By Ryan Magath, CPA, CFE, Financial Research Associates
Over the last year and a half, a lot has changed in our post-pandemic world. Some changes have been positive, some changes have been negative; however, it is inevitable that many changes are here to stay as the “new normal”.
During the pandemic, many companies implemented changes to their executives’ compensation in order to address liquidity concerns, align company and executive incentives, and to better position companies for the unknown that lies ahead. Understanding the changes to a spouse’s compensation that may have occurred during the pandemic and how the changes will affect compensation going forward as well as the related assets is imperative for a matrimonial matter.
The first step to understanding any changes that may have occurred to a spouse’s compensation package starts with discovery. The following documents include examples of items that should be requested in order to analyze a spouse’s compensation and identify changes that may have occurred to a spouse’s compensation. It should be noted that the following list is not all inclusive and should be tailored based on the specific facts and circumstances of the case.
- Employee’s annual compensation statements / summaries.
- Grant award letters.
- Settlement / vesting letters.
- W-2 statement.
- Annual earnings statement and paystubs.
- Personal tax returns.
- Schedule K-1’s.
- Employment agreement.
- Deferred compensation annual statements / summaries.
- Brokerage or other investment account statements.
- Employee handbook.
- Plan documents (retirement, deferred compensation, stock option, other).
In addition to the documents listed above, it is best practice to request any personal financial statements and debt applications that may exist. These documents may help identify streams of income or other assets received as compensation (e.g. stock options, restricted stock units, stock appreciation awards, etc.).
A few examples of areas to look out for are discussed below.
Pay Reductions and Compensation Deferrals
When Covid-19 first shut down the United States in March of 2020, many companies were panicking. The panic and fear of the unknown resulted in pay reductions for some individuals, including executives. The reductions to an individual’s pay may appear to be their “new normal”; however, such reductions may be temporary or otherwise subsidized. For example, many executives agreed to pay reductions when the pandemic first hit in exchange for additional deferred compensation. The restructuring of compensation packages from cash payments to deferred compensation allowed companies to maintain liquidity, while keeping their executives incentivized.
Deferred compensation can be awarded in various forms such as stock option plans, restricted stock units, stock appreciation awards, phantom stock plan awards, carried interest or other forms. Deferred compensation awards often have a vesting schedule; therefore, it is important to understand when the deferred compensation was earned. Just because some awards may be worth “zero” at the cut-off date or not yet vested as of the cut-off date, does not mean that they should be ignored.
Stock Option Re-Pricing
Further, companies that were negatively impacted during Covid-19 often have seen a large decrease in their stock price. Due to this large decrease in stock price, executives were holding equity awards (generally stock options) with no value because the price to exercise the equity award was greater than the current market value of the underlying stock. Consequently, these “underwater” equity awards may no longer incentivize the individual. To address this issue, some companies implemented stock option repricing, option for option exchanges, or grant refresh options in order to provide value to the equity award and incentivize their executives. Therefore, these equity awards that previously had “zero” value may now hold significant value.
All of the various changes that have occurred and continue to occur to executives’ compensation packages need to be identified and evaluated. Simply reviewing an individual’s year-end paystub or Form W-2 from 2020 likely will not identify the complete picture of an individual’s income. Some changes to executives’ compensation have been positive, some changes have been negative; however, it is inevitable that we need to analyze all of the necessary documents and be on the lookout for pandemic-related changes that might have occurred in order to determine what the “new normal” level of compensation for our clients looks like.
Ryan Magath is a senior financial analyst at Financial Research Associates. He is a licensed Certified Public Accountant in New Jersey and a holder of the Certified Fraud Examiner credential. He is also a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. He provides forensic accounting services, valuation services, and other litigation-related services.