A cliff vest is a process by which an employee’s stake in your company gradually increases over time. The “cliff” part of the term comes from the way the graph looks as you start someone’s increased ownership in the first year and gradually add higher percentages as the employee works more. The idea is that you allow the worker time to earn your loyalty by staying productive over the terms of the vest.
How Do You Track Time For a Cliff Vest?
Use vesting schedules to track how much time your employees have to work at the company before they actually own 100% of the shares you promise them. This strategy aligns your interests with those of your employees, preventing a rogue worker from quitting as soon as they receive their equity shares. Automated calendar programs and wage trackers can help with a vesting schedule.
Cliff vesting schedules give the employee 100% of promised shares after a specified period of employment passes. You can use cliff vesting alone or in conjunction with a traditional vesting schedule. For example, imagine your company allows for profit-sharing benefits with a 3% stake in the company’s profits after five years. The new hire starts on April 1 and earns one-fifth of the 3% stake after 12 months on the job. This is the cliff part of the vesting schedule. After the second year, the employee moves from one-fifth to two-fifths throughout the year. After five years, the employee can get a full 3% share of the profits. If your profits amount to $100,000, that employee’s share is $3,000.
Another Cliff Vesting Example
Consider the following example illustrating how a cliff vest combines with a traditional vesting schedule. Under this scenario, your employee gets 480 shares that vest at a rate of 10 shares per month with a cliff vest after 24 months. After one month, the employee owns 10 shares. After six months, the employee owns 60 shares. After month 23, the employee owns 230 shares, but once the 24th month completes, the cliff vest kicks in and the employee owns the full 480 shares.
Cliff vesting is an interesting tool you can use to ensure your employees’ interests align with your own. The concept helps you retain great employees who are inherently worth the equity you promise them. QuickBooks can help you track employee pay and benefits over time. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.