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Stock Appreciation Rights (SARs)

Learn how Stock Appreciation Rights (SARs) work, their tax implications, and benefits over ESOPs. Get Expert Consultation.

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  • Is Employee turnover a challenge for you?
  • Are you finding it difficult to motivate your star employees?
  • Do you want to link compensation to equity without diluting it?

If these are your issues, this piece is for you. Read on. Retaining employees is a challenge for new startups who are cash strapped. In a world where new startups are booming by the dozen, skilled professionals have no dearth of options. Stock appreciation rights (SARs) are used as a compensation tool instead of cash to retain good talent

What Are SARs?

Companies offer SARs at the current market price. When the company does well financially, the company stock value is bound to appreciate. This appreciation in value is passed on to the employees as cash or stock options.

Do SARs Have A Vesting Period?

Yes. The whole purpose of offering SARs is to retain the employee for a longer period. SARs will have a vesting period of a couple of years. If you leave the organization before the vesting period, you will lose the benefit of appreciation.

Whar Are The Benefits Of SAR?

SARs are a reasonable compensation tool for the retention of employees as it gives them a chance to perform and grow the company and reap the benefit of the company’s performance. It is a very good incentive for skilled professionals to contribute their talent for the success of the company. Since the stock price is a measure of the performance of a company, this is a fair way to compensate employees and retain them for a longer period.
Unlike ESOPs, SARs do not involve dilution of equity. The appreciation in price can be paid to the employee in cash. This makes it a very convenient option for new startups.

Here Is An Example

The price of the shares of Company A is Rs 50 today. An employee is granted stock appreciation rights for 1000 shares and the vesting period is 3 years.
At the end of three years, the price of the share goes to Rs 150. Now the employee can choose to sell his rights. He will gain 1000*(150-50) = 100,000. He can collect Rs 100,000 in cash or convert it into stock which means he gets 100,000/150 = 660 shares.
However, if the stock price has fallen during the period, the employee may choose not to exercise the option as it would result in a loss.

Should SARs Be Automatically Exercised On Vesting?

There is usually a three-month window after the vesting date during which the right must be exercised. At the end of the period, the right to exercise will expire.

What Is The Taxability Of SARs

SARs are not taxed at the time of grant or on vesting. Only when the right is exercised, the difference between the fair market value and the grant price is taxed as a perquisite in the hands of the employee.

What's The Accounting Treatment For SAR?

The employer will have to recognize the expected expenditure based on the fair market value. This expense will need to be recognized till the point where the employee exercises the right.

How can Start-Up Movers help you?

  • Advisory services to help the company decide between ESOP and SAR as an employee compensation option
  • Drafting the SAR policy
  • Advisory services regarding the accounting and tax treatment of SAR
  • Obtaining Board Approval for the adoption of SAR policy
  • Advisory services for the implementation of SAR in the company

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