A vesting period refers to the amount of time in which an employee is required to work for an employer before he or she is able to fully own his or her shares of the employer’s stock option plan. Should the employee quit or be terminated before the vesting period ends, the company can buy back the shares of the stock for the original price. An employee is not permitted to sell or transfer stock options during a vesting period.
Vesting is the process in which an employee who has a qualified retirement plan or stock option plan must work for a company that provides said plan. Once the vesting period begins, the benefits that the plan offers cannot be revoked; as long as the employee has met the vesting period yet no longer works for the employer after meeting the qualifications of the period, the benefits of his or her stock option plan cannot be revoked.
Since vesting provides employees rights to the assets (stock option plans or retirement plans) that an employer provides, it offers employees an incentive to do a good job and remain working with a company until the period of vesting has been met.
The employer establishes a vesting schedule, which determines when employees are able to acquire complete ownership of an asset. Typically, rights that cannot be forfeited accumulate, and they are based on the amount of time an employee has worked with the company. A common example of vesting is a 401(k) company match, in which an employer matches every dollar that a person puts into the retirement plan at a certain percentage. Generally, this matching of dollars takes several years to vest. In other words, an employee is required to work with the company long enough to receive the benefits.
There are various types of vesting and vesting periods. Each type offers a certain vesting period during which time an employee must continue to work for the employer before he or she receives full ownership of the benefits. Some of the different types of vesting periods include:
A vesting period can be a very effective employee retention tool, as it encourages employees to remain with an employer in order to receive benefits. Greater employee retention leads to less loss monetarily and can ultimately increase sales.