How Executive Compensation Plans Impact Property and Support in a Divorce

Jeffrey ClingJeffrey Cling • November 16, 2015

Q: What are executive compensation plans?
JC: Executives receive compensation you would typically expect such as salary, bonus and retirement plans like RRSPs or pensions. Those types of benefits are easy to deal with in family law cases. The challenge occurs when executives receive more complex compensation such as stock options and restricted share units. So, From a family law perspective, these require a bit more attention.

Q: How does a spouse’s executive compensation plan impact the valuation of their property?
JC: Compensation that was awarded, but not yet received prior to separation, can be considered property for family law purposes. A good example of this is stock options, which can have value, but that value will only be realized when the options are exercised at some point in the future. Therefore, at the time of separation, the value must be considered.

Q: What impact do compensation plans have on income for support purposes?
JC: From an income perspective, executive compensation plans can be tricky. This is because benefits sometimes show up years after the compensation is granted. It’s important to understand how these plans work and when the benefit will show up in the spouse’s tax return.

Q: What are Stock Options and how do they affect property?
JC: Stock options give the executive the ability, but not obligation, to buy shares of a company at a set price for a specified time period. For example, if you were granted 1,000 options to buy shares of company at $10 for 8 years, you could buy them for $10 regardless of their current price. If the stock price goes above $10, you could exercise the options and pocket the difference. If the stock price goes down, you simply wouldn’t exercise them. We, as business valuators, use valuation models to determine the value of the options.
Employee stock options carry additional risks because they are not traded on public markets and often come with additional restrictions and terms. For example, some plans cancel the options if the spouse’s employment is terminated. We deduct discounts for these risks and then deduct income taxes. Stock options are usually considered property for family law purposes. In the year they are exercised, they can also be considered income for support purposes.

Q: How do Stock Options impact an executive’s income for support purposes?
JC: If an executive exercises his or her stock options, the amount that will be included in income will be the difference between the stock price and the price the shares were purchased at. For example, options exercised at $10 for shares that are worth $30 would result in income of $20 per share. One thing that is important to know is that there will typically be no income related to stock options unless or until they are exercised.

Q: What are Restricted Share Units?
JC: Restricted Share Units, also known as RSUs, are bonuses in the form of company stock provided to executives. RSUs are effectively shares of the company that are restricted from being accessed or sold for a defined period. Once this time period lapses, they vest, which means their restrictions are lifted. Vesting periods are typically three years and are sometimes staggered. On the “vest date,” the executive will receive the shares and is free to sell them.

Q: How are Restricted Share Units valued?
JC: Restricted Share Units are normally considered property for family law purposes. The value of RSUs is determined by multiplying the number of RSUs by the stock price at the valuation date. Like stock options, RSUs are not publicly traded. Not only can you not trade them, but they carry additional risks as well. We apply discounts for these risks and then deduct income taxes. In the year they vest, they can also be considered income for support purposes.

Q: How do Restricted Share Units impact an executive’s income for support purposes?
JC: RSUs are included in a spouse’s tax return as income in the year they vest. The amount included in income is normally the stock price at the vest date multiplied by the number of RSUs. For example, if 1,000 units vest at a share price of $20, the amount that will be included in the spouse’s income is $20,000. In summary, stock options and RSUs are just two examples of the types of executive compensation plans that exist. It is important to understand how the plans work and the potential impact on property and income for family law purposes.