Stock Appreciation Rights (SARs) – The advantages for employers

Enterprises can face difficulties in attracting and retaining talented personnel. Moreover, talent is no longer always satisfied with just a salary; there is often an expectation of future-oriented rewards. Start-ups and scale-ups often cannot offer high salaries due to liquidity constraints.

For this reason, more and more companies in the Netherlands are offering alternative rewards, such as Stock Appreciation Rights (SARs). SARs represent a claim on the enterprise, the value of which is linked to the value of shares in the company.

For more information on Stock Appreciation Rights see the blog about the pros and cons of SARs in the Netherlands. In the blog below, corporate lawyer Dirk de Waard will provide further insight into why SARs are attractive for the employer in the Netherlands.

In short, SARs are attractive for employers for the following four reasons:

1 | Tax Benefit

Firstly, the amounts paid out are tax-deductible from the company’s profits.

However, there are exceptions, for example, when the employee receives an annual salary of more than half a million per year. Furthermore, the payment the employee receives on the SARs qualifies as income, so income tax must be withheld.

All of this leads to SARs generally being more fiscally attractive than other forms of profit participation, such as shares or stock options. In short, deductibility makes SARs a fiscally attractive instrument for enterprises.

2 | Flexibility

The legal arrangement of SARs takes place through an agreement between the employer and employee. Since this involves an informal contract, no notary is involved, and the parties have the freedom to shape the contract themselves. As a result of this freedom, the employer has the flexibility to offer customized SARs to their employees.

Common clauses that the employer generally benefits from including are the exclusion of transferability of SARs and the possibility of exercising SARs. By legally excluding transferability, the employee cannot alienate (i.e., resell) the SARs, thus binding them to the enterprise. Regarding the second case, the employer can include a provision that the employee can only exercise their SARs if they are in employment. This also binds the employee to the employer.

Finally, the flexibility of SARs is also used in practice in combination with offering stock options as a form of profit participation. The cash payout through SARs will provide the employee with liquidity, which they can then use to take advantage of the stock options. These are also known as tandem SARs.

3 | Retention of Talent and Personnel

Attracting and retaining talent is a crucial driver for enterprises. SARs is a good ‘equity-related’ instrument that allows employees to participate in profits. Moreover, the employer, as discussed under point 2, can draft the provisions themselves, thereby rewarding their employees to remain loyal to the company.

Additionally, this is also motivating; the employer is more generously rewarded when the company prospers.

4 | Reservation of Corporate Rights and Obligations

Another significant advantage of SARs for the employer is that they are not linked to corporate rights. SARs prevent employees from voting during the general meeting, as would be the case with the distribution of shares as a form of profit participation. This again aligns with the flexibility of SARs.

Contact us

All in all, granting Stock Appreciation Rights in the Netherlands is a fiscally interesting option for enterprises to reward and retain their employees without losing control. At Blenheim, we have extensive experience in drafting agreements such as Stock Appreciation Rights and are happy to advise you further. Please contact corporate lawyer Dirk de Waard if you would like to discuss an example of a Stock Appreciation Rights agreement.