Skip to main content

Please enter a keyword and click the arrow to search the site

Value of vesting provisions



Publishing details

Authors / Editors

Johnson T

Publication Year



Employee stock options and other forms of deferred compensation typically include provisions stipulating forfeiture upon termination of employment prior to some date. This paper considers the impact of such vesting provisions on the value of the deferred claim. The answer depends on the full specification of the employment contract to the vesting horizon. In typical contracts, the value surrendered in the vesting provision is equal to the value of the claim, rendering the benefit worthless to the employee. Used in this way, vesting provisions destroy any incentive effects the benefit may have been intended to produce. They can also be inefficient, negating any savings of long-term contracting and potentially leading to under investment. We characterize optimal explicit and implicit contracts that might overcome these problems, and outline empirical implications that would distinguish the hypothesis that their efficient use is the exception rather than the rule.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 347


IFA Working Paper

Available on ECCH


Select up to 4 programmes to compare

Select one more to compare
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox


Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.