Fully Vested
Being fully vested means a person has rights to the full amount of some benefit, most commonly employee benefits such as stock options, profit sharing, or retirement benefits. Benefits that must be fully vested benefits often accrue to employees each year, but they only become the employee's property according to a vesting schedule.Vesting may occur on a gradual schedule, such as 25 percent per year, or on a "cliff" schedule where 100 percent of benefits vest at a set time, such as four years after the award date. Fully vested may be compared with partially vested.
Full Vesting
Definition
Full vesting means that a person has complete ownership of a particular benefit. The most common examples include employee benefits such as stock options, profit sharing, or retirement benefits. Benefits that require full vesting typically accumulate annually for employees, but according to the vesting schedule, they only become the employee's property after a certain period.
Origin
The concept of full vesting originated from the need for companies to create incentive mechanisms for employees. As early as the mid-20th century, many companies began to adopt stock options and profit-sharing plans to encourage employees to stay with the company long-term and improve their performance. Over time, these plans evolved into today's full and partial vesting mechanisms.
Categories and Characteristics
Full vesting can be divided into two main types: gradual vesting and cliff vesting.
- Gradual Vesting: In this plan, an employee's benefits vest incrementally over time. For example, 25% vesting each year, resulting in full vesting after four years.
- Cliff Vesting: In this plan, an employee's benefits do not vest until a specific time point, at which all benefits vest at once. For example, all benefits vest at once after four years.
Specific Cases
Case 1: A tech company offers new employees stock options with a gradual vesting schedule, vesting 25% each year. After four years of employment, all stock options are fully vested, and the employee can freely buy and sell these stocks.
Case 2: A manufacturing company uses a cliff vesting plan where employees' retirement benefits fully vest after five years of service. If an employee leaves before five years, they forfeit all retirement benefits.
Common Questions
Q: What happens if I leave before full vesting?
A: If you leave before full vesting, you typically forfeit any unvested benefits. For example, if you are in a gradual vesting plan and have worked for two years, only 50% of your benefits are vested. Upon leaving, you can only retain this 50%.
Q: What is the difference between full vesting and partial vesting?
A: Full vesting means you have complete ownership of all benefits, while partial vesting means you only have ownership of a portion of the benefits, with the remaining portion requiring additional time to vest.
