For executives, founders, and other highly compensated professionals, a substantial portion of compensation may not arrive in a traditional paycheck. Restricted stock units, stock options, performance awards, deferred bonuses, and other equity incentives can represent significant wealth, sometimes with vesting schedules extending for years.
During a California divorce, dividing these assets can be challenging enough. The analysis becomes more complicated when an executive’s compensation is also subject to forfeiture or clawback provisions that could reduce or eliminate an award after the divorce settlement.
At Fernandez Law Group, our Certified Family Law Specialist and team of attorneys represent clients in complex California divorces involving sophisticated compensation structures and substantial financial interests.
An Equity Award May Come With Strings Attached
Executive compensation plans frequently condition an employee’s right to receive or retain an award on future events. An executive may need to remain employed through a certain date, meet performance targets, or comply with restrictive provisions the employer sets.
A compensation agreement may also give the company the right to recover previously awarded compensation under specified circumstances. These clawback provisions can arise from company policies, employment agreements, incentive plans, or regulatory requirements.
For divorcing spouses, that means the stated value of an equity award may not tell the entire story.
Vesting and Forfeiture Can Affect Property Division
California generally treats property acquired during marriage as community property, while property acquired before marriage or after separation is generally separate.
Equity compensation complicates that framework because an award may be granted at one point, vest later, and compensate an employee for services performed across different periods.
California courts have developed methods for allocating stock options and similar compensation between community and separate property based on the award’s purpose and the relevant period of employment.
But determining the community interest is only part of the problem.
Suppose an executive receives restricted stock during the marriage, but some shares will not vest for several years. If continued employment is required and the executive leaves the company before vesting, the expected compensation may disappear.
Performance-based awards can present similar uncertainty when future corporate or individual targets determine whether the executive receives anything at all.
What Happens When Compensation Is Clawed Back?
Clawbacks create another potential complication because compensation that appeared available for division may later have to be returned.
A divorce settlement involving executive equity should therefore address more than the number of shares or the current estimated value. Depending on the compensation plan, negotiations may need to consider who bears the risk if an award is forfeited, canceled, reduced, or recovered by the employer.
That becomes particularly important when one spouse receives other assets in exchange for relinquishing an interest in deferred compensation. Assigning today’s value to a contingent award without accounting for its restrictions can create an uneven result if the compensation never materializes.
The Compensation Documents Matter
Understanding the actual terms of an executive compensation package is essential before attempting to value or divide it.
Relevant records may include grant agreements, equity incentive plans, vesting schedules, employment agreements, compensation statements, company clawback policies, and documents explaining performance conditions.
California divorce requires spouses to exchange financial information, making complete disclosure particularly important when compensation extends beyond salary and readily identifiable accounts.
In complex cases, financial professionals may also be needed to evaluate the value and risk associated with contingent awards.
Protecting Executive Compensation in a California Divorce
Deferred compensation should not be treated as guaranteed money simply because it appears on an executive’s compensation statement. The reason an award was granted, when it vests, what conditions remain, and whether the employer can cancel or recover it may all affect how the asset should be addressed during divorce.
Fernandez Law Group represents executives, business owners, professionals, and their spouses in Los Angeles County divorces involving equity compensation and other complex assets.
If your divorce involves restricted stock, stock options, deferred compensation, or compensation subject to forfeiture or clawback provisions, call (310) 564-9163 or contact Fernandez Law Group online to schedule a confidential consultation.