Takeaways
- SARs are a type of equity compensation linked to a company's stock price.
- SARs are similar to stock options, but you don't have to pay the exercise price.
- Companies like SARs because they don't increase shares outstanding.
- SARs boost employee income if the stock increases during a set timeframe.
- SARs are taxed on the difference between the stock and strike price at the time of exercise.
What Are Stock Appreciation Rights (SARs)?
Stock Appreciation Rights, commonly known as SARs, provide you the right to the cash equivalent of the appreciation in value of a set number of shares of stock over a predetermined period. SARs are a form of equity compensation companies offer to employees.
They are unique because they allow you to benefit financially from the company's stock price increase without requiring you to purchase or own actual shares. Â Essentially, you receive a payout equivalent to the company's stock value appreciation over a predetermined period.
Unlike traditional stock options, SARs do not require an upfront investment or stock ownership, making them an attractive compensation option for many employees who don't want to outlay cash.
Read More: Best Online Stock Brokerage Accounts
Take the Next Step:
On Acorns Website
Acorns Investing App
Smart Money Rating: 4.9/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
How Stock Appreciation Rights Work
When a company issues SARs, it sets a "grant price," often equal to the market price of its stock at issuance. You are then granted the right to profit from any appreciation above this grant price within a specified time frame, known as the vesting period.
Once SARs vest, you can exercise them, typically receiving either a cash payout or shares of stock equal to the difference between the grant price and the stock's current market price. Practically, employers almost always opt to pay employees in cash. However, you could receive the benefit in shares.
For example, if you receive SARs at a grant price of $30 per share, and the stock price rises to $50 per share, you will gain $20 per SAR exercised. You could receive this gain as a cash payment or shares.
Read Also: 9 Simple Steps to Advance Your Career
Examples of Stock Appreciation Rights
Let's look at a practical example. Imagine that a new employee at a technology company is granted 1,000 SARs with a grant price of $25 and a vesting period of two years. After executing the company’s growth strategy for two years, the stock price jumps to $40.
If the employee decides to exercise her SARs, she will receive either $15,000 in cash (1,000 SARs x $15 appreciation per SAR) or company common stock equal to that amount, depending on the company's specific SARs policy.
SARs are used to link employee incentives directly to company performance and stock appreciation.
Read Also: 7 Alternative Investments for 2025
Stash Your Cash in a CD:
Member NCUA
Alliant Credit Union CD
Smart Money Rating:Â 5/5
APY: 5.10 % (Terms Apply)
Required Minimum Balance: $1,000
Pros of Stock Appreciation Rights
SARs provide many advantages both to employers and employees. Here are a couple to consider:
- No Initial Cost: Unlike stock options, you don't need upfront cash to purchase shares, making SARs accessible and attractive to more employees.[1]
- Aligned Interests: SARs tie employee compensation directly to stock performance, incentivizing employees to contribute to and benefit from the company's success.
- Flexibility in Payouts: Employers can choose to pay out SARs in cash or stock, giving them greater flexibility to manage their payment method depending on the company's financial position. For example, public companies might issue cash to keep their outstanding share count low and manage their earnings per share.
- Tax Benefits: You usually don't owe taxes until you exercise your SARs, which allows you to defer paying taxes to when funds are more readily available for you to pay taxes. You will pay ordinary income tax when you exercise your SARs.[2] [3] Read more about the Best Online Tax Filing Software.
Related: What Is Discretionary Income?
Cons of Stock Appreciation Rights
Despite their benefits, SARs also have some drawbacks. Here are several you need to know:
- No Ownership Rights: SAR holders typically don't receive dividends or have voting rights, as they're not actual common stock or preferred shareholders.
- Volatility and Risk: Your gains depend entirely on stock price performance, making SARs potentially risky if the company's stock does not appreciate significantly during your vesting period.
- Dilution Risks: If companies frequently issue SARs payable in shares, it may dilute stockholders' equity, negatively impacting existing shareholders' interests.
- Limited Upside in Certain Conditions: In stagnant or declining stock market conditions, SARs offer little or no financial benefit, potentially demotivating employees. (Read more about bear markets).
Read More: 10 Steps to Get the Raise You Deserve
Take the Next Step:
SARs vs. Other Equity Compensation
Understanding how SARs compare to other forms of equity compensation can clarify their suitability for different employees and companies:
- Stock Options: Stock options grant employees the right to buy shares at a specific price. Unlike SARs, exercising options requires upfront cash to purchase shares, which might not appeal to or be financially possible for all employees. (Read more about ISOs and Non-Qualified Stock Options).
- Restricted Stock Units (RSUs) provide employees with actual shares of stock upon vesting, typically without a purchase price. While SARs grant cash or shares based on appreciation, RSUs grant outright ownership upon vesting, often regardless of stock price movements. (Read more about RSUs).
- Employee Stock Purchase Plans (ESPPs) allow employees to purchase company stock, often at a discounted rate, through payroll deductions. This involves upfront spending, contrasting sharply with SARs' cashless participation. (Read more about participating in ESPPs).
Choosing between SARs and other equity compensation methods depends on your company’s goals and employee preferences. SARs are particularly appealing when a business wants to tether employee compensation directly to stock price performance without requiring employees to become shareholders immediately.
Smart Summary
Stock Appreciation Rights offer you the chance to financially benefit directly from your contributions to a company's growth without needing upfront cash to exercise your options or purchase stock. While SARs have unique advantages, including flexibility, aligned interests, and simplicity, you must evaluate their risks and downsides. Comparing SARs with alternatives such as stock options, RSUs, and ESPPs helps you and your company choose the best compensation approach aligned with your strategic and personal finance objectives.
You Might Also Like:
Smart Money requires our expert writers to rely on trusted primary sources—academic research, government reports, expert interviews, original reporting, and peer-reviewed data—to deliver precise and up-to-date content. All of our content is thoroughly fact-checked. We also incorporate relevant research from reputable publishers when it aligns with our editorial focus. For a closer look at our rigorous journalistic standards, explore our editorial guidelines.
(1) Fidelity. Stock Appreciation Rights. Last Accessed March 25, 2025.
(2) Internal Revenue Service. Equity (Stock) – Based Compensation Audit Technique Guide. Last Accessed March 25, 2025.
(3) Internal Revenue Service. Tax Guide 2024. Last Accessed March 25, 2025.
