Regarding Stock Appreciation Rights (SARs)–a non-stock compensation award that gives an employee cash equal to the appreciation in a company’s share price over a period of time.
“Some companies want to reward certain employees without the attendant ownership that stock entails or because they are not in a position to offer stock. That’s where the unfortunately named SARs (along with their cousin, “phantom stock”) can come into play. Think of SARs and phantom stock as a kind of contingent bonus that offers companies a way to allow employees to share in the appreciation in its equity without having to issue publicity-drawing stock options…
SARs are really quite simple. A company will issue a SAR on date “x,” and give it a vesting date of “y.” Anytime after date “y,” the employee can exercise the SAR and receive the difference between the share price at vesting and the price at issuance. SARs can be paid in cash or stock. Phantom stock, on the other hand, is exclusively cash-based, and can be set up the same as a cash SAR or can be set up as the payment, in cash, of the value of a specified number of shares after the vesting period…”
Read more in this PLI – Pocket MBA article.
For more on this topic, particularly the tax treatment of SARs and options and the effect of the deferred compensation legislation passed last October, please see this Fenwick and West article.
Hat tip to David S. Thomas for the link.