Vesting Schedule – Definition

Cite this article as:"Vesting Schedule – Definition," in The Business Professor, updated May 12, 2019, last accessed October 22, 2020, https://thebusinessprofessor.com/lesson/vesting-schedule-definition/.

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Vesting Schedule Definition

Vesting Schedule describes an incentive program or retirement plan organized by an employer but which can only be accessed by an employed when it is fully vested. Legally, vesting Schedule describes a case in which an employer gives or an employees earns the right to claim a future payment or asset. When an incentive or retirement plan is fully vested, the employer gives the employee full ownership of certain funds or assets. Vesting Schedule can also be used in inheritance law or real estate, it describes the non-forfeitable rights given to an individual over a property or inheritance.

A Little More on What is Vesting of Ownership

Aside from being used to describe vesting between an employer and employee, vesting Schedule is a term that can be applied in certain industries. In the context of incentive plans and retirement benefits, vesting gives rights stock incentives or retirement plans provided by the employer. In most cases, employers vest employees who merit such plans or incentives. This serves as encouragement for employees to remain with the organization and also remain committed to their duties.

Vesting Schedule is a timetable that determines when an individual gets full ownership of assets of benefits vested by an employer. So, until that time is reached, the employee must stay with the organization.

Vesting and Employee Retention

Oftentimes, vestings are strategically done by employers to retain employees with immense skills who have proven to be of impact to the organization. Vesting is an employee-retention tool used by many employers.

This is an enticing method that proves to be effective for retaining skilful employees. For instance, a vesting Schedule might state that an employee is entitled to 50 units as bonus at the end of the second year and in consecutive years. If the employee leaves after the second year, the 50 units to be collected in consecutive years will be forfeited. So as to fully enjoy vesting Schedule, employees are motivated to remain with an organization for longer periods of time.

Vesting and Inheritance

Vesting Schedule is also applicable to inheritance. This is exercised by a person who wishes to vest an inheritance to an offspring or another individual. A waiting period must be set in the vesting schedule, for inheritance, it is often after the death of the party who vested the inheritance (property, assets, funds and others).

The waiting period stipulated in the vesting schedule helps to minimize conflicts over the inheritance.

Vesting and Startup Companies

In a bid to retain qualified employees and encourage their loyalty, startup companies engage in vesting schedule. These companies vest grants, benefits or incentive plans to their employees, board members, service providers and others. A success-oriented startup company might need this to retain competent service providers and employees. The common vesting period peculiar to startup companies is between 3 and 5 years.

References for Vesting Schedule

Academic Research on Vesting Schedule

How has vesting changed since passage of employee retirement income security act, Graham, A. D. (1988). Monthly Lab. Rev., 111, 20.

Performance-vesting provisions in executive compensation, Bettis, J. C., Bizjak, J., Coles, J., & Kalpathy, S. (2018). Journal of Accounting and Economics.

Qualified Pension and Profit-Sharing Plan Vesting: Revolution Not Reform, Osgood, R. K. (1979). BUL Rev., 59, 452.

Equity vesting and managerial myopia, Edmans, A., Fang, V. W., & Lewellen, K. A. (2013). National Bureau of Economic Research.

Stock option grant vesting terms: Economic and financial reporting determinants, Cadman, B. D., Rusticus, T. O., & Sunder, J. (2013). Review of Accounting Studies, 18(4), 1159-1190.

Strategic news releases in equity vesting months, Edmans, A., Goncalves-Pinto, L., Wang, Y., & Xu, M. (2014). National Bureau of Economic Research.

Employee share ownership and performance: golden path or golden handcuffs?, Sengupta, S., Whitfield, K., & McNabb, B. (2007). The International Journal of Human Resource Management, 18(8), 1507-1538.

Executive stock option vesting conditions, corporate governance and CEO attributes: evidence from Australia, Qu, X., Percy, M., Stewart, J., & Hu, F. (2018). Accounting & Finance, 58(2), 503-533.

Vesting of private pension benefits in 1979 and change from 1972, Rogers, G. T. (1981). Soc. Sec. Bull., 44, 12.

Mandated Vesting: Suppression of Voluntary Retirement Benefits, Van Zante, P. M. (1999). Notre Dame L. Rev., 75, 125.

Executive stock option repricing, internal governance mechanisms, and management turnover, Chidambaran, N. K., & Prabhala, N. R. (2003). Journal of Financial Economics, 69(1), 153-189.

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