Stock Appreciation Rights (SAR) Dictionary
We have called this a dictionary but not organized it alphabetically intentionally! We’ve tried to capture the flow of events that take place and we believe this will help you understand Stock Appreciation Rights (SAR) better!
- SAR: The word SAR stands for Stock Appreciation Rights. A SAR is a form of bonus compensation given to employees equal to the ‘appreciation’ or increase in the price of the company stock over an established time period. SARs are beneficial to the employee when the company stock price rises. In SARs, employees do not have to pay the exercise price but receive the sum of the increase in stock or cash.
- SAR Plan: A SAR Plan holds certain agreed-upon terms and conditions based on which SARs are granted and exercised for the employees in a company
- Grant Date: The date on which SARs are issued to the employee
- Grant Letter: The letter given by the company through which SARs are issued to the employee
- Vesting: In very simple and general terms, vesting refers to the amount of time an employee must work before acquiring a certain benefit. Vesting is, therefore, the process by which an employee becomes eligible to exercise his / her SARs and become a beneficiary. Typically, the first vesting happens after 12 months and thereafter periodically, as defined in the SAR Plan
- Vesting Period: The period between the grant date and the date on which all the specified vesting conditions of ESAR are satisfied. A very common vesting period is 4 years with a one year cliff
- Vested SARs: Number of SARs for which vesting date has been completed (in the past)
- Unvested SARs: Number of SARs for which vesting date has NOT yet arrived (still in the future)
- Cliff Period: This is the minimum period after the first SARs get vested when the grant date.
- Exercise: This is about the employee using his or her ‘right’ to get stocks or cash or a combination of both. An employee can exercise only after the SARs have been vested, not before *
- Exercise Period: After vesting, the employee earns the right to get the stock or an equivalent of the company. But the employee can get those shares or their equivalent only within a certain period, and this is called the exercise period or the ‘exercise notice period’ *
- Exercise Price: Exercise price is the base price at which the appreciation in stock price will be computed. This will be mentioned in the grant letter.
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Click here for a blog on the difference between ESOPs and SARs.