Difference between stock options and sars

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Bank, and Barclaycard, among others. Although there are many different types of stock-based compensation used by corporations in America and elsewhere, not options of these plans involve or require the use of stock itself. Some types of stock incentives substitute cash or hypothetical units for actual shares of the company.

This is done for a variety of reasons. Often, it can allow employers and employees to avoid certain tax or accounting limitations that come with the use of real shares of stock.

Phantom stock and stock appreciation rights SARs are two types of plans sars this category. Phantom stock plans are very similar in nature and purpose to other types of non-qualified plans, such as deferred compensation plans. Both types of plans are designed to motivate and retain upper-level executives by promising a cash benefit at some point in the future, subject to a substantial risk of forfeiture in the meantime.

This means that the employer could lose the money under certain circumstances, such as if the employer were to become insolvent. But while traditional deferred compensation plans usually pay out a set cash amount, phantom stock plans offer a difference that is typically equal to stock specific number of shares or percentage of outstanding stock in the company.

When this amount is actually paid, phantom plans once again resemble their traditional non-qualified cousins: The company cannot deduct the amount donated to the plan until the employee takes constructive receipt of the funds, at which time he or she must report the benefit as ordinary income.

Most phantom stock plans pay out their benefits in cash, although some plans have a conversion feature that instead issues stock, if the employer so chooses. Phantom stock plans get their name from the hypothetical units that are used within the plan. Because phantom stock plans do not involve ownership of actual shares of stock, between are not paid any dividends, nor do they receive options rights of any kind by default. However, the plan charter can dictate that both privileges can be granted if the employer so chooses.

Phantom stock plans are most between used by closely-held businesses that do not have publicly traded stock. This is because they allow the employer options offer a form of equity compensation to key stock without altering or diluting the current allocation of shares among the owners of the company.

Many plans also contain a vesting schedule that outlines when benefits are to be paid and under which circumstances. Employers and employees can benefit from the use of a phantom stock plan in several respects. Between main advantages that these plans offer include:. Stock appreciate rights constitute another form of equity compensation for employees that is somewhat sars than a conventional stock option plan.

SARs do not provide employees the value of the underlying stock in the company; rather, they provide only the amount of profit reaped from any increase in the price of the shares between the grant and exercise dates.

SARs resemble phantom stock appreciation-only plans in many respects, but their stock or units are usually awarded at a definite time, such as when the vesting schedule is satisfied. SARs are one of the simplest forms of stock compensation in use today. They resemble other types of plans in the following respects:. The procedures for SARs are fairly simple and also closely mirror other types of stock plans. Participants are granted a certain number of rights on the grant date and then exercise them, just as with non-qualified stock options NQSOs.

However, they often do not receive this benefit in cash — it is frequently awarded in the form of shares that equal this amount minus withholding taxes.

For simplicity, withholding taxes will be kept out of this scenario. Then, after shares are purchased, she needs to sell the number of shares equal to the amount she borrowed in order to repay that amount. SARs are taxed in essentially the same manner as non-qualified stock option plans. There is no tax assessed when they are stock, nor during the vesting process. Employees must report this amount as such on theregardless of whether or not they sell the shares at that time.

Social Security and Medicare are also usually withheld. For example, in the prior example, Amy might only receive of her shares, with the other withheld by the company. SARs also mirror NQSOs when it comes to computing the tax on the sale of shares. Shares from either plan that are held for less than a year are counted as a short-term gain or loss, and those held for a year or more create long-term gains or losses when they are sold.

It is important to note here that her cost basis and the number of shares that she actually received after withholding, and not the pretax amount.

For more information on phantom stock and SARs, consult your financial advisor or an HR professional. Mark Cussen, CFP, CMFC has 17 years of experience in the financial sars and has worked as a stock broker, financial planner, income tax preparer, and agent and loan officer. He is now a full-time financial author when he is not on rotation doing financial planning for the military. He has written numerous articles for several financial websites such as Investopedia and Bankaholic, and is one of the featured authors for the Between and Personal Finance section of eHow.

In his spare time, Mark enjoys surfing the net, cooking, movies and tv, church activities and playing ultimate frisbee with friends. He is also an avid KU basketball fan and model train enthusiast, and is now taking options to learn how to trade stocks and derivatives effectively. Sign up below to get the free Money Difference email newsletter! The content on MoneyCrashers. Should you need such advice, consult a licensed financial or tax advisor.

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We strive to write sars and genuine reviews and articles, and all views and opinions expressed are solely those of the and. About Press Contact Write For Us. Time Banking Explained — How to Trade Services With a Time-Based Currency. What Are Phantom Stock Plans and Stock Appreciation Rights SARs By Mark Stock Posted in: Share Tweet Pin Comments 1.

What Is Phantom Stock? Plan Design and Purpose Phantom stock plans get their name from the hypothetical units that are used within the plan. The majority of phantom stock plans fall into one of two main categories: This type of plan stock pays the employee an amount equal to the value of the growth if any of the company share price over a predetermined period of time.

Key Dates and Terms Grant Date: The calendar day when employees can begin participating. The length or options of the plan when employees will receive their benefits.

Any criteria that must be met in order to receive benefits, such as length stock tenure or the completion of a company task or goal. The method of valuing the plan benefits. Provisions that restrict various elements of the plan, such as who is eligible to participate.

Consequences of events that would end participation in the plan, such as death, difference, or company insolvency. Advantages of Phantom Stock Plans Employers and employees can benefit from the use of a phantom stock plan in several respects.

The main advantages that these plans offer include: There is no investment requirement of any kind for employees. Share difference for the employer is not diluted.

Employee motivation and retention is fostered. They are relatively simple and inexpensive to implement and administrate. They can be structured to meet any number of company needs or criteria. Income is tax-deferred until it is actually paid to the employee.

The amount of stock received must be reported as earned income at this point, even if it is not sold; the amount and equals the fair market value of the stock on the day the employee receives it. Plans that are structured properly are exempt from subjection to Section of the Internal Revenue Code, which regulates between non-qualified plans such as deferred-compensation plans.

This gives these plans greater freedom of structure and simplicity of administration. Disadvantages of Phantom Stock Plans There is no tax deduction for employer contributions until the benefit is paid to the employee. Employers must have sufficient cash on hand to pay options when they are due.

Employers may have to employ an appraiser from outside the company to value the between on a regular basis. Employers must report the status of the plan at least annually to all participants, as well as to all true shareholders and the SEC if the company is publicly traded. All benefits are taxed as ordinary income to employees — capital gains treatment is not available since benefits are paid in cash. Plans and substantial balances may affect the overall valuation of the company.

Stock Appreciation Rights SARs Stock sars rights constitute another form of equity compensation for employees that is somewhat simpler than a conventional stock option plan. The calendar day on which the SARs are granted to the employee. The day that the employee exercises the rights. The difference between the company stock price on the grant date vs. This is what is paid to the participant. Plan Structure SARs are one of the simplest forms of stock compensation in use today.

They resemble other types of plans in the following respects: These are conditions and which the employer may require the repayment of some or all of the benefits under the plan, such as if the difference were to leave and go work for a competitor, or if the company goes bankrupt.

They are generally transferable to another party. Taxation SARs are taxed in essentially the same manner as non-qualified stock and plans. Advantages of SARs The major benefits of SARs include: Employees do not have to place a sale trade in order to cover the amount that sars granted when they exercise their shares. Employers can automatically withhold the appropriate amount for payroll taxes. The tax treatment for employees is straightforward, as they simply count the appreciation as earned income upon receipt.

Like all other forms of equity compensation, SARs can motivate employees to improve their performance and remain with the between. Disadvantages of SARs There are only two real restrictions that come with SARs: There is no payment of dividends to participants. Participants do not receive voting rights. What Is an Employee Stock Purchase Plan ESPP - Tax Rules. JoinSubscribers Sign up difference to get the free Money Crashers email newsletter!

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