Are You Sure You Want to Pause Vesting for Leaves?

Vesting is a critical component of equity compensation, designed to incentivize and retain employees by rewarding them for their continuous service to the company. However, the question of whether to adjust vesting schedules for employees on leave has become a contentious issue.

With various types of leaves, including maternity, medical, and personal, companies face a dilemma: should they alter vesting schedules to account for these periods of absence?

In this article we’ll be making the case as to why adjusting vesting for leaves is not advisable, highlighting the challenges, legal complexities, and impacts on employee morale and gender equity.

Understanding Vesting and Leaves

Vesting refers to the process by which employees earn the right to own shares or options in their companies over time. Typically, these shares are granted as part of an employee's compensation package and are subject to a vesting schedule, ensuring that the employee remains with the company for a specified period. Leaves of absence, on the other hand, are periods during which employees are away from work for various reasons, such as maternity, medical issues, or personal matters.

Awards are earned through the work that employees perform for the company; employees who are on leave aren't working, so it might seem reasonable to adjust vesting in their awards. It might even feel unfair to employees who aren't on leave if vesting isn't adjusted for employees who are on leave. But there's more to this question than meets the eye. There are both practical and philosophical reasons to think twice about these adjustments.

What Is the Most Common Practice?

NASPP research on this question reveals that most companies do not adjust vesting schedules for employees on leave. Over 90% of respondents to the NASPP/Deloitte Tax 2024 Equity Incentives Design Survey report that they do not adjust vesting in full value awards for statutory or paid leaves. Even for nonstatutory unpaid leaves, 83% report that they do not adjust award vesting. The data on stock options and SARs is about the same.

This practice ensures that all employees are treated equally and minimizes the administrative burden of tracking and adjusting vesting for stock plan administrators.

Gender Equity and Disproportionate Impact

Adjusting vesting schedules for leaves can disproportionately impact women, who statistically take more and longer leaves than men, particularly for maternity but also to care for family members. According to a 2018 survey by the Department of Labor (the most recent data we could find), women are more likely to take leaves and are on leave for longer durations. Penalizing employees for taking leave by adjusting their vesting schedules exacerbates gender inequities in the workplace.

Women who take maternity leave, for instance, may find themselves at a disadvantage compared to their male counterparts who do not take similar leaves. This practice not only affects their immediate compensation but can also have long-term implications on their career progression and financial security. It can also discourage men from taking advantage of leave policies; at a societal level this can have the effect of forcing women to take on caregiver roles. Companies should strive to create policies that promote gender equity and support employees in balancing their professional and personal lives; pausing vesting for leaves arguably penalizes caretakers.

Legal and Compliance Complexities

Adjusting vesting schedules for employees on leave presents significant legal and compliance challenges, especially for multinational companies. Different countries have varying legal requirements regarding equity compensation and employee leave. Navigating these complexities can be daunting for companies, potentially leading to legal ramifications if not managed correctly.

In some jurisdictions, altering vesting schedules based on leave status may be considered discriminatory, particularly if this policy disproportionately affects certain groups, such as women (which is likely the cases, as maternity leave is typically the most common type of leave of absence).

Ensuring compliance with local labor laws and equity compensation regulations requires significant resources and expertise. Therefore, maintaining a consistent vesting policy across all regions simplifies compliance and reduces legal risks.

Challenges in Data Accuracy and Administration

Another argument against adjusting vesting schedules for leaves is the significant challenge in maintaining accurate leave data. Companies often struggle to track the various types and durations of leaves accurately. This complexity can lead to administrative burdens and the risk of errors and inconsistencies in vesting schedules, which can ultimately lead to transactions that need to be unwound and a policy that cannot be uniformly enforced. 

In addition, because attribution of expense for equity awards is tied to award service periods (typically the vesting period), pausing vesting will affect the period over which expense is recorded for equity awards. Where an employee's return date is unknown (a common occurrence), it can be difficult to assess exactly how expense should be recorded. Some systems will cease to report expense for awards until the employee's return date is recorded. Thus, adjusting vesting schedules can necessitate meticulous tracking and ongoing updates, which can become cumbersome for human resources and payroll departments, and can introduce significantly variability into expense accruals. The administrative overhead can lead to inefficiencies and potential errors, outweighing any perceived benefits of adjusting vesting for leaves.

Impact on Employee Morale and Retention

Employee morale and retention are crucial for any organization’s success. Policies perceived as punitive, such as adjusting vesting schedules for leaves, can significantly impact employee morale. Employees may feel undervalued and unsupported if their compensation is negatively affected due to taking necessary leave.

Maintaining consistent vesting schedules during leave periods can foster a supportive work environment and enhance employee loyalty. Employees are more likely to stay with a company that values their well-being and recognizes the importance of taking leave when needed. By not adjusting vesting schedules, companies demonstrate their commitment to fairness and support for all employees.

Consistency and Fairness in Policies

Standardized policies that do not adjust vesting for leaves ensure consistency and fairness across the organization. Allowing managers to make discretionary decisions on vesting adjustments can lead to inconsistencies and perceived favoritism. A uniform policy removes ambiguity and ensures that all employees are treated equally.

Best practices suggest that companies should implement clear and consistent vesting policies that do not penalize employees for taking leave. This approach promotes a culture of fairness and equity, which can positively impact employee satisfaction and organizational reputation. Companies that prioritize equitable treatment are more likely to attract and retain top talent.

NASPP Resources

For more detailed information on the challenges companies face when tolling vesting, please check out the NASPP Webinar: Modifying Vesting Schedules for Leaves of Absence where key questions such as those listed below will be answered:

• Why do companies consider changing their stance on tolling vesting for leaves and how can you help explain impacts to leadership?
• What factors should you consider when implementing this change?
• What tax and legal considerations should you look out for?

Treatment of vesting during a leave isn't the only consideration for a leave policy. Companies should also consider ensuring that employees on leave don't miss out on annual grants.

And check out our Equity in Brief videos on leave of absence policies:

• Gotchas When Adjusting for Leaves
• 5 Things to Know about Equity Awards and Leaves of Absense