{"id":8250,"date":"2023-08-20T11:47:37","date_gmt":"2023-08-20T06:17:37","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=8250"},"modified":"2023-08-20T14:58:56","modified_gmt":"2023-08-20T09:28:56","slug":"vesting","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/","title":{"rendered":"Vesting: Why is it a great employee retention technique?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69ec743fa9f20\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69ec743fa9f20\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#What-Does-Vesting-Mean\" >What Does Vesting Mean?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Basics-of-Vesting\" >Basics of Vesting<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Understanding-Employee-Stock-Options-ESOPs\" >Understanding Employee Stock Options (ESOPs)<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Vesting-Schedule-Meaning-Types\" >Vesting Schedule: Meaning &amp; Types<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#How-to-Calculate-Vesting\" >How to Calculate Vesting?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Tax-Implications-of-Vesting-in-India\" >Tax Implications of Vesting in India<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Why-is-Vesting-a-Popular-Employee-Retention-Technique\" >Why is Vesting a Popular Employee Retention Technique?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#Vested-vs-Non-Vested-Benefits\" >Vested vs Non-Vested Benefits<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/vesting\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-Does-Vesting-Mean\"><\/span><b>What Does Vesting Mean?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you&#8217;ve been granted ESOPs or offered a deferred bonus, chances are you&#8217;re stumped by the concept of vesting. In reality, the concept is quite simple.<\/p>\n<p>Here&#8217;s a detailed guide to everything you need to know about vesting, whether you are an employer, employee, or just plain curious!<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Basics-of-Vesting\"><\/span><b>Basics of Vesting<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Simply put, vesting is an employee retention technique.<\/p>\n<p>Employers give their employees a guarantee that if they stay for a specified term of employment, they will earn assets like equity stocks or retirement plans.<\/p>\n<p><span style=\"font-weight: 400;\">The intent is to give employees an incentive to stay with the business. <\/span>Retaining top talent should be every business&#8217;s major goal, alongside profitability and growth.<\/p>\n<p><span style=\"font-weight: 400;\">Let&#8217;s understand how vested benefits work with t<\/span>he most common vested benefit: ESOP, or the Employee Stock Option Plan.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Understanding-Employee-Stock-Options-ESOPs\"><\/span><b>Understanding Employee Stock Options (ESOPs)<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>An ESOP is a contract that gives an employee the right to buy a stock at a predetermined price for a finite period of time.<\/p>\n<p>Watch the below video for more:<\/p>\n<div style=\"width: 770px;\" class=\"wp-video\"><!--[if lt IE 9]><script>document.createElement('video');<\/script><![endif]-->\n<video class=\"wp-video-shortcode\" id=\"video-8250-1\" width=\"770\" height=\"433\" poster=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/Screenshot-2023-07-18-at-6.02.14-PM.png\" preload=\"metadata\" controls=\"controls\"><source type=\"video\/mp4\" src=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/Vesting.mp4?_=1\" \/><a href=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/Vesting.mp4\" target=\"_blank\" rel=\"noopener\">https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/Vesting.mp4<\/a><\/video><\/div>\n<h4>How are ESOPs Vested?<\/h4>\n<p>As a vested benefit, employees have to fulfil the requirements of their vesting schedule in order to gain ownership of their ESOPs.<\/p>\n<p>ESOPs typically start vesting only after a cliff period. Cliff period is the minimum period that an employee has to work for the company before any of the options start vesting. Let&#8217;s understand how ESOPs are vested using an example.<\/p>\n<h4>Example of ESOP<\/h4>\n<p><span style=\"font-weight: 400;\">A company offers 100 ESOPs to its employee with the following conditions.<\/span><\/p>\n<ul>\n<li>Options granted: 100<\/li>\n<li>Grant price: Rs 1<\/li>\n<li>Cliff period: 1 year<\/li>\n<li>Vesting schedule: Time-based, 20% each year<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">After this initial one-year cliff period, 20% of the options will vest in the first year. This means that the employee can exercise 20% of his stock options by purchasing the shares at the predetermined price of Rs 1.