How are bonuses and future bonuses treated in divorce?

Many businesses offer their employees bonus schemes; however, the financial rewards can vary enormously. Some offer significant sums and can double their annual salary, whilst others hand out more modest sums. But how are bonuses treated if a couple divorce? Our article finds out.

If you are experiencing issues with your finances and you feel you need legal advice to resolve matters, contact specialist family solicitor Maria Coster of Stowe Family Law. Maria has an excellent record in family law matters as well as being involved in a number of complex cases involving issues such as domestic violence, substance misuse, and parental alienation.

What is considered a bonus?

Bonuses are a common form of payment and reward highly valued employees. They are typically comprised of stock options or cash and can be discretionary, contractual, payable immediately, or deferred.

Over time, the amount of a cash bonus is likely to fluctuate in real terms, but the future value of a deferred stock scheme is even less predictable. The two most common forms of deferred stock schemes regularly encountered by family solicitors are stock options, where employees are offered shares at a particular price which will become theirs at a future date. This is called “deferred vesting”.

Deferred bonuses are awarded based on employee performance in a particular year, but are usually paid three years later in order to encourage the employee to remain with the company, as unpaid bonuses are generally forfeited if an employee leaves. The timing of the award and receipt may be a critical in determining whether the bonus is considered a matrimonial asset.

Matrimonial Assets

Now we know what is considered a bonus, we have to look at matrimonial assets. These are things such as property, money or other items acquired whilst the couple are together. If the bonus was received before separation, it will be put into the marital pot alongside all those other assets that will be divided between the couple as part of the financial settlement. In addition, if the bonus was received after separation, but deals with the financial period whilst the couple was still together, then this will also be added into the pot.

Even bonuses relating to a period after separation will not automatically be protected, or “ring-fenced” and remain with the earning spouse. This is because the couple’s financial needs must be considered first and foremost when figuring out a fair settlement. Therefore, unless there are significant assets, the court will be unable to ignore the bonus when considering the issue of need.

Some employers pre-pay bonuses and add in a clawback provision if the employee leaves the company or fails to meet certain performance criteria. In this case, it may be possible to argue that the bonus should be not considered a matrimonial asset because it has the potential of being withdrawn. If that were to happen, not only would those funds be removed from the matrimonial pot, but costs would likely be incurred as the employee would be obliged to return the pre-tax sum even though they received the post-tax sum.

What about future bonuses earned?

After the division of assets and pensions has been negotiated, consideration must be given to whether one party should pay spousal maintenance to the other. If spousal maintenance is not required because the couple earns sufficient to meet their respective income needs, a clean break order will probably be made. This prevents a spouse from making any financial claims against the other in the future, so all bonuses received after the date of the clean break will remain with the spouse who earned it.

Although the law says that a clean break order should be achieved where possible, there are many cases where one spouse is unable to manage financially without the support of the other. Here, spousal maintenance may be ordered, and the amount to be paid will depend on the income that the couple collectively receive by taking into account earning capacity, any other resources available to them, and their reasonable income needs. So if the paying spouse regularly receives a large bonus, the court will not ignore this, and can, if it is deemed necessary to meet the receiving spouse’s reasonable need, order a percentage of any net bonus to be paid to them.

In the leading case in this area of Waggott v Waggott, the court stated that an earning capacity is not an asset that is capable of being shared on divorce. Meaning that one spouse is not entitled to half of the other’s income, even if an equal division of the assets is considered appropriate. Spousal maintenance should therefore be determined on a needs basis rather than a sharing basis.

What if the bonuses are paid as shares or share options in the business the spouse works for?

If a company is quoted on the London Stock Exchange, then the value of the share can be determined from the published information. If a company is private, then its accountant can be instructed to value the shares for the purposes of the divorce. These shares cannot be traded on the stock exchange and may not be capable of being transferred between spouses. So couples commonly look at other arrangements, such as a sale of their shareholding to other shareholders or raising a loan to compensate the non-owning spouse.

Share options offer more of a challenge because they are an option to buy shares on a given future date at a price set out when the share option is handed out. The person receiving it must usually comply with various conditions in order to convert the option into shares, such as remaining employed with the company for a specified period of time. If the share price at the future date is less than the price fixed when the option was given, the shares become worthless. This raises the question whether such an asset can fairly attract a value in divorce proceedings and if the court deems it does, how it should be valued.

Are bonuses considered when calculating child maintenance?

Child maintenance is dealt with by the Child Maintenance Service (CMS) who will calculate the amount that should be paid by taking into account the payer’s previous year’s income. Bonus payments will therefore be considered; however, this can cause issues for those who receive large bonuses some years, but not in others. Here, the payer’s income will be reassessed each year their income changes. Of course, not all couples use the CMS and agree the amount of child maintenance payable between them.