For many executives and highly compensated professionals, a paycheck tells only part of the financial story. Compensation packages may include:
- Stock options
- Restricted Stock Units (RSUs)
- Performance-based equity awards
- Annual and long-term bonuses
- Deferred compensation
- Employer stock
- Other incentive compensation
When divorce enters the picture, these assets can create difficult questions. What happens to stock that hasn’t vested yet? What if an RSU grant was made during the marriage but won’t vest until years after the divorce? What if a bonus is paid after the divorce but was earned based on work performed during the marriage?
In a Texas divorce involving executive compensation, determining when an asset was received is not always the same thing as determining when it was earned. And that distinction can matter.
Start With Texas Community Property Law
Texas is a community property state. Generally, property acquired during marriage is presumed to be community property unless a spouse establishes that it is separate property. With ordinary assets, determining when something was acquired may be relatively straightforward.
Executive compensation can be different. An executive may receive an equity grant today that does not vest for several years. A bonus may be based on performance over a particular period but paid months later. Stock options may be granted during the marriage but become exercisable after divorce.
As a result, determining what portion of an executive compensation package belongs to the marital estate can require a much closer look at the underlying award.
What Are Restricted Stock Units (RSUs)?
RSUs are a common form of equity compensation. Rather than immediately giving an employee unrestricted shares of company stock, an employer promises shares (or sometimes their cash equivalent) once certain conditions are satisfied. Typically, those conditions involve continued employment over a specified vesting period. Some awards may also depend on performance goals or other requirements.
For example, an executive might receive 4,000 RSUs that vest over four years. If the executive divorces after two years, an obvious question arises: What happens to the remaining unvested RSUs?
The answer may depend on why the award was granted and what period of employment or performance it was intended to compensate.
Unvested Does Not Necessarily Mean “Not Marital”
A common misconception is: “They haven’t vested yet, so my spouse can’t have any claim to them.”
That is not necessarily true. The fact that an award will vest after divorce does not, by itself, resolve whether some portion of that award may have been earned during the marriage. Courts may need to consider factors such as:
- When the award was granted
- Why it was granted
- The applicable vesting schedule
- Whether it rewards past, present, or future employment
- Whether vesting depends on continued employment
- Whether performance requirements apply
- The terms of the employer’s compensation plan
The actual plan documents can therefore be extremely important.
What About Stock Options?
Stock options give an employee the right to purchase company stock at a specified price, generally subject to certain conditions. Like RSUs, options may vest over time. And again, the key question in divorce isn’t necessarily: “When can the employee exercise the option?”
Instead, the analysis may involve determining when and why the option was earned. Options granted before marriage, during marriage, and after separation may require different treatment depending on the circumstances. When an option’s vesting period crosses the date of divorce, determining the community and separate portions can become particularly complicated.
Bonuses Can Create Similar Problems
Executive bonuses can also raise characterization questions. Suppose an executive receives a substantial bonus in February. The divorce became final the previous December. Is the bonus automatically separate property because the executive received the money after the divorce?
Not necessarily.
If the bonus compensated the employee for work or performance during the previous year, while the parties were married, the timing of the payment alone may not answer the question. Conversely, compensation received after divorce for services performed after the marriage may present a very different analysis.
This is why attorneys may need to examine exactly what period the compensation was intended to reward.
Deferred Compensation Can Be Even More Complicated
Some executives defer a portion of their compensation until a future date. That may provide tax or retirement-planning benefits, but it can create additional issues during divorce. A spouse cannot necessarily remove compensation from the marital estate simply by arranging to receive it later.
When deferred compensation is involved, attorneys may need to examine:
- When the compensation was earned
- When it becomes payable
- Whether it is subject to forfeiture
- What restrictions apply
- How the account or benefit will eventually be distributed
The fact that money will not be received until years after the divorce does not necessarily mean it has no value to the marital estate.
Performance Awards Add Another Layer
Some executive compensation depends not only on continued employment but also on company or individual performance. For example, an award might depend on:
- Revenue targets
- Earnings
- Share-price performance
- Total shareholder return
- Individual performance metrics
That can make valuation particularly difficult. At the time of divorce, nobody may know whether the executive will ultimately receive the full award, or anything at all. These situations may require creative solutions when dividing the marital estate.
How Do You Divide Something That Hasn’t Vested Yet?
There is not necessarily one universal solution. Depending on the circumstances, parties may agree (or a court may determine) that an award should be addressed through a structure that accounts for future vesting. In other cases, the value of an asset may be considered when dividing other property.
The appropriate method depends on factors such as:
- The type of compensation
- The terms of the award
- Tax consequences
- Vesting requirements
- Transfer restrictions
- The overall marital estate
This is one reason high-asset divorces often require more individualized property-division strategies than cases involving only traditional bank and retirement accounts.
Taxes Matter
Two assets with the same number on a spreadsheet are not necessarily worth the same amount.
For example: $500,000 in cash is not necessarily economically equivalent to $500,000 of unvested RSUs.
The RSUs may be subject to:
- Future income taxes
- Market fluctuations
- Vesting requirements
- Employment conditions
- Restrictions on transfer
Those factors should be considered when evaluating a proposed property division. Looking only at the gross value of an asset can create a misleading picture.
Employer Documents Can Be Critical
One of the first steps in a divorce involving executive compensation may be gathering the actual compensation documents. Those could include:
- Equity incentive plans
- Individual grant agreements
- Vesting schedules
- Employment agreements
- Compensation statements
- Brokerage statements
- Bonus plans
- Deferred compensation documents
- Tax returns and W-2s
- Pay statements
These documents can help establish when awards were granted, what they were intended to compensate, and what conditions must occur before they are paid or vested. A screenshot showing the current balance of an equity account rarely tells the whole story.
Experts May Be Necessary
Depending on the size and complexity of the compensation package, attorneys may work with:
- CPAs
- Financial experts
- Business valuation professionals
- Tax professionals
- Other experts familiar with executive compensation
Experts can be particularly helpful when an award is difficult to value or when tax consequences significantly affect its true economic value. Not every case requires an expert. But in a high-asset divorce, spending money to correctly analyze a seven-figure compensation package can be far less expensive than dividing it incorrectly.
Don’t Forget About Compensation That Isn’t Obvious
When one spouse is a highly compensated executive, discovery should generally look beyond base salary. An executive’s total compensation package may include benefits that don’t immediately appear in an ordinary paycheck. That is why understanding the entire compensation structure is important. A salary of $300,000 may tell a very different financial story if the executive also receives hundreds of thousands of dollars, or more, each year through equity grants, bonuses, deferred compensation, and other incentives.
Final Thoughts
Stock options, RSUs, bonuses, and deferred compensation can be some of the most valuable, and most misunderstood, assets in a high-asset Texas divorce. The biggest mistake is assuming that the date an asset vests or is paid automatically determines whether it is community or separate property.
Often, the more important question is: When and why was the compensation earned?
Answering that question may require reviewing employment agreements, equity plans, grant documents, vesting schedules, compensation records, and tax information. When substantial executive compensation is involved, properly identifying, characterizing, valuing, and dividing those assets can have a significant impact on the ultimate property division.
Facing a Divorce Involving Executive Compensation?
High-asset divorces involving stock options, RSUs, deferred compensation, bonuses, and other sophisticated financial assets require careful analysis. At Grinke Stewart Family Law, we represent clients in complex Texas divorces involving significant marital estates, business interests, separate-property claims, executive compensation, and other complex financial issues. If you or your spouse receives substantial equity or executive compensation, understanding the complete compensation package, and how Texas law may apply to it, is an important part of protecting your financial interests during divorce.
