Executive Compensation in Divorce - Exes with Benefits

Corporate executives in today’s business world receive much of their compensation in the form of valuable benefits. These benefits are the items other than cash compensation used by companies to attract and retain top talent. For many they represent the dream – stock options, stock units, direct equity, deferred compensation, retirement plan matching, unique equity instruments and the potential for a windfall. All these can help an executive build significant wealth and are the carrot keeping them at a company.

Graduates from top schools aspire to obtain these items as a benefit of joining a specific company. But people rarely plan for a situation like a divorce, and many are caught off guard with how it works. Specifically, the division of financial instruments and economic benefits. In some cases, they need to borrow money to share the dollar value of these benefits with their ex-spouse. Other times they have an ongoing “financial partnership” with their exes. Careful planning and a solid understanding are needed to navigate today’s reality that exes do get benefits.

As forensic accountant regularly hired by lawyers to analyze financial benefits and testify in Court, I can tell you that preparation and research matters. Whether you are the executive or the spouse of one, these components of executive compensation should be identified, analyzed and well understood. They are listed here to provide a guide for anyone with corporate benefits.

Base Salary – This represents the guaranteed annual cash salary usually paid monthly or bi-monthly. It is often the baseline for support payments, but the analysis does not end there as this may be the smallest portion of overall compensation. In today’s business world, unlike years ago, there has been a shift towards more compensation being in the form of valuable benefits. This aligns with a company’s goal of retention and creating performance-based incentives.

Bonuses – Additional cash compensation based on either individual or company performance. This is typically paid either annually or periodically.

Options – Stock options give employees the right to purchase company stock at a predetermined price. They are granted as a reward for performance or as part of an overall compensation package. Options may have significant value but can be subject to complex vesting schedules and restrictions. Many states have formulas to determine the number of shares that are marital (to be shared with an ex). Even if not transferable, the value often becomes a consideration in analyzing the finances of a divorce.

RSUs – Restricted Stock Units are company units awarded to employees that vest over time, like options. Unlike options that give an employee the right to purchase ownership, RSUs are not direct ownership. They are units that mirror the value of ownership without diluting the existing shareholders. When company value increases, RSU value increases. This keeps the employee’s goals aligned with those of the company.

PSUs – Performance Share Units. These are like RSUs in that they are awards that vest over time. The value in these is based on performance related contingencies such as earnings and revenue targets. As a result, while they may represent a valuable source of wealth, they have more contingencies attached. A vesting formula can be applied to determine the marital portion of this benefit.

Deferred Compensation – These plans allow employees to defer a portion of their earnings until a future date. Done to reduce tax liabilities or as part of retirement savings, these can be challenging because the money may not be accessible at the time of a divorce.

Other Ownership Interests – Ownership instruments continue to evolve with new and creative arrangements emerging. Stock appreciation rights and phantom stock have existed for some time. Modifications of these require careful analysis of plan documents.

Retirement Plans – Retirement plans such as 401k plans are more straightforward. They require the use of a QDRO, Qualified Domestic Relations Order, to transfer a portion to a souse without tax consequences.

What is the vesting formula for options, units and often other instruments? States will vary on the exact formula. The basics include a fraction with the numerator being the amount of time the asset was held during the marriage and the denominator being the total vesting period. The percentage calculated represents the marital coverture period (the marital portion to be divided).

Other considerations in calculating your portion of financial assets may include:

·      Transferability restrictions in the plan documents. Plan documents may designate who can be a “permitted holder” of these instruments and it may not include an ex-spouse. The documents may also distinguish between permitted transfers and assignments of interests. 

·      Whether your state is a Fair Market Value or a Fair Value state for divorce property division.

·      Income items versus assets. Many of the items listed above have a component of each. For example, grants of options may be compensatory. The grant may also result in an asset. The compensation component will need to be isolated from the asset and asset appreciation component to avoid double counting.

Divorce for company employees has complexities to be traversed. With careful planning, a comprehensive understanding of the intricacies of specific plan documents, and the advice of your lawyer, each party can approach the process with a plan for corporate financial benefits. As a good executive will tell you, understanding the playing field and sound planning is always an advantage.