Golden Parachutes

A golden parachute is an agreement between a company and an employee (usually an upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. These may include severance pay, cash bonuses, stock options, or other benefits. Most definitions specify the employment termination is as a result of a merger or takeover, also known as “change-in-control benefits”, but more recently the term has been used to describe perceived excessive CEO (and other executives) severance packages unrelated to change in ownership (also known as a golden handshake).

Arguments for and against

Support

• Proponents of golden parachutes argue that the parachutes provide benefits to stockholders:
• Make it easier to hire and retain executives, especially in industries more prone to mergers.
• Help an executive to remain objective about the company during the takeover process, and possible loss of position after takeover.
• Dissuade takeover attempts by increasing the cost of a takeover, often part of a poison pill strategy.
• it helps the CEO to implement long-term targets thereby increasing revenue of the organization.

Opposition

• Dismissal is a risk in any occupation, and executives are already well compensated.
• Executives already have a fiduciary responsibility to the company, and should not need additional incentives to stay objective.
• Golden parachute costs are a very small percentage of a takeover’s costs and do not affect the outcome.
• Benefits create perverse incentives.

A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses their job through firing, restructuring, or even scheduled retirement. This can be in the form of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of stock options. According to Investopedia, a golden handshake is similar to, but more generous than a golden parachute because it not only provides monetary compensation and/or stock options at the termination of employment, but also includes the same severance packages executives would get at retirement.

The term originated in Britain in the mid-1960s. It was coined by the city editor of the Daily Express, Frederick Ellis. It later gained currency in New Zealand in the late 1990s over the controversial departures of various state sector executives.

Typically, “golden handshakes” are offered only to high-ranking executives by major corporations and may entail a value measured in millions of dollars. Golden handshakes are given to offset the risk inherent in taking the new job, since high-ranking executives have a high likelihood of being fired and since a company requiring an outsider to come in at such a high level may be in a precarious financial position. Their use has caused some investors concern since they do not specify that the executive has to perform well. In some high-profile instances, executives cashed in their stock options, while under their stewardship their companies lost millions of dollars and thousands of workers were laid off.