\u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">Year<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2020<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2021<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2022<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2023<\/span><\/td>\n<td><span style=\"font-weight: 400;\">2023<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Stock Units Vested<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Total Units Vested<\/span><\/td>\n<td><span style=\"font-weight: 400;\">20<\/span><\/td>\n<td><span style=\"font-weight: 400;\">40<\/span><\/td>\n<td><span style=\"font-weight: 400;\">60<\/span><\/td>\n<td><span style=\"font-weight: 400;\">80<\/span><\/td>\n<td><span style=\"font-weight: 400;\">100<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Every year, 20% of the stock options vest \u2013 which means by the end of the fifth year, the employee can exercise all 100 of the stock options given.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Vesting-Schedule-Meaning-Types\"><\/span>Vesting Schedule: Meaning &amp; Types<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>All vested benefits follow a vesting schedule, which details how the employee earns the benefits.\u00a0These schedules can be tied to a period of time, a milestone, or a mix of both. Let&#8217;s understand each one.<\/p>\n<h4>Time-Based Vesting Schedule<\/h4>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-8384 \" src=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/vesting-graphic-e1689680554246.png\" alt=\"vesting schedule - time based \" width=\"568\" height=\"448\" srcset=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/vesting-graphic-e1689680554246.png 712w, https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/07\/vesting-graphic-e1689680554246-300x237.png 300w\" sizes=\"(max-width: 568px) 100vw, 568px\" \/><span style=\"font-weight: 400;\">This kind of vesting schedule gives the employee ownership of the asset over a period of time. <\/span><span style=\"font-weight: 400;\">The asset begins to vest after the cliff period.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The cliff period is the minimum required term of employment after which the employee begins to gain ownership of the asset.\u00a0<\/span><\/p>\n<h4>Milestone-Based Vesting Schedule<\/h4>\n<p>Under a milestone-based vesting period, the employee gains ownership of the asset after a certain milestone is reached. The milestone is predetermined, and could be an IPO, completion of a business project or when the company hits a certain valuation.<\/p>\n<h4>Hybrid Vesting Schedule<\/h4>\n<p>A combination of both time and milestone based vesting schedules requires the employee to complete a period of employment and also hit the pre-decided milestone.<\/p>\n<table>\n<tbody>\n<tr>\n<th>Vesting schedule<\/th>\n<th>Pros<\/th>\n<th>Cons<\/th>\n<\/tr>\n<tr>\n<td>Cliff vesting<\/td>\n<td>Simple to understand and administer<\/td>\n<td>Risky for employees<\/td>\n<\/tr>\n<tr>\n<td>Gradual vesting<\/td>\n<td>More employee-friendly<\/td>\n<td>More complex to administer<\/td>\n<\/tr>\n<tr>\n<td>Hybrid vesting<\/td>\n<td>Best of both worlds<\/td>\n<td>Can be more complex to administer than cliff vesting<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span class=\"ez-toc-section\" id=\"How-to-Calculate-Vesting\"><\/span>How to Calculate Vesting?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p data-sourcepos=\"17:7-17:45\">The formula for calculating vesting is:<\/p>\n<p style=\"text-align: center;\"><strong>Vested shares = (Number of shares x Vesting percentage) \/ 100<\/strong><\/p>\n<p data-sourcepos=\"21:7-21:148\">For example, if an employee has 100 shares of stock options with a vesting percentage of 25%, they would have 25 vested shares after one year.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tax-Implications-of-Vesting-in-India\"><\/span>Tax Implications of Vesting in India<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In India, stock options and RSUs are taxed as perquisite income. This means that the fair market value of the shares on the vesting date is clubbed with the employee&#8217;s salary and taxed as per the applicable tax slab.<\/p>\n<p>The tax rate for stock options or RSUs depends on the employee&#8217;s income tax slab. For example, if an employee is in the 30% tax bracket, they would pay 30% tax on the fair market value of the shares on the vesting date.