SARs are a type of employee compensation that grants the holder the right to receive a cash payment based on the appreciation in the value of a company's stock over a specified period. Unlike stock options, SARs don't require employees to purchase shares upfront. Instead, they receive a pay-out based solely on the stock's price increase. SARs are profitable for employees when the company's stock price rises, which makes them similar to employee stock options (ESOs). However, employees do not have to pay the exercise price with SARs. Instead, they receive the sum of the increase in stock or cash.
Before we go deep into how SAR works, the process of granting SAR, and what are the tax implications of SAR. Let’s understand about the different types of Stock Appreciation Right (SAR)
Stand-alone SARs are granted separately from stock options, allowing the employees of the company to enjoy the benefit of increased stock price without purchasing the stocks. Key features of Stand-alone SARs include:
Tandem SARs are issued alongside incentive or non-qualified stock options. Employees have the option to choose either the SAR or the stock option. Choosing the SAR, it enables the employees to benefit from the appreciation of a company's stock while being connected to stock options. Some key features of Tandem SAR include.
Initially, the company allocates SAR units from the predetermined option pool to eligible employees. These SAR units enable employees to benefit from the appreciation in the value of a specific number of shares issued by the company, exceeding the designated price in the SARs Grant. This is part of the company's SAR scheme.
The SAR Grant must adhere to the vesting period established by the company. Upon completion of the vesting period, employees have the option to exercise or retire their accrued SARs within the specified exercise period outlined in the SARs scheme.
During the exercise, the company compensates the difference in share price from the issuance date to the exercise date. This compensation can be settled entirely in shares, cash, or a combination of both. However, they have to act on their rights before the SAR expiration date, which typically occurs 7-10 years from the grant date. Once the company fulfills the SARs, they are considered retired.
The process of granting of SARs follows different procedures in listed and unlisted companies.
Taxation is more straightforward with Stock Appreciation Rights. SARs follow a tax approach similar to non-qualified stock options (NSOs). Employees do not face any taxes during the granting or vesting phases. When cash-settled SARs are exercised, they are considered part of the salary and taxed accordingly. In the case of equity-settled SARs, taxation occurs twice: first as salary income and then as capital gains tax when the employee sells the shares. Typically, employees retain a few shares to cover the tax amount.
Cover the Tax Amount. Stock Appreciation Rights Stages | Taxation for Employees |
Grant | Non-Taxable |
Vesting | Non-Taxable |
Mon | Taxable as regular income (income slab applied) |
Sale (in case of equity-settled SAR) | Capital Gains Tax |
ESOPs and SARs differ in how employees pay and get taxed.
But the basic idea is the same: employees make money when the company's share price goes up, whether through ESOPs or SARs.
Let's delve into the concept of SARs using an example.
ABC Inc. has awarded stock appreciation rights to its employees under the following conditions:
Now, let's consider that an employee decides to exercise their right as of January 1, 2026, and on that date, the market price of the shares is $300.
Net Money Value of Shares = (Market Price of share – Exercise Price) * No of Shares
No. of Shares Received = Net Money Value of Shares/Market Price
This means that they would gain $18,000 from their 60 SARs
Particulars |
Amount |
Market Price |
$300.00 |
Exercise Price |
$120.00 |
No. of Shares |
100 |
Net Money Value of Shares |
$18,000.00 |
No. of Shares Received |
60 |
Learn the complexities of Stock Appreciation Rights (SARs) and their advantages for employees and companies. Understand the key aspects of taxation, and vesting schedules.
SARs can be a valuable tool for companies seeking to attract, retain, and motivate employees by aligning their financial interests with the company's success. However, it's essential to carefully consider the advantages and disadvantages, along with the company's financial position and goals, before implementing a SAR plan.
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