Stock Appreciation Rights and the SEC: A Case of Questionable Rulemaking

Abstract

The alchemists of old have returned in the guise of the Securities and Exchange Commission, performing wondrous transmutation through the effective creation of an security out of a form of executive compensation known generically as appreciation ( SARs). As described in greater detail below, 1 a stock appreciation rights program is a form of deferred incentive compensation. Grantees are awarded SAR-units representing an equal number of the grantor's equity shares. currently being traded in public marketi. Upon eventual exercise of the rights accompanying such units, grantees ,receive an amount equal to the appreciation in market value of a like number of shares of the grantor's publicly traded stock between date of grant and date of exercise. This amount may be payable in cash, stock, or a combination of the two. SARs thus provide grantees the benefit of stock ownership without equity interest, investment, or risk of loss. Publicly held companies used SARs for a number of years2 without SEC comment as to potential exposure to the provisions of either the Securities Act of 1933 (1933 Act)3 or the Securities Exchange Act of 1934 (1934 Act).4 SAR programs offer many advantages over other forms of executive compensation and hence have grown rapidly in number. These advantages include the availability of benefits without the requirement of monetary payments (unlike stock option programs), the utilization of SARs as an interest-free form of financing the purchase of stock under tandem stock option programs, the job performance incentive created by the correlation of earnings and market appreciation, and the ability to structure SAR plans so that market appreciation is measured over a longer time span than is generally used for stock option plans, thus better serving the corporate purpose of retained employment. 5 The elimination of the preferential tax