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Nov 30, 201712:27 PMExit Stage Right

with Martha Sullivan

Plan before attracting a new employee with stock

(page 2 of 2)

Stock appreciation rights (SAR) are very similar to phantom stock. SAR focuses exclusively on the growth in the share value over time. Stock appreciation rights may give the employee the opportunity to receive his or her payment for the growth in value in the form of cash or as actual shares of ownership as of the exercise date. Phantom stock doesn’t allow for conversion to actual shares.

Accounting for this compensation depends on which approach is employed. In general, the change in the employee’s interest in the benefit, subject to a potential vesting formula, is booked as compensation expense each year. Taxes are due when the employee receives a payment, which is taxed as ordinary income and deductible by the employer. If the stock appreciation rights benefit is paid in the form of actual shares, different rules apply for both accounting and tax purposes.

Phantom stock and stock appreciation rights offer employers a great deal of design flexibility and are an attractive executive compensation alternative to actual stock. With flexibility comes the risk of complexity, so consult experienced accountants and attorneys for the design and management of the compensation program. However, this complexity may be much more manageable than untangling stock ownership with a new, untested employee.

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