Salaries, Bonuses & Shares
In our increasingly complicated world, it is becoming more common that high earning professionals do not just receive salary, but also receive sizeable bonuses, stock options and deferred benefits as part of their remuneration packages.
We have long standing expertise in dealing with the challenges that these present, on both sides of the argument.
Salary is important in the context of a breakdown of marriage or breakdown of a relationship where there are children, because the base salary will be relevant in respect of either spousal maintenance or child maintenance payable by one to the other. Most base salary elements are fixed and, therefore, it is relatively simple to assess what the per calendar month income will be for that person from this element. In the case of periodical payments for children (child maintenance), there is a set formula of base salary which will be paid towards the care of the child by the absent parent. In respect of periodical payments for a spouse (spousal maintenance), there is no set formula, but the Court will look at the income of the parties, the earning capacity of the party who is seeking periodical payments and the genuine income needs (generously interpreted) of the person who is seeking periodical payments for themselves.
Apart from the risk of redundancy, base salary is fairly stable and predictable.
Cash bonuses are paid in addition to one’s base salary. However, there are wide variations and fluctuations as to how cash bonuses are paid. For example, some bonuses are paid on an open “discretionary” basis, some bonuses are paid upon a set of personal and/or company targets being realised and some bonuses are paid on a sliding or uplifting scale, depending on various factors. Most commonly, they are paid annually, but where they are closely linked to sales targets, they can resemble commissions and be paid much more frequently as a short-term incentive.
If a cash bonus is being paid, then the question of whether the bonus can be considered a normal part of one’s income and, therefore, added to the family income when considering spousal or child periodical payments. It is important to consider from the viewpoint of the person receiving the bonus that the bonus is not guaranteed and, therefore, it would not make sense from that person’s perspective to have any periodical payments due out of their bonus to be expressed as a figure. It can make more sense for that person to have the amount expressed as a percentage of the bonus. However, then the issue arises as to why, if there is a very large bonus, should perhaps a long-separated spouse receive a windfall much in excess of their stated need?
Bonuses paid as shares or stock options
Traditionally, in order to incentivise staff, companies offer share option schemes. This would normally allow an employee to purchase stock at a certain fixed value, no matter what the actual value at the time of exercise. For example, if 1,000 stock options were granted at a “strike price” of £2.00 per share in 2012, not exercisable for two years and at the time of exercise, the stock market price was £3.00 per share, then the employee would be making a 50% gain. Stock options may not be considered as part of income and they may well add to the capital pot, but it does depend upon the circumstances in which they are granted and, of course, it will be relevant as to whether this is a common occurrence in the income stream of that individual.
Deferred vesting is a very common feature, where the options can only be exercised if the employee is still with the same employer after three years for example.
Some companies, particularly banks in the past, granted shares to employees as part of their annual remuneration package. Usually, the shares vested into the name of the employee and delivered at the same time. Again, these can usually be considered as an extension of income, rather than adding to the capital pot, but each case will turn on its own facts.
Due to the recession and financial difficulties post 2008, with many financial professionals coming under more scrutiny and condemnation from various circles, a culture of claw-back of bonuses or shares has been instituted in the City. The wider ramifications of this are not yet in play.
EC rules now limit bonuses to twice salary, which has led to an explosion of creative ways to define extra payments in other terms than “bonus”.
More traditionally, employers especially banks, will seek to claw back certain aspects of their employees’ remuneration packages, for example if they leave the company within a certain period of time a share allotment may be subject to “claw-back”. It is important to note that, in normal circumstances, if a portion of the employee’s remuneration package will be subject to claw-back, then this will very often be offset by any new employer that wants to recruit them, as part of the negotiation package. When acting for the spouse of such an individual, it is important to keep that in mind.
Finally, the taxation rules need to be borne in mind when assessing what is to be a fair deal between the spouses.
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‘GA’, Perth, Australia (October 2015)