The issue of the division of deferred compensation in divorce – more particularly, unvested deferred compensation, is often one that is hotly disputed. This is in part because there is not a lot of case law on the issue. The case law is clear that deferred compensation (eg. stock options, restricted stock, RSUs, REUs, etc.)
Very often, we deal with cases where our client or his/her has compensation from employment that is more than just salary plus bonus. Rather, with all of the financial services companies, pharmaceutical companies and other corporations in this area, we see all sorts of different compensation structures, including stock options, restricted stock, RSUs, REUs, etc. Moreover, when the employee is in management or higher up in the company, the types of deferred compensation and/or equity plans can get even more complex. Further, by its very nature, deferred compensation is not realized as income immediately, but usually over several years, typically 3 to 5 years. Often it vests in two ways. On way is serial vesting – 100 options are granted which vest over 5 years – 20 per year. Sometime there is cliff vesting which means that the options all vest in year 5. When an employee has been with a company for several years, then often start to have deferred compensation vesting each year and possibly available for income.
The question often arises as to whether these deferred compensation vehicles are income, assets or both, While the answer is not simple, it is not as complex as many make it out to be..
Typically, deferred compensation that was granted prior to the date of the Complaint for Divorce is treated as an asset and is subject to equitable distribution. If the deferred compensation is vested, meaning it can be immediately cashed in, then quite often it is equally divided (though again, New Jersey is an equitable distribution state not an equal division stated so it is not an automatic that these assets will be equally divided – sometimes it just seems that way.)
If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult. I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests. More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse. Many believe this to be the fairer way of equitably dividing deferred compensation.
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?)
I recently heard a person say that their spouse believed his alimony and child support would be based solely on his salary. I am sure he would like that but that statement is wishful thinking at best. If he was correct, several hundred thousand dollars each year would be his alone and not considered for support. Aside from potentially being unfair, it is not the law.
In fact, in New Jersey, the definition of income from support purposes includes all sources of income. In fact, the Child Support Guidelines includes, but is not limited to 23 possibilities for income, as follows:
a. compensation for services, including wages, fees, tips, and commissions;
b. the operation of a business minus ordinary and necessary operating expenses (see IRS Schedule C);
c. gains derived from dealings in property;
d. interest and dividends (see IRS Schedule B);
e. rents (minus ordinary and necessary expenses – see IRS Schedule E);
f. bonuses and royalties;
g. alimony and separate maintenance payments received from the current or past relationships;
h. annuities or an interest in a trust;
i. life insurance and endowment contracts;
j. distributions from government and private retirement plans including Social Security, Veteran’s Administration, Railroad Retirement Board, deferred compensation, Keoughs and IRA’s;
k. personal injury awards or other civil lawsuits;
l. interest in a decedent’s estate or a trust;
m. disability grants or payments (including Social Security disability);
n. profit sharing plans;
o. worker’s compensation;
p. unemployment compensation benefits;
q. overtime, part-time and severance pay;
r. net gambling winnings;
s. the sale of investments (net capital gain) or earnings from investments;
t. income tax credits or rebates (excluding the federal and state Earned Income Credit and the N.J. homestead rebate);
u. unreported cash payments (if identifiable);
v. the value of in-kind benefits; and
w. imputed income
For any family law practitioner, a high net worth and asset-rich divorce matter can become complicated. Depending on which party the attorney represents, careful thought must be given to the division of assets, tax consequences and the calculation of income for support purposes. This task has become more difficult with the recent volatility of the stock market and the many changes in high earning executive compensation, retirement and bonus packages. A recent article in BusinessWeek by Alexis Leondis addresses and reminds us of many of these changes.
As many big financial firms gained media attention as a result of their financial practices and federal bailouts hit the streets, these companies were forced to take a closer look at their executive compensation packages. Historically, many of the higher up executives received what some would call enormous bonuses in addition to their already six figure salaries. These bonuses were included when calculating support figures as this money was typically used to meet daily expenses of the family, including the maintenance of lifestyles that consisted of private school tuitions, nannies and luxury vacations.
Mark Ashton, a partner in our Exton, Pennsylvania office, and the editor of the firm’s Pennsylvania Family Law blog, wrote an excellent post on that blog entitled "Stock Option Developments." To read the post, click here.
Stock options have become a large part of executive compensation over the last few decades. Moreover, they have become common additional/incentive compensation even…