TL;DR

Graded vesting is a schedule where an employee's ownership of employer contributions to a retirement plan or equity grant increases incrementally over a set period rather than all at once. A common structure is 20% per year over five years, so an employee who leaves after three years owns 60% of the employer's contributions. It is used to incentivise retention over time rather than creating a binary cliff.

How Graded Vesting Works

Graded vesting replaces the all-or-nothing logic of [cliff vesting](/glossary/cliff-vesting) with a gradual ownership ramp. Under a cliff schedule, an employee vests nothing until a specific date, then owns 100% of the employer contribution instantly. Under a graded schedule, ownership accumulates in defined increments, typically annually. A five-year graded schedule at 20% per year means an employee who stays four years owns 80% of the employer's matched pension contributions or equity grant, not zero.

The two most common applications in recruitment contexts are defined contribution pension plans and equity compensation. In the US, ERISA regulations set minimum vesting standards for qualified retirement plans. A six-year graded schedule is the statutory maximum for employer match contributions: employees must vest at least 20% per year starting from year two, reaching 100% by year six. Many employers use faster schedules to stay competitive. In the UK, pension contributions in workplace schemes vest immediately in most cases, so graded vesting in the British context typically refers to equity and share plan schedules rather than pension contributions.

For equity, graded vesting is almost universal in venture-backed technology companies. The standard structure is a four-year vest with a one-year cliff: no ownership in the first year, then 25% on the cliff date, followed by monthly or quarterly vesting for the remaining three years. This is "cliff plus graded" rather than pure graded, but the post-cliff period operates on the same graduated principle. An employee who joins a Series B startup and leaves after two and a half years owns 25% from the cliff plus approximately 18 months of monthly vesting on the remaining 75%, totalling roughly 56% of their original grant.

Why It Matters for Recruitment

Vesting schedules are a retention mechanism, and recruiters need to understand them to do compensation discussions competently. A candidate who holds 60% vested RSUs and is eight months from their next vesting cliff is not in the same position as a candidate with no unvested equity. The first candidate is looking at a real financial cost of switching, and that cost has a number. A recruiter who ignores vesting schedules when building an offer, or who cannot help a client calculate a buy-out, loses placements that should have closed.

For in-house recruiters competing for candidates who hold unvested equity at their current employer, the offer must account for the value being forfeited. This is the buy-out question. If a candidate has £40,000 in unvested RSUs (net of tax) that will vest over the next 18 months, matching their base salary is not enough. The offer needs either a cash sign-on bonus approximating that forfeited value, an accelerated equity grant with a different vesting schedule, or a compelling argument for why the equity upside at the new company justifies the immediate loss.

For executive search, understanding equity mechanics is table stakes. Senior candidates often have multiple layers of unvested grants from different years, plus options at various strike prices. A good search consultant maps the candidate's full equity position before opening the compensation conversation, because the number that matters is not the face value of the equity but the expected value net of forfeiture, tax, and the probability of a liquidity event.

In Practice

A Series C startup is hiring a VP of Engineering from a public tech company. The candidate currently earns a £180,000 base with a £60,000 annual RSU grant on a standard four-year graded vest. They have two years of unvested RSUs remaining: approximately £90,000 at the current share price, vesting in equal quarterly tranches.

The startup offers £200,000 base plus a 0.6% equity stake on a four-year graded vest with a one-year cliff. At the startup's current internal valuation, 0.6% represents paper value of approximately £320,000. The candidate's net expected value from leaving depends on two things: how likely the startup is to achieve a liquidity event, and what happens to the unvested £90,000 at the current employer.

The recruiter structures the offer with a £45,000 cash sign-on bonus to bridge half the unvested equity forfeiture and a 0.7% grant (increased from 0.6%) to reflect the risk premium of leaving a liquid public market instrument for private equity. The candidate accepts. The sign-on bonus is structured as two payments: £25,000 on joining and £20,000 at six months, with a claw-back if the candidate leaves within 18 months. This protects the client and addresses the candidate's cash-flow concern.

Key Facts