In short
Under graded vesting, a share-based award vests in installments, such as 25% a year over four years, rather than all at once at the end (cliff vesting).
Key takeaways
- For awards with only service conditions, companies choose to recognize cost straight-line over the whole period or separately for each tranche.
- Under straight-line, the cumulative cost must be at least the grant-date value of the portion already vested.
- Recognizing each tranche separately front-loads the cost.
Where it's tested
BAR: Stock Compensation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Options vest in equal portions each year over three years (graded vesting) and have only a service condition. How may the company recognize the cost?