Vesting

Key Takeaways:

  • Vesting means to earn a right to a payment (present or future), assets, or any other benefit
  • Vesting Period refers to the waiting period before an earned financial reward is reaped
  • Vesting is most commonly used for equity share or stock options given by employers to their employees

What is Vesting?

Vesting means to earn a right to a payment (present or future), assets, or any other benefit. Legally, a vested right on any asset cannot be snatched by a third party. Vesting is often used in reference to retirement plan benefits obtained by an employee. The term is often used in real estate and inheritance law.

What is a Vesting Period?

Vesting Period refers to the waiting period before an earned financial reward is reaped. The vesting period should not see a change of status for it to lead to the reward. 

Types of Vesting Schedule

Immediate Vesting: Immediate vesting enables employees to get complete ownership of the vested money whenever it comes in their accounts.

Cliff Vesting: Cliff Vesting transfers the whole ownership to the employees in a single chunk after a defined period of time.

Graded Vesting:  Graded Vesting increases the ownership of contributions with time, eventually giving 100% ownership to the employees.

Examples of Vesting

Vesting is most commonly used for equity share or stock options given by employers to their employees. The employees on being given the stock options at a deep discount as a reward for performance need to continue working at the company for a certain period of time, say five years, which is the vesting period, before being able to exercise the ownership of the stocks.

Vesting is also often used for deferred compensation plans and retirement plans offered by employers to employees. Under general circumstances, a vested right isn’t available to be reclaimed by the employer.