You may have run into some forms of executive compensation in your family law practice, however, you might not fully understand them. Executive compensation is becoming increasingly complex to divide in divorce settlements as it continues to be tied to work performance. Knowledge of the underlying financial principles can help you advise your clients better when it comes to property division or child or spousal support negotiations.
Types of Executive Compensation and Property Division Considerations
Besides the basic cash incentives of a salary and a bonus, an executive may also receive an ownership stake in the employer’s company through equity (stock grants and options) and deferred equity compensation (restricted stock awards and unvested options). Other forms of compensation include supplemental retirement insurance or deferred savings plans.
As Thomas Field, Esq. of the Illinois law firm Beermann LLP and AACFL Advisory Faculty Member Jim Godbout, Principal at CliftonLarsonAllen mentioned in our fall 2019 webinar, you can’t divide them all in the same way. For instance, cash is more readily available than deferred forms of compensation. Stock options and awards may be tied to future work performance, and therefore, be unvested or “restricted” stock units (RSUs).
When the executive received the compensation is another factor in property division. Was it before or during the marriage? Most states follow equitable distribution or community property laws. Generally speaking, stock and vested options earned during the marriage are marital property and are often allocated as part of the estate.
In determining whether the compensation is marital property, it’s important to look at the plan documents. They will reveal:
- why the company granted the incentive
- the vesting period and schedule
- the ability to transfer
- what happens upon the employee’s departure, retirement, or a company buy-out
- any unique provisions.
For example, stock options may not vest until after a divorce and restricted stock may be considered marital property subject to division. Even if the division of unvested options and restricted stock is part of the marital estate, when those options vest and the executive exercises them or they become unrestricted and sold, after the divorce, they may be considered income for child support.
Executive compensation may not be divided like other parts of the marital estate, such as a 50/50 split. In mediation or collaboration, the parties can agree to custom division. Judges have latitude in their decision-making. Follow the usual tax treatment in your state and your state’s case law regarding executive compensation forms.
These are just some of the more common types of executive compensation. It’s also helpful to gain an understanding of lesser-known types you may run into, such as stock appreciation rights and supplemental retirement insurance. Our Certified Financial Litigators (CFL™) course helps you stay on top of all the different forms of executive compensation and how they can affect a divorce.
An Effective Way to Round Out Your Executive Compensation Education
Today’s economy has become more complex. Experience in executive compensation and other aspects of property division can set you apart from other attorneys and help you become a trusted adviser to your clients, especially in negotiations or disputes.
As your clients navigate through a divorce, one of the biggest events in their lives, they need the sharpest attorneys to guide them. A solid understanding of the fundamentals taught in our Certified Financial Litigators (CFL™) Training course can make a difference in their lives. They may more easily begin a new chapter on more secure financial footing. While years of experience as a divorce attorney is undoubtedly valuable, imagine the power and benefit to clients of combining that legal knowledge with enhanced financial skills!
Learn how the CFL™ Certification can help you better understand executive compensation and other financial aspects of divorce in our free information packet today.