How to Handle Executive Compensation in a Divorce Settlement

What’s Executive Compensation and Does It Matter in Your Divorce?

The typical CEO makes 351 times as much as an average worker. When you are dealing with these larger-than-usual sums of money, divorce gets very complicated. In order to divide assets fairly, you may need to understand how executive compensation works.

What Is Executive Compensation?

Executive compensation is a special type of pay most frequently used for high-level executives in a business. Instead of getting a traditional cash salary, executives are often awarded a certain amount of stock or other incentive plans. These special payment forms are meant to reward executives who perform well, and they often have special tax benefits that help high-paid employees avoid higher tax brackets. Some common forms of executive compensation include:

  • Option grants
  • Deferred compensation
  • Long-term incentive plans
  • Retirement packages
  • Executive perks

If a person is receiving executive compensation, it can end up affecting their divorce. Unlike a standard paycheck, dividing up executive compensation isn’t straightforward. Some types of executive compensation fluctuate in value, and other types might lose value if they are converted into cash too soon. Depending on the compensation, it might be entirely impossible to liquidate it or transfer ownership. All of these factors need to be considered in a divorce with executive compensation.

Common Types of Assets That Cause Confusion in a Divorce

In most divorces, dividing assets is a straightforward thing that consists of splitting all marital assets into two equal portions. However, with executive compensation, things get tricky. Sometimes, it can be hard to even tell if an asset is joint property or separate property, and when you do want to divide it, you might find it’s difficult to do so. Here are some of the most common ways that executive compensation makes a divorce more confusing:

  • Vested stocks: Often, stocks have vesting periods, which means that you are only allowed to sell the stock and receive the value after a set amount of time. Typically, these are only marital property if the right to vest the stock happens before the marriage ends. However, there are a few rare cases where this rule of who gets stocks in divorce doesn’t apply.
  • Restricted stock awards: These are stocks that an employee loses if they leave their place of work before the stock vests. This type of executive compensation usually cannot be transferred to another person, and usually, they aren’t marital property until they vest.
  • Retirement plans with tax penalties: Many executive retirement plans have a tax penalty for cashing out the plan too early. Trying to divide the plan during divorce can cause people to lose quite a lot of money.
  • Capital gains on stocks: Another thing to remember is that you have to pay taxes when you sell a stock. If a stock has grown in value drastically over the past year, the spouse who ends up getting the cash for the stock could have to pay thousands in taxes.
  • Deferred compensation plans: Often, executives are given the option to defer receiving some of their compensation until a later date. This has some tax benefits, but it can also make things confusing in a divorce. Make sure that all calculations are based on a person’s total compensation, not the amount of money they receive after deferrals.
  • Non-transferrable stocks: In some cases, there might be vested stocks that are technically marital property but are held only in one name. Depending on a person’s terms of employment, transferring this stock can be difficult or even impossible.

Executive Compensation Can Affect Alimony and Child Support

Keep in mind that your financial state does more than just affect asset division. If you were married for a long time or if you have children, you might also need to consider alimony and child support. To determine how much a person pays in alimony or child support, the court usually looks at how much money they have. Many types of executive compensation make it hard to determine a person’s exact worth. For example, if a person has stocks that could be worth millions one day and thousands the next, how do you determine what they should pay each month for child support?

Typically, the court just looks at a person’s income when figuring out child support and alimony payments. However, it’s important to realize that they do have leeway to consider other, less conventional forms of income. If one person has executive compensation, the court can take that into account. Ultimately, their focus is on ensuring the needs of a child or a dependent spouse are properly met. Therefore, these sorts of decisions are made on a case-by-case basis. Since the court has so much discretion in making a decision, it’s a good idea to have a divorce attorney on your side during the argument.

How to Get Your Fair Share of Executive Compensation

Because executive compensation is so complex, you need to approach the whole divorce very carefully. Whether you are trying to hold onto as much of your own executive compensation as possible or get a share of your ex-partner’s compensation, there are some things that you can do to prepare yourself to tackle the division of finances:

  • Start collecting evidence as early as possible: In these cases, information about your partner’s finances and your family’s lifestyle are very important. Make notes about significant details just in case your ex decides to try to hide things. Keep track of receipts, bank accounts, pay stubs, and other helpful evidence.
  • Find a good lawyer: Since there are so many tiny details that make a difference, it’s essential to get help. Take the time to interview reputable lawyers and pick one who is a good fit for your case. A lawyer can help answer your questions about the process and keep you from accidentally leaving any money on the table.
  • Get a clear idea of what assets you have: It’s also very important to paint a clear picture of how many assets each party has. This helps you figure out what a fair division of money actually is. In most cases with large sums of money and complex compensation packages, you can benefit from hiring a financial analyst.
  • Be creative with your solutions: Don’t get so caught up in splitting everything in half that you end up losing money. Consider doing things like trading assets with each other or agreeing to accept a percentage of future stock dividends. For example, you might want to consider letting your ex hold onto their vested stock options in exchange for you getting the house. These sorts of solutions can make everyone happy without costing you money.

Since executive compensation can complicate divorces, it’s a good idea to contact a divorce attorney who is comfortable handling cases that involve large sums of money and complex financial matters. At the Law Office of Kelly Berton Rocco, we have experience addressing these challenging situations. Learn more about our Hackensack law firm by calling 201-343-0078 or messaging us now. We’ll be happy to set up a consultation.

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