Big bonuses: share the wealth?

Posted: 26/10/2023

It has been announced this week that the UK’s cap on bankers’ bonuses will be removed.  From 31 October 2023, for the first time since 2014, bankers in the UK will not be limited to a bonus of twice their base pay. 

Whilst other financial regulations on pay and bonuses will remain (such as ensuring base pay and bonuses are ‘appropriately balanced’, the requirement for a percentage of bonuses to be paid out over a number of years, and clawback provisions in cases of misconduct or poor individual/company performance), the UK is heading back to the pre-financial crash era of unlimited bonuses. 

What does this mean for couples who are separated/ing or in the process of divorce, where one spouse might now expect a significantly increased bonus?

Approach of the Family Court

When considering the division of assets in financial remedy proceedings, the starting point of the Family Court is the application of the sharing principle: 50:50 division. In applying the principle, the court will consider whether there are any valid ‘departure points’ in either parties’ favour: does fairness in that particular case justify a departure from equal division of assets?

One such departure point could be post-separation accrual of assets. This may need to be carefully considered by the court in circumstances where one spouse has received a bonus after the parties have separated.  

How is the sharing principle applied to bonuses awarded, or tranches of deferred compensation granted, during the marriage, which are paid out/vest sometime after separation? Whilst in McFarlane v McFarlane [2006] UKHL 24, Baroness Hale's general proposition was that ‘the marital partnership does not stay alive for the purpose of sharing future resources unless this is justified by need or compensation’, Sir Nicholas Mostyn (who retired as a High Court judge earlier this year) has previously arbitrarily suggested that he would not allow a post-separation bonus to be classed as non-matrimonial (and therefore excluded from the pool of assets capable of being shared) unless the bonus related to a period that commenced at least 12 months after the separation. So, the sharing principle may be applied to bonuses awarded during, or even shortly after, the marriage, even if that bonus is paid out sometime after separation. 

Post-separation bonuses

Post-separation income is not subject to sharing[1]. Post-separation capital, however, can be.  Whether post-separation bonuses (including unvested deferred compensation) are treated as income or capital is therefore paramount to financial remedy negotiations or proceedings. The higher courts have provided some guidance as to the treatment of post-separation bonuses, however different courts/judges have taken markedly different approaches, including:

• treating post-separation bonuses, or unvested deferred compensation granted during the marriage, as a future income stream and not a capital asset subject to sharing[2];
• treating post-separation bonuses, or unvested deferred compensation granted during the marriage, as a capital asset, but identifying the ‘matrimonial’ element by treating it as accruing on a straight line basis from the start of the earning year to vesting point[3] (the matrimonial element being the portion of the bonus/compensation notionally accrued between the start of the earning year and separation); and
• treating post-separation bonuses, or deferred compensation, as a matrimonial asset to be shared, on the basis that the inherent risk in an asset which had not yet liquified should also be shared[4].  

Extensive arguments can also be made about the treatment and division of post-separation bonuses or unvested deferred compensation which are conditional. Distinctions can be made between bonuses with continuing (post-separation) specific performance-related conditions, and those which are only conditional on continued employment. 

Income v capital

If the equal division of assets will not meet the capital and income needs of a party, the court can consider making an order for spousal maintenance. If, historically, the parties have relied on bonuses to meet their income needs it may be argued that, post-separation, future bonuses should continue to be used to meet maintenance payments.

If a party is going to receive a much more significant bonus this financial year, will this result in claims for higher levels of maintenance, and applications to vary existing maintenance orders upwards? The court favours ‘clean break’ financial orders with no ongoing maintenance where possible and income needs can, where there is sufficient capital to do so, be ‘capitalised’ so that the receiving spouse is awarded a lump sum through which they can meet their day-to-day expenses. 

Increased quantum of post-separation bonuses will not necessarily lead to increased maintenance. When deciding whether to order maintenance, and if so how much, the court will need to consider the income requirements and actual spending of the parties during the marriage. If the previous level of income spending was not such that the ‘additional’ element of an uncapped bonus will be required to meet needs, it is unlikely that the additional sum will be taken into account. Income is to meet reasonable needs, not to be shared.   

It will wait to be seen whether, in long marriage cases where a party can establish that the family had a higher standard of living before the bonus cap was enforced in 2014, and a larger bonus is then awarded post-separation, an argument could be advanced that the parties’ spending pre-2014 could be a factor that the court should consider when deciding on maintenance orders.  

The treatment of bonuses, especially post-separation bonuses, in financial settlements or financial remedy proceedings is undoubtedly complex. Following the uncapping of bonuses by the UK financial regulators, the stakes for both parties will potentially be significantly higher, and these complex arguments are likely to feature with increasing frequency. It would be prudent to take legal advice at an early stage if you are likely to be awarded a bonus this financial year and are considering separation, or if divorce and financial remedy proceedings have been, or will shortly be, commenced. 

If you are contemplating marriage, the treatment of future bonuses in the unfortunate event of a divorce can be regularised by entering into a pre-nuptial agreement. If you are already married and consider that separation might be a possibility, or you want to regularise the position now to protect yourself from such an eventuality, a post-nuptial agreement can be entered into. 

The Penningtons Manches Cooper family team has significant experience in representing clients who are employees, or the spouses of employees of banks, building societies and investment firms. If you would like any further information, please contact our family team.

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