<\/p>\n<p>If you sell your vested shares, you will be taxed on the capital gains at the following rates:<\/p>\n<table>\n<tbody>\n<tr>\n<th>Holding period<\/th>\n<th>Capital gains tax rate<\/th>\n<\/tr>\n<tr>\n<td>Less than 3 years<\/td>\n<td>15%<\/td>\n<\/tr>\n<tr>\n<td>More than 3 years<\/td>\n<td>10%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span class=\"ez-toc-section\" id=\"Why-is-Vesting-a-Popular-Employee-Retention-Technique\"><\/span><strong><span style=\"font-family: Roboto, Arial, sans-serif;\">Why is Vesting a Popular Employee Retention Technique?<\/span><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Vested benefits are a win-win situation to both employer and employee. By offering a retention incentive to top talent, employers ensure low attrition rates. Founders who don&#8217;t have to worry about losing top talent can focus on expansion and growth!<\/p>\n<p>Vested benefits like ESOPs and deferred bonus are only part of a larger financial strategy that all successful, high-growth businesses must have in place.<\/p>\n<p>Here&#8217;s a few other strategies that employers keep in mind for good money management:<\/p>\n<ul>\n<li>A solid investment strategy and a well-diversified <a href=\"https:\/\/razorpay.com\/blog\/business-banking\/portfolio\/\">portfolio<\/a><\/li>\n<li>A well-thought out budget and forecast plan for each quarter<\/li>\n<li><a href=\"https:\/\/razorpay.com\/x?r=blog_cta_business_banking_vesting&amp;utm_source=blog&amp;utm_medium=cta\">Automated financial management<\/a> for minimal errors and smooth finances<\/li>\n<\/ul>\n<p><strong>Learn more: <a href=\"https:\/\/razorpay.com\/x?r=vesting&amp;utm_source=blog&amp;utm_medium=cta\">Automated Business Finances\u00a0<\/a><\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Vested-vs-Non-Vested-Benefits\"><\/span>Vested vs Non-Vested Benefits<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Companies also offer non-vested benefits, which do not follow a vesting schedule. These do not contribute to long-term employee retention efforts, but are just as important.<\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Aspect<\/b><\/td>\n<td><b>Vested Benefits<\/b><\/td>\n<td><b>Non-Vested Benefits<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Definition<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Benefits earned and fully owned over time<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Benefits immediately accessible upon employment<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Ownership<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Full ownership after completing vesting period<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Immediate ownership upon joining the company<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Vesting Period<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Requires a specific length of service to vest<\/span><\/td>\n<td><span style=\"font-weight: 400;\">No vesting period required<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Forfeiture<\/span><\/td>\n<td><span style=\"font-weight: 400;\">May be forfeited if employee leaves before vesting<\/span><\/td>\n<td><span style=\"font-weight: 400;\">No forfeiture as benefits are immediately owned<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Examples<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Employer contributions to retirement plans like Provident Fund<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Basic salaries, PTO, health insurance, bonuses<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>What Does Vesting Mean? If you&#8217;ve been granted ESOPs or offered a deferred bonus, chances are you&#8217;re stumped by the concept of vesting. In reality, the concept is quite simple. Here&#8217;s a detailed guide to everything you need to know about vesting, whether you are an employer, employee, or just plain curious! Basics of Vesting<\/p>\n","protected":false},"author":151156542,"featured_media":8251,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[1947,3680],"class_list":{"0":"post-8250","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"tag-esop","9":"tag-vesting"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8250","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156542"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=8250"}],"version-history":[{"count":14,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8250\/revisions"}],"predecessor-version":[{"id":8681,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8250\/revisions\/8681"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/8251"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=8250"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=8250"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=8250"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}