You are part of an employee committee demanding higher compensation from your company. Your main request: stock participation. You're tired of the fat cat owners getting rich off the sweat of your labor. You want your share.
Stock options are the obvious fix. However, there are problems. Stock options require the individual employees to purchase the stocks involved. If you are granted 100 stock options with a $15 strike price, you have to come up with $1,500 to get the shares.
There's another potential fix: stock appreciation rights.
SARs are similar to stock options, but they only cover the appreciation in the stock value over a period of time. They get paid out as either stock or as cash. Unlike a stock option, the employee doesn't have to buy them...they just get the cash or stock.
A stock rises from $15 to $20 during a year. The employee has 100 SARs, paying off anually in cash. They receive $500 for that increase in the share price. It's like a bonus tied to stock performance.
Related or Semi-related Video
Finance: What is right of accumulation?2 Views
what is the right of accumulation? All right well it's
basically the right to count cumulative mutual fund purchases toward discounted
volume price breaks as they relate to Commission's that is you get to
accumulate or you have the right to accumulate your volume discount over time [counting money out on table]
like you don't need to put in the order for a ton of mutual fund shares upfront
they credit you over time so remember that whole mutual fund breakpoint thing
like from $250 to 2500 the Commission on the best things in life our fees fund
yeah that's 5% then on 2,500 to 10,000 the Commission is 3% and then like from
10 to a hundred grand it's like 1% blah blah blah blah blah something like that
break points in fees ie you get a break at twenty five hundred and ten grand and
a hundred grand right there's a break there so if you invested five grand and
got the three percent retroactive Commission rate if you had the right of
accumulation well then you can invest say another twenty five hundred a year
for two years for a total of another five grand and then receive retro
actively essentially a credit if that's how this funds indentures described it
it's essentially a reduction in your commission from that 5% to 3% yeah that
works very clever why would mutual funds do
this well remember that mutual funds charge investors a percentage of assets [investor looking at a pyramid of money]
the assets they manage year after year after year well the Commission upfront
is kind of small as a number when compared with total revenues to the
mutual fund over decades of happy clients continuing to hold that fund and
pay the annual fee so pretty much anything a fun can do to bring a client
in the door and then have them hold on to the money for long periods of time is
smart business for that fun so giving an investor the right to acumulate volume [counting money on table]
and then give that customer volume and price breaks along the way well it makes
a lot of sense financially the real dough is made by the management company [investor looking at pyramid of money]
collecting its annual management fee year after year after year
yeah that is one happy piggy [money going into expanding piggy bank]
Up Next
Rights offerings are essentially hostile takeover defenses. Unfortunately, they're not as cool as swords and shields.