In this article, we’ll discuss what you should know regarding divorce and executive compensation plans. During a divorce, it is critical to understand your marital estate and all it contains.
Divorce and Executive Compensation Plans
Salary and compensation can be a complex and sometimes tricky area to navigate, particularly in divorces that involve one or more spouse’s executive perks and compensation beyond their typical base salary. If you or your spouse are an executive or in management at a company, it will be critical to have an understanding of the relationship between divorce and executive compensation plans.
Executive compensation beyond salary typically comes in a few forms, including:
- An Employee Stock Option is a benefit offered by employers that allow the employee to purchase shares of company stock, at a discounted rate, usually after a certain time period has occurred, ie., “vesting”. Employee stock options allow the employee to buy company stock at some regular frequency, usually at a price that is discounted from the current market price. Purchased shares can be sold immediately, or they can be held for at least a year for more favorable tax treatment.
- Restricted Stock, the most commonly-used form of executive compensation, is shares of company stock given to an employee for past performance or for future retention and performance and can be given in the form of actual shares (RSAs) or as a right to acquire the shares at vesting (RSUs). It’s vital to get the actual grant documents to know which the case is since it makes a big difference when determining how many of the shares are marital property. Restricted Stock can be in two forms: either actual shares of stock (RSAs), or a right to acquire shares at vesting (RSUs). This is a job for a CDFA® (Certified Divorce Financial Analyst) or other financial experts familiar with executive compensation issues.
- Employee Stock Purchase Plans allow an employee to buy stock on a regular basis at a discounted price, and the shares can either be sold or held for more than a year. Purchased shares via an employee stock purchase plan can also be sold immediately if preferred.
- Deferred Compensation Plans allow an employee to elect to defer a portion of their compensation or salary, usually made available at the time of retirement, and may be matched in total or up to a certain percentage by the employer. These deferrals may be salary, bonus, or even equity compensation. In some cases, the employer will match the deferrals. Deferred compensation plans are completely discretionary, so any spousal maintenance would be based on the total compensation before any deferrals. Any balances in the plan are likely marital property as well and should be analyzed carefully. Most plans are distributable at retirement, but some plans allow distributions during employment as well. These deferred compensation plans can also be either qualified, pre-tax contributions or non-qualified.
- Payment and use of a company vehicle, cellular phone, computer or complementary gym, or country club membership.
In a divorce, each of these benefits will need to be accounted for as divisible assets or for the calculation of spousal and child support. Those calculations can be messy and difficult, and having an attorney who specializes in high net worth divorces will be vital for ensuring the best possible results in a convoluted situation.
Adding A Financial Professional
Choosing to bring in a financial professional such as a financial advisor or certified public accountant early in the case will help avoid any last-minute scrambling in mediation for documents and information. This can also assist you in developing your strategy and give you additional time to explore all the financial options with your divorce attorney and your financial professional.
Your financial professional will also help ensure that the final Settlement Agreement is properly written to reflect the way the executive compensation will be handled. Executive compensation accounts are not typically eligible to be given to a non-employee spouse at the time of divorce so the employee spouse must have very specific instructions on what must happen to specific grants, shares, and options upon vesting that take into consideration the taxation responsibilities, etc.
If you or a loved one is facing a divorce involving executive compensation issues, contact the attorneys at OWENS & PERKINS by clicking here or by calling our office at 480.994.8824 to schedule your FREE 30-minute consultation.