Stock Appreciation Rights (SARs) provide option-like economics without requiring the recipient to pay an exercise price. At grant, the company sets a base value (usually the FMV). Upon exercise, the company pays the recipient the appreciation (the difference between the current FMV and the base value) in cash or shares.
For example, if you hold 1,000 SARs with a base value of $10 and exercise them when the stock is at $25:
Taxation matches NSOs. The spread at exercise is ordinary compensation income reported on Form W-2, subject to FICA taxes and income tax withholding. The default supplemental withholding rate of 22% applies, which may create an under-withholding liability if your marginal rate is higher (section “Supplemental withholding rate”). Subsequent appreciation of stock-settled SAR shares is taxed as capital gains. Unlike options, SARs carry no AMT risk, and if the stock price falls below the base value, they expire worthless without any loss of capital.