Should You Be Offering Your Employees SARs Instead of Cash Bonuses?
In the aftermath of the global pandemic and “The Great Resignation,” many employers are wondering how to retain their employees in a way that benefits both the workers and the company. Traditionally, cash bonuses have been an effective way to reward employees for their hard work, but is this still the best way to show your employees that they are valuable?
Stock appreciation rights (SARs) are gaining popularity as another way to incentivize, reward, and retain employees. These compensation vehicles offer employers a greater degree of flexibility to create a benefits plan that works not just for the employees but for the company as well. Here is everything you need to know about SARs and how to tell if they make sense for your business.
What Are SARs?
Stock appreciation rights are a type of equity compensation that is tied to a company’s stock price over the course of a specified period of time. Unlike other equity compensation, SARs are usually paid out in cash and do not require employees to purchase or own stock. As the employer, you still retain the right to pay out SARs in shares of stock but it is not required.
When considering SARs, there are several key terms to understand:
- Grant date: The date at which the SARs are officially given to the employee.
- Exercise date: Even though an SAR may have been granted today, it cannot be cashed in until the exercise date. Further, it can only be cashed in if the stock price has gone up since the grant date. The exercise date is dependent on a vesting schedule, which can consist of years of service or hitting certain performance milestones.
- Expiration date: The last date that an employee can exercise an SAR.
- Exercise price: This is the price at which the SAR can be exercised for either cash or shares.
Benefits of SARs
This is the number-one benefit of SARs. Employers have full control over who receives SARs, how much they receive, when they can be exercised, and even how they are paid. With cash bonuses, they can only be paid out in cash. But with SARs, employers have the option to pay in cash or shares of stock depending on what makes more sense for the company at the time.
Higher Payouts With Less Risk
On the employee end, SARs require little to no risk or investment from employees. They are not required to purchase stock in order to receive the incentive pay. They only need to satisfy the terms and conditions as outlined in the award agreement. This can make SARs more attractive than other equity compensation models.
Additionally, employees often receive higher payouts with SARs than if their employer simply gave them a cash bonus at the end of the year. This is because SARs are not tied to employee compensation level, as bonuses usually are. Instead, they are tied to company stock price, which could have a much higher potential for annual growth than employee salary.
Performance-Based Retention & Incentives
Equity compensation is commonly used to reward and retain employees by granting them a stake in the company. SARs essentially tie employee earnings to your company’s success, meaning they are more likely to act in a way that helps your company succeed. SARs are also used to retain employees due to the vesting schedules. Employees with unvested SARs will be more likely to stay with the company, at least until their shares vest.
Not only that, but SARs can also be structured in a way that provides employees with a share of the net proceeds if the company is sold. This can be a great way to incentivize employees and keep them motivated to do good work.
SARs can also be used as an add-on incentive for companies that already have ESOP plans in place.
SARs Do Not Have to Be Paid if an Employee Is Terminated
Employers can create provisions in the SAR agreement that outline what will happen if an employee resigns or is terminated. These conditions can range from a reduction in the payout all the way to forfeiting the benefits entirely depending on the circumstances of an employee’s dismissal. Again, this gives employers the ultimate flexibility over who receives incentive pay and when.
SARs can also be used to foster employee loyalty by including non-compete clauses into the SAR award agreement. This can prevent employees from cashing in on your increasing stock price only to leave to work for your competitor.
Making the Right Choice
While there are many benefits to SARs, there are also many factors to consider before implementing an SAR plan into your compensation structure. Employers must weigh the options for vesting rules, liquidity concerns, eligibility, tax implications, and so much more.
At New Century Investments, we can help you navigate the SAR process and make the right choice for your business. Schedule a complimentary introductory consultation by calling us at 817-238-6300, emailing Matt.Ward@NewCenturyInvestments.com, or scheduling an appointment online.
Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals.
Matt graduated from Texas Tech University with a bachelor’s degree and is a CERTIFIED FINANCIAL PLANNER™ and Chartered Retirement Planning Counselor℠ professional. When he’s not working, you can find Matt hiking, playing the guitar, and spending time with his family. To learn more about Matt, connect with him on LinkedIn.