Document Type


Publication Date



A stock appreciation rights (SARs) program is a form of deferred incentive compensation. Grantees are awarded SAR-units representing an equal number of the grantor’s equity shares currently being traded in public markets. SARs provide grantees the benefit of stock ownership without equity interest, investment, or risk of loss. Stock appreciation rights programs offer various advantages over other forms of executive compensation and have grown rapidly in number. These advantages include the availability of benefits without the requirement of monetary payments, the utilization of SARs as an interest-free form of financing the purchase of stock under tandem stock option programs, the job performance incentive created by the correlation of earnings and market appreciation is measured over a longer time span than is generally used for stock option plans, thus better serving the corporate purpose of retained employment. Additionally, paired with the elimination of the preferential tax treatment of qualified stock options in the Tax Reform Act of 1976, SARs have become increasingly popular. However, despite the attractiveness of SAR programs, recently adopted amendments to the Security Exchange Commission’s rule 16b-3 have substantially chilled the continued growth of SARs.

This Article will discuss the issues raised by the Commission's adoption of the amendments to rule 16b-3. After briefly describing the most important features of SAR programs, it will consider the question which the Commission did not choose to answer-whether section 16(b) applies to transactions in SARs. The Article will then examine the basis and scope of the safe harbor provisions, particularly from the perspective of companies that may find themselves either deliberately or unwittingly outside the harbor's confines, and will consider to what extent such provisions are appropriate standards even if section 16(b) is applicable to SARs. Because of the Commission's particular concern with plans that provide participants the ability to obtain cash (in lieu of an equivalent value of stock) upon SAR exercise, this Article will focus principally upon these issues in relation to SAR cash settlements.