Stock Appreciation Rights for employees
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What is a SAR?
stock appreciation rights Advantages :
- Flexible terms and conditions
- Tax deductible for the company
- Less expensive set up costs than other equity incentives
- No financial risk for employees
- No tax risk for the employer
stock appreciation rights Disadvantages:
- Employees may feel less like an owner and therefore could be less engaged since they don't own any shares or depositary receipts
- Tax costs for employees are probably higher in comparison to benefits from shares
Okay, tell me more
Nowadays, SARs are pretty standard for an employee participation plan. One of the main reasons for choosing SARs, is that employees in early stage ventures don't have the capital or liquidity to purchase a stake (shares) in the company. In addition, early stage ventures often don't have sufficient liquidity to pay high salaries and bonuses. Other reasons for using SARs are:
- the flexibility it offers, as changes can be made without notary
- easy of implementation
- relatively low cost compared to other employee incentive plans
SARs are contractual rights, which means you could technically have a SAR contract written out on the back of an envelope and it would still be valid, you are not obliged to head out to the notary and spend money on hard to comprehend contracts.
So, with choosing a SARs, the employees obtain a claim against the company that is linked to the increasing value of the company and its shares. This is a different setup from having direct shares or depositary receipts in the company. Something people often say is that the employees hold a “virtual share” or a “phantom stock” in the company.
And how does it work from a legal perspective?
So, how does a SAR work in practice?
It's good to emphasize that the employees obtain a right to a claim against the company and not towards other shareholders in the company. This right legally arises from the underlying SAR plan or SAR contract, so as stated above, SARs are contractual rights and are not attached to shares or depositary receipts. When a SAR contract is granted to employees, the value of the SAR is calculated according to a certain formula. View the example below for a practical example of a SAR.
An example of a SAR calculation
As the SAR is considered flexible, there are all kinds of variations on SAR plans, such as different plans where employees are not only entitled to a value increase of the shares in the company but also profit rights. Therefore, SARs are contractual rights which do not entitle the employees to actual shares or depository receipts, but instead grant them a contractual right to the increase of the value of the company and / or profit rights connected to the underlying shares in the company.
And as an employer, how is this taxed?
All paid benefits from the SARs to employees are fully tax deductible for corporate income tax purposes against 15% - 25%. This is the main advantage of SARs in comparison to awarding an option and/or shares as these are not tax deductible. The benefit deriving from the SARs will be taxed as salary for the employees against the progessive personal income tax rate from 37.10% up to a maximum of 49.50%. As the benefit will qualify as salary, the employer has the obligation to withhold and pay wage tax on these benefits against the same tax rates.
What is the difference between a SAR and shares?
Shares are ownership rights in a company. They give voting rights and profit rights to the owner of the shares. A SAR is an agreement between employer and employee (not between shareholder and employee), where the employee is treated as if they were a kind of shareholder. That's why a SAR is sometimes called a 'virtual share'. Depending on the agreements in the SAR contract, the employee receives a bonus upon dividend payments and sale of the company. While dividends and profits are taxed in box 2 or box 3, a SAR is taxed in box 1.
Why RoundE?
RoundE is your partner in employee participation plans. Instead of hiring expensive lawyers to set up your participation plan, we developed in-house software to streamline this process: saving you time and money
Quality
Our plans are checked by both tax and fiscal specialists. You also get a , so the contract fits your needs perfectly
Fair pricing
We besparen kosten door ons bedrijf online te runnen en het hele proces te automatiseren, waardoor we zeer concurrerende prijzen kunnen aanbieden.
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You can contact us at anytime and one of our legal experts will be ready to help you. With any purchase, you also get a free consult with one of our experts
