SARs are a type of employee incentive plan through which the employees benefit from the appreciation of the stock price of the company over a specified period of time. This is a way companies can align the employees with the overall goal of the company. Similar to ESOPs, SARs have vesting or lock-in period which is minimum one year in India as per section 24(1) of the SEBI (Share-Based Employee Benefits) Regulations 2014.
Unlike stock options, SARs does not require the employees to pay the strike/exercise price. SARs are paid as bonus which is linked to the appreciation in the stock price of the company.
In the case of SARs, the employees may be paid in cash (discussed below).
Also, unlike Sweat Equity, employees do not receive equity in the company when SARs are allocated.
TYPES OF SARs
1. Stock-Settled SARs
In the case of the Stock-Settled SARs, the appreciation of the share price is paid in the form of shares of the company. Take, for example, a company XYZ issues SARs when the share price is Rs. 10. Suppose an employee received SAR for 1000 shares. Now, after one year of lock-in, the SARs are eligible to be vested. The stock price now is Rs. 20. So, the appreciation for the 1000 share is Rs. 10,000. The employee will receive (Rs. 10,000 / Rs. 20) = 500 shares of XYZ.
2. Cash-Settled SARs
In the case of the Cash- Settled SARs, the appreciation of the share price is paid in the form of cash. Referring to the above example, Rs. 10,000 will be paid out to the employee.
PHANTOM STOCK OPTIONS
Phantom Stock Option is just another name for the Cash-Settled SAR. The Phantom Stock Option is a better option for the employer than ESOP or Stock-Settled SAR because employees do not get any voting rights but still, the compensation is aligned to the stock performance. So, basically, Phantom Stock Options are cash bonus for the appreciation of the stock price.
TYPE OF PHANTOM STOCK OPTIONS
1. Appreciation only
Appreciation only Phantom Stock Options pay an amount equal to the appreciation of the stock price from the time of issuance to the settlement.
2. Fully Paid
These Phantom Stock Options pay an amount equal to the stock price at the time settlement.