Vesting

Employers often use vesting to encourage staff to stay. Until benefits vest, an employee who leaves may lose some or all of them.

There are two common types of vesting schedule. Cliff vesting gives full ownership all at once after a set period. For example, an employee might own none of the employer's retirement contributions until completing three years of service, then own 100%. Graded vesting gives ownership gradually, for example 20% after each year of service, until the employee is fully vested after five years.

The employee's own contributions to a retirement plan are typically always fully vested. Vesting rules usually apply only to the employer's contributions.

Vesting also applies to equity compensation, such as stock options and restricted stock units. A common arrangement in technology companies is four-year vesting with a one-year cliff: nothing vests in the first year, then 25% vests at the end of the first year and the remainder vests monthly or quarterly over the next three years.

Understanding vesting schedules is important when considering a job change, because leaving just before a vesting date can mean giving up significant benefits.