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Employee Stock Options vs Stock Appreciation Rights: What's the Difference?

When it comes to employee compensation, there are two main types of stock that companies can offer: employee stock options and stock appreciation rights. Both are forms of equity compensation that can be used to attract and retain top talent, but there are some key differences between the two. Here's a look at the key differences between employee stock options and stock appreciation rights.

1. Employee Stock Options

Employee stock options give employees the right to purchase shares of the company's stock at a set price (known as the "grant price"). The grant price is typically set at the current market price of the stock at the time the options are granted. The options can then be exercised at any time up to the expiration date, at which point they will expire and become worthless.

There are two main types of employee stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). ISOs are only available to employees and are subject to special tax treatment. NQSOs, on the other hand, can be granted to anyone (including non-employees) and are subject to regular income tax rates.

2. Stock Appreciation Rights

Stock appreciation rights (SARs) are similar to employee stock options in that they give the holder the right to purchase shares of the company's stock at a set price. However, with SARs, the holder does not have to exercise their rights in order to receive the benefit. Instead, the benefit is paid out in cash or stock (at the company's discretion) at the time of expiration.

SARs can be either "tied" to the performance of the stock or "untied" from it. Tied SARs will only pay out if the stock price has increased above the grant price, while untied SARs will pay out regardless of the stock price.

3. Key Differences

There are a few key differences between employee stock options and stock appreciation rights:

  • Employee stock options must be exercised in order to receive the benefit, while SARs do not.
  • SARs can be paid out in cash or stock, while employee stock options can only be paid out in stock.
  • SARs can be "tied" to the performance of the stock, while employee stock options cannot.
  • ISOs are subject to special tax treatment, while NQSOs and SARs are not.

4. Which is Better?

There is no clear answer as to which is better - it depends on the company's needs and the preferences of the employees. Employee stock options may be more attractive to employees who are looking for a long-term investment, while SARs may be more attractive to those who are looking for a quick payout.

5. Conclusion

Employee stock options and stock appreciation rights are both forms of equity compensation that can be used to attract and retain top talent. There are some key differences between the two, but which is better depends on the company's needs and the preferences of the employees.

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