Reproduced with permission from Benefits Practice Center, Executive Compensation Library, Journal Reports: Law & Policy, Benefits Practice Resource Center. Copyright 2006 by The Bureau of National Affairs, Inc., 800-372-1033, www.bna.com.
Recent developments in the tax law and accounting pronouncements have generated a renewed interest in stock settled stock appreciation rights (“SSARs”). As employers search for new and innovative techniques to attract, retain, and compensate employees, the use of SSARs has now become a viable alternative. As with all equity compensation awards, however, SSARs raise various tax, corporate securities law, accounting, and plan design considerations that must be addressed before implementing a SSARs program.
A SSAR is essentially a contractual right to receive value tied to the post-grant appreciation in the value of the underlying shares subject to the award. Unlike a typical stock appreciation right (“SAR”), a SSAR is settled in employer stock. Economically, a SSAR provides the same compensation value as a stock option, but the employee is not required to pay an exercise price upon exercise of the SSAR.
While SSARs are not a new form of compensation award, the renewed interest in SSARs derives primarily from the favorable accounting treatment potentially available to SSARs under FASB Statement No. 123(R), Share-Based Payment (“FAS 123(R)”). Previously, under APB No. 25, SSARs resulted in variable accounting treatment that required periodic charges to expense as the employer's stock increased in value. Under FAS 123(R), a properly designed SSAR receives the same accounting treatment as an option. That is, with respect to options and SSARs treated as equity awards under FAS 123(R), employers measure the compensation element of the award at the time of grant and the expense is recognized over the service period (usually the vesting period). No interim expense adjustments are generally required. Prior to FAS 123(R), many employers had ceased using SSARs to avoid the negative impact of variable accounting.
The use of SSARs also remains viable under Internal Revenue Code §409A (governing nonqualified deferred compensation). Under the initial guidance issued by the IRS, the use of SSARs was generally limited to publicly traded corporations. However, the Proposed Regulations issued under §409A3 provide that both publicly traded corporations and nonpublicly traded corporations can utilize SSARs if certain requirements are satisfied (e.g., the SSAR is issued at fair market value and contains no other deferral feature). Accordingly, the major obstacles impeding the use of SSARs have been removed.