What is a Golden Parachute?

Senior executives may get hefty compensation called a golden parachute during a merger or takeover. Golden parachutes, or poison pills, are contracts with influential leaders that can assist a company in deterring unwelcome takeover attempts. Stock options, cash incentives, and substantial severance are possible.

Named for their purpose, golden parachutes let laid-off workers fall softly.

How Golden Parachutes Work

Use golden parachute provisions to outline the significant perks an employee would get upon termination. Takeovers and mergers typically lead to senior executive terminations. Gold parachutes can provide severance pay in cash, bonuses, stock options, or compensation vesting. The employment contract specifies the criteria for the silver parachute clause to apply.

In addition to monetary incentives, additional lavish parachute bonuses include:

• Keep enrolling in employer pension programs.
• All retirement benefits vest
• Paid dental and health insurance
• Legal fee compensation

These and other unique advantages have prompted shareholder and public criticism. After the financial crisis, several organizations reviewed executive-level compensation systems and found new methods to relate executive performance to corporate success. Their purpose has often been to establish whether such packages benefit the corporation and its investors.

Controversy Over Golden Parachutes

Using golden parachutes is contentious. Supporters say golden parachutes help attract and keep top executives, especially in merger-prone sectors. Proponents also think that these substantial reward packages assist CEOs to stay impartial during a takeover or merger and deter takeovers due to the expense of golden parachute contracts.

Golden parachutes are too expensive for dismissed CEOs, according to opponents. Opponents may claim that CEOs have a fiduciary duty to work in the firm’s best interest and should not require financial incentives to stay impartial and assist the company. Critics of golden parachutes contend that the accompanying expenses are negligible compared to takeover costs, resulting in minimal influence on the outcome of the endeavor.

Next is the golden handshake. This program provides severance compensation to executives who become jobless, comparable to a golden parachute. Both expressions refer to severance compensation offered to executives upon termination, although a golden handshake also covers retirement packages.

Sample Golden Parachutes

Press reports of golden parachutes include:

• Taking over Hewlett-Packard Enterprise would give CEO Meg Whitman about $91 million. If fired, she would receive almost $51 million. The company’s downsizing gave her $35.6 million.
• Staples and Office Depot considered merging until a federal judge halted it in May 2016. If they combined, Office Depot’s CEO would have received $39 million under his golden parachute.
• Dell merged with EMC in 2016. The CEO of EMC got $27 million in pay per his golden parachute rules.

Conclusion

• Golden parachutes are hefty severance payouts in senior executives’ contracts when they leave.
• Golden parachutes may include insurance, pensions, hefty bonuses, and stock incentives.
• The approach is contentious since underperforming or short-lived CEOs and other top executives can earn a lot with little labor.