Executive compensation and divorce

Executive compensation and divorce

On Behalf of | Nov 6, 2023 | Divorce

Divorce in Michigan is complicated if you or your spouse are an executive. If your executive compensation includes stock options or restricted stock plans, these will likely become part of your divorce negotiations.

Stock options as executive compensation

Many companies permit employees to purchase future stock at the original grant price. However, stock and restricted stock have vesting periods that prohibit usage. This period lasts 1-5 years.

An example of this principle is Amazon employees, who started in 2016 with a 5-year vesting period ending in 2011. Because the 2016 grant price was $600, these stocks would turn large profits.

However, in the year someone exercises these options, the earnings receive the same treatment as ordinary income for tax purposes. The taxes might be 40% or more, depending on the tax bracket.

Taxes are always essential to remember when dividing your assets. For restricted stock, the entire value becomes taxable after the end of the vesting period.

Asset division is important

Leaving before the end of the stock’s vesting period or not meeting performance benchmarks can result in the forfeiture of these assets. Some of the most common vesting schedules companies use are cliff vesting for a designated number of years or graded vesting, which uses a percentage after each service year.

One thing that complicates the separation process sometimes is companies having restrictions against transferring stock. Many executives put such stock in a constructive trust to benefit the non-employee spouse.

Following the trail

A genuine problem that may arise during a divorce is a spouse’s “hiding” incentive compensation plans. Ensuring that you have assistance with finding these assets is essential.

Understanding how executive compensation can impact your divorce is essential. When you have the necessary assistance, you can ensure you get what is due.