Complex Financial Issues
Valuing and dividing executive employment benefits
In today’s financial sector employment market, many compensation packages include not only salary and cash bonuses, but also stock options and other long-term incentive plans. Several assessments should be made upon reviewing the long term incentive plan documents, including whether there is current liquidity in the stock units, whether the stock units are transferable to the other spouse and whether, at the time of the divorce, they capable of being presently valued.
It is imperative that an attorney experienced in financial matters evaluate and ensure that you understand these compensation packages and how they should impact support obligations and/or be distributed as marital property in a divorce, importantly taking into consideration the tax impact of these complex compensation structures.
What is an employee stock option (ESO)?
Many publicly traded companies use employee stock option plans to compensate, retain and attract employees. These plans are contracts between its employees that give employees the right to buy a specific number of the company’s shares at a fixed price within a certain period of time. An option can be bought or sold at any time prior to the expiration date, but there’s no obligation to so do.
What is a Restricted Stock Unit (RSU)?
Many companies have begun issuing employees RSU’s, which is a commitment by the company to give the employee stock in the company at a certain point in time in the future, either in actual shares or the cash equivalent, based upon what the stock is worth at that future point in time. RSU’s have a vesting plan, which usually highlights certain milestones that must be reached before the funds can be distributed, such as performance milestones or years of service.
How are long term incentive awards treated in a divorce?
Even though a stock option is not exercisable until the future, or is unvested at the time of your divorce, if it is earned during the marriage it may still be a marital asset subject to equitable distribution or may form the basis of additional compensation to the titled spouse for support purposes. Sometimes title to stock options may be transferred to the non-employee spouse or the value divided as of the date of the divorce.
In other circumstances, the non-employee spouse may receive a portion of the proceeds of stock options after the employee spouse exercises them, taking into consideration any taxes incurred by the titled spouse.