In the heart of California’s tech industry, compensation packages often extend beyond traditional salary and stock options. As high-tech professionals work their way through the complexities of divorce, it is helpful to understand the nuances of deferred compensation.
Understanding restricted stock units
This form of compensation gained popularity early in the 2000s, particularly within the tech industry. One example of a tech company that has made use of this form of compensation to entice high value workers is Tesla. Restricted stock units (RSUs) represent a promise that the company will issue stock to the employee at a future date, contingent upon meeting specific conditions. Unlike stock options, RSUs do not require the employee to purchase shares. Instead, they generally receive shares outright once conditions are met, typically vesting over time.
But what happens when an employee whose compensation includes RSUs gets a divorce? The process is complicated since RSUs often vest over a period, such as three to five years, as the courts generally only consider vested shares as marital property. It is also important to consider tax implications during divorce negotiations as RSUs qualify as ordinary income upon vesting. This can translate to a large tax bill and lower the value of the asset.
Exploring performance shares
Performance shares offer another form of deferred compensation and are linked to achieving specific company performance metrics. These shares incentivize employees to contribute to the company’s success, aligning personal and corporate goals. Similar to RSUs, performance shares vest based on achieving predetermined targets. For performance shares, these targets can include revenue growth or stock price appreciation. The uncertainty of meeting these criteria can affect their valuation in divorce settlements. As such, it is important to assess the likelihood of meeting performance criteria to determine their worth during asset division negotiations.
Those who receive deferred compensation are wise to plan for hurdles during the asset division portion of divorce negotiations. These unique compensation tools offer many benefits to corporations and employees but are a struggle to value and divide during divorce. You can reduce the risk of issues by having a better understanding of the likely value of the asset and tax implications when entering negotiations. In some situations, it may make sense to offer another asset, such as a vacation property, in exchange for full retention of deferred compensation assets. It is wise to discuss this and other legal strategies with an attorney experienced in these more nuanced negotiations to mitigate the risk of any surprises after you finalize the divorce.