Photo of The Talbot County Courthouse, in Easton, Maryland
We Want To Protect Your Rights And Interests

Dealing with executive compensation during a divorce

On Behalf of | Aug 9, 2023 | Divorce

When people decide to divorce, asset division is often one of the most complex parts of the resulting legal procedures. This is especially true in a high-asset divorce. While both parties’ minds may quickly turn to salaries, brokerage accounts, vehicles and Maryland real estate, there are other key assets to keep in mind during a divorce, including executive compensation awards.

Executive compensation and stock options

Executive compensation is often used by companies to make themselves more appealing to high-powered corporate leaders and valuable team members. One of the most common types of executive compensation is a stock option program, which awards restricted shares or the option to purchase stock at a specific price to valued employees. Restricted shares and stock options are typically encumbered with a vesting period of a number of years. This means that the employee or executive must wait for that period before exercising the option and realizing the profit. During asset division, valuing stock options and restricted shares that have not yet vested can be complex, because the future progress of the company is not entirely predictable.

Tax impact of executive compensation

Taxation is another factor to consider when valuing stock options and restricted shares; exercising the options or selling restricted shares comes with the associated tax rate at the time of the transaction. Considering only the potential value and not the tax burden can lead to an unfair outcome for the owner of the shares.

Coming to an agreement about stock options or restricted shares in a divorce can be complicated. In some cases, one party may relinquish claims in exchange for keeping their own executive compensation or another asset, or a constructive trust may be set up for a future planned distribution. In all cases, it is important to address the tax issues at the time of settlement in order to avoid future unpleasant surprises.