What is a Share Appreciation Rights Plan?
This article was originally published by The Hamilton Spectator.
Employee incentive plans are vehicles which employers use to attract and retain employees. These plans are popular with start-up businesses and small private companies that do not have the ability to offer the same compensation packages as established and larger businesses.
A Share Appreciation Rights Plan (“SARP”) is a type of employee plan, which can provide a company with a variety of benefits, while reducing certain drawbacks.
1. Brief Overview
Under a SARP, participating employees are granted units. The units are tied to the value of a company’s growth shares, such as common shares. As the value of a company increases, the value of its growth shares rise, and thereby each unit increases in value. In such a scenario, an employee would receive the appreciation value of a unit from the grant date to the date the unit can be exercised.
2. Benefits
Typically, SARP’s will include a provision specifying that an employee will not be responsible for paying the company in the event the value of the unit(s) is negative. In other words, if the company’s growth shares became less valuable from the grant date to the exercise date, the employee would not be responsible for paying the negative difference to the company. Accordingly, there will be no downside for the employee to participate in the plan.
In addition to there being no downside risk for the employee, the company will not issue actual shares to the employee, unlike a stock option plan, and thereby not have to worry about administrative or material liabilities owing to shareholders.
If you have any interest in such an employee plan, please reach out Hassan Chaudhary at Ross & McBride LLP.
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