SAR vs RSU

Overview

Start-up ecosystem is ever evolving and becoming increasingly dynamic. At times, it becomes difficult to attract and retain the top talent. With a rigorous competition among the firms, start-ups face a challenge to retain the key employees because of higher salaries being offered by established giants. This is where equity compensation for startups plays an important role. However, it often becomes difficult to decide on what type of employee stock compensation should be used. The best plan always works towards benefiting the employees based on their needs and also helps the employer to get the best out of the employees. Issue of viable startup equity plan sets the organization apart and more attractive from the peers in the same industry. Issue of the correct type of equity plan links the interests of the employee with that of organization and makes them feel valued and part of organization. 

In this blog we will discuss two such share based payment methods called Stock Appreciation Rights (SARs) and Restricted Stock Units (RSUs) and contrast their benefits and shortcomings. 

Stock Appreciation Right (SAR)

Stock Appreciation Rights (SAR) allows an employee to receive the cash equivalent to the appreciation in value of a fixed number of stocks between grant date and exercise date. SARs do not allow the employee to acquire actual ownership of the stocks but accrues the benefit of the stock appreciation to them. Employees are not required to pay anything in return for the appreciation in the value of SARs. Since the cash to be received by the employees is linked to company’s stock price i.e. SARs become profitable for employees when the value of companies shares increases, it acts a motivational tool for the employees but without any actual ownership. The gain enjoyed by the employee in the form of cash is taxable as ordinary income. 

Restricted Stock Units (RSUs)

Restricted Stock Grants (RSUs) are stock grants to employees upon fulfilment of certain conditions such as upon achieving a set milestone or after completion of a certain time period or combination of both. The shares are granted to employees free of cost. Employees can also sell the RSUs once they receive the stocks. Restricted Stock Units (RSUs) may be granted in the form of equity shares or cash equivalent in value, depending on the terms of RSU grants. RSUs are more convenient because no stock pricing is involved.

SAR vs. RSU

Conclusion

Employee stock compensation plans of all types add value to the employee as well as the employer but they operate in different ways. Many factors shape the decision about selection of the right plan but understanding the differences between SAR vs RSU is crucial to make an informed decision. Equity based plans have a diverse landscape in the corporate sector. Some provide benefits to employees in the form of equity shares while some compensate the employees in cash. There are unique benefits associated with each type of plan and these plans can be tailored, modified or designed as per the needs and goals of the employee and the employer.