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Executive compensation: Its effect on divorce

On Behalf of | Aug 4, 2022 | Divorce

If you are divorcing an executive who owns stock options in a growing company, you may need to learn more. Executive compensation may be part of your New Jersey spouse’s holdings. It happens with high-powered executives and is something you may want to know about.

Executive compensation including stock options is part of a company’s motivation. They may have the purpose of boosting morale as well as helping to retain the best talent in the company. As companies see shrinking profits, they try to retain their best employees with these financial perks.

The stock option

This guarantees the employee the ability to buy stock in the company based on the “grant price.” This is the value of the stock on the day granted. Once the vesting period (from one to five years) is over, the employee may exercise the buying option.

An example would be a very successful merchandising company that gave a stock option in 2016. At that time, the value was trading at $600 per share. After the waiting period is over, that employee may now buy stock at $600 per share in a market where the value is now $3000 for a share. Costing this employee only $600 today, they will make a tidy profit, no matter how may shares they buy. However, that employee pays tax for the year they exercise the option; it is income.

Restricted stock options

The company puts limits on these options. Called “golden handcuffs,” as employees who leave or receive firing forfeit their rights to the stock. When a restricted stock vests, its entire value becomes taxed at high ordinary income tax rates.

Leaving the company

They may lose the entire value, when the employee leaves the company before the stock vesting period. Performance benchmarks may also be a term dictated by the company; not meeting them may cause loss of the stock option.

Divorce complications

Dividing the stock options may make the divorce process quite messy. Employers may not allow transfer of stock options or restricted stock options to another person. These assets are not the same as a brokerage account.

Executive compensation may include stock options and restricted stock awards. They need to be taken into account during property division.