In brief
- Incentive plans (such as bonuses, share awards, and carried interest) can form a significant part of wealth for high earners. However, in the event of a divorce, the nature of these assets can make them complex to divide.
- The Family Court can make orders in respect of incentive awards, and an area of contention is often whether they should be treated as matrimonial or non-matrimonial assets in any particular case.
- Valuation challenges, knowledge gaps between spouses, and the desire to end ongoing financial ties can be common issues in these cases.
When considering the financial consequences of divorce, attention often focuses on the obvious assets: the family home, savings, and pensions. For high earners working in finance, tech, or private equity, however, the real wealth frequently lies elsewhere, including in incentive plans. These can far outweigh salary in terms of value, and dividing them on divorce is rarely straightforward. Understanding how the Family Court approaches incentive-based remuneration is crucial, as its treatment can fundamentally shape any financial settlement.
What are incentive plans?
Incentive plans are employer schemes designed to reward and retain staff, often forming a large part of remuneration, particularly in sectors such as finance, hedge funds, private equity, and tech. They go beyond base salary and may include annual performance bonuses, carried interest (a share of fund profits), deferred share awards, and options or cash payments linked to performance over several years.
How are assets divided on divorce?
The guiding principle is fairness. Since White v White [2001] 1 AC 596, it has been established that contributions made by the breadwinner and homemaker must be treated equally.
The Family Court applies three principles, which have emerged from the application of the factors set out in Section 25 of the Matrimonial Causes Act 1973:
- Needs: Both parties and any children of the family must have reasonable housing and income. In high-value cases, this may extend to school fees, travel, and lifestyle.
- Compensation: Rarely applied, but relevant where one spouse has sacrificed career opportunities.
- Sharing: Assets built up during the marriage are usually divided equally. Assets acquired before marriage, after separation, or through inheritance may be treated as non-matrimonial and would not be subject to sharing, but can be used to meet needs.
Full disclosure is essential. Parties must provide a complete picture of their finances through a document called Form E, including listing income, assets, pensions, and liabilities.
For incentive schemes, disclosure frequently requires provision of plan rules and incentive award documents, bonus letters, and historic payments, with questionnaires potentially allowing further scrutiny of vesting dates, performance conditions, deferred compensation, or discretionary bonuses. The Court takes disclosure seriously – even uncertain or contingent entitlements must be declared, as attempts to conceal or undervalue assets can undermine the settlement, or permit any order made to be subsequently set aside.
Treatment of incentive plans
The Family Court will consider:
- Timing: Awards that vest during the marriage are usually seen as matrimonial assets. Deferred or unvested awards are also likely to be considered matrimonial if they relate to work done during the marriage, even if they vest later. If extra work is required after separation, then the deferred award may be considered part matrimonial and part non-matrimonial.
- Nature: Guaranteed, contractual awards are easier to value, and it is simpler to determine whether they are matrimonial – performance-based or discretionary awards carry more uncertainty.
- Practicality: The Court may prefer offsetting (one spouse keeps the award, the other receives more of another asset) or a lump sum, rather than dividing speculative future entitlements. The Court cannot, however, offset without first knowing the value of the asset in question. The more speculative the entitlement, the less likely the Court is to place a cash value on it.
A key tool is Wells sharing (Wells v Wells [2002] EWCA Civ 476), which allows uncertain or unvested awards to be divided in specie at the time the Court makes its order. The actual pay-out will occur only when the awards materialise.
Common issues that arise
- Knowledge gap: One spouse often has detailed knowledge of incentive plans, while the other does not. This can lead to mistrust and disputes about value.
- Deferred remuneration: LTIPs often vest over three to five years. If part of the award is linked to work done during the marriage, they are potentially shareable (in respect of the marital element), even if received later.
- Valuation: Independent experts are frequently required to assess value, taking into account vesting, performance conditions, and tax.
- Clean break v ongoing ties: Some prefer complete financial independence, while others prefer to accept deferred provision in order to achieve a closer to equal sharing award.
How we can help
Incentive awards are often central to a spouse’s wealth. At Mishcon de Reya, we combine expertise in family law and incentive structures. We guide clients through disclosure, negotiation, and structuring settlements to achieve clear and fair outcomes, whether through agreement or court proceedings.