New US Tax Laws May Nullify Stock Appreciation Rights

by Leroy Baker, Tax-News.com, New York

21 October 2004

Tax experts are fearing that the benefits of stock appreciation rights (SARs), a form of stock-based pay that has been steadily growing in popularity, may be nullified when the US Treasury Department comes to draft regulations for the recently passed tax bill as part of a tightening of deferred compensation rules.

SARS give employees the right to any increase in a stock’s value between the granting of the rights and the time it is exercised, and a change in accounting rules that will require firms to recognize the cost of stock options as an expense on their income statements was expected to boost the popularity of this form of compensation further.

However, according to the Wall Street Journal, tax and pay experts fear that provisions in the draft regulations will take the shine off SARs by requiring beneficiaries to disclose ahead of time when they intend to exercise their grants. If a date is not set, then executives could be compelled to pay tax when the award vests, as opposed to paying tax when the income is realized. Employees typically have ten years from the date of the grant to cash in SARs.

Unless SARs are exempted from the deferred compensation rules, it is feared by many observers that the schemes will be unable to function, and most companies will withdraw them in favour of other forms of incentive.

Recommended