Trendline of retirement ages with toy figures for businessmen standing at each age.

How Companies Adjust Equity Awards for Retirement

March 05, 2025

Equity awards are an important benefit and can often comprise a significant portion of employee compensation. Given this, companies should make thoughtful decisions about how equity awards will be treated when employees retire. In this blog entry, I discuss different approaches to retirement provisions for equity awards and current practices.

Most companies pay out equity awards to retirees.

While the timing and amount of payout can vary, it is very common for companies to pay out at least a portion of all types of equity awards to retirees. Companies are more likely to pay out performance-based awards than service-based awards. Almost 75% of respondents to the NASPP/Deloitte Tax 2024 Equity Incentives Design Survey pay out performance-based awards to retires, while 65% pay out service-based full value awards and only 63% pay out service-based stock options/SARs.

One likely reason more companies pay out performance awards than other types of vehicles may be that these awards are typically granted only to senior executives, who often receive more generous retirement benefits than lower ranking employees. On the other hand, stock options tend to be granted more by technology companies and less mature companies (i.e., companies that expect to experience significant growth). These companies often have younger workforces, which may explain why companies are less likely to pay out stock options than other types of equity vehicles.

Acceleration is more common for service-based arrangements than performance awards.

When paying out equity awards to retirees, companies must decide between accelerating vesting or allowing awards to continue to vest as originally scheduled. For performance awards, the predominant practice is to pay out the awards to retirees only at the end of the performance period (i.e., continuing vesting).

This allows the company to ensure that retirees receive a payout only to the extent that the performance conditions are met. Otherwise, the performance awards can incentivize the wrong behavior.

Imagine a situation where a company is nearing the end of its performance period and it becomes clear that the performance conditions are not going to be achieved, resulting in the expectation that the awards will be forfeited. Now let’s also imagine a worst-case scenario in which the entire executive team is eligible to retire. If the awards provide for full (or even pro rata) payout immediately upon retirement, the executive team would be incented to retire rather than trying to turn the situation around. That’s not the kind of incentive the board is hoping the performance awards will create!

Acceleration is considerably more common for service-based awards. For full value awards, 27% of respondents to the 2024 survey accelerate vesting and 32% continue vesting. For stock options, 22% accelerate vesting and 38% continue vesting.

My blog entry “Pros and Cons of Accelerating vs. Continuing Vesting Upon Retirement” offers a great rundown of why companies might choose one approach versus the other.

Practices are split between pro-rata and full payouts.

Another choice companies face when choosing to pay out equity awards to retirees is whether to pay out awards in full or on a pro-rata basis. When awards are paid on a pro-rata basis, retirees receive a payout that is commensurate with the amount of service they completed before retiring.

We see a fair amount of variation in practice here. For service-based awards, companies are more likely to provide a full payout (45% for options and 38% for full value awards) than a pro-rata payout (15% for options and 21% for full value awards). Practices are more evenly divided for performance awards: 36% of companies provide a full payout and 34% pay out awards on a pro rata basis.

My blog entry "Pros and Cons of Pro Rata vs. Full Payouts to Retirees" discuss key implications to consider when deciding between full and pro rata payouts for retirees. 

There are lots of ways to determine retirement eligibility.

Most companies use a combination of age and service criteria to determine when employees are eligible to retire but there is considerable variation in practice when it comes to how these two criteria are combined.

Just over 40% of respondents to the 2024 survey require employees to achieve both a minimum age and minimum years of service to be eligible to retire. But this is less than half of companies—the other 57% of respondents are all over the map:

  • At 16% of companies, employees are eligible to retire when the sum of their age and their years of service equal a specified number (e.g., age + years of service = 70).
  • At 10% of companies, employees can be eligible to retire when they reach A) a minimum age with a specified number of years of service or B) an older minimum age regardless of their years of service. For example, employees might be eligible to retire when they are 50 and have 10 years of service or when they are 55.
  • Retirement eligibility is contingent only on age at 8% of companies.

The remaining 23% of companies use a variety of other approaches. Some companies define three eligibility alternatives. For example, employees might be eligible to retire when they A) reach a minimum age and years of service, or B) reach an older age regardless of their years of service, or C) when they’ve achieved a higher number of years of service regardless of their age.

More Information

Listen to the NASPP webinar “Top Trends from the 2024 Equity Incentives Design Survey" for more information on forfeiture provisions, including a summary of how companies treat equity awards in the event of termination due to death and disability. 

  • Barbara Baksa
    By Barbara Baksa

    Executive Director

    NASPP