Vesting is when an employee gains ownership rights over employer-provided benefits or contributions, such as stock options, retirement plans, or employer-matched contributions to a retirement account. It is a mechanism that allows employees to gradually earn and gain control over these benefits over a specified period of time.
It is crucial to establish clear vesting schedules and communicate them transparently to employees. These schedules should outline the specific timeframes and conditions under which employees will gain ownership rights to their benefits. Regular communication about vesting milestones and progress can also help motivate employees and reinforce their commitment to the company.
Example of vesting
An employee (Sarah) has been given a stock option grant of 4,000 shares, with a vesting schedule of four years. This schedule involves a one-year cliff, then monthly vesting.
At the end of the first year (cliff period), Sarah vests 25% (1,000 shares).
Over the next three years, Sarah vests the remaining 75% (3,000 shares) monthly (3,000 / 36 months = 83.33 shares per month).
By the end of the four years, Sarah is fully vested and owns all 4,000 shares.