Legal Definitions - stock-appreciation right

A Stock-Appreciation Right (SAR) is a form of incentive compensation, often granted to employees, that allows the recipient to benefit from the increase in a company's stock price without actually having to purchase the underlying shares.

When an employee exercises a SAR, they receive a payment, typically in cash, equal to the difference between the stock's market price at the time of exercise and its price when the SAR was originally granted (often called the "grant price" or "base value"). This means the employee profits from the stock's appreciation in value. SARs are sometimes granted alongside stock options, and exercising the SAR often results in the cancellation of the corresponding stock option.

Here are a few examples to illustrate how Stock-Appreciation Rights work:

• Example 1: Startup Employee Compensation

  Imagine a software engineer, Sarah, joins a promising tech startup called "CodeFlow Inc." As part of her compensation package, she receives 2,000 SARs with a base value of $15 per share. After three years, CodeFlow Inc. experiences significant growth, and its stock is now valued at $60 per share. When Sarah decides to exercise her SARs, she receives a cash payment calculated as the difference between the current value and the base value, multiplied by the number of SARs: ($60 - $15) * 2,000 = $90,000. Sarah benefits from the company's success without ever needing to invest her own money to buy shares, making it a valuable, low-risk incentive.

• Example 2: Executive Performance Incentive

  The CEO of "Global Manufacturing Corp.," Mr. Chen, is awarded 10,000 SARs as part of his annual performance bonus, contingent on the company achieving specific revenue targets over the next two years. The SARs are granted when Global Manufacturing's stock price is $120. If the company successfully meets its targets and the stock price rises to $170 per share, Mr. Chen can exercise his SARs. He would receive a cash payment of ($170 - $120) * 10,000 = $500,000. This example shows how SARs can be used to motivate executives by directly linking their compensation to the company's financial performance and shareholder value growth.

• Example 3: Employee Retention in a Maturing Company

  "Evergreen Solutions," an established consulting firm, wants to retain its top-performing senior consultants. To do this, they grant 1,500 SARs to a lead consultant, David, which vest over a four-year period. The SARs are granted when the company's internal valuation (and thus implied share price) is $250. Over the four years, David's contributions help the company grow steadily, and the implied share price increases to $300. When David's SARs fully vest and he exercises them, he receives a payment of ($300 - $250) * 1,500 = $75,000. This illustrates how SARs can serve as a powerful retention tool, encouraging valuable employees to stay with the company and contribute to its long-term appreciation.