Stock Appreciation Rights

Stock appreciation rights are one of the alternatives available to corporations for incentive compensation plans for their officers and employees. Stated generally, a stock appreciation right is the right to the increment in value of the corporation's stock over a certain period of time. In most compensation plans stock appreciation rights are a part of a non-qualified1 stock option plan. Typically, when used in connection with a stock option plan, one stock appreciation right is granted for each share under option, and each stock appreciation right is exercisable only to the extent that the related option is exercisable. The stock appreciation right gives the recipient the right to receive the increase in value of the stock under option and such increase is generally paid to the recipient in shares of the corporation's stock. In some plans, at the discretion of the board of directors or a compensation committee of the corporation, the stock appreciation right is also payable wholly or partly in cash.2 Thus, the addition of stock appreciation rights to a stock option plan gives to the optionee a valuable alternative, the flexibility to realize directly in stock, or perhaps wholly or partly in cash, the gain attributable to his option, i.e., the difference between (a) the market price of the underlying stock on the date of exercise and (b) the market price of the stock on the date the option is granted (the exercise price of the option). The following is a simple example of a stock appreciation right which is a part of a non-qualified stock option plan. An optionee is granted an option under the plan for one thousand shares of the corporation's stock. The option price is $20 per share, which is the market price at the date of grant. He is also granted related stock appreciation rights which are payable to him in stock or, at the discretion of the corporation's compensation committee, in cash. Several years later the stock has a market value of $30 per share and the option is completely exercisjable. The optionee could exercise his option