Adam Hugill explains deferred compensation and how it works in practice, while Frances Tsang discusses the issue in the context of a divorce. Can deferred compensation form part of the matrimonial pot? How can the future vesting of deferred compensation affect a spousal claim? What does Wells sharing mean?
SHOW NOTES:
00:06 What is deferred compensation?
00:16 What is the purpose of deferring compensation?
00:43 How does deferred compensation work in practice?
01:33 Why would employees agree to be locked into such agreements?
02:06 In the context of a divorce, how do the Courts deal with deferred compensation?
02:28 Is my deferred compensation part of the matrimonial assets?
03:26 How much can my spouse claim?
TRANSCRIPT
Deferred Compensation and Divorce Proceedings
What is deferred compensation?
At its simplest, deferred compensation is a financial benefit that is not paid immediately but deferred to be paid in the future.
What is the purpose of deferring compensation?
The workforce is more mobile and transient than ever before. Employees often move jobs every few years, and it’s almost unthinkable for someone to work their 40-year career for one employer.
A mobile workforce is potentially very disruptive and expensive for employers, especially in terms of recruitment and retraining time and costs.
Employers have, therefore, tried a lot of things to decrease employee turnover. One of these things is to defer compensation.
How does deferred compensation work in practice?
Deferred compensation usually arises as part of an annual bonus award. Rather than paying an employee the bonus in full at the end of the year, part of the bonus (sometimes a very substantial part) is referred to as being “unvested” and is then deferred subject to the rules of a deferral plan.
The deferral period is usually 3 – 5 years. During this period, a portion of the unvested deferred benefit – usually in equal instalments – becomes vested and paid to the employee.
A key provision in any deferral plan is that the employee must be in employment in order for the benefit to vest. Benefits will often be forfeited if, for example, the employee voluntarily resigns.
Employees should also be aware that if they are working for a multinational company, it is very likely that the deferred plan will be subject to foreign laws, often the place of where the multinational is primarily Head Quartered.
Why would employees agree to be locked into such agreements?
In certain industries is it the norm. For example, in banking, deferral of part of the compensation of senior management or risk takers is required by policy / regulatory requirements.
There are also often tax advantages of deferring compensation.
While it is seen as a retention tool, it is not uncommon for employees to leave, forfeiting unvested deferred compensation. This usually happens when the immediate rewards at the new employer are significantly. The new employer may also be prepared to compensate / match the lost deferred benefit as part of a sign-on incentive.
In the context of a divorce, how do the Courts deal with deferred compensation?
In a divorce, the ultimate question is, whether my spouse is entitled to claim a share in my deferred compensation.
To answer the question, there are two steps: is my deferred compensation a part of the matrimonial assets? If so, how much can my spouse claim?
Is my deferred compensation part of the matrimonial assets?
To answer the first question, we must first find out when the bonus was declared.
If the bonus was declared before the parties’ separation, it goes into the matrimonial pool.
If it was declared after separation, which is what we call post-separation accrual, how much goes into to the pool will depend on how far we can attribute the bonus to the marriage as a marital acquest. This depends on a number of factors, including the duration of the marriage, the date of separation, the date the bonus was declared, the parties’ respective contribution to the marriage (which includes non-monetary contribution such as taking care of the children), etc.
Generally speaking, the longer the marriage, and the closer to the date of separation that the post-separation bonus is declared, the more likely that the bonus will be considered a matrimonial asset.
How much can my spouse claim?
To answer this question, we must distinguish two types of deferred compensation: one that has been vested before the Trial, and one that hasn’t been vested.
If a deferred bonus is vested before the Trial, you then have a value for the bonus and a figure to add into the pool.
However, if the deferred bonus is not vested before the Trial, the question is how do we value the bonus – what figure do we give it? The answer is: you often can’t give it a figure.
This is because if the employee leaves the company before the bonus is vested, he can’t get the bonus. The value would be 0. It is therefore unfair to prematurely include the unvested bonus in the matrimonial pool, especially if you have a high turnover rate in the industry or the company.
However, it is also unfair that we ignore the unvested bonus altogether, because the bonus will vest if all conditions are met.
The Courts have 2 ways to deal with this problem.
Generally speaking, we can treat it as a future financial resource of the spouse. We don’t give it a figure, but we consider it as a factor when we decide on asset division and maintenance.
However, in the appropriate case, we can invite the Court to give an order for Wells sharing.
The term Wells sharing comes from the English case of Wells v Wells, in which the Court gave an order for sharing of future earnings on a percentage basis. This approach was adopted in Hong Kong in a case of a 20-year marriage. The Wife was given a Wells sharing order for the Husband’s unvested share bonus declared up to 3 years after they separated – 50% of the share bonus in the first year, 25% in the second year and 12.5% in the third year. However, she would only get it as and when the bonus becomes vested and saleable.
Whether we can ask for a Wells sharing order depends on the circumstances of the case. Relevant factors include the length of the marriage, the needs of the parties, the parties’ contribution to the marriage, any children involved, etc. In a relatively short marriage, say 10 years or below, the Court would be more hesitant to give such an order, but would prefer treating the unvested bonuses as the spouse’s future financial resources. These are factual matters, and will need to be examined in the context of each and every case.
This video is for informational purposes only. Its contents do not constitute legal or professional advice.
