Why not stock-settled SARs
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I have begun researching stock-settled SARs as part of a portfolio approach to executive equity. My reading suggests they have the same accounting treatment as stock options and stock-settled SARs result is less dilution since shares are only issued on the gain in stock price. What am I missing? I don't understand why stock-settled SARs are not favored over options.
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Joe, I can't answer your question but I would comment that the "less dilution" point is only partly true. It's certainly true that using stock-settled SARs results in fewer shares being in issue in the market, but it also results in the corporation receiving less cash.
Example: SAR is granted in relation to 10,000 shares when the share price is $10. Share price doubles to $20. SAR delivers 5,000 free shares.
Alternatively, a stock option is granted over 10,000 shares when the share price is $10. This time the company issues 10,000 shares and receives $100,000.
You could either analyze this as selling 10,000 shares at half price; or as selling 5,000 shares at market value and 5,000 shares for nothing.
So really, in both scenarios, the dilution consists of issuing 5,000 free shares. With the option, the corporation also sells some shares at fair market value, but this is not really dilutive.