Vesting Schedules for Stock Options

One of the key considerations in setting up a stock option plan is establishing a vesting schedule. A vesting schedule, outlined in the stock option agreement, details the amount of time it takes for

Some companies offer new employees immediate vesting as a type of sign-on bonus. Others structure their plans so that options vest over a period of years, creating an incentive for employees to remain with the company. Still other businesses reward employees for hard work through performance-based stock options plans that vest incrementally when certain performance goals are met.

In general, the type of vesting schedule you choose will depend on two things: how you want to use the stock options -- to attract, motivate, reward or retain employees -- and whether you have a qualified or nonqualified stock option plan.

Vesting Schedules for Nonqualified Options
Most broad-based stock option plans are structured as nonqualified options. In general, nonqualified stock options are not regulated as elaborately as qualified stock options and allow for a more flexible vesting schedule.

Companies with broad-based stock option plans typically follow a 3- to 5-year schedule that vests a certain percentage of options each year. But the most common schedule vests an equal percentage of options (25 percent) every year for four years, according to study of broad-based stock options by the National Center for Employee Ownership, a private nonprofit membership and research organization.