March 23, 2012

When a bonus is not a bonus

By Peter Jones, partner

Despite the government’s move to reduce the burden on the courts by encouraging warring couples to undergo mediation or arbitration, it looks as though our judges will still have just as much on their plates in the coming months and years. Thanks to changes in the way that senior executives are paid in this challenging economic climate, more and more divorce settlements from the last decade in particular are likely to be subject to review.

Public and political outrage over Britain’s bonus culture was just revving up in 2008 when former Prime Minister Gordon Brown, among others, declared that irresponsible pay-outs had contributed to the financial crisis.

Cash rewards for executives – especially those in the financial services sector – had become an established and calculable benefit, as dependable as the basic income. Either party in a divorce settlement could expect a percentage of such payments to be part of a maintenance agreement. Not any more.

In the wake of the Government’s £37bn rescue package for the banks and in response to pressure from the FSA, shareholders and the public, changes had to be seen to be made. Senior executives now receive a considerable proportion of their bonus as deferred shares, which, by their very nature, would have to be held for months or even years before they could be sold for cash.

As family lawyer James Pirrie has identified, this could represent a significant decrease in available finances, which in turn has implications for both parties who reached a divorce settlement prior to the financial crisis. Following the House of Lords’ 2000 ruling that a marriage’s assets should be divided equally between the two parties, it became the norm for the wife – and it was and still is usually the wife – to be awarded maintenance payments from the husband’s salary as well as a share of the annual bonus.

However, court orders that assumed a certain level of bonus income on an ongoing basis may now be untenable. The challenge now is to establish a “fair” outcome of such reviews – should the wife receive some of those deferred shares or a greater proportion of the salary, for example? It will also be necessary to establish that what appears to be a straightforward drop in available income is not being compensated for in a less obvious way – in other words, hidden. 

Do you think it’s fair for an ex-partner to share their ex’s bonus? Share your thoughts with us below or email us here.