Equity Compensation Advisor

Stock Appreciation Rights (SARs) provide the holder with the right to receive cash compensation in an amount equal to the increase in value of a specified number of shares of stock. 

Although you may be thinking SARs sound like stock options, the difference is that SARs do not require the holder to come up with cash at the time of exercise.

For instance, your client receives a SAR for 5,000 shares when the stock is trading at $30/share.  Five years later when this client exercises their SAR, the stock is trading at $50/share, your client receives $100,000 (5,000 shares times the $20 increase per share).

Sometimes a company may pay a SAR in shares of stock instead of cash.  In this example, the client receives 2,000 shares of stock in lieu of $100,000. 

SARs are taxed the same as nonqualified stock options.  The holder does not report income at the time they receive the SAR or when it becomes exercisable.  They report compensation income on the amount of cash received.  If the holder is an employee, the income is subject to withholding and social security tax.  In the case of SARs that pay off in shares of stock, the holder reports compensation income equal to the value of the shares on the date the shares were transferred.

Not long ago I was working with a client who was looking to leave her current employer for another company.  She was rightfully concerned about restricted stock and stock options she had with her current employer. They had been worth significantly more the previous year and had lost value as the price of the stock dropped. 

We discussed what forfeiture value meant and how much she would be “leaving on the table” if she left the company.  The true forfeiture value is not the in-the-money value of the vested options, because she could exercise her options that had vested.  In fact, the real forfeiture value is the potential upside value (time-value) of the vested options over time and the Black-Scholes value of the unvested options.

My client’s vested in-the-money options were worth $126,000, and the forfeiture value of her options was $282,000.  This $282,000 is what she would be leaving on the table if she took the new job.  I ran an analysis that calculated the forfeiture values, which was advantageous in negotiating comparable equity awards with her new prospective employer. In this client’s case, despite the drop in stock prices over the last couple of years, all was not lost. It’s a great example of how leaving an employer doesn’t have to mean leaving value behind.