One of the developments that has fundamentally changed how executive compensation works in recent years is the widespread adoption of clawback provisions. A clawback allows an employer to recover compensation already paid to an executive under certain circumstances, most commonly fraud, misconduct, or a financial restatement. When those provisions apply to assets that have already been divided in a Texas divorce, the consequences can be severe for both spouses.
What Is a Clawback Provision?
A clawback provision is a contractual clause in an employment agreement or equity award that allows the employer to demand repayment of some or all compensation the executive has already received. Common triggering events include material financial restatements of company results, violations of noncompete or confidentiality agreements, and engagement in misconduct.
Since 2023, publicly traded companies listed on the New York Stock Exchange and Nasdaq have been required to maintain formal clawback policies under listing standards adopted in response to Securities and Exchange Commission rules implementing Section 954 of the Dodd-Frank Act. These rules require companies to claw back incentive-based compensation received by current and former executive officers during the three-year period preceding any required accounting restatement, without regard to fault. The former officer is required to repay the compensation even if they had no role in the error.
Why Clawbacks Matter in Texas Divorce
The problem in divorce is straightforward. An executive receives a bonus of $1 million that is community property. The divorce decree awards $500,000 of that bonus to the non-executive spouse as part of a property settlement. Two years later, the company announces a financial restatement, and the clawback policy requires the executive to return the entire $1 million. The executive’s contractual obligation runs to the company, not to the former spouse. The former spouse keeps the $500,000 they received, but the executive is now $500,000 in the hole.
This scenario is not hypothetical. It has played out in corporate scandals at major publicly traded companies, and it is a real risk for any executive working at a public company in Houston or anywhere else.
Planning Around Clawback Risk
An experienced Houston divorce attorney will look carefully at the clawback provisions in every employment agreement and equity award before any settlement is signed. Key questions include whether the specific award is subject to a formal SEC-mandated clawback policy, what triggering events apply, how far back the look-back period extends, and whether the executive has any indemnification or gross-up protection from the employer.
Several approaches can reduce the risk to both parties. The settlement can be structured to allocate a portion of the risk back to the non-executive spouse, meaning that if a clawback actually occurs, the former spouse agrees to repay a proportionate share of any amounts they received. Alternatively, the decree can adjust the overall division to account for the possibility of a clawback, awarding the non-executive spouse a larger share of other less risky assets in exchange for a smaller share of potentially clawable compensation.
What a decree should never do is ignore clawback provisions entirely. Any clause that treats executive bonus or equity compensation as an unconditional asset without acknowledging the clawback risk is likely to produce problems down the road.
Who Bears the Risk: Practical Decree Language
Because clawback obligations are personal to the executive and cannot be assigned to a former spouse, the decree itself cannot force the former spouse to return compensation they received as part of a settled property division unless the parties agree to that mechanism in advance. This means the executive bears all of the clawback risk by default if the decree is silent on the issue.
A carefully negotiated settlement can include a mutual risk-sharing agreement in which both parties acknowledge the possibility of a clawback event and agree on a reimbursement formula. For example, the parties might agree that any post-divorce clawback demand reduces the executive’s future support obligations by a pro-rata amount, or that the non-executive spouse will repay the executive a portion of any actually recovered compensation. These provisions require careful drafting and may not be appropriate in every case, but they provide a mechanism for allocating risk that both parties understand at the time of settlement.
Another protective measure is to use other, non-clawbackable assets to satisfy the non-executive spouse’s share of the community estate whenever possible, reserving the potentially clawable compensation for the executive. If there is sufficient liquidity in real estate, retirement accounts, or other holdings, structuring the settlement to minimize the non-executive spouse’s reliance on executive compensation assets reduces the exposure for both parties.
For related topics, see our articles on restricted securities in divorce and the comprehensive guide to executive compensation and stock options.
Blog 134: How to Value Performance-Based Stock Awards During a Texas Divorce
Performance-based stock awards are among the most difficult compensation assets to value in a Texas divorce. Unlike time-vested RSUs or stock options, performance awards pay out only if the company hits specific financial or operational targets, and those targets may be years away from resolution when the divorce is filed. For executives at Houston energy companies, healthcare systems, and financial firms, these awards can represent the largest single component of total compensation.
How Performance Awards Work
A performance share unit (PSU) or performance stock award grants the executive a right to receive company shares at a future date, but only if the company meets defined metrics during the performance period. Common metrics include total shareholder return compared to a peer group, earnings per share growth, return on equity, and revenue thresholds. The number of shares actually earned typically ranges from zero to some maximum, depending on results.
The performance period is usually two to four years. If the divorce occurs in the middle of a performance period, neither spouse knows yet how many shares will actually be earned or what the stock will be worth when they vest.
Characterization Under Texas Law
Texas Family Code section 3.007 provides the framework for determining the separate and community portions of equity awards that span the marriage and post-divorce periods. For a performance award that was granted during the marriage but has a performance period that extends beyond the divorce, courts apply a fraction that compares the portion of the performance period that fell during the marriage to the total performance period. The resulting community percentage is multiplied by the shares actually earned when the performance period closes.
The key distinction from time-vested awards is that performance awards have two types of contingency: time (the performance period must be completed) and performance (the target must be hit). Courts and practitioners generally agree that the community fraction addresses the time contingency, and whatever number of shares is actually earned governs what percentage of that amount was community property.
Valuation Methods
When one spouse wants to offset the value of a performance award against other assets now rather than waiting for the performance period to end, a valuation is required. Financial experts typically use one of two approaches.
The first is an intrinsic value approach, which assumes target performance and discounts the expected share count at today’s stock price back to a present value, applying a discount for the risk that the target will not be met. The second is a Monte Carlo simulation or similar probability-weighted model that estimates the distribution of possible outcomes based on historical volatility and company performance trends.
Both approaches are defensible, and opposing experts often produce very different numbers using the same underlying data. Courts in Houston and across Texas give financial experts significant latitude in this area, and the choice between current valuation and deferred distribution is often a major negotiating point.
Practical Strategies
For most cases, the simplest and least controversial approach is a deferred “if and when” division. The decree specifies that the non-executive spouse receives a defined percentage of whatever performance shares actually pay out, calculated after applying the community fraction formula. No valuation battle is needed. The risk of underperformance is shared, which is generally fair to both parties.
For more on similar award types, see our guide to RSUs, PSUs, and divorce in Texas.
Special Considerations for Performance Awards at Energy Companies
For executives at Houston’s publicly traded oil and gas companies, performance awards are often tied to metrics like total shareholder return relative to industry peers or return on capital employed. Those metrics can swing dramatically with commodity price cycles, making a performance award granted during a high-price environment worth very little at the time of divorce, or vice versa. When valuing these awards for settlement purposes, it is important to use financial models that account for commodity price volatility rather than simply extrapolating from current conditions.
Because performance awards combine time-based and results-based components, and because each component introduces uncertainty, the if-and-when deferred distribution approach is especially well-suited to these assets in Houston-area energy company divorces. An experienced Houston divorce attorney can draft decree language that clearly defines what happens in each scenario, including target performance, below-target performance, and above-target performance, so that both spouses receive their fair share regardless of how the performance period resolves.