The term employee stock appreciation rights plans refers to compensation programs that provide a select group of employees with the ability to share in the increase in value of the company's stock without owning shares. In addition to enjoying the increase in the stock's value, phantom stock plans allow the employee to receive dividends too.
Stock appreciation rights and phantom stock plans are oftentimes offered in conjunction with non-qualified stock options.
Unlike stock purchase plans, which are considered non-compensatory and provide employees with the ability to purchase shares of the company's common stock at a discount, stock appreciation rights and phantom stock plans are typically provided to a select group of employees the company desires to retain or reward.
Unlike stock options, which provide employees with the immediate transfer of company ownership by awarding the employee with shares of common stock they can purchase at a discount or receive free of charge, these plans entitle the employees to "virtual" shares of stock. That is to say, they enjoy the benefits of ownership without the actual transfer of stock. The difference between stock appreciation rights plans, also known as SAR, and phantom stock plans is small but worth noting:
While the issuing company enjoys a tax deduction when the cash is paid, both of the above plans are considered taxable compensation to the employee. Both of the above mentioned plans are often used in conjunction with non-qualified stock options (NQSO) plans since the after-tax cash received by the employee can be used to lower the tax burden associated with the NQSO.