What is meant by the term "vesting period"?

The term "vesting period" specifically refers to the timeframe in which certain conditions must be met for an individual to earn rights to the benefits granted by a stock option or equity plan. During this period, the recipient must typically fulfill specific requirements, which may include continuing employment with the company or achieving certain performance metrics. Only after the vesting conditions are satisfied does the individual officially acquire the rights to the shares or options promised.

This understanding highlights the importance of the vesting period in incentive compensation structures, where it serves to align the interests of employees with those of the company's shareholders over time. It is a crucial element that ensures employees remain committed to the organization, as they must wait before they can exercise their options or access their shares.