CandleFocus Glossary Editor
The term “vesting” refers to an employee’s acquisition of rights of ownership to certain assets, particularly with regard to employer-matching retirement funds and stock options granted by the employer as part of a compensation package. Vesting is a process through which an employee’s legal rights to receive and use these assets increase over time.
Generally, vesting occurs through a schedule that outlines certain dates for the employee to become increasingly entitled to more of their matching funds and stock options. This can be in the form of a cliff vesting schedule, wherein the employee has no rights before the vesting date, after which they are 100% vested, or a graded vesting schedule, wherein the vested amount increases gradually over a number of years.
The amount of time it takes to become fully vested will depend on the type of asset being vested, as well as the employer’s specific vesting policy. A common vesting schedule is three to five years. In this case, an employee will become 20% vested in each asset after the first year, 40% vested after the second, 60% after the third, 80% after the fourth, and 100% vested after the fifth.
This incremental increase in vested ownership rights ensures that the employee continues to work and remain with the employer in order to fully benefit from the asset. It also allows the employee to develop an ongoing relationship with the company. Vesting also encourages greater commitment from employees, as they are more likely to save for retirement and take advantage of stock options if they have ownership rights to them.
Regardless of the specific vesting policy a company has in place, it is important that employees know what their rights are, when they become vested and other details pertaining to the assets they are acquiring. Vesting is an important part of any employee’s compensation package and it is in their best interest to understand their employee rights.
Generally, vesting occurs through a schedule that outlines certain dates for the employee to become increasingly entitled to more of their matching funds and stock options. This can be in the form of a cliff vesting schedule, wherein the employee has no rights before the vesting date, after which they are 100% vested, or a graded vesting schedule, wherein the vested amount increases gradually over a number of years.
The amount of time it takes to become fully vested will depend on the type of asset being vested, as well as the employer’s specific vesting policy. A common vesting schedule is three to five years. In this case, an employee will become 20% vested in each asset after the first year, 40% vested after the second, 60% after the third, 80% after the fourth, and 100% vested after the fifth.
This incremental increase in vested ownership rights ensures that the employee continues to work and remain with the employer in order to fully benefit from the asset. It also allows the employee to develop an ongoing relationship with the company. Vesting also encourages greater commitment from employees, as they are more likely to save for retirement and take advantage of stock options if they have ownership rights to them.
Regardless of the specific vesting policy a company has in place, it is important that employees know what their rights are, when they become vested and other details pertaining to the assets they are acquiring. Vesting is an important part of any employee’s compensation package and it is in their best interest to understand their employee rights.