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What Are Stock Appreciation Rights

21 Sep 2023

Introduction

Employers often reward their employees in many ways. One way to reward employees is Stock Appreciation Rights or SARs. The way SARs work makes it a good way of rewarding employees for both employees and employers. In this blog, you'll learn about SARs and how they work.

What are Stock Appreciation Rights?

Stock Appreciation Rights is a reward based on the performance of the company's stock for a specific period. The employee gets a reward either in cash or in the form of the company's share if the price of the company's stock goes up. However, Stock Appreciation Rights are subjected to a fixed period.

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If the company has issued the SARs with the stock options, the reward will be redeemed against buying the options. Moreover, one can also pay the due taxes with SARs. The SARs a company issues with stock options are known as tandem SARs.

Since you can get SARs in cash, it is one of the best reward options due to its high liquidity. However, the employer can pull back the reward from the employee after its issuance under the Clawback provision. However, it only happens in rare cases for a valid reason.

What is the Taxation Rule for SARs?

The taxation policy for SARs is simple, as there's no tax to pay on SARs. However, at maturity, the employer may take a small part as taxes to pay to the government, but it's only when applicable. Otherwise, SARs remain untaxed. It is also why employees like SARs, along with their flexibility.

Example of Stock Appreciation Rights

Let's say you get 200 units of SARs as a reward for good performance by your company. The period of maturity of these SARs is two years. So, after two years, the SARs will mature, and you can encash them in the way specified by the company.

To calculate the reward, let's assume the price of the company's stock two years back was ₹200 per share. Moreover, now it is ₹350 per share. So the stock has risen by ₹150, and the reward will be ₹150 times 200, that is ₹30,000. However, if you leave the company before the SARs' maturity, you may lose it if the employer describes it.

To Sum Up

The way SARs work makes sense as the company's stock will rise only if it performs well and employees are also part of it. However, you may not get anything if the store doesn't see an increase. But considering SARs resemble a long-term investment, it is rarely possible. If you want to invest in your company's stock or any other, get a Demat Account from Motilal Oswal and start investing today for a better future.

 

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