-stock-options-what-you-need-to-know","status":"publish","type":"post","link":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/insights\/stock-appreciation-rights-sars-vs-stock-options-what-you-need-to-know\/","title":{"rendered":"Stock Appreciation Rights (SARs) \u2013 what you need to know"},"content":{"rendered":"

There\u2019re many different forms of employee equity compensation. Today, we\u2019re going to discuss\u00a0stock appreciation rights (SARS)<\/strong>\u00a0and how it\u2019s similar to and different from Stock Options.<\/p>\n

What are Stock Appreciation Rights (SARs)?<\/b><\/h2>\n

Stock appreciation rights (SARs) are a type of\u00a0equity compensation<\/a>\u00a0that ties to your company\u2019s stock price to motivate and retain employees. It provides the holder with the ability to profit from the appreciation in the value of the awards.<\/p>\n

When thinking of SARs, always focus on the \u2018Appreciation\u2019 part. That\u2019s because SARs are rewarded based on the\u00a0appreciated value \u2013\u00a0<\/strong>\u00a0the difference between the stock price at the time you were granted and the price at the time you get them.<\/p>\n

Don\u2019t get confused by the name \u2018\u2019Rights\u2018\u2019, these \u201crights\u201d do not include rights to dividends or voting rights.<\/p>\n

How do stock appreciation rights work?<\/b><\/h2>\n

Grant:\u00a0<\/strong>Like stock options, SARs are granted at a set price which is used to calculate the appreciated value at the time you receive them.<\/p>\n

Vesting:\u00a0<\/strong>Similar to stock options, SARs often have a vesting period (i.e. a waiting period before gaining the award ownership) and expiration date. Once a SAR vests, employees can exercise (purchase) it anytime before its expiration date.<\/p>\n

Exercising\/Receiving<\/strong>: Unlike stock options that require employees to pay an exercise price (or called purchase price), employees DO NOT need to make any upfront payment to receive the awards<\/p>\n

When you want to receive your SARs, you typically notify your company according to the procedures in your stock plan or grant agreement. You will get the proceeds of a stock increase either in cash or in an equivalent number of company shares.<\/p>\n

\n\t\t\t\t\t\t\t\t\t\t\"How
How do SARs work?<\/figcaption><\/figure>\n

Example of Jane who is granted 100 SARs:<\/h3>\n

At the time of the grant, the stock price is \u00a350. After vesting, the stock price is \u00a366 and Jane wants to receive the award at this time. So, each of Jane\u2019s SAR is worth \u00a316 (\u00a366 \u2013 \u00a350), meaning she is awarded \u00a316 x 100 = \u00a31,600.<\/p>\n

If the amount is paid out in a form of cash, Jane will receive \u00a31,600 in cash. If it is paid out in shares, she will receive 24 shares (\u00a31,600 \/ \u00a366). Again, Jane can get this \u00a31600 benefit without having to pay for the SARs.<\/p>\n

Stock appreciation rights taxation<\/b><\/h2>\n

Like non-qualified stock options (NSOs), you, as an employee, don\u2019t have to report anything for tax purposes until you exercise.<\/p>\n

Let\u2019s check each stage of the SAR life cycle:<\/p>\n

Grant:<\/strong>\u00a0Like stock options, there are no federal income tax consequences when you are granted SARs.<\/p>\n

Vesting<\/strong>: Again, no tax consequences at the time of vesting like options.<\/p>\n

Exercising<\/strong>: The appreciated value gets taxed as earned income and is subject to payroll tax. The appreciation is the difference between the market price at receiving awards and the market price at grant, multiplied by the number of SARs received. Using Jane\u2019s example:<\/p>\n

Taxable income<\/strong>: \u00a31600 [(\u00a366 \u2013 \u00a350) x 100]<\/p>\n

Sale<\/strong>: If you receive shares of stock after vesting and then decide to sell, you may owe capital gains tax. Sticking with the same example, if Jane decides to sell her SARs for $70, post-exercise share price appreciation will be taxable as short-term\/long-term capital gain.<\/p>\n

Capital Gains<\/strong>: \u00a396 = (\u00a370 \u2013 \u00a366) x 24<\/p>\n

(Note:<\/strong>\u00a0You must hold your SARs for at least 1 year after exercise to have the sale proceeds taxed favorably as long-term capital gain)<\/p>\n

What happens to my stock appreciation rights if I leave my employer<\/b><\/h2>\n

Generally, termination (e.g. retirement, injury and changing job) triggers the acceleration of SAR expiration, depending on your employer\u2019s plan rules. You typically have limited time to exercise the vested awards.<\/p>\n

Benefits of Stock Appreciation Rights to employers<\/b><\/h2>\n

The benefits of SARs for employers can be summed up in a few words; flexibility and less dilution of shares. This is without taking into consideration the primary aims of employee equity compensation \u2013 motivating, retaining and attracting talent.<\/p>\n