What Does Vesting Mean?
The term “vesting” means to set aside something, most often to reserve for someone’s own use. When it comes to employment benefits, vesting means that the employee will gain the right to receive employer-provided assets or services. These assets can range from retirement benefits to vacation days. The specific type of benefit usually determines who is allowed what rights when it comes to vesting.
Purpose of Vesting
Employers use vesting to keep valuable benefits they offer employees exclusive only to the people who have earned them. They do this for a number of reasons, including:
- Making sure that the company receives its full value from an employee before he or she can leave it later on with those valuable assets;
- Making sure that employees receive their full value from the company before they can ask for it later on after leaving or being fired, thus fulfilling the obligation to all parties involved.
What Is a Vesting Period?
Vesting periods are the time spans that come with various types of vesting. Each type of vesting has its own unique duration, commonly referred to as a vesting period. Those periods can vary in length, but they will always correspond to the type of vesting involved.
Types of Vesting Periods
There are four main types of vesting periods with regard to employment benefits: immediate, time-based, milestone-based, and hybrid.
This means that employees who sign up to receive it will immediately gain access to all of the benefits offered by their employer.
This is probably the simplest type of vesting when it comes to employment benefits. It means that the employee will receive the benefit after they have worked for it for a certain period of time; usually one year.
This type of vesting means that the benefit will be awarded when certain milestones are met. Those milestones could come in the form of things like entrance into retirement, obtaining a master’s degree, or completing some other educational program.
Of course, it wouldn’t make sense for all employment benefits to have immediate vesting. Some employees might find themselves receiving a percentage of their total benefits after meeting certain milestones while receiving the rest after passing a specific period of time.
Pros and Cons of Vesting
Employers might be tempted to offer the immediate vesting option when it comes to employment benefits because they know that employees will get access to what they need right away. That’s why some companies even use that type of schedule for their retirement plans, which is otherwise a perk most people would expect to have with cliff or graded vesting. On the other hand, the biggest advantage of cliff and graded vesting is that it gives employers time to reward employees who stick around for a longer period of time. The act of encouraging them to stick around long enough to earn those benefits might even help keep better employees in their places.
The best type of vesting for any employment benefit will really depend on what the company’s goals are and how many options they have in terms of covering those benefits. It might even be a good idea to mix things up a bit by offering more than one option so that employees can choose a schedule based on their own needs.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.