• February 23, 2024
 Is my spouse entitled to share my bonus if we divorce?

Is my spouse entitled to share my bonus if we divorce?

In the complex landscape of divorce proceedings, the question of whether a spouse is entitled to a share of bonuses and equity awards adds a layer of intricacy. Understanding the nuances of the benefits is crucial in divorce cases, as they may constitute a significant portion of a spouse’s income.

In this article, Partner Liz Francis explores how divorce courts handle such cases, emphasising the importance of a thorough examination of the relevant details, including the terminology associated with awards, bonuses, options, and performance shares.

Additionally, Liz delves into the challenges of dealing with awards made during the marriage versus those granted post-separation, highlighting the discretionary nature of divorce law in this complex area. The discussion extends to the tax implications and considerations when determining the fair distribution of these assets.

Will a divorce court order a payment of my bonuses and share awards?

Many companies reward key employees with benefits in addition to their basic salary. Often this is by way of cash bonus and/or equity in the company. How does a court deal with maintenance and other claims when a significant proportion of a spouse’s income comprises long term incentives plans (Ltips) that are not as transparent as a cash salary? Indeed, some such Ltips can be extremely uncertain and can be dependent on the future performance (of the recipient and/or his/her company). In some cases, they are also prone to clawbacks – that is the company can clawback the payments made, sometimes years after they have been received for a variety of reasons. Further it should also be appreciated that such benefits can be lost in certain situations e.g. if the recipient moves jobs or has his/her employment terminated.

It is important to look at all the relevant detail and study this carefully. A full understanding of how the plans operate is vital as well as a proper understanding of the terminology used. It is important to ask for documentary evidence of the awards and to ensure you understand the granular detail.

 Terminology

Award -this is what the company has granted to the recipient. It is a generic term that can encompass cash bonuses but also options and other types of shares such as performance shares. 

Bonus this is also a generic term and can refer to anything paid in addition to the salary. A bonus can be paid in cash or in equity. Bonuses can be discretionary (which is more common) or written into a contract. Some employees receive commission and again this can be discretionary or fixed into the employment contract.

Last Date to Exercise – the date by which a recipient must sell vested shares or lose them. A recipient is not bound to sell as soon as options vest but generally has a time limit to do so.

Option – this is an opportunity to buy a certain number of shares at a later date (the vesting date) at a fixed price (known as the exercise price, option price or strike price). The value of these is an unknown until they actually vest when the current share price as per the stock market is applied. The value of an option is the share price less the option price. It follows that the value of these can be hard to predict as share prices fluctuate continually.

Performance Shares – these are shares that are dependent on either the performance of the employee and/or the company. Often an award can be made but is subject to variation and scaled up or down depending on performance.

Restricted Units (RSUs) – RSUs are a type of restricted stock that’s granted based on a set vesting schedule or after certain restrictions have been met. There can be performance or timing restrictions, similar to restrictions for options.

Under water – this is the term used when the option exercise price is more than the currently quoted share price meaning that at that point the shares have no value

Vest– this is when the shares or options crystallise and can be accessed (subject sometimes to a permitted trading window).

Vesting Date – this is the date the shares become available for sale. The vesting date is set in advance. An award can vest in totality at a fixed point or in tranches over a period.

Generally, if an award was made during the marriage, then it is frequently treated as a capital asset, subject to the sharing principle. However, one cannot safely predict the future value (or tax payable) and it would be safer to simply agree to share the net receipts whenever they are sold post vesting. Or one could compare the current net value to the more certain and liquid assets when assessing whether it should be shared in this manner or offset.

It is common for divorce lawyers to disagree how awards granted post separation should be dealt with. These are generally considered to form part of the recipient’s post separation income and so not a matrimonial asset to be shared. However, either might suggest that it would be appropriate to have a fixed amount of maintenance to meet basic needs and then a slice of the bonuses/Ltips as they vest as a top up to provide for extras. This is likely to be a matter for negotiation, and parties should be aware that this area of law is highly discretionary. Generally past reported cases show that sharing of individual post separation endeavours undermines a clean break, and that the higher the element of personal endeavour to produce the value, the less appropriate it might be to share at all. If such awards are shared it would not be equally but at a reduced percentage that scales down. Also, a cap is generally applied to the amount.

As ever it is important to understand the tax treatment of any awards. Schemes can be different and there could be some eligible for tax advantages. Benefits are taxed as income or as capital gains (and sometimes a mixture). Any payment by the recipient should be phrased as a percentage of the net of tax and NI receipt.

Article written by Liz Francis, Partner at Hanne & Co.

Liz Francis - Hanne & Co

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