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Also known as SARs, stock appreciation rights are benefits granted by an employer, based on criteria that is established as part of the employment contract. With most stock appreciation rights plans, a qualified employee is issued rights based on pay scale, performance and any other factor the employer deems necessary. The rights may be extended on an annual basis, allowing the employee to amass SARs over time. The value of the rights is normally connected with the current level of performance by the shares of stock issued by the employer.
A basic stock appreciation rights plan allows employees to earn benefits from stock increases without actually owning stock. For example, if a given employee currently has a hundred SARs in his or her account, and the unit price of the stock issued by the employer increases by a total of $100 US dollars (USD) within the time period specified in the program agreement, the employee receives $10,000 USD. That amount can either be routed to a retirement fund, or used to purchase shares of the company stock. In some cases, the SAR plan may allow the employee to use a percentage of the earnings to purchase stock and place the remainder in the company retirement program.
While the value of stock appreciation rights are related to the value of stock issued by the employer, there is a key difference between owning SARs and owning shares of stock. With stocks, the employee usually has to pay some type of grant price in order to exercise an option with the shares. By contrast, an employee pays nothing to benefit from SARs, and does not have to acquire the underlying security to obtain that benefit. In addition, once the rights are awarded at a certain price, that benefit is not taken away if the stock prices drop during the next evaluation period.
With stock appreciation rights, qualified employees can participate in the plan for as long as they remain with the employer. In the event that the employee chooses to resign from the company, and is fully vested in the program, he or she may be able to roll over the amount of the plan into a pension or other retirement plan. Should the employee die while still with the company, many plans allow for the benefits to be transferred to the employee’s beneficiary. A plan administrator can explain exactly how SARs generate returns for the employee, how long it takes to become vested in the plan, and what happens with the balance of the plan should the employee resign or pass away.