Stock Options and Executive Compensation in Divorce

Co-authored by Jennifer Koiles Pratt and Michael I. Flores

When a divorce involves a spouse employed as a higher-level executive, the financial issues involved in property division, alimony, and child support become much more complicated. The executive compensation landscape has changed and now involves much more than just an annual salary, health insurance, and a 401K plan. Compensation packages that divorce attorneys see for executives often center on incentives such as stock options, restricted stock units, and other related equity awards.

To protect yourself, you need to be sure that your divorce practitioner understands how these forms of executive compensation work, how they are awarded, when they can be realized, and how to characterize them in a divorce settlement or trial. If your attorney does not know how to handle stock options, restricted stock, equity awards, and other forms of executive compensation, you risk losing your fair share of this compensation.

Vested and Unvested Stock Options

Stock options are a common component in executive compensation packages, and they can be handled in different ways in a divorce. A stock option is a right to purchase stock in a company at a certain beneficial price. Stock options are often awarded as unvested, so the employee must stay with the company until the date that they vest in order to take advantage of the option. Once options vest, the employee has the right to exercise the options, pay the advantageous preset purchase price, and then either sell or hold the stock.

In divorce, unvested stock options can be treated as assets and divided between the parties. Alternatively, they can be treated as future income and included in the calculations for determining child support or alimony, or both. Make sure your divorce lawyer knows how to advocate for the course of action that serves your best interests and that the options are valued appropriately.

Some Stock Options Could Be Excluded from Marital Property

In many situations, it makes sense to consult financial specialists who can help determine what percentage of the stock options should be treated as part of the marital estate and which could potentially be excluded from the marital estate. The reason behind the compensation often plays a key role in this determination.

Some companies award executive compensation to retain an employee, and they structure that compensation so that it vests over a long period of time and gives the employee an incentive to stay with the company. For stock options provided as an incentive for future employment after a divorce, it is reasonable to argue that those options are not part of the marital estate because they are not intended to be used during the marriage.

Special Rules Often Apply

It is important for the attorneys involved in the divorce to understand the rules governing the applicable forms of executive compensation. At the beginning of a case, both attorneys should request the compensation handbook or compensation contract for their client or the opposing party’s spouse with executive compensation. They need to read and comprehend the rules regarding each facet of executive compensation.

Many forms of executive compensation cannot simply be divided like a 401K or the proceeds of a house sale. For example, companies often do not allow their stock options to be assigned to a non-employee spouse. If the executive employee is a C-level employee, they may be subject to limitations that affect the exercise of certain forms of executive compensation. Finally, the attorneys need to understand the differences in the way executive compensation is handled in a publicly traded company compared with a privately held company and how to adjust for disparities in tax rates.

The Attorneys at Koiles Pratt Family Law Group and Michael I. Flores, PC are Ready to Assist YOU

When you need experienced legal guidance to protect your interests in complex divorce situations, you can count on the attorneys at Koiles Pratt Family Law Group and Michael I. Flores, PC. Whether you are dealing with stock options, restricted stock, equity awards, or other sophisticated challenges, we have the skills and applied knowledge to lead you to the right solutions. We invite you to schedule a case evaluation with our team today.