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Is not-yet-paid deferred compensation divisible in a divorce?

On Behalf of | Oct 12, 2023 | Community Property Division

Executives, financial officers and other highly-compensated professionals often negotiate very complex employment contracts when starting a new position. They might request severance pay in case they lose their job without advance notice and may be eligible for a variety of compensation beyond their base pay and standard benefits. Many businesses offer deferred compensation as a performance incentive or a means to keep the best talent at their company for as long as possible.

Deferred compensation could include offering restricted stock units or a retention bonus paid out after a set amount of time. Companies may also offer performance-based bonuses to push new workers to achieve as much as possible for the organization. Such compensation can often be worth tens of thousands of dollars or more if an employee qualifies to receive the full amount.

However, they may need to work for multiple years before they become eligible to actually receive that deferred compensation. During a divorce in California, one spouse may try to claim a share of the deferred compensation of the other. If an employer has not paid that compensation yet, is it subject to division?

Some of the compensation may be marital property

When the California family courts have to make a determination about dividing marital property, they look at when people earned or acquired resources. Judges will also review any existing marital contracts, such as prenuptial agreements. Barring a pre-existing agreement between the spouses, deferred compensation is often at least partially divisible in a California divorce. The portion of the compensation accrued during the marriage would be part of the marital estate even though the employer has not yet paid that compensation to the worker.

The spouses will therefore have a challenge ahead of them. They will need to determine how much of the deferred compensation is part of the marital estate. In some cases, they may need to attempt to put a value on that compensation because it does not have a fixed market value. Restricted stock units and performance-based compensation may shift in value depending on what happens after the divorce.

Having a plan to address more challenging resources can take some of the stress out of the early stages of a California divorce. Yet, in complex cases, it’s difficult to create such a plan alone. Therefore, seeking legal guidance as proactively as possible is generally a good idea.