A vesting period is a legal term that refers to the amount of time that must pass before a person earns the right to payment, asset, or benefit. It is most often used in retirement plans where a person accrues certain rights to money contributed by an employer after a specific period of time has passed. It is also used when an employee is granted stock options in a company they work for but can only exercise those options after a specific period of time has passed; that is, the vesting period. With retirement contributions, the vesting period is usually set by government rules applying to retirement accounts while share and option vesting periods are negotiated between the employer and employee.
With some types of employment, and particularly in startup companies, employers offer their staff shares of company stock or stock options that enable the employee to buy the shares at the current price at some point in the future (when, if the company succeeds, they should be worth significantly more). For startup companies, this form of reward can be used to attract talented individuals when the company does not yet have enough funds to pay the amount such individuals can otherwise command on the market. It is also used to encourage employees in a company to feel a sense of ownership and to be invested in its success; it can also be used to retain employees who might otherwise take a job elsewhere.
The vesting period that is associated with this grant of shares requires the employee to remain with the company for the specified period; if they leave the company or are terminated before the vesting period has passed they lose the right to the shares. The specific details of how employee share schemes operate and their vesting periods are usually spelled out in an employee’s employment contract or other agreement that applies when shares or options are offered.
Vesting periods can also be a part of employee contributions to retirement plans. In some cases, employer contributions are not owned by the employee until a vesting period has passed. The conditions associated with employer retirement contributions and vesting are usually contained in a company’s retirement plan summary that is available from the insurance administrator.
The period for vesting can be zero where an employee gains the benefits of shares or retirement contributions immediately but often there are vesting periods associated with these benefits that are set at the discretion of the employer.
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