What are stock appreciation rights?
SARs, or stock appreciation rights, are contractual rights that entitle you to receive the appreciation from a corresponding number of company shares after the grant date. Instead of exercising a stock option, you exercise the SAR and, depending on the plan's design and practices, receive in either cash or stock the "spread" between the exercise price and the fair market value on the date of exercise. For stock plan participants, all the other rules and financial-planning considerations are similar to those of nonqualified stock options.
Example: You are granted 1,000 SARs at a price of $10. After the vesting date, you exercise them when the market price is $25. The company issues 600 shares for the $15,000 value of the spread [($25,000 value at exercise minus $10,000 value at grant) divided by $25 current share price].
Typically, SARs are used by companies that, for reasons of policy or securities law, do not wish to grant options to employees to purchase actual shares in the company. While SARs produce tax deductions on the exercise spread for employers, they have been less desirable than stock options from the employer's perspective. Your company does not receive any cash with SARs, in contrast with option exercises. With expensing of stock options required under ASC Topic 718 (formerly FAS 123(R)), the use of SARs has increased because they are less dilutive than options and because stock-settled SARs now receive fixed accounting.
For the taxation of stock appreciation rights, see the FAQs in the section SARs: Taxes.