Divorcing as an Executive? How Compensation Packages Can Impact Divorce

Couple and their lawyers talking about the divorce during a meeting in the office. Divorcing as an Executive? How Compensation Packages Can Impact Divorce concept.

In high-asset divorces, divorcing as an executive can be particularly complex, as your compensation packages may include various genres of benefits, perquisites and income. These packages can influence outcomes such as child support, spousal support, and property division. Understanding how each component of a compensation package is essential to reaching a fair and equitable settlement is key.

Executive Compensation Packages in Divorce

Executives such as directors, corporate officers, Chief Financial Officers, Chief Executive Officers, and other “C-Suite executives” are usually well-compensated for their work. Often, this compensation is in exchange for demanding work schedules and expectations that can strain a marriage and may ultimately lead to divorce. Depending on the size and nature of the company and your role in the business, your executive’s compensation may include:

  • Restricted Stock Units (RSUs)
  • Preferred Stock Units (PSUs)
  • Stock Savings Plans
  • Deferred Compensation
  • Company Car
  • Cash Bonuses
  • Commissions
  • Incentive Pay
  • Base Pay
  • Defined Pension Plans
  • Defined Contribution Plans
  • K-1 Income
  • Vested and Unvested Stock Options
  • Other Perquisites and In-Kind Compensation

Base Pay (Wage or Salary Income)

While base pay is generally the bulk of rank-and-file employees’ income, for executives, the base pay may be only a small portion of the full executive compensation package. In divorce, it is important for both parties to have a clear understanding of the executive compensation structure to ensure that any settlement is fair and equitable, and will not result in more litigation later on.

Bonus and Commission Income

As an executive, your quarterly or annual bonuses or commissions you receive as a result of your hard work and your company’s success, can constitute a significant portion of your annual income. These amounts must be factored into the calculation of the executive’s income for both child support and spousal support purposes as part of splitting executive compensation in a high-asset divorce, and is often done so using a percentage of the actual amounts earned in a given year. However, because these bonuses are not received monthly, it is important to consider your cash flow to make sure that any income withholding order for child support does not deprive you of the liquid assets you need to support your own household.

Retirement Contributions

Most executive compensation packages will include substantial contributions to your retirement accounts. This may include:

  • Pensions
  • 401(k) (for-profit) or 403(b) (non-profit) contributions
  • Employer match contributions

While these accounts may not generally be accessed without financial penalty prior to retirement age, they are subject to division by the courts, and can be transferred to the non-earning spouse tax-free until the non-earning spouse (alternate payee) begins to take distributions, if done through a Qualified Domestic Relations Order (QDRO) entered pursuant to a Judgment of Divorce.

K-1 Income for Business Owners

If you are a stockholder or business owner, your executive compensation package may also include dividends paid directly from the company separate from your ordinary income. These distributions are usually reported on a Schedule K-1 in the individual’s tax return, and are called K-1 income.

Restricted and Preferred Stock Units and Vested and Unvested Stock Options

One of the more complicated aspects of addressing an executive compensation package in divorce is dealing with the party’s restricted and preferred stock units (RSUs and PSUs) and vested and unvested stock options. It is important to understand and obtain full disclosure of the grant dates, strike prices, vesting dates, and transferability rules around such assets.

Perks and In-Kind Compensation

Another aspect of executive compensation that is often overlooked are company perquisites (“perks”) or in-kind compensation. This might include:

  • Access to a company vehicle
  • Travel expenses
  • Meals
  • Housing or room and board
  • Discounted or free access to company products and services

While some of these benefits may not show up on your tax returns (be sure to check W-2s especially for car allowances), they might be includable as income for child support, or considered in deciding spousal support or an equitable property distribution.

How Courts Calculate Executive Compensation Income for Child Support

Every parent, regardless of income, is expected to contribute to the care and maintenance of their children. This is done through the payment of child support. The Michigan Child Support Formula (MCSF) calculates each parent’s financial obligation based on their share of the combined family income and the number of overnights the children spend with each parent. This includes base pay, bonuses, commissions, K-1 income, and even some perks. If you are trying to resolve your divorce out of court, your domestic settlement agreement should be clear what is (and isn’t) included in the calculation of child support.

The MCSF also has a special provision for “extremely high income” families whose combined family income greatly exceeds the top of the General Care Support Table. ($17,871.57 per month or approximately $214,500 per year in 2025). If your family earns significantly more than the then-applicable threshold, the Court should fashion a child support amount that provides for the children’s needs without resulting in a windfall to your ex-spouse.

Valuation of Executive Compensation

When business ownership interests are part of an executive compensation package, hiring an expert business valuation expert may be advisable to establish what the business interests are worth, so they can be equitably divided. In the case of a long-term payout to the non-business owner, securing those payments is critical.

Tax Implications of Splitting Stocks

When considering an offer for a property settlement agreement, it is important for both parties to consider the tax implications of that settlement. Certain types of compensation, such as stocks, will be taxed differently than the executive’s base pay. In addition, transfer of stocks can cause a capital gains adjustment due to a change in basis, which if not handled properly, can result in unexpected tax obligations after the divorce is final. Both parties should review any property settlement with their accountant as well as their divorce attorney to ensure they know the net, after-tax value of the assets awarded after the taxes are paid, and are well-advised what to expect when they file future tax returns including distributions from a divorce settlement.

Splitting complex compensation packages can be difficult, especially if the family has strategically leveraged their assets through stocks, investments, or the purchase of additional real property. If the property division is left up to the court, it will consider several factors, including each party’s contributions to the marital assets, their needs and ability to work, the length of the marriage, and the parties’ past relations and conduct (including fault and lifestyle). However, if parties can agree on a property settlement, they can control what each spouse will receive in the divorce, making sure both sides receive an outcome they can live with.

The high-asset divorce lawyers at Nichols, Sacks, Slank, Sendelbach, Buiteweg & Solomon have a support structure in place to take on the highly complex issues involved in evaluating and dividing executive compensation packages. We will work with you to identify each part of the executive’s income and compensation, establish their values, and ensure you receive a fair distribution of the marital assets. Call 724-994-3000 to schedule a consultation with one of our experienced Michigan divorce attorneys to discuss your financial situation and divorce needs.

Categories: High Asset Divorces