7.1.10: Stock Appreciation Rights (SARs)

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Abstract

An SAR is a "stock appreciation right," meaning that the issuer purchases for cash the right to cancel the holder's options at a price equivalent to the spread-the difference between fair market value of the option stock and the exercise price. The payment should be deductible to the issuer (and income to the employee),[1] assuming the payment is not "unreasonable compensation" under § 162(m) nor offends the "Golden Parachute" rules in § 280G.[2] If an option plan entails a built-in SAR-i.e., the employee has a right to elect an SAR-the issuer incurs expense[3] as its stock appreciates. Often "put" rights of this sort are built into plans adopted by nonpublic companies, which don't care much about reported earnings.[4] If the SAR with a put feature lapses when the issuer becomes public, there is a one time charge to earnings, measured by the strike price versus the IPO...