Accelerated Vesting: How speeding up access could slow down employee attrition

As the old saying goes, the definition of insanity is doing the same thing over and over again, yet expecting a different outcome each time. When it comes to operating a successful business this is especially true since you need to recognise which practices aren’t working and where things need to change to improve outcomes – they’re not going to happen by themselves.

Take your employee equity compensation or share plan for example. The advantages of operating such a scheme are obvious, proven to not only help attract high quality staff, but also to promote loyalty and encourage staff retention. However, if you’re not seeing these benefits then it might be time to take a look at your current offering and see if it needs to be tweaked, with one possible solution being to amend the vesting period.

At Global Shares we work with companies every day on their employee equity solutions. So, whether you are an existing customer, have an employee equity plan with another supplier but feel it isn’t meeting your needs or are yet to introduce a scheme to your company, you should speak to one of our team, who will be able to advise on your options.

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What does a vesting schedule do?

A vesting schedule is the process by which an employee earns the right to their shares or stock options over time. Normally employees forfeit their unvested portion of assets if they leave before the set time has elapsed or if the target isn’t achieved.

Milestone based:

A method whereby benefits are granted based on the achievement or performance of certain targets, either personal, e.g. sales goals, or companywide, e.g. an acquisition or IPO.

Time based:

A percentage of stock options are earned over time. When the first option is granted this is the cliff, and the rest of the options are granted monthly, quarterly or annually, in line with a set vesting schedule, e.g. 25% in year 3 and year 4 and the remaining 50% in year 5.

Hybrid:

A combination of the above. Employees are only eligible to exercise stock options after staying in the company for a minimum predetermined period, while also attaining a particular objective.

Accelerated Vesting:

A company might choose however, as an incentive, to shorten the vesting period to allow employees to gain access to their restricted company stocks or stock options more quickly. This is known as accelerated vesting since it is typically faster than the initial or standard vesting schedule.

Adapt and evolve

While there will always be some level of employee attrition, the advantages of employee equity compensation plans are well documented. They not only show staff they are appreciated, but get them to buy into your company’s mission and culture, while ultimately helping with the retention of world-class talent. Traditionally share plans had vesting periods of 3 to 5 years plus, the rationale being a reluctance to forfeit the pay-out would encourage staff to stay. However, as the average tenure has lowered you might be seeing high turnover regardless, like in the tech industry where the current average length of service is 3.5 years.

What we are seeing now is companies adapting and evolving with the times. Possibly as a reaction to the Great Reshuffle/Great Resignation there appears to be a trend among tech companies of speeding up share vesting, thereby enabling employees to access equity holdings much earlier. This is similar to how companies who previously only offered pay-increases at set times each year are now accommodating out-of-cycle increases to combat the out-flow of staff.

Accelerated vesting – A modern trend?

Amazon recently announced that in some cases they would be introducing an ongoing monthly vesting schedule. Prior to this vesting was at a rate of 5% after the first year, 15% after the second and 20% every six months over the next two years.

Apple are reportedly launching out-of-cycle RSU (Restricted Stock Unit) grants, whereas previously these were only offered annually.

Google, it is reported, are changing the weighting on their 4 year vesting from an equal 25% split per annum, to a frontloaded 33% in years one and two, 22% in year 3 and 12% in year 4.

Kindred Group plc recently worked with Global Shares to set up a share plan that has a 2 year vesting period where every permanent employee, outside of the executive management team, regardless of location, gets the same amount. As part of this unique approach employees are granted awards every year and by doing so, Kindred are hoping to avoid an event where the scheme ends and attrition could potentially spike. By granting annual awards they ensure that staff will always have a percentage holding yet to vest. This approach won Kindred the ESOP Star 2021 award and the ‘Most Innovative and Creative Plan Design’ at the 2022 Global Equity Organization (GEO) Awards.

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At Global Shares we understand not only the power of employee ownership, but the need to ensure that the plan you have in place is fit for purpose, achieving exactly what you require from it. So whether you are looking to revamp an existing share plan, move from another provider or are new to the concept of employee equity we understand that you need the correct plan for you.

No matter what stage you are at in your company’s lifecycle we can help you to address your employee equity solution needs. We work with companies across the globe each day to manage their share plan requirements. Remember, not all jurisdictions will have the same compliance rules in place, so it’s essential that you seek professional support. As part of our service Global Shares not only provides expert guidance but we also have a team of specialists who can advise on the intricacies in each region.

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