Share Appreciation Rights Schemes

 

Share appreciation rights (SARs), formerly known as Phantom Shares, enable a company to incentivise and retain valuable staff by providing eligible participants the opportunity to receive long-term incentive remuneration payments based on the equity performance of the business.

 

The advantages of SARs

• There is no dilution of the issued share capital as no shares are transferred to the executive
• As the amount of the bonus is linked to the increase in the share price the executives interest and that of the shareholders are aligned and their common objective becomes the increase of value to the business
• The business is entitled to a tax deduction for the full cost of payments under the plan
• There are no regulatory requirements to be met and the plan is extremely flexible
• Administration cost of the plan is minimal.

 

A SARs scheme is particularly attractive in the following circumstances:

• The business’ owners want to share the economic value of equity, but not equity itself.
• The business already has a conventional ownership plan but wants to provide additional equity incentives, perhaps without providing equity itself, to selected employees.
• Management has considered other plans but found their rules too restrictive or implementation costs too high.
• The business is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there are no actual shares.
• The business cannot offer conventional kinds of ownership plans because of corporate restrictions. This would apply for instance with a close corporation, partnership, or a sole proprietorship.

 

Share Options

Under a share option plan, employees are granted an option over a number of shares at an option price which is usually (but not necessarily) equal to the market value of a share at the date of grant of the option. The employees then have the right but not the obligation to buy a certain amount of shares in the business at a predetermined price. There is typically a specified vesting period before the employees are allowed to exercise the option. The idea behind share options is to align incentives between the employees and shareholders of a company. Shareholders want to see appreciation of equity, so rewarding employees is vital to ensure that all parties are striving towards a common goal.

 

Advantages of Share Options

• Aligned shareholder and employee goals;
• Improved employee performance due to possible financial rewards;
• Effective staff recruitment and retention strategy;
• Flexibility in the type of shares and conditions attaching to those shares which may be used; and;
• Straightforward and generally easily understood by participants.