We see it all of the time. The support (alimony and child support) obligor’s income is made up of multiple components – typically salary, bonus and/or deferred compensation. In cases where the bonus/deferred comp makes up only a small portion of the total yearly income, you usually wont see too much fighting about what the
Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and former editor of our Pennsylvania Family Law Blog wrote an interesting post entitled "Elements of Expense: How Employers Help to Make Your Life Expensive & Your Lawyer Bewildered".
In his post, Mark ruminates on the difficulty in deciphering the modern pay stub. Mark notes that over the years we have evolved from a time and place where compensation consisted of salary and a bonus to one where a paystub reads like the Dresden Codex (an anthology of Mayan astronomical tables). In fact, the piece emanated from him having just devoted more than half an hour to reading and interpreting two paystubs that included salary, commission, vacation time, etc. as well as more than $100,000 of payments under the titles: ECC Disc Incentive; Long Term Cash Vest; RS Unit Vesting; and RSS Vesting.
Of course, once a you get past the alphabet soup of categories of income and withholdings, next you have to figure out what to do with them. For instance, you have to make a decision as to whether this is really income, an asset or both. This often comes into play with regard to bonuses and the exercise of deferred compensation. Is it recurring or non-recurring? Is it an anomalous, one time payment? Does this reflect an undisclosed change in how and/or the amount of someones compensation. What year should it be attached to, e.g. a bonus paid in 2012 for 2011 (do you just look at income received in the calendar year or do you add the salary received in a calendar year to the bonus for that year paid in the first quarter of the next year?)
Very often, we deal with cases where one or both parties’ incomes are variable, because they are tied to commissions, etc,. or heavily tied to a bonus which can vary. In fact, for many people who work on Wall Street, their salary (oftentimes in the $120,000 to $150,000 per year range), makes up a small percentage of their annual income with the rest coming as bonus at the end of the year or in the first quarter of the next year. Moreover, it is not uncommon for the bonuses to vary widely from year to year based upon company performance, etc.
This often makes cases difficult to settle, especially during the uncertain if not unstable economic times of the last several years. Typically, the law provides that when someones income is variable, that a 3 or 5 year average should be considered for support purposes. In these times, is that fair. Take the person working at a hedge fund who was earning seven figures for several years, but for the last few years, if they still had a job, only earned their $120,000 per year salary. Ask that person if taking an average of 3 or 5 years for support purposes is fair. Moreover, from a cash flow perspective, even when an average is used, the payor can be really strained to pay support if their actual income is lower than the average used. As time goes by after the divorce, in theory, this should be balanced by the years when they earn in excess of the average. In the years closest to a divorce, after all assets were distributed and perhaps the liquid assets were used to pay for the divorce, to pay equitable distribution, to buy a new home, etc., there may be no fund to serve as the buffer in one of these under average years.