Vesting schedules are the mechanism that makes employee share schemes work as retention tools. Here is a complete guide to how vesting works for Nigerian listed company ESIS.
A vesting schedule determines when an employee's right to their allocated shares fully matures. Before vesting, shares are allotted to the employee but cannot be transferred or sold — they are subject to forfeiture if the employee leaves. After vesting, the shares belong unconditionally to the employee and can be held or sold freely. The vesting schedule is the mechanism that transforms a share scheme from a simple benefit into a powerful retention tool.
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Nigerian listed company ESIS most commonly use one of two vesting structures:
Under a cliff vesting schedule, all shares vest on a single date — typically three or five years after the allotment date. An employee who leaves before the cliff date receives nothing from the unvested allotment. An employee who stays through the cliff date receives the full allotment in one event. Cliff vesting creates maximum retention pressure at the vesting date but provides no partial benefit for employees who leave before the cliff.
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Under a graded vesting schedule, shares vest in tranches over time. A common structure vests one-third of the allotment each year over three years. An employee who leaves after year one forfeits two-thirds of their allotment but retains the year-one tranche. Graded vesting provides continuous retention incentive — there is always more to vest — while giving employees a partial benefit even if they do not complete the full vesting period.
More sophisticated schemes — particularly Performance Share Plans (PSPs) for executives — combine time-based vesting with performance conditions. Shares vest only if the employee remains employed (time condition) AND the company or individual meets defined performance targets (performance condition). Common performance metrics include earnings per share growth, total shareholder return relative to peers, or specific strategic objectives.
Leaver provisions in the scheme rules determine the treatment of unvested shares. Good leavers (retirement, redundancy, death, serious ill-health, or departure by mutual agreement) typically retain a pro-rata portion of unvested shares based on time served in the vesting period. Bad leavers (resignation, dismissal for cause) typically forfeit all unvested shares. The distinction between good and bad leaver is one of the most important design decisions in a scheme — and a frequent source of employee questions and disputes if not clearly communicated at enrolment.
Some schemes include accelerated vesting provisions that trigger full vesting ahead of schedule in specific circumstances — typically a change of control of the company (takeover), death, or serious illness. Accelerated vesting on a change of control is sometimes called a 'single trigger' (vesting on the change of control event alone) or 'double trigger' (vesting only if both a change of control occurs AND the employee is subsequently terminated). The choice between single and double trigger has significant implications for the cost of a scheme in an acquisition scenario.
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