vesting

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noun vest·ing \ˈve-stiŋ\
Updated on: 26 Jul 2017

Definition of vesting

  1. :  the conveying to an employee of inalienable rights to money contributed by an employer to a pension fund or retirement plan especially in the event of termination of employment prior to the normal retirement age; also :  the right so conveyed

Recent Examples of vesting from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'vesting.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of vesting

1944


Financial Definition of VESTING

vesting

What It Is

Vesting occurs when a financial instrument or account becomes wholly owned by an investor.

How It Works

For example, let's assume that John Doe receives options to buy 2,000 shares of Company XYZ, his employer, for $10 a share. He receives the options as part of his compensation package.

His shares vest over a five-year period, meaning they do not become exercisable for five years. This means John must stay at the company for at least five years before he can exercise his stock options.

Vesting is also common in retirement plans. For example, if John Doe's employer matches the contributions he makes to his retirement plan, those contributions might vest over, say, three years. This means that although the employer agrees to add extra, free money to John's retirement account, that free money doesn't really become his for three years.

Accelerated vesting occurs when a stock option becomes exercisable earlier than originally scheduled. So if Company ABC comes along and buys a 51% stake in Company XYZ, this constitutes a change in control and John Doe's options might automatically vest even though the five-year period has not elapsed. John exercises his options at $10 a share, sells the shares for $20 a share, and walks away with a tidy profit.

Why It Matters

Vesting is a tactic for encouraging loyalty among employees. Vesting can be a windfall to employees, though some tax consequences may exist. Depending on the type of option, for example, John Doe might need to pay taxes on the grant value of the shares ($10) as well as the capital gains on the profit from the sale of those shares.



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