Incentive compensation can play a significant role in divorce proceedings, especially when it comes to high-earning individuals. Understanding the different types of incentive compensation and how they are treated in a divorce is crucial for both parties involved.
Types of Incentive Compensation
Incentive compensation refers to various forms of pay that are designed to reward employees for their performance and align their interests with those of the company. Here are some common types of incentive compensation:
- Stock Options: These give employees the right to buy company stock at a predetermined price, known as the grant price. Stock options typically vest over a period of time, meaning the employee must remain with the company for a certain duration before they can exercise the options.
- Restricted Stock Units (RSUs): RSUs are company shares given to employees as part of their compensation. These shares are subject to vesting conditions, such as continued employment or performance targets (known as performance stock units of PSUs). Once vested, the employee owns the shares outright.
- Deferred Compensation: This is a portion of an employee’s compensation that is set aside to be paid at a later date. Deferred compensation can include retirement plans, bonuses, or other forms of payment that are contingent on future events.
- Performance Bonuses: These are additional payments made to employees based on their performance. Bonuses can be annual, quarterly, or tied to specific projects or milestones.
Treatment of Incentive Compensation in Divorce
The treatment of incentive compensation in divorce proceedings can be complex, as it often involves determining whether the compensation is treated as income or property and, if it is property, what portion is considered marital property and how should it be divided. Here are some key considerations:
- Vesting and Timing: One of the primary factors in determining the treatment of incentive compensation is the vesting schedule. Compensation that has vested during the marriage is generally considered marital property and subject to division. However, unvested compensation may be treated differently, depending on the jurisdiction and specific circumstances, and this is where the allocation of separate v. marital compensation is likely to come into play.
- Valuation: Valuing incentive compensation can be challenging, especially for stock options and RSUs, which may fluctuate in value. Courts may use different methods to value these assets, such as the grant price, current market value, or projected future value. Courts may also choose to treat the compensation as income when received and provide for a separate calculation of support to be paid if and when that incentive compensation is actually received.
- Tax Implications: The division of incentive compensation can have significant tax implications. For example, exercising stock options or receiving deferred compensation may trigger tax liabilities that need to be considered in the divorce settlement.
- Division Methods: There are various methods for dividing incentive compensation in a divorce. One common approach is the “if and when received” method, where the non-employee spouse receives a portion of the compensation when it is actually paid out. This method accounts for the contingent nature of some forms of incentive compensation.
Conclusion
Incentive compensation can add a layer of complexity to divorce proceedings, but understanding the different types and their potential treatment can help both parties navigate the process more effectively. By considering factors such as vesting schedules, valuation methods, and tax implications, divorcing couples can work towards a fair and equitable division of these assets.
If you missed it, our team covered this topic in depth during a recent event—click here to access the webinar recording.
If you have any further questions or need more detailed information, contact a member of our Forensic & Dispute Advisory Services team.
