Advantages
- It is an option type instrument but with more attractive features.
- Unlike Options, SARs are not considered a “contribution plan” and face lesser regulation and limits.
- Benefit arises from future (only) growth, but not past value.
- SARs are 50% to 80% less dilutive than options on the same terms, for an identical benefit outcome.
- Participants are spared the challenge of funding the exercise price, which is accounted for at settlement.
- Being “indeterminate”, SARs can achieve effective tax deferral even for founders or >10% shareholders.
Disadvantages
- Under normal growth rates (<15% p.a.), “leveraged” or option type structures like SARs produce a lesser benefit than Rights (nil exercise price).
- SARs are not eligible for start-up tax concessions.
- SARs cannot be assessed as having a nil taxable up-front value under the option valuation regulation.
- Like Options, there is a high risk of producing no value.
- Can be a poor retention tool if the share price does not grow.
About Share Appreciation Rights Plans
Share Option Plans have long been the preferred plan type for smaller companies with significant potential for sharp increases in their share prices such as those involved with technology, resource exploration, research or development of new products or services. Unfortunately, options are also generally the most dilutive way to provide equity interests to employees, with typical option values being in the range of 20% to 50% of the value of a Share. Further, employees often struggle to fund the exercise price particularly if there is no market into which to sell the shares to repay funding sources.
SARs can solve all of these problems by making the exercise price “virtual”, and are sometimes referred to as “cashless exercise options”. This feature changes the nature of the instrument from being a security, to being an “derivative” which has tax and regulatory implications. Otherwise, the benefit outcomes of SARs are identical to the benefit outcome of options on the same terms.
