Executive Compensation in Divorce – Critical Information to Know
Divorce is never easy and often has financial complexities that require an expert to evaluate. Some of the most confusing assets are the various components of executive compensation. Executive compensation is a term that encompasses stock options, restricted stock or RSUs, an employee stock purchase plan and deferred compensation plans. Let me provide a bit of a primer on each type.
Employee Stock Options
Stock options give an employee the right, not the obligation, to buy stock at a discount at some date in the future and are usually subject to some sort of vesting schedule. Options used to be the most common type of non-wage compensation. Changes in accounting rules have made them less common, but there are still plenty of plans out there. Occasionally, the options can even be for shares of a different, but related, company. There are two primary types of stock options: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQs). Generally, you won’t see ISOs anymore. Recent tax changes have made them less advantageous for employers. The difference between the two is in tax treatment and transfer-ability.
Where it gets tricky, is if the options are partially vested at the time of divorce but can’t be touched for four more years. Well, obviously some of the intrinsic value belongs to the spouse, but how much? The calculations are ugly. Trust me; you just want to bring in an expert to have it done right. In a nutshell, if an option grant of 100 shares has a 6-year vesting schedule, and 3 years has elapsed at the time of the divorce, then 50%, or 50 shares, are deemed to be marital property and subject to division in the divorce. That is the most common situation, but there are some states where the vesting is irrelevant and ALL shares are marital. You need to ask the expert familiar with your state.
Restricted Stock
Restricted stock is now the most commonly used form of executive compensation. This is shares of company stock, given to an employee, either as compensation for past performance or an incentive for future performance. It’s critical to get the actual grant documents in order to know which case it is. It makes a big difference when determining how many of the shares are Marital Property. They can be in two forms, either actual shares of stock (RSAs), or a right to acquire shares at vesting (RSUs). Restricted Stock has less risk than options and is rarely worthless. Again, depending on award dates, vesting schedules, dates of marriage and separation, the marital portion can be quite complex to calculate, but critical that you have it done. This is another job for that CDFA® (Certified Divorce Financial Analyst) or other specialist.
If your spouse received shares like this on an annual basis, the future grants are likely to be included in his/her income projections and available for either spousal maintenance calculations and/or child support.
Employee Stock Purchase Plan
This is a benefit wherein the employee is allowed to buy company stock at some regular frequency, usually at a price that is discounted from the current market price. When the shares are purchased, they can be sold immediately or held at least a year for more favorable tax treatment.
The key to remember here, is that because the employee can buy at a discount and immediately sell, it’s like instant cash over and above the regular earnings. That can definitely be considered as income for support.
Deferred Compensation Plans
With this option, the employee can choose to defer some portion of current compensation until a future date. These deferrals may be salary, bonus, or even equity compensation. Sometimes, the employer will also match these deferrals. They are totally discretionary, so any spousal maintenance should be based on total compensation before any deferrals. Any balances in the plan are likely marital property as well, and should be analyzed carefully. Most plans are only distributable at retirement, but some plans allow distributions during employment as well. These plans can also be either qualified, pre-tax contributions or non-qualified.
My spouse has executive compensation and has filed for divorce. Now what?
Do yourself a favor, and bring in an expert as early as possible, preferably before the Discovery phase. The expert will be able to provide you with a list of exactly what documents are necessary to properly value the assets and determine marital property vs. separate property. This will prevent any last minute scrambling if you end up at trial. Most CDFAs® are qualified to do this, but not all. Be sure to find one versed in executive compensation who feels comfortable with the task.
It will also help if the CDFA® is available for any depositions so that he or she can be qualified as an expert early, and preview for the other party the quality of financial information that you’re having prepared. Sometimes, this is just what it takes to encourage a settlement! The CDFA® can also help ensure that the final Settlement Agreement is written to properly reflect the way the compensation will be handled. Executive compensation accounts are not usually 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 shares, options and grants upon vesting, that takes into account the taxation responsibilities, etc.
Executive compensation can be very complicated and, if you take it on yourself, you’re exposing yourself to a lot of risk. These assets are often substantial pieces of the marital pie, and it is critical that they are valued correctly, so that you can negotiate your settlement confident that you are really receiving what you’re entitled to. This is one area you don’t want to scrimp on. This expert on your team could single-handedly get you thousands of dollars more in settlement by ensuring that EVERYONE has all of the correct information.
This article was originally posted on DivorceTownUSA.com, a website dedicated to connecting divorce professionals with clients seeking help. Click to view the article on their website
Nancy Hetrick, ADFA™, MAFF™, AWMA®
Smarter Divorce Solutions, LLC
Nancy Hetrick is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information she provides is financial in nature and should not be construed or relied upon as legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal or tax professionals knowledgeable about the divorce laws in their own geographical areas. Divorce financial planning is a fee-only process that does not involve investment advice or securities or insurance transactions.